Chapter 2: Competitive Government
Stimulate Competition in State and Local Government
Summary
The Federal Activities Inventory Reform (FAIR) Act of 1998 was designed to reduce federal agencies’ operating costs and increase their efficiency through the use of public-private competition. Texas should pass a similar Competitive Government Act requiring state agencies to conduct such competitions within a framework devised by the state’s Council on Competitive Government.
Background
“Public-private competition” is a process by which government employees compete with private vendors to determine which would be the most economically efficient provider for a particular government service. Public-private competitions should be designed to facilitate accurate and fair comparisons between public and private providers of similar functions and services to determine the best course of action for maintaining or enhancing agencies’ effectiveness while lowering their costs.
The FAIR Act of 1998 was intended to encourage government agencies to assess their functions and determine which could be subjected to competition with the private sector. The FAIR Act directs federal agencies to submit to the Office of Management and Budget (OMB) an annual inventory of their “commercial” activities, defined as activities performed by federal employees that are not inherently governmental. The act allows the government to choose the source—public or private—that is most cost effective and in the best interest of the taxpayer. The policy implementing the FAIR Act, OMB’s Circular A-76 (revised in 1999), articulates a compelling argument for competition in government:
The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Government to rely on commercial sources to supply the products and services the Government needs.[1]). (Internet document.)
The philosophy advanced by A-76 is that government should focus on its core functions and rely on private business whenever products and services can be obtained from them.
The key to success is to subject government services to the same competitive pressures operating in private markets. Engaging government employees in competition with the private sector requires them to rethink and reengineer existing business processes to ensure that governmental goods and services are delivered as efficiently and effectively as possible.
Competition in the Federal Government
The federal government is using the FAIR Act as an important management tool for reducing costs. According to Randall Yim, the Deputy Undersecretary of Defense who oversees the Department of Defense’s (DoD’s) privatization efforts, “The department is aggressively pursuing competitive sourcing and the FAIR Act inventory is one of the key management tools in this process....While the inventory provides us with a pool of potential candidates, our plan is to evaluate the positions to ensure competitive sourcing makes good business sense. ”[2]
The DoD has already achieved significant successes with injecting more competition into its operations. As of April 2000, the Defense Logistics Agency (DLA) had completed three of 16 planned public-private competitions for the operation and management of defense distribution depots.[3] These depots perform functions such as storing and distributing large tactical vehicles and testing nuclear, chemical, and biological equipment. The competition is being managed electronically, with requests for proposals and responses all maintained on the Web.[4] A private firm, EG&G Logistics, has won competitions for two depots employing a total of 576 people. One of EG&G’s winning bids will cut depot costs by more than 20 percent over the federal employees’ bid.[5] Meanwhile, federal employees won the third competition, to run the depot in Columbus, Ohio, with a bid also expected to result in considerable savings for the taxpayers.[6]
In all, the DoD has 112,000 employees participating in competitions with private contractors. An additional 118,000 employees will participate in public-private competitions by 2005. The Pentagon says that the FAIR Act and subsequent competition for public jobs will deliver $11 billion in savings by 2005, and achieve recurring annual savings of more than $3 billion after 2005.[7]).
The federal experience suggests that, regardless of whether private or public employees win these competitions, they result in savings. According to the OMB, average savings of 30 percent result when the private sector wins a competition, while savings reach 20 percent or more when public employees win and retain services in-house. At the federal level, government agencies typically win half of all competitions.[8]
Competition in Texas
Texas has already shown a strong commitment to the tenets of competitive government. The 1993 Legislature created the Council on Competitive Government (CCG) in response to a growing interest in making government more efficient and cost-effective. CCG provided the state with a formal mechanism for competing governmental services. The council’s initiatives are credited with saving the state more than $53 million since its inception.
Generally, CCG can require state agencies to participate in a wide range of competitive government activities. Moreover, the council is exempted from the state’s procurement laws in making its recommendations. Finally, it carries the implicit approval of the state’s highest elected officials because they sit on the council, which includes the Governor, Lieutenant Governor, Comptroller, Speaker of the House of Representatives, chair of the General Services Commission, and the Texas Workforce Commissioner of Labor.
In addition to the CCG’s activities, state agencies are free to initiate their own competitive projects. The Comptroller’s office, for instance, recently subjected its outgoing mail service to public-private competition, and awarded the contract to a private company for an estimated savings of more than $700,000 over two years.[9]
A FAIR Act for Texas
Under Texas’ current competitive process, CCG is authorized to identify competitive opportunities throughout state agencies, and to respond to suggestions for competition from private vendors. At present, however, nothing in state law requires the agencies themselves to identify such opportunities, or to catalog their own commercially-available activities—stipulations that have made the FAIR Act a valuable vehicle for initiating competition at the federal level. Similar legislation for Texas could potentially produce major improvements in state government’s cost effectiveness. It is important that incentives exist for agency personnel to participate in competitions. Agencies should be allowed to distribute a portion of any cost savings to personnel involved in the competition process when its employees win a competition against the private sector.
Despite its successes, however, the FAIR Act also has its shortcomings. In particular, the inventories of commercial activities submitted by federal agencies to the OMB are simply lists of full-time equivalents (FTEs) and corresponding job titles; the inventories do not tie FTEs to specific services or functions, making accurate comparisons with private companies difficult. Andrew Fortin, former manager of privatization policy at the US Chamber of Commerce, has said the FAIR Act process has left the chamber “disappointed, frustrated, yet optimistic. Disappointed because the inventories are nearly indecipherable and lack a common format,” Fortin explained. “Optimistic because we are committed to making the FAIR Act a helpful tool in the never-ending process of reinventing government.”[10] The US General Accounting Office reports that a wide variety of reporting formats are used to meet FAIR Act requirements and that several inventories from federal agencies must be documented and examined before the federal government can identify a set of best reporting practices.[11]
Texas should be able to avoid such problems by monitoring the progress of the federal government in designing and implementing best practices for competition.
Recommendation
State law should be amended to establish a Competitive Government Act. This act would establish a comprehensive statewide system to ensure that, as a general rule, government performs no function when a private business can do that function better and at a lower cost.
The Council on Competitive Government is the logical vehicle to implement a Texas Competitive Government Act. The act should include a legislative intent clause as follows:
It is the intent of the Legislature to limit the size of state government and to use public funds as effectively and efficiently as possible in the performance of essential governmental functions. This intent is based on a philosophy that government should perform no function when a private business can do that function better and at less cost.
In addition, the act should:
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Require agencies and universities to inventory their commercially-available activities using instructions developed by the CCG and to report this information in their strategic plans. These inventories should specifically tie positions to functions or services. All agencies and universities should be required to compile a list of their commercially available activities by June 1, 2002 and report this information electronically to the Governor’s office.
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Require state agencies to include in their strategic plans a plan for subjecting a targeted percentage of their commercially-available activities to competition. CCG, working with agencies would establish a reasonable percentage target and identify competitive projects. The results of agency efforts should be reported to the CCG as completed and summarized in subsequent strategic plans.
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Allow agencies or divisions to distribute a portion of any cost savings resulting from a competition to the employees involved in the competition process. This would occur only if the incumbent employees win the competition. The Texas Incentive and Productivity Commission already has a process in place to certify the cost savings and facilitate the distribution of financial rewards.
Fiscal Impact
The fiscal impact of a Texas Competitive Government Act cannot be estimated. Texas spent $3.9 billion in wages and salaries in fiscal 1999 (excluding benefits and jobs in higher education).[12] The federal government has determined that about 75 percent of its FTEs work in commercially-available activities.[13] Using the federal experience as a model, Texas has approximately $2.9 billion of its wages and salaries devoted to commercially-available services.
The Comptroller’s office realized a savings of 31 percent by subjecting its mail service to competition with the private sector.[14] The federal government is averaging cost reductions of at least 20 percent through competition.[15] If Texas’ state agencies open to competition general revenue-funded, commercially-available functions accounting for at least $20 million each year, and realized an average savings of 20 percent results, the Texas Competitive Government Act could yield ongoing savings that would grow by $4 million annually.
[1] US Office of Management and Budget, “Circular No. A-76 (Revised 1999),” Section 4, Washington, DC (http://www.fo.hq.dla.mil/A-76/OMBCircularA-76.html
[2] Brian Friel, “DoD May Put More Jobs up for Outsourcing,” Government Executive (January 5, 2000) (http://www.govexec.com/dailyfed/0100/010500b2.htm). (Internet document.)
[3] US Department of Defense, Defense Logistics Agency, “DLA Holds Public-Private Competitions,” Fort Belvoir, Virginia, June 26, 2000 (http://www.supply.dla.mil/a76). (Internet document.)
[4] American Forces Press Service, “Defense Logistics Agency Capitalizes on Technology,” by Paul Stone, January 8, 1998 (http://www.dtic.mil/afps/news/9801084.html). (Internet document.)
[5] Katy Saldarini, “Union Takes Outsourcing Decision to Court,” Government Executive (March 20, 2000) (http://www.govexec.com/dailyfed/0300/032000k1.htm). (Internet document.)
[6] US Department of Defense, Defense Logistics Agency, “Defense Logistics Agency announces Defense Distribution Depot Competition Results,” Fort Belvoir, Virginia, November 10, 1999 (http://www.ddre.dla.mil/pressrel/ddc_111099.htm). (Internet document.)
[7] Brian Friel, “DoD puts 500,000 Jobs on Outsourcing List,” Government Executive (December 14, 1999) (http://www.govexec.com/dailyfed/1299/121499b1.htm(Internet document); and Catherine MacIntire Peters, “Down to the Core,” Government Executive (May 1999) (http://www.govexec.com/features/0599/0599s1.htm). (Internet document.)
[8] US Office of Management and Budget, Testimony of John A. Koskinen, Deputy Director for Management, Office of Management and Budget, Before the Senate Committee on Governmental Affairs Regarding the Freedom from Government Competition Act (S.1724.) (Washington, DC, September 24, 1996) (http://www.whitehouse.gov/OMB/legislative/testimony/19960924-23180.html). (Internet document.)
[9] Texas Comptroller of Public Accounts, Competitive Strategies Division, “Mailing Vendor Cost Comparison Summary,” Austin, Texas, June 7, 2000.
[10] Brian Friel, “Contractors Challenge Outsourcing Lists,” Government Executive, (November 1, 1999) (http://www.govexec.com/dailyfed/1199/110199b2.htm). (Internet document.)
[11] US General Accounting Office, Competitive Contracting: Preliminary Issues Regarding FAIR Act Implementation (Washington, DC, October 28, 1999), p. 6 (http://www.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=gao&docid=f:gg00034t.txt.pdf). (Internet document.)
[12] Texas Comptroller of Public Accounts, 1999 Annual Cash Report (Austin, Texas, November, 1, 1999), p. 128.
[13] Katy Saldarini, “More than 194,000 federal jobs could potentially be outsourced,” Government Executive, (October 2, 2000) (http://www.govexec.com/dailyfed/1000/100200kl.html). (Internet document.)
[14] Texas Comptroller of Public Accounts, Competitive Strategies Division, “Mailing Vendor Cost Comparison Summary,” Austin, Texas, June 7, 2000.
[15] Office of Management and Budget, Testimony of John A. Koskinen, Deputy Director for Management, Office of Management and Budget, before the Senate Committee on Governmental Affairs Regarding the Freedom from Government Competition Act (S.1724).
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