Prepare for the debate about which agency functions are “inherently governmental” and whether contracting out saves money.
President-elect Donald Trump’s recent choice for budget director had been in Congress only six months in 2011 when he waded into the perennially divisive debate over what tasks on the government agenda can be performed by outside contractors.
“I have been approached by several small businesses that have had their work 'insourced’,” said Rep. Mick Mulvaney, R-S.C., swept into office during the Tea Party wave of 2010. "Government agencies are cancelling contracts with private-sector businesses, taking the work in-house, and often even hiring away the private businesses' employees. By doing that, the Obama administration is growing government, hurting small business and costing taxpayers money.”
Mulvaney avowed then that a key way to reduce the “skyrocketing” national debt would be “outsourcing non-governmental functions to the private sector.”
Flash forward to Trump’s promise of a federal hiring freeze within his first 100 days in office. Though details remain vague on how Trump would implement his freeze, a similar policy during the Reagan and Carter administrations resulted in the hiring of more contractors to compensate for smaller internal agency workforces. Thus, observers of government procurement and federal employee unions are preparing for another swing of the pendulum in a decades-long debate about which agency functions are “inherently governmental” and whether contracting out more of them actually saves money.
“The thing we’re watching for would be exactly what is the government trying to achieve here, and what is the most effective and efficient way to achieve that objective,” said David Berteau, president and CEO of the 400-company Professional Services Council, whose contractor members might gain new work if Trump pursues outsourcing.
But for unions, the cost question is settled. “There is always a contradiction when an administration wants a lot of outsourcing and saving money,” said Jacqueline Simon, public policy director for the American Federation of Government Employees. “Outsourcing is the most expensive way to get work done, and if we get a real fiscal hawk, not a pretend one, we’ll end up with a policy much more constrained when it comes to contracting out.”
Decades of Debate
The insourcing-outsourcing dynamic revolves around the noted Office of Management and Budget Circular A-76, issued in 1966 (though the tension over when to outsource goes back to the early Eisenhower administration). Continually updated, A-76 requires agencies to compete with private-sector firms for the opportunity to perform types of work that the agencies have decided is not inherently governmental in nature.
The George W. Bush administration sought expand the use of A-76 “conversions” to outsource more work, but ran into resistance from employee groups and Congress, forcing it to scale back the efforts during Bush’s second term. The Obama administration in turn banned most outsourcing and pulled more functions back to the agencies. In September 2011, the Office of Federal Procurement Policy sought to clarify what qualifies as an “inherently governmental” function that must be performed in-house, calling the guidance a “milestone” in implementing President Obama’s 2009 directive on reducing contractor waste.
More recently, lawmakers working on the fiscal 2017 National Defense Authorization Act, at the behest of the Pentagon, inserted language that would have opened the door to more defense outsourcing, but it was killed after lobbying by AFGE and the International Federation of Professional and Technical Engineers.
Yet the Obama administration was not successful in heading off a movement in Congress to outsource some private debt collection at the Internal Revenue Service. Complying with a 2015 law, the tax agency this September unveiled its plan for 2017 to hire four outside firms to handle unpaid tax balances deemed “inactive” for in-house debt collectors.
That privatization move was strongly opposed by the National Treasury Employees Union. It argued that such an effort tried in 1996 produced a net loss of $17 million, and warned in a statement that “with the ever-increasing numbers of tax phone scams and identity theft problems, the outsourcing of tax collection will be confusing for taxpayers and could make taxpayers more vulnerable to criminals.”
NTEU National President Tony Reardon told Government Executive this month that “it is very difficult to freeze hiring across the government without seriously disrupting services to the public. NTEU is committed to making sure the incoming administration and the new Congress understand this worrisome dynamic. Additional outsourcing would only worsen the problems caused by a hiring freeze. Outsourcing the work of the federal government leads to a loss of accountability and efficiency and diminishes the quality of service to taxpayers.”
What Trump Might Confront If He Attempts Outsourcing
“Every recent administration has outsourced increasingly,” said Michael Fischetti, executive director of the National Contract Management Association, noting that contractor spending rose from around $200 billion in 2000 to $550 billion in 2011, before falling to $450 billion now. Sixty-two percent of this spending is for services, and there are twice as many people who are contractors than just a few years ago, when “we had General Services Administration employees mowing the lawns,” he added.
During the Iraq war, the Bush administration had more contractors than soldiers in the war zone, Fischetti said, adding that “services” are difficult to define. “Who supervises the in-house contractor secretaries?” he asked. Clearly, contractors are key components in the success of such agencies as NASA and the Energy Department.
Addressing Trump’s hiring freeze, “I’d ask at what point do you lose the core expertise of the civil service to be able to manage what contractors are doing?” Fischetti said. “In the short run, a hiring freeze makes it more challenging because most agencies are understaffed already.”
The federal hiring process, Fischetti acknowledged, is “challenging, bureaucratic and not where we want it to be. But I worry in the long term about the civil service not having the expertise to oversee the process for many years to come.”
AFGE’s Simon stressed that the question of whether outsourcing saves money “is not really a matter of opinion, but data and evidence.” The last time A-76 competitions were used on “any kind of scale, the government employees’ bids came in lower than the contractor proposals nearly 80 percent of the time,” she said. “Contractors don’t want to perform work cheaply, they want profit.” By contrast, government workers “work on a nonprofit basis, and are modestly paid to do the government’s work,” she said.
The rationale for the current moratorium on A-76 competitions, she said, is that the process needs improving to achieve more consistency in measuring costs and alleged savings. And any changes await agency inventories of their service contracts—a difficult task not required of contractors using taxpayer funds, she said.
“An apples to apples comparison,” Simon added, removes the cost of paying employee benefits “so that contractors don’t win the competition by not supplying health benefits to the families of the workforce.” She said it is common for contractors to bill taxpayers for the employee benefits they provide. In some cases, such as parental leave, these are benefits not available to government workers.
The Professional Services Council has long favored “removing the congressional constraint on public-private competition,” acknowledged Berteau. “But in many ways it is not the most effective way to determine whether work should be done by government employees or contractors or a combination in partnership.”
To achieve the best balance, “you have to have a strong capable government workforce,” he said. A “blanket hiring freeze,” which he recalls under the Reagan administration, could actually “reduce the government’s ability to contract out appropriate work if it is not managed carefully. It can have negative consequences if too many people leave and can’t be replaced.”
As for Trump’s ultimate approach, Berteau said it is too soon to tell without knowing who the president-elect will pick as agency undersecretaries, who will be running GSA and who will be the deputy budget director for management.