Commentary

Will Trump, Congress Try to Make the Federal Government Compete Again?

Expanding competitive sourcing could benefit taxpayers

A recent article in Government Executive raises the question of whether the incoming Trump administration will make greater efforts to outsource government functions to the private sector, after the Obama Administration not only slowed down the rate of privatization of federal government services, but also “insourced” (de-privatized) functions.

The Eisenhower administration first established a policy direction for the outsourcing of federal government sources by issuing Bureau of the Budget Bulletin 55-4 in January 1955, which subsequently became OMB Circular A-76 after the Department’s renaming. The Circular provides a framework for the federal government for public employees to compete with the private sector in performing duties deemed typically “commercial” in nature.

The Circular provides for exceptions under which the federal government can perform such commercial functions, while also establishing a means of annual self-assessment to determine whether agency functions are inherently “commercial” or “governmental,” as required by the Federal Activities Inventory Reform (FAIR) Act of 1998.

As the article notes, the George W. Bush administration did expand private-sector contracting through most of its duration, but after the 2006 midterm elections, Congress imposed a moratorium on competitive sourcing effective December 2007. Furthermore, the Bush administration repealed an administrative policy in 2003 that included language strongly discouraging the federal government from performing functions or services that compete with existing private sector enterprises.

Given current federal policy towards outsourcing, the Trump administration and the next Congress have an opportunity to re-embrace competition, as the Federal Government Privatization section of Reason Foundation’s Annual Privatization Report 2016 (APR 2016) explains.

The 2007 moratorium changed language in A-76, while also requiring private firms submitting proposals to assume employee benefit costs at least equal to those of equivalent federal government employees, thereby eliminating the examination of one area of potential cost savings that state and local officials often cite in making their case for privatization. Using the most recent OMB data made available from FAIR Act filings show that 43% of the federal government’s 2.6 million employees (1.1 million) serving in agencies subject to the Act perform functions inherently “commercial” in nature.

Studies of OMB estimated potential savings from competition have been rare lately, but historically show savings of 27% per full-time equivalent compared. Applying that savings rate across all 1.1 million commercial positions referenced above would yield up to $35 billion in annual savings—regardless of whether the public or private sector performs the function. The mere introduction of competition from the private sector often reduces costs in the public sector, a fact often lost in discussions about outsourcing government services.

Instead of allowing taxpayers to benefit more from competitive sourcing, many in the federal government want to ensure that the private sector has even less ability to compete, mostly by dismissing its effectiveness. The Government Executive article provides a quote from Jacqueline Smith, policy director of the American Federation of Government Employees stating that “[o]utsourcing is the most expensive way to get work done,” while also simultaneously calling for employee benefit costs to be ignored when making cost comparisons, which largely has the same effect as the current policy of assuming at least equivalent employee benefit costs between the public and private sectors— the level of potential competition between sectors is diminished, and the potential for taxpayer benefits from such competition diminishes.

Critics also focus on the track record of previous public vs. private competitions to provide government services. While federal government employees usually have won competitions with the private sector for providing services (73% according to 2007 OMB figures cited in APR 2016, the last year the OMB provided such data), without competitive tension from the private sector, agencies may otherwise lack incentives to reduce costs and increase efficiency.

The Trump administration appears to be more predisposed to privatization than the Obama administration, as the article notes. In addition to announcing a federal hiring freeze, President-Elect Trump’s massive infrastructure plan calls for significant involvement from the private sector. As with many Trump proposals, they are short on specifics at this point. While government competing with the private sector more benefits taxpayers, the potential for abuse in outsourcing and privatization decisions remains. Any infrastructure plan as large in size and scope as what the Trump Administration proposed will require openness and transparency at every step, as is the case with the substantial contracting out that likely will come with a hiring freeze. Otherwise, the potential for abuse will be very high.

Allowing the private sector to compete with the federal government for providing services benefits taxpayers, but federal policy enacted nearly a decade ago is standing in the way. Changing the language in A-76 to remove the moratorium on competition and allow for more robust cost comparisons might be one solution, though one prominent federal outsourcing expert has gone so far as to suggest scrapping the entire A-76 process and replacing it with a more open, competitive framework.

Regardless of the means, expanding federal competitive sourcing will benefit taxpayers by using competition to drive down costs and innovate in service delivery. Given the Trump administration’s plans to implement both a hiring freeze and large spending projects, relying more on the competitive sourcing of government sources may be a necessity.