A better way to spend more on education

Published 6:46 pm Wednesday, September 10, 2014

Alabama school districts miss an opportunity to save tens of millions of dollars every year. This is the conclusion of the latest installment of the Johnson Center’s Improving Lives in Alabama volume, authored by Dr. Dan Smith and graduate student Robin Aguiar-Hicks. Alabama’s school districts lag behind the nation in contracting with private companies for maintenance, transportation, and food services.

Currently the overwhelming majority of Alabama districts provide such services “in house” using district employees. Consequently school officials must make decisions about providing these services and supervise these employees. As I have discussed recently, cost decisions are rarely cut-and-dried, making decisions about maintenance or lunches challenging.

Businesses face many similar decisions. Every time a business produces a good or provides a service using their own employees, it is responsible for controlling the cost. If you run a bank and decide to make your own office furniture, you must ensure that the carpenters hired to build the desks, chairs and cabinets use tools and materials efficiently. It is preposterous for a bank to make as opposed to buy office furniture, but let’s consider how and why buying helps the bank control cost.

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A bank president delegates furniture production decisions to the manager of the furniture company. This helps because the furniture company manager knows more about making furniture, like when less expensive materials can be used without significantly affecting quality, than a bank president. The bank can only hope to match the furniture company’s cost, and then only by diverting substantial time and effort from bank operations. Instead the bank president can use the price of furniture and reputation of the maker to control costs. If two companies make comparable quality furniture, the one that sells it for less must be better at controlling costs.

The potential cost savings escalate when contracting involves services unrelated to a business’s core function. Bank presidents will likely find banking really interesting and the details of furniture making boring. School superintendents will be passionate about educating children and consider controlling the cost of janitorial services burdensome.

Alabama school districts trail others across the nation in contracting out for auxiliary services. A survey by Smith and Aguiar-Hicks earlier this year revealed that only 16% of state districts contracted out for maintenance, transportation or food services. By contrast, almost two thirds of school districts in Michigan contract for these services. Only 4% of Alabama districts contract for transportation services, compared with 30% nationally. Our school districts seem more likely to halt bus service altogether than to exploit private service cost savings.

Decades of privatization have allowed many comparisons by economists of cost control by the public and private sectors documenting significant cost savings from privatization with no deterioration in service quality. A study of school transportation privatization in Indiana found savings of 12% per year.

Contracting with private providers could yield enormous savings for Alabama school districts, which currently spend $1.4 billion annually, or 20% of the education budget, on auxiliary services. If we conservatively project 10% cost savings, this amounts to $140 million annually. To put this in perspective, Governor Bentley’s proposed 2% pay raise for teachers this last spring, rejected by the state senate as too expensive, would have cost $74 million per year.

Alabama’s public schools have experienced significant budget tightening in recent years. Teachers have received just one raise since 2007, and buy many of the school supplies used in their classrooms with their own money. Savings from auxiliary service privatization would not compromise the quality of classroom instruction and could benefit teachers. Smith and Aguiar-Hicks report that districts which have privatized of auxiliary services in Michigan pay teachers higher salaries than districts providing these services in-house.

Both business and government face a challenge to control costs without compromising quality. Purchasing products and services on the market represents a judicious way to control costs. Contracting out for auxiliary services can direct tens of millions of our tax dollars already budgeted for education back into the classroom to improve the lives of Alabama’s children.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. Read more about Improving Lives in Alabama at http://business.troy.edu/JohnsonCenter/improving-lives-in-alabama.aspx.


About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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