Privatization Brings Big Savings to Michigan's State Universities

Privatization Brings Big Savings to Michigan's State Universities
April 1, 2005

Budget pressure in recent years has forced Michigan's public institutions of higher education toward cost savings and contracting out of services, according to news reports and a recent survey by the Mackinac Center for Public Policy.

In fiscal 2005, for which the state government approved an effective "no change" in funding for Michigan's 15 public universities, those institutions have been working overtime to balance their budgets. This has led them to increase contracting out to the private sector for services.

In May 2004, for example, Western Michigan University (WMU) signed a contract with Commercial Sanitation Management Services Inc. to handle custodial needs in its 22 residence halls. The contract is projected to save the university $1.5 million annually.



$1.1 Million Below Union

Before choosing Commercial Sanitation, WMU received bids from five private firms and from the union that represented the 60 custodial workers WMU had employed prior to its decision to privatize. Commercial Sanitation submitted the lowest bid--approximately $1.1 million less than the union's.

Similar evidence of cost savings and institutional efficiency appeared in a survey of the state's public universities conducted by the Mackinac Center for Public Policy last summer. Of the 15 schools, 10 took part in the survey. Four universities--Central Michigan University, Grand Valley State University, Saginaw Valley State University, and Wayne State University--did not respond, and Western Michigan University declined to participate because of ongoing contract talks.

According to the survey results, the most commonly outsourced services among the responding universities were garbage and sanitation services (90 percent of the schools outsourced these services), bookstore operations (80 percent), vending operations (70 percent), and legal services (70 percent). Other outsourced services included maintenance (50 percent), utilities (50 percent), food services (40 percent), busing (30 percent), laundry (30 percent), and custodial services (30 percent).



Need for Firms' Expertise

Almost all of the university officials interviewed for the Mackinac Center study said expertise was their main reason for outsourcing.

"What we are is an educational institution; that's where we have our expertise," said David W. Barthelmes, vice chancellor for administration at the University of Michigan-Flint.

Gary Reffitt, director of purchasing and communications at Eastern Michigan University, echoed Barthelmes, telling the Mackinac Center, "Universities are starting to realize they're in the education business, not the bookselling or food or laundry business."

Cost savings and efficiency also rated high among universities' reasons for privatizing. Ferris State University's (FSU) vice president for administration and finance, Dr. Richard P. Duffett, reported going from losses of $85,000 per year to profits of $85,000 per year on the school's vending services once the university partnered with Consolidated Vendors Corporation of Norton Shores, Michigan in August 2003.

Some school administrators also cited equipment needs and capabilities as driving their schools to outsource. FSU contracted with Automated Apartment Laundries to purchase and replace the school's old laundry equipment when it hired the company to provide laundry services beginning in August 2003. Duffett said of outsourcing, "I think we [universities] have taken advantage wherever we can ... to serve both students, faculty, and staff. [There's] been a lot of good, hard work done."



Advantages of Consortium

Officials of the universities have adopted a creative solution to their budget problems through creation of the "Higher Education Purchasing Consortium," which the schools formed with the state of Michigan in August 2003 to gain leverage when negotiating contracts with private firms.

Michael Boulus, executive director of the Presidents' Council, State Universities of Michigan, said of the consortium, "[The] overarching goal is for universities to work creatively to keep costs down."

All 15 public universities in Michigan are part of the consortium. Each university participates only in the contracts it chooses.

One example of the consortium's work was a recent contract for electrical power. In February 2004, the State Department of Management and Budget, Michigan State University, Western Michigan University, and the University of Michigan-Flint signed a contract with Consumers Energy through the consortium. The agreement is expected to save each signer 7 percent on electricity, or approximately $730,000 for the three universities combined.

The universities also have used the strength-in-numbers approach to manage their rising costs of health care and insurance, forming the Michigan Universities Coalition on Health (MUCH) and Michigan Universities Self-Insurance Corporation (MUSIC).



Room for Improvement

Despite the progress made so far in response to the state's current budget crisis, there is still room for improvement in state university spending, said Michael LaFaive, director of fiscal policy at the Mackinac Center.

"Institutions that contract out for important services should remember a few basic items to optimize results," LaFaive said. "Maintain an open bidding process; include multiple vendors; give appropriately detailed specifications for the desired service; and engage in periodic, competitive rebidding. If schools don't get these minimal aspects right they may risk giving privatization a bad name."

LaFaive said contracting that saves money and focuses the schools on education will be good both for Michigan citizens and state university budgets.


Laura J. Davis (ljdavi@umich.edu) is a University of Michigan student who served as a fiscal policy intern for the Mackinac Center for Public Policy in 2004.