To Improve School Productivity, Bid Out Instructional Services

(IP-1-1989)

January 10, 1989

Issue Paper

By Douglas B. May

Executive Summary

• The status quo in public education is relatively unsatisfactory to all parties:

parents, students, teachers, taxpayers, employers.
• Core of the problem may be the effort to prop up a monolithic, socialized
industry in this era of market solutions and decentralized institutions.
• School vouchers, the leading market alternative, have much appeal but are
debatable on grounds of equity, constitutionality, and bureaucratic encroachment.
• Contracting-out, effective for many other government services, could be applied
to the teaching function.
• Potential benefits would include economy, productivity, morale, and innovation.
• "Affirmative Action for Private Enterprise in the Classroom," taking Colorado as a
pilot, could begin with a legislative mandate to contract out one-third of all the
states teaching services by 1993.
• Feasibility of the phased approach, in both political and policy terms, is
suggested by the Colorado legislation adopted last year that is now beginning to
contract out 20% of Denvers bus routes.
Embarrassment of the Educational Status Quo

The idealistic aims of public education have changed little over the years.
Each year the amount of money we spend on education increases, and the
teacher-student ratio improves. Yet fewer and fewer customers are satisfied
with the end product.

Kids, parents, and teachers alike are "voting with their feet" and bailing out of
the current system, walking away frustrated and angry at the unresponsive
status quo.

Teacher burnout terminates too many careers. Student flight from mediocre
public schools, meanwhile, creates (at best) an elite system of de facto
private schools where the cost of entry is equal to the cost of a new home in a
wealthy suburb, or feeds (at worst) a growing dropout population that is
barely employable and socially burdensome.

More dollars are not the answer. Rather, the problems which cause these
disappointing results are systemic. Isnt it time we set aside our antiquated
ideas about the public education system and reformed it along more
entrepreneurial lines?

One fresh approach would begin with a candid recognition that the current
system of public education is a socialized model far out of touch with state-of-
the-art methods in todays service economy. Designed to provide equal
educational opportunity for everyone, it often fails this basic objective. Its
productivity, meanwhile, suffers from the same inefficiencies as all other
socialized bureaucracies. It is largely unresponsive to anything but the vested
interests of its own participants. Administrators and teachers alike squander
resources on turf wars and power plays. Special interest groups, seeking
preferential funding treatment, dominate the decision-making process.

Accountability receives much lip-service, but it is entrusted to local

committees which are usually at the mercy of more-knowledgeable teachers
and administrators "guiding" them through their review. Such toothless
watchdogs rarely, when push comes to shove, overcome the power of the
established interests. Many observers agree that genuine accountability can
only be achieved by moving the schools back toward some kind of market
system.

Voucher Benefits and Drawbacks

The most widely discussed plan for doing this, up to now, has been to
voucherize the entire system of K-12 education. With vouchers, pro rata
shares of the governments total expenditure on education would be given
directly to parents who could then freely choose their own schools, public or
private. Vouchers would allow nonpublic schools to gain market share against
what is currently a quasi-monopoly, and they would force accountability on
the public schools by making them compete with each other and the nonpublic
sector for enrollment and revenues.

By privatizing the education system at the funding level, however, the

voucher system invites attack by those who fear at educational equality and
inclusiveness are being sacrificed in the name of free-market efficiency.
Furthermore, some critics allege, the only sure winners with a voucher policy
would be the well-to-do -- who are already utilizing private schools at full cost
and who would suddenly reap an unmerited subsidy windfall for part of that
cost.

Constitutional questions also arise about whether taxpayer funds should be

used to pay tuition at schools with religious affiliations. There is the additional
fear that vouchers could spell the end of all truly private education, since most
plans call for restricting voucher payments to an "accredited" roster of
schools, requiring additional government intervention and a new bureaucracy
to decide who is and is not approved.

In summary, while vouchers may eventually prove to be the best alternative,

they do not come without their own set of concerns. There is another realistic
strategy for beginning to privatize schools which deserves a fuller exploration
than it has received heretofore. It would bypass most of the above difficulties
by focusing on the services rendered within the public school system. Its
essence: competitively contracting out the teaching function.

Contracting out teaching services would lift from citizen school boards,
monolithic unions, and top-heavy bureaucracies the responsibility for
educational productivity and cost-effectiveness -- lodging it instead upon a
new industry of for-profit instructional companies vying with one another for
the business of various school districts (or even individual school buildings or
programs within buildings).

School boards and superintendents would no longer hire and supervise the
teaching staff in the traditional (decreasingly productive) fashion. Instead, a
number of private teaching firms (specializing variously in math, reading,
sciences, and so forth) would compete for the instructional contract, just as
law firms currently compete for the legal work of local government units,
accountants compete for government auditing contracts, and construction
firms compete for contracts to build government office buildings.

Even in some school districts now, private firms compete for construction
contracts, food service contracts, and bus contracts. There is no reason that
this means of using the market to maximize efficiency of services cannot be
extended to the arena of teaching services. Private firms would thus have an
incentive to develop successful programs, prove their effectiveness, and
market them to various school districts. School boards would be responsible
only for overseeing budget and performance specifications -- a big enough job
to keep any part-time board member busy for the duration of his or her term.

Numerous other government services are already being contracted out

because more and more Americans are realizing that the governments mere
acceptance of responsibility for funding certain services does not bring with it
any special skill at actually providing those services.

Highway engineering and construction work is often contracted out to private

vendors. Defense contractors design and build the equipment used by the
military to protect us. Increasingly, fire safety and public transportation
services are being contracted out to private vendors who can improve service
and lower costs.

In the field of education, however, the local school district not only feels an
obligation to pay for public education, the district also considers itself (for little
reason other than long habit and unexamined custom) to be a singularly
competent provider of teaching services.

But the widespread public disenchantment with our educational system stands
in jarring contrast to the administrators high self-esteem. A majority of
parents surveyed are actually in favor of vouchers-- but shrill public protest
by teacher-led parents groups alleging the unfairness of a voucher system
has so far squelched the kind of sustained public debate that might lead to the
implementation of such a system.

The contracting-out alternative, meanwhile, has yet to receive any attention in

the current education debate. When it does, frantic opposition is predictable
since, like the voucher proposal, privatizing schools through contracting-out
would prompt the removal of a lot of educational deadwood. Unlike the
voucher system, however, the approach sketched in this paper would
concentrate on reforming the public system instead of perhaps making it
easier for those better-off to opt out of the public system (leaving behind
societys poorest and least motivated students to fend for themselves).

This approach is already being pioneered very modestly, in a handful of states

and districts, as reported recently in The Wall Street Journal. See the
Appendix.

Advantages of Contracting-Out

The benefits of contracting out education programs are many. By separating

the responsibilities of teaching and program administration from the
responsibilities of funding allocation, much of the current incentive to play
power politics is eliminated. School board members, allocating resources
based on the needs of the students and parents residing in that particular
school district, would no longer be held hostage by the political power of
teacher unions, whose membership often decides the outcome of local school
board elections.

Responding to the profit motive, education entrepreneurs ("edupreneurs," did

someone say?) would have to serve the dual masters of quality and
efficiency. Without a quality product, local districts would choose other service
providers or, if a mediocre provider were mistakenly hired, the contract could
soon be terminated for cause. And if the edupreneur's operations are
inefficiently run, then he will quickly deplete his financial resources and be
forced out of business. Those edupreneurs who can best balance both
imperatives will create successful businesses and thus begin to revolutionize
the public education system.

With todays near-monopoly system of public education, no real accountability

exists. The parties who suffer most from poor quality and inefficiently
allocated resources are the students who pass through the system without
receiving adequate preparation for productive lives, and the taxpayers who
must later pay to retrain such mal -educated youth for jobs or to incarcerate
them in jails or to support them on welfare. By introducing an element of
competition and accountability, underperforming workers would be gradually
sorted out of the education industry.

Though some cheerleaders for the teaching profession may deplore this rude
adjustment to how the real world works, it is probable that very few teachers
will ultimately be given the boot. All teachers, however, upon seeing merit
rewarded and incompetence removed, should eventually find the new system
to be a source of inspiration. (Nothing saps ambition as much as seeing fellow
workers dawdle -- for equal pay and recognition -- particularly for the creative
employees who, by the very nature of seeking progress, sometimes stumble
and find themselves alone with no one to encourage their efforts.)

By empowering teachers and encouraging them to hire on with (or even

create and fund) new and progressive firms that develop better teaching
methods and successfully implement them, a contracting-out system would
offer the opportunity for teaching professionals to regain autonomy in the
classroom. If their innovations are successful and students benefit from them,
the demand for the services of that teaching firm will rise. Ultimately, that
teacher and his/her firm will benefit from more clients at better prices. Thus,
the dedicated classroom teacher has everything to gain by encouraging this
idea for reform.

Raising the stature of the teaching profession is a goal sought by many, but
the proposed solution is too often to throw more money at the problem --
which only antagonizes the already-rebellious taxpayers and parents. In a
privatized system, the status accorded edupreneurs and teaching
professionals will rise tremendously.

Already, the "public schools of choice" program in Minnesota (allowing parents

to choose among various public schools in and out of their local district) has
begun freeing teachers to develop new programs better suited to their own
teaching skills and the wishes of the community. Prior to introducing an
element of competition, there was a tendency for the school bureaucracy to
suppress new ideas and alternative school proposals. By introducing
competition, however, administrators have had to encourage innovation and
as a result both students and teachers have much more choice, making the
teachers are happier and more effective employees.

Reform through contracting-out may also encourage new entrants into the
education field. For example, what if accounting firms decided to compete for
business class instruction contracts? The big accounting firms already have
large training departments which could be expanded into profit centers aimed
at teaching high school bookkeeping courses. Besides earning profits, the
accounting concern may obtain an introduction to the labor pool s newest
entrants and create cost-effective apprenticeship programs that attract many
new workers to their firm.

Engineering firms may elect to create new subsidiaries to compete for science
and math program contracts, Apple or IBM could go after computer science
contracts. The NCAA (this is America, this is the Eighties) might even organize
a nonprofit consortium to develop its own high school physical education
program. Book vendors could joint-contract with municipalities and school
districts for library services. Rather than import experts into the teaching field,
the new system would join educators with established professionals for mutual
profit.

Finally, by creating a system of privatized teaching firms which compete for

the business of many different school districts, the contracting-out approach
would create an opportunity to benefit from new technology and economies of
scale in the field of education. Currently, a single district cannot often
underwrite the expense of creating a new program of instruction. There is no
means of selling the new program to others to recoup the initial investment of
time and money. No property rights accrue to todays public school innovator.
One possible source of innovation is textbook publishers, but the cost of
development can be so high that even major publishers can rarely recoup
their investment on. book sales alone.

However, if front-end R&D costs could be recouped in the form of teaching-

contract profits spread over several school districts, the economies of scale
might make the investment more reasonable. Progressive programs that
appear uneconomical today could suddenly make economic sense after the
broad implementation of a system of contracting out teaching services.
Furthermore, since no particular school district is underwriting the cost of new
program development, the technologies could be equally available to districts
both poor and wealthy, large and small, urban and rural.

In summary, though contracting out teaching services would involve radical

changes in the status quo, it is not itself a radical idea. Contracting-out is
already broadly used throughout the government sector and though a system
of competitive bidding is not without risk (our school systems hardly need the
equivalent of the Pentagons $400 hammers), there is no reason to believe
that local school districts currently have a competitive advantage over private
industry when it comes to delivering teaching services.

Contracting out is already used at the school district level (in school building
construction, food service preparation, etc.) -- and dropout clinics that cater to
students who have given up on the conventional system are already
succeeding with performance contracts in Washington State and California. A
provision for such clinics also was written into Colorado law by Senate Bill
201, adopted in 1987.
Questions to Be Explored

Proponents of this new approach can anticipate the chorus of doubters

labeling it impossible, immoral, or both. "Yes, but education is different from
all those other government functions that have been successfully privatized,"
we will be told. Is it really so different?

Since this issue paper is meant as a sketch of new possibilities, not a full-
dress policy study, the following lines of inquiry are suggested for further
investigation:

1. Quantitatively, how could contractual teaching firms operate lean enough to

a) save taxpayers money, b) pay teachers well, and c) still show a profit to
investors?

2. Would providers necessarily be non-union? Could the plan be structured so

as to disarm the expected opposition by NEA and AFT, converting them into
self-interested supporters?

3. Would vigorous competition really spring up, or would oligopoly set in?

4. How readily/rapidly could a school district terminate a failing contractor and

install a new one?

5. Taking Colorado as a laboratory, what actual or foreseeable companies

might be expected to enter the bidding if instructional contracts were offered
in the near future?

6. Again specific to Colorado -- where, how, and when could a contract- school
pilot plan be launched on a small enough scale and with tight enough
safeguards to provide a low-risk test of this concept?

Conclusion and Recommendations

Contracting-out works -- both because it installs an effective means of

demanding accountability, and because privatization gives valuable property
rights to successful innovators.

It reduces questions about unfairness and inequity and retains a primary

emphasis on preserving local school districts.

It bolsters responsiveness to voters and taxpayers by placing major spending

decisions clearly at the board level instead of at the staff level.

It empowers teachers to create their own programs with less interference by

district bureaucrats -- though it does submit the teachers to the sometimes
even more stringent discipline of the marketplace.

Reform along these lines will not come from within the educational
establishment, however. Because the contracting-out reform breaks down the
current hierarchy from a bi-polar system (teachers vs. school districts) into a
multi-vendor system, the most ardent supporters of the status quo will be the
powerful teachers unions. While individual teachers have much to gain from
this reform, they will not find their unions sympathetic to such.

Consequently, reform will have to be imposed upon the current players in the
educational arena by citizen pressure from the outside. The stubbornness of
Colorados status quo was indicated last year when House Bill 1247, a modest
proposal requiring that the contracting out of school transportation systems
must at least be considered, was promptly shut out of legislative consideration
by powerful special interest groups.

Last years RTD privatization reform shows it can be done. With careful
grassroots organizing, thorough policy development, and skillful legislative
tactics the 1988 success of a 20% contracting-out bill for Denver bus routes
could be duplicated by school reformers in 1989 or 1990.

The author recommends consideration of an Affirmative Action Plan for

Private Enterprise in the Classroom which will mandate, by a certain point in
time, perhaps three to five years, that 50% (or 35% or 20% or whatever is
feasible) of all teaching services shall be contracted to private vendors.

This phased approach would give local school districts the flexibility to retain
administrative authority over special programs which they deem particularly
sensitive or particularly advantageous to keep in-house.

However, for a growing proportion of teaching services (those in which the

districts have no decisive advantage as providers) instruction would begin to
be delivered by the private sector where accountability and property rights
create greater incentives for innovation and efficiency.

Through this reform, Colorado could move toward a revitalized public

education system, available to all, which is responsive to community needs,
efficiently managed, and provided with an incentive to perform and progress.

The socialized system of delivering teaching services has been with us long
enough. The time for significant reform has come.

DOUGLAS B. MAY is an executive with United Capital Management Group, part

of the United Bank of Denver. A Colorado native, he holds an economics
degree from Stanford and is working on a novel about privatizing the U.S.
educational system.

EDITOR of the Independence Issue Paper Series is John K. Andrews, Jr.,

president of the Institute.
Nothing written here is to be construed as necessarily representing the views
of the Independence Institute or as an attempt to influence any election or
legislative action.
Please send comments to Independence Institute, 14142 Denver West Pkwy.,
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