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Analysis of the Managed Competition Initiative as Presented in the FY 2000 Proposed Operating Budget and Financial Plan
May 7, 1999




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TEL. 202-727-3600, FAX 202-724-8814

Deborah K. Nichols
District of Columbia Auditor


The Honorable Linda W. Cropp, Chairman
Council of the District of Columbia
441 4th Street, N.W., Suite 704
Washington, D.C. 20001

Letter Report: Analysis of the Managed Competition Initiative as Presented in the FY 2000 Proposed Operating Budget and Financial Plan

Dear Chairman Cropp:

Pursuant to your request, the District of Columbia Auditor examined the managed competition initiative as presented in the Fiscal Year (FY) 2000 Proposed Operating Budget and Financial Plan (Budget). This letter report presents the Auditor's analysis and findings regarding the proposed managed competition initiative for FY 2000.


The objective of this examination was to determine:

  • whether $28.11 million in projected savings in FY 2000 from managed competition initiatives are likely to be achieved.

The projected savings for the managed competition initiative for FY 2000 through FY 2003 are $ 100.1 million2. For purposes of this analysis, however, the Auditor's primary focus is limited to the projected savings for FY 2000.

In conducting this examination, the Auditor reviewed and analyzed information presented in the FY 2000 Proposed Operating Budget and Financial Plan and information provided by the Office of Budget and Planning and the Office of the City Administrator. Also, the Auditor interviewed representatives of the Office of Budget and Planning, Office of the City Administrator's Office of the Competitive Services (Office of Competitive Services), and representatives of other cities that have established a managed competition or similar program.


The FY 2000 Proposed Operating Budget and Financial Plan contained several approaches to "improving the District Government." One of the approaches was the development of a managed competition program for the District of Columbia Government. Savings from the managed competition program were projected at $28.1 million for fiscal year 2000 and $51.65 million for fiscal years 2001 through 2003 for a total of $79.75 million.



The fiscal year 2000 proposed budget is balanced, in part, on the District achieving projected savings of $28.1 million from the managed competition initiative. As a result, if the $28.1 million is not realized, the fiscal year 2000 budget will essentially be unbalanced.

Included in the estimated $28.1 million projected savings from managed competition for fiscal year 2000 are two programs in the Office of Property Management that are under consideration for privatization instead of managed competition. The two programs are security services and custodial services. Both programs have an aggregate dollar value of approximately $15.2 million. The exclusion of these two programs from the managed competition estimate reduces the total value of programs to be competed by $15.2 million and reduces the projected managed competition savings of $28.1 million by $3.1 million. Therefore, if these services are privatized, the actual projected savings for FY 2000, if any, will be less than the $28.1 million estimated by the Office of Budget and Planning.

A response from officials of the District's Office of Budget and Planning regarding projected savings associated with the managed competition initiative stated the following:

"If savings totaling $31.9 million are not realized in FY2000, this will create a budget deficit. One option to address this result is to establish a contingency fund to protect the District in the instance that unallocated savings do not materialize."

Budget officials did not identify the amount or source of revenue to fund the contingency fund. Further, the Executive Branch, in a budget hearing on managed competition, indicated that another option for addressing any shortfall in managed competition savings is to require District agencies to identify savings in the amount of the shortfall. We believe that this alternative is unacceptable in that most agencies cannot find "savings" without reducing services or some other aspect of their operations which translates into a budget cut, not a savings. Therefore, requiring District agencies to absorb budget reductions to address any shortfall in managed competition savings could adversely impact city programs and/or service delivery.


Mission Statement, General Policies, Goals and Objectives. Had Not Been Defined And Clearly Articulated For the Managed Competition Initiative

The proposed use of managed competition to achieve effective service delivery to District residents represents a new approach for the District of Columbia Government. The District's workforce is naturally concerned about the purpose of the initiative, how it will be implemented, and the effect of managed competition on job security. In order for managed competition to be successful and generate cost savings to the District government, these questions and other concerns must be adequately addressed. The managed competition program for the District of Columbia Government must have a comprehensive and clearly articulated mission statement, program policies, and concrete, well-defined goals and objectives that are expected to be achieved. Further, the mission statement, program policies, goals and objectives, in addition to the methodology that will be used to implement managed competition, must be clearly articulated to all employees who will be affected by it.

The importance of a clearly defined program mission, polices, goals and objectives has been cited by experts and scholars who have studied or been involved in the implementation of managed competition in other cities. For example, experts state that many programs fail because there is no clear mission for the managed competition program3. The lack of a definitive mission statement could lead to goals that are not clear, complete, or achievable. Also, the support necessary to effectively implement a managed competition program may be more easily gained when the program's mission and goals are clearly articulated and understood. An example of a mission statement for the City of Charlotte, N.C. is presented below4:

"In evaluating the most efficient way to provide public services, the City shall use a competitive process in which private service providers are encouraged to compete with City departments for the opportunity to provide such services, and in which the option of delivering services through public employees and departments must be justified through the competitive bidding process. The City shall encourage the provision of public services through contracts with private service providers, wherever this offers the lowest cost, most effective method of service delivery consistent with service level standards and other adopted City policies."

At this time, it appears that a clearly defined mission statement, goals, objectives, and policies have not been clearly articulated for the District of Columbia Government's proposed managed competition program. When the Auditor of the District of Columbia requested copies of this information from the Office the City Administrator, a representative of that Office referred the Auditor back to thirteen pages of information presented in the proposed FY 2000 Operating Budget entitled: "Managed Competition, a Strategy for Improving Services." This section of the proposed budget contained general information on the managed competition concept, the efforts of other cities, as well as some specific discussion of the managed competition approach for the District of Columbia. However, none of the information presented in these pages was identified and labeled by the Office of the City Administrator as representing the specific mission statement, goals, objectives and policies for the District of Columbia's managed competition program.

The Auditor acknowledges that it can be beneficial to provide general information about managed competition and models of other cities that have successfully implemented such programs. However, to facilitate the success of the program in the District of Columbia, the Executive Branch must articulate a clearly defined mission statement, goals, objectives and policies specific to the unique circumstances and concerns of the District of Columbia Government.

Lack of Adequate Planning May Lead to a Delay in the Implementation of FY 2000 Managed Competition Initiatives

The Office of Competitive Services could not provide an anticipated date for the implementation of managed competition projects in FY 2000 and indicated that the Office of Competitive Services "is still laying the groundwork for managed competition programs for FY 1999." Further, according to the Office of Competitive Services, "planning for specific FY 2000 programs will begin in the near future." Subsequent inquiry revealed that a contractor will assist the Office of Competitive Services in planning and implementing a managed competition program. The Office of Competitive Services should ensure that the contractor's scope of work includes, but is not be limited to, developing a mission statement, program policies, goals, and objectives. Further, the contractor must have sufficient time to review labor agreements, personnel, procurement, and other applicable laws and regulations that may need to be modified in order to achieve the purpose of managed competition.

The Auditor believes that planning should have been initiated much sooner than the third quarter of fiscal year 1999 in order to ensure the prompt yet prudent implementation of fiscal year 2000 managed competition projects at the beginning of fiscal year 2000. Early planning and implementation may have enhanced the District s ability to meet and possibly exceed the projected $28.1 I million in savings from managed competition in FY 2000. The ability to achieve the projected $28.1 million in savings has been placed in doubt as a result, in part, of untimely planning and execution of steps necessary to implement a viable managed competition program to the level and extent proposed by the Executive Branch. As a consequence, the Auditor questions whether the entire process related to the implementation of the FY 2000 managed competition initiative can be completed in sufficient time to achieve the projected savings predicted in the FY 2000 proposed budget. At the time of our field work in mid to late April, approximately five months before the beginning of fiscal year 2000, a selection of programs — one of the basic steps in the process — had not occurred.

District Officials Have Not Determined the Actual Cost of Projects For Managed Competition

Accurate and comprehensive cost data has not been developed for District government activities proposed for the District's managed competition program in FY 2000. As a result of this deficit in information, the District really does not know how much it costs to provide the services proposed for managed competition in FY 2000.

Obtaining accurate cost data for District government programs and activities selected for managed competition is critical. Reasons why this data is important include, but are not limited to, the following:

  • assisting in the evaluation of bids submitted for services. If the District government does not know the cost of providing services it cannot accurately determine the competitiveness of bids.
  • determining whether or not savings are being achieved from managed competition. If the government does not know how much it costs to deliver specific services or to carry out specific tasks, it cannot measure savings.

A GAO report5, which discussed the importance of reliable cost data, indicated that reliable and complete cost data on government activities are needed to ensure a sound competitive process and to assess overall performance. Further, other experts6 indicate that comparison of alternatives, such as whether to select a private contractor, continue services by employees or to privatize, will give inaccurate and misleading results if the true cost of providing a service or program is not known. Both the direct cost of services as well as the allocation of indirect and overhead costs should be included with cost information.

The Auditor found that the projected $28.1 million in savings from managed competition in the District of Columbia Government in FY 2000 was calculated using either actual or proposed budget amounts as the "value" of each program. Even this "value" was determined inconsistently in that the FY 1999 budgeted amount was used to calculate estimated savings for some programs and for other programs the FY 2000 proposed budget amount was used to calculate estimated savings The Auditor questions the achievability of projected savings that were not calculated on the basis of accurate, comprehensive cost data. The actual cost of an activity must be determined and used, rather than the amount budgeted or a proposed budget amount, to evaluate competing bids and to determine projected savings. Without the use of actual cost data, it is impossible to accurately determine the actual savings that may or may not be realized from managed competition initiatives.

When accurate and comprehensive cost data were not used, some states encountered problems in calculating savings. For example, the Massachusetts State Auditor called into question the reported savings of some privatization activities in that State as a result of inadequate cost analysis before privatization and a lack of substantiating data on the benefits claimed after privatization.

Negotiations with Labor Unions Representing District Government Employees Not Been Finalized

According to the Office of Competitive Services, there were no signed agreements with labor unions regarding how employees will be treated under managed competition. One of the more important areas that must be developed in order to facilitate a successful managed competition program is a good working relationship with the members, representatives, and leaders of labor unions. Some views of experts on managed competition on this subject include the following:

  • one of the specific steps in establishing a program of managed competition is to "review labor-relations issues and involve the labor unions in the process7."

  • a previously organized labor-management committee was helpful in the managed competition effort. This labor-management committee was established "to promote understanding and cooperation between management and labor8." The labor management committee facilitated the exploration of new ways of providing city services without the constraints of collective bargaining, which included possible agreements to change job classifications and sick-leave policies outside the formal negotiation process.

At a hearing on managed competition before the Council of the District of Columbia's Committee on Government Operations, testimony from representatives of several labor unions representing District government employees indicated that union participation is essential if managed competition is to succeed in the District of Columbia. At the time of our field work, it did not appear that all line workers and union representatives had been fully informed about managed competition and its implications for workers.

A majority of District employees belong to a labor union. As of March 23, 1999, approximately 73 percent of the District government s workforce belonged to a union. The Auditor could not readily determine the number of union employees for each of the services identified for managed competition, but did determine the number of union providing services that are candidates for managed competition. Table I below lists the total number of agency employees in each of the agencies as well as the number and percentage of union employees in each of the agencies containing activities identified as candidates for managed competition in FY 2000. Although the entire agency is not a candidate for managed competition, certain activities within these agencies are candidates. Table I provides an overview of the number of union employees that should be gained as supporters of managed competition.

Percentage of Total Employees Represented by Unions That Are Potentially Affected by Managed Competition

Agency Total Number of Employees Number of Union Employees Percentage of Union to Total Employees
DPW 1,617 1,168 72%
DHS 1,562 1,053 67%
DCRA 328 219 67%
DHCD 101 61 60%
DOES 569 416 73%
Department of Corrections 2,547 2,190 86%
FEMSD 1,586 1,487 94%
CABLE TV 6 1 17%
Department of Recreation and Parks 489 311 64%
OCTO 27 0 0%
OPM 162 101 62%
MPD 4,242 3,924 95%
Total 13,236 10,931  

District of officials should develop a policy addressing issues of concern to all District employees affected by managed competition. The District should consider establishing a "safety net" for employees adversely affected by managed competition beyond that which is provided in D.C. Code, Section 1-1181.5b.

This policy should address issues including, but not limited to, the following:

  • assistance in finding jobs for employees who may be displaced and not hired by the contractor;
  • health benefits for displaced workers; and
  • comparative pay for employees hired by a contractor.

In response to an inquiry from the Office of the District of Columbia Auditor, the Office of Competitive Services indicated that if District government employees are not successful bidders, the District government would assist them. However, the response further indicated that the terms of such assistance had not yet been determined and were subject to discussion with labor representatives.


According to a GAO report entitled, "Privatization, Lessons Learned by State and Local Governments," officials in six governments surveyed indicated that employees must be provided training to successfully compete against the private sector. The Mayor's FY 2000 budget states the employees must be presented with an opportunity to compete on a "level playing field." The "level playing field" was to be established by providing training to both employees and management in managed competition tools, techniques, and skills. The training was to include proposal preparation and conducting activity-based costing. In a response to an inquiry from the Auditor, the Office of the City Administrator indicated that: "employees will not be offered an opportunity to compete until they have been offered a sufficient level of training."

A contract to provide basic training in managed competition was recently awarded by the Office of the City Administrator for four 3-day orientation sessions for 180 employees from 14 agencies. The first 3-day session is May 19, 1999 with three additional sessions scheduled for June 3, 9, and 16, 1999. According to a memorandum to agency directors, a limited number of slots were allocated for employees from each agency. Therefore, all employees and managers of agencies that may be affected by managed competition will not be able to attend these orientation sessions. Less than two percent of the 13,236 employees identified in Table I as potentially affected by managed competition are scheduled to attend the orientation sessions.

Further, according to the memorandum, the "training" is actually an orientation session to introduce agency employees and managers to managed competition. These orientations may not provide employees with adequate information and training to successfully perform activity based costing and competitive bid preparation. It is imperative that quality training of employees begin immediately if they are to successfully compete for managed competition activities in FY 1999, FY 2000 and beyond. The lack of quality training could affect employees' ability to successfully compete to provide services, delay the RFP process, and delay the contract award process.

The Auditor notes that areas other than training must be examined and where necessary legislative changes must be made to ensure that employees compete on a genuinely level playing field. These areas include:

  • reviewing the District's procurement law and regulations to ensure that District employees competing to provide District services will have the same flexibility as the private sector to timely obtain equipment and supplies of the best quality for a competitive price;
  • reviewing the District's personnel laws and regulations to ensure that District employees competing to provide services under managed competition agreements will have the ability to take appropriate personnel actions in a timely manner to streamline and optimize their operations; and
  • establishing policies regarding the source of funds for replacing obsolete equipment.

These issues must be addressed in sufficient time to allow employees to participate in the managed competition program in a competitive manner.


Based on the Auditor's analysis of the District's managed competition initiative as presented in the FY 2000 Proposed Operating Budget and Financial Plan, it appears that several key issues related to the District's implementation of the managed competition initiative remain unresolved. These unresolved issues include but are not limited to:

  • uncertainty about which programs will be selected for managed competition in FY 2000;
  • absence of accurate and comprehensive cost data;
  • uncertainty regarding safety net provisions for workers; and
  • incomplete negotiations with labor unions.

The Auditor questions whether $28.1 million in savings can be achieved from managed competition in FY 2000 as a result of untimely planning and execution of the managed competition initiative. With only five months remaining in fiscal year 1999 in which to implement key aspects of managed competition, the Auditor questions whether this is sufficient time to accomplish the specific requirements necessary to generate savings of $28.1 million for FY 2000.

The Auditor's examination of managed competition suggests that, if properly planned and executed, it could assist the District government in its efforts to improve service delivery while increasing efficiency. To achieve these goals, however, the managed competition program for the District of Columbia Government must have a comprehensive and clearly articulated mission statement, program policies, and concrete, well-defined goals and objectives that are expected to be achieved. Further, accurate cost data must be obtained in order to ensure that bids can be adequately evaluated and savings accurately measured. The District government, which is in the early stages of developing a managed competition program, has much remaining to do before it can successfully generate savings to the level and extent presented in the proposed FY 2000 budget.

Respectfully submitted,

Deborah K. Nichols
District of Columbia Auditor

1. The $28.1 million represents projected FY 2000 managed competition savings. The $31.9 1.9 million presented in the Fiscal Year 2000 Proposed Operating Budget and Financial Plan includes projected savings of $3.8 million for internal process improvements. The Auditor s analysis of the FY 2000 projected savings from managed competition excluded the $3.8 million in projected internal process improvement savings.

2. The $100.1 million does not include the discount of 25 percent applied in FYs 2000-2002 for start-up implementation issues. Discounted savings for FYs 2000-2003 total $79.75 million.

3. The Infrastructure of Managed competition by David L. Seader, senior manager, municipal utilities and Mary K. Lee, principal consultant domestic privatization with Price Waterhouse LLP. presented in the May/June 1997 newsletter of the National Council for Public-Private Partnerships.

4. The National Council for Public-Private Partnerships, an article entitled: The Infrastructure of Managed Competition by David L. Seader and Mary K Lee.

5. Privatization, Lessons Learned by State & Local Governments, a GAO report dated March 1997.

6. David L. Seader, senior manager, municipal utilities, and Mary K. Lee, principal consultant, domestic privatization, of Price Waterhouse LLP.

7. Managed Competition: A Tool for Achieving Excellence in Government by Ron Jensen of Ron Jensen and Associates, also a former director of public works for the city of Phoenix.

8. Terry Sharpe, assistant director for the City of Fort Lauderdale.

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