The Board of Governors asked that the UNC system look for opportunities to save money by hiring private contractors to perform work now carried out by state employees.
The board had been instructed by the legislature to identify possible savings that could be achieved by privatization. But the board went one step farther Friday, adopting a motion that UNC system officials implement privatization where it was appropriate.
Marshall Rauch, a former state senator and chair of the board's Budget and Finance Committee, quoted from a report that estimated the UNC system could save $16.9 million through contracting out some services.
"The committee believes that the opportunity exists for the university to save significant dollars and redeploy those funds to high priority needs of our universities," Rauch told the board.
The board's study examined seven campus functions, weighing the potential for savings through privatization. The study identified three of the areas as having the most potential for savings--housekeeping, heating and air conditioning maintenance and groundskeeping.
Debating the report
The board gave the report no discussion on Friday. But it was the focus of comments in a board work session the day before.
Bill McCoy, UNC system vice president for planning, told board members on Thursday that individual campuses would be allowed to study whether functions on their campuses should be privatized. Doing so would allow for differences in local labor markets and other conditions specific to each campus, he said.
"In some cities they may determine it makes sense to outsource and in another city they may not," McCoy said.
A campus should be able to demonstrate it could save a significant amount of money before choosing to contract out a function, he said.
The board may wish to establish guidelines by which campuses would be required to demonstrate that projected savings through privatization exceed a certain percentage of current costs, he said.
Contractors also could be required to agree to pay their employees wages that matched those of the local market for that service, he said.
"We would then see whether we are paying our state employees too little or too much," he said.
Board member Ben Ruffin said he was concerned about the impact of outsourcing on employees.
"I don't think we want privatization to take away from the least-paid of our people and I'm afraid that's what's going to happen," he said.
Ruffin also questioned whether the report needed to be so explicit in estimating savings in wages and benefits in current university contracts, which was listed as 11 percent.
But McCoy said the legislaure mandated that the board specifically state what amount of potential savings could be attributed to lower wages.
McCoy said university administrators were sensitive to the needs of their employees. But he said it was important the UNC system demonstrate it took care in the way it spent the money given to it by North Carolina's taxpayers.
Savings through lower wages
After a review of outsourcing at other U.S. public agencies and universities, the study concluded that, in general, significant cost savings could be achieved through privatization.
The study went on to compare current costs of seven functions at the 16 UNC system schools with estimates of how much a private company might charge for performing the same work.
Ken Boutwell, a consultant with MGT of America who carried out much of the study, said the report was not meant as the final word on whether particular functions should be privatized. It was meant, however, as a guide to what functions could be examined in more detail, he said.
Of the seven functions studied, three proved to have greater potential for cost savings--housekeeping, groundskeeping and heating and air conditioning maintenance, he said.
The report said it was very difficult to estimate how much of savings could be attributed to lower wages and benefits because private contractors declined to share information concerning their wages and benefits. Savings estimates contained in the study largely were drawn from surveys of administrators at UNC system schools who oversee contracts with private companies.
According to those surveys, UNC system schools have 322 contracts with outside companies, totaling $105.3 million in expenditures, the report said. Of the 322 contracts, 79 were considered to have resulted in annual savings totaling $7.8 million, according to the report.
The report said it was important to note that of the 79 contracts considered as to having led to a cost savings, only 14 of the contracted activities led to savings that could be attributed to lower wages and benefits.
In those 14 activities, approximately 80 percent of the savings were estimated to be due to lower wages and benefits, the report said. The report also noted that private contractors disputed the figures, saying administrators who responded to the surveys don't have a full understanding of their operations.
The report also said experience within the UNC system showed in some cases that savings could be achieved through outsourcing without paying lower salaries and benefits.
Not the only tool
The report outlined a process by which campuses could examine whether particular functions should be privatized.
Institutions should expect to take 18 months to study and implement a privatization project, the report said. The time would be used to develop a privatization procedure plan, develop criteria for choosing what services should be privatized, choose services for privatization, assess the impact on employees and the institution, prepare a transition plan, advertise for contract bids, negotiate with the selected vendor and begin the contract.
Institutions also should not consider privatization as the only way to find savings, the report said.
Before any function is privatized, employees should be given a chance to demonstrate they could perform the service at the same cost as an outside vendor, according to the report. Institutions also should be allowed to examine whether savings could be achieved through re-engineering work processes or by introducing new technology.
Possible savings through privatization
Here is a list of the seven functions studied for possible savings through privatization. Listed are the estimated savings across the UNC system and the estimated savings at Carolina. In the case where privatization was estimated to cost Carolina money, that figure is in parentheses.
Function UNC system UNC-Chapel Hill
Housekeeping $6,152,000 $2,195,000
HVAC 5,380,000 3,257,000
Groundskeeping 2,759,000 519,000
Steam plant 260,000 N/A*
Trash disposal 966,000 N/A**
Data processing 1,374,000 (7,489,000)
Hazardous waste N/A** N/A**
*UNC-Chapel Hill's steam plant operations were excluded from the study because of the University's new investment in a state-of-the-art facility that could not be compared easily with private companies.
**These functions already have been partially or wholly contracted out.
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