How to Kill Competition for the Delivery of Government Services

Rather than trying to regulate what private-sector contractors pay their executives, governments should be looking for the best deal for the taxpayers.
by | December 12, 2013
 

Public-employee unions say they're outraged at an increase of nearly 25 percent in the annual amount companies that contract with the federal government can be reimbursed for their executives' compensation. But the controversy highlights a much bigger problem with the nature of government contracting, and not just for the feds.

"Christmas has come early for federal contractor employees, yet the government's own employees are looking at stockings full of coal," said American Federation of Government Employees (AFGE) President J. David Cox. The increase from $763,029 to $952,308, set by a formula that mimics compensation levels of private-sector CEOs, comes at a time when rank-and-file federal workers are looking at a 1 percent raise in January.

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There's plenty of momentum in Washington to curb contractor compensation. After proposing a $200,000 cap last year, the Obama administration has called for reducing the reimbursement limit to the president's $400,000 annual salary. AFGE is pushing to limit it to the vice president's $230,700 wage. The bipartisan budget bill approved by the House would limit the amount contractors can charge for executive pay to $487,000. And the House-approved defense-authorization bill would lower the compensation limit, though by far less than the budget bill.

It isn't just the feds who are in the business of limiting reimbursements for contractor compensation. In Massachusetts, for instance, a law that limits the private sector's ability to compete to deliver state services regulates the compensation of all private employees who work on a state contract.

But Massachusetts doesn't stop there. It requires that the contractors pay at least the same percentage of health-insurance costs as the state does and even adds foregone tax revenue to the price of a private bid if any portion of the work is performed outside Massachusetts. There is no corresponding allowance for tax revenue that would be generated from having private, taxable entities rather than public employees perform the work.

The Massachusetts law, enacted 20 years ago this month, has done exactly what it was intended to do: all but eliminate competition to deliver state services. That's the real problem with the whole debate over limiting contractor-compensation reimbursements. Rather than focusing on cost-plus agreements under which contractors are reimbursed for whatever they spend, governments should use competitive bidding to drive down costs and shift risk to the private sector.

An annual salary of nearly $1 million is indeed hefty, particularly as we emerge from a period of layoffs and tight public budgets. But governments' goal should be to purchase the best possible outcomes for taxpayers at the lowest possible price. Maximizing competition is the best way to achieve that goal -- and to create an incentive to rein in bloated contractor salaries.

This column has been updated to reflect the contents of the compromise federal budget and defense-authorization bills.

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