State of New Hampshire – State Agency Decision-Making Practices: Employees Versus Contractors

Source: State of New Hampshire, Office of Legislative Budget Assistant, Performance Audit Report, March 2013

We were asked to examine if State agencies determined whether it was more cost-effective to hire personnel or contract for services during State fiscal year (SFY) 2012. The State agencies we examined usually did not determine whether it was more cost-effective to contract-out or provide a service in-house using existing or new State employees. Instead, agencies often reported their budgets set the number and type of employees available. This, in turn, drove contracting because remaining service needs could only be met with contractors. Some agencies did not analyze whether it would be more cost-effective to contract-out or perform a service inhouse. When analysis was undertaken, agency decision-making was usually informal or ad hoc, and agencies inconsistently considered cost, effectiveness, and risk during these analyses. No statewide law, rule, or policy required agencies conduct comparative analyses. No oversight body consistently requested agencies to report on comparative analyses.

Some governments at the state, federal, and local levels regulate their agencies’ decision-making processes when they choose between contracting-out or performing a service in-house with public employees. Efficiency and effectiveness were often the focus of these efforts. These processes often relied on structured competition to help produce cost savings and improve service quality, regardless of whether a public or a private entity was selected. Formal plans demonstrating the costs and benefits of proposed options were integral to these processes and helped ensure alternatives were considered uniformly and transparently. We compared State agency processes against these observed practices.

The 21 agencies we examined contractually obligated approximately $3.5 billion in SFY 2012 through 986 multi-year service contracts. In SFY 2012, these agencies were budgeted for approximately $754 million in personnel-related expenditures. The vast majority of these commitments were entered into without the benefit of a comparative analysis to determine which was in the State’s best interest.

We recommend the Legislature consider defining inherently governmental functions and commercial services, and provide guidance on when agencies must: 1) provide a service using State employees, 2) provide a service using contractors, and 3) conduct analyses to determine which method is in the State’s best interest. We also recommend the Legislature consider to what extent it may wish to structure State agency decision-making processes when agency managers are required to consider whether to contract-out or provide a service using State employees. The Legislature might simply require comparisons be completed, or provide more guidance, specifying how analyses are to be completed, what analyses must include, and what oversight of decisions is required. Changes to State budget law may provide a suitable means to provide this guidance, and there may also be a need to provide a way for agencies to submit changes resulting from comparative analysis to their budget outside the normal budget cycle.

This audit did not focus on individual contracts or contracting at any one agency. We requested a response to the audit from the Department of Administrative Services in its capacity as the conduit for service contracting in the Executive Branch.