June 15, 2007 Volume 108 Number 12

Custodial outsourcing at Portland schools proves costly mistake

By DON McINTOSH, Associate Editor

When the Portland Public School Board voted July 8, 2002 to fire the district’s 300 custodians and contract out, district officials said the move would save $4.5 million a year. Five years later, it’s becoming clear how far off the mark that was.

Far from saving money, the decision may have ended up costing the district somewhere in the neighborhood of $10 million. Flaws in the original cost savings analysis decreased the actual savings, and legal expenses and other items increased the costs.

Attorneys did very well by the board’s 2002 decision, because the district ended up paying to fight several complicated lawsuits over a five-year period, one of which went all the way to the Oregon Supreme Court and beyond. And the court ruled the firing was illegal. By April 2007, the district had paid $639,530 to Miller Nash LLP to represent it in the outsourcing lawsuits. And the district paid $200,000 to a specialist law firm, Resolution Counsel, to help settle one of the cases, a class-action lawsuit by the fired custodians. During settlement negotiations, the district also paid $33,080 to economic expert Morones Young Valuations LLC, and $18,365 to Independent Actuaries. The case was settled for $14.5 million. Part of that was the amount the district paid to the lawyers representing the custodians — $3,625,000 in attorney fees and $140,000 in out-of-pocket costs. Altogether, that’s $4,655,975 of taxpayer money that went to attorneys and financial experts as a result of a decision that was supposed to save $4.5 million a year.

After attorney fees and costs, the class-action settlement totaled $10.73 million: about $37,000 each to 280 fired custodians, and $370,000 to reimburse custodians who were hit the hardest by out-of-pocket health costs. On top of that, the district will have to pay about $500,000 in payroll taxes, bringing the total cost of the settlement to $15 million.

The district didn’t want to pay the $15 million all at once out of reserves, so it hired attorney Harvey Rogers, a municipal finance specialist and partner in the K&L Gates law firm, for advice on financing options. A School Board committee met June 13 to consider the recommendation: Borrow $15.5 million for seven years at 5.52 percent interest, paying only interest the first two years. If the Board adopts the proposal, the district would be paying for the custodial settlement through 2014 and would pay $3.8 million interest in addition to the $15 million settlement cost.

There were also one-time costs attached to the decision to outsource, and then to rehire an in-house staff. The firings caused the district to have to pay about $2 million extra in unemployment insurance the first year. To oversee the transition back to an in-house custodial workforce, the district paid $27,000 to management consultant Jim Christiansen. The district also had to hire additional human resources staff to help with the hire of 300 custodians. And it had to purchase new cleaning equipment, such as floor washing and polishing machines. The district has budgeted $1.2 million to buy new cleaning equipment this summer. After it contracted out, PPS sold its previous equipment to the contractor for $20,000. The equipment has a useful life of about five years, and PPS Facilities Director Brian Winchester says most of the equipment sold to the contractor was near the end of its life cycle, because tight budgets had prevented its replacement.

All of the above expenses stemmed from the decision to contract out — and the fact that the decision ultimately ran afoul of a state civil service law.

But another factor casts doubt on the district’s estimate of the savings.

In an e-mail to district employees last May, PPS Chief Operating Officer Cathy Mincberg said Portland Public Schools saved more than $5 million a year by contracting for custodial services with the Portland Habilitation Center.

“That is a significant sum in a time of tight budgets,” Mincberg wrote, “the equivalent of at least one teaching job in every school, every school year.”

But that $5 million a year savings figure — roughly what the district estimated all along —never took into account the custodians’ willingness to cut their own wages and benefits to save their jobs. Under the gun from the threat of contracting out, the union bargaining team agreed in Spring 2002 to $2.4 million in concessions. The district held to its demand for $4.5 million, and no deal was reached.

Any claim of savings has to be modified by the concessions the district passed up, especially because the district’s negotiating history with every other union group in the last five years suggests the custodians wouldn’t have been able to bargain back their old salaries.

The district’s annual custodial budget was $15.6 million before contracting out; with the concession it would have been $13.2 million.

In the first year of contacting out, custodial expense came to $12 million, for management, supplies, and payments to the janitorial contractor. All told, PPS payments to the private contractor, Portland Habilitation Center (PHC) totalled just under $48 million by late May 2007. PHC’s initial bid was $9.6 million, and billings rose only slightly in subsequent years, to $10.8 million the year before in-house custodians began returning. That was cheaper than the in-house staff would have been.

But with the concession figured in, the district ended up saving just $2.5 million a year, or maybe $13 million over five years. And those savings were more than offset by the $14.5 million settlement, the $4 million in interest it will cost to pay that out over time, and up to $3 million in other costs.

In the end, the district lost, but so did the custodians, and the taxpayers.

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