Sunday, June 3, 2012


You may have been following the debate about whether The Ohio State University should raise a pile of cash by leasing out its parking operations for 50 years. This week, the Dispatch reported that they had received a bid of $483 million - all to be paid at the commencement of the lease.

First off, I'm kinda blown away by that number. For those familiar with the concept of Present Value, this is the equivalent of being paid a little more than $30 million per year for each of those 50 years, assuming an earnings rate of 6% (which is well less than the earnings rate being assumed for the State Teachers' Retirement System). Even if you assume our current 0% earnings rate environment extends for another half-century (oh, I hope not!), then it's still like getting nearly $10 million/yr of clear profit.

My understanding is that the OSU parking operations generate little if any positive cash flow for the university, and I've heard it may be losing a couple million per year. But that may be the results of accounting treatments that include substantial depreciation expenses, which isn't real money, especially for a tax-exempt organization.

So on the surface, and without knowing all the details of the contract, this seems like a pretty good deal for OSU. One wonders what kind of modeling the bidder has done, and what kinds of assumptions have been made to make it worth paying OSU a half-billion dollars in cash today on the hope of making it back with a profit over 50 years.

Maybe the deal puts the responsibility on the new operator to maintain the pavement, gates, booths and all the other fixtures and equipment. Maybe they have to pay for the electricity to run the parking lot lighting. Could be that they will be responsible for the cost of removing snow from the lots in the winter.

Without question, a big part of their assumptions has to be that they will significantly reduce labor costs. I wonder how much that is in reality, as many of the times I've parked at OSU lately, the process was entirely automated. But maybe there are times and places when they have attendants on duty in the booths, although I've always assumed that these are usually students who work part time on the cheap. But maybe most of these folks are fulltime, and if so most likely unionized workers who are getting compensation and benefits some feel are unreasonable.

So, what does that have to do with us - a public school district?

It turns out that public school districts do a fair amount of outsourcing as well - using outside contractors to perform certain functions rather that employing inhouse staff. Perhaps the most common of those is transportation - getting kids to and from school. One of the largest of these operators is First Student, whose buses we see around central Ohio transporting kids for Columbus City Schools.

But there are a number of other functions which are sometimes outsourced, both in the public sector, and in private industry. My background is in the IT world, and that is certainly a field where outsourced resources are quite commonly used, especially since one can find skilled software developers in India or China who will work for a fraction of the salary demanded by an American-based worker.

All kinds of functions can be outsourced. The question is whether they should be.

One can come at that question from a purely financial perspective, and make decisions simply on the basis of which alternative - employees or contractors - costs less. In almost all cases, outsourcing will win.

But there's more to it than a simple financial comparison, and many of those factors are hard to quantify into dollars and cents.

In my three decades at CompuServe, our strategy was generally to do everything inhouse that we could. We purchased the license to manufacture our hosts/servers inhouse, at a facility we built in Dublin. Our communications switches/routers were designed, manufactured, programmed, maintained and operated by engineers and technicians who were employees of the firm. Our teammates mowed our own grass, plowed snow from our parking lots, and cleaned our restrooms.

Why?  Because our business wasn't so much about the technology as it was being a trusted service provider to our customers worldwide. Therefore, we wanted every person involved in the chain of delivery of that service to feel that they were part of one big team. It may not have been the cheapest way to get things done, but it promoted a sense of shared duty and responsibility - of family, as trite as that sounds. All you have to do is put out word that a group of CompuServe alumni are gathering at some pub, and the place is packed - more than a decade after the company ceased to exist.

I see that kind of spirit of team in our school district as well. Every Thursday afternoon when I'm at Hilliard Crossing Elementary, I see Tim and John, the custodians there, go down the hall with a tennis ball on the end of a pole, erasing all the scuff marks left on the floor by hundreds of pairs of little sneakers. When they're done for the day, the floor truly shines like a mirror, even though they know the next day it will get all scuffed up again.

Why?  One, because they're good guys who take pride in their work. But they also know that they're part of the team who are all there to do their part in educating the kids of our community. It's hard to put a price on that.

One function we did outsource at CompuServe was our food service operations. I think there's just something about food service operations that makes outsourcing a good choice. Maybe it's because of the high visibility and high intensity of the service. It could be because of the transient nature of many workers in this industry - it's just too much of a distraction for school administrators to make sure all the workers you need are showing up every day.

Whatever all the reasons, note that food service is the one major function we outsource in our school district as well. Aramark has been a good partner in that regard.

My CompuServe experience causes me to be generally opposed to outsourcing important function in our schools. I like it that our kids are transported by bus drivers who are part of our team, and often neighbors and friends. I think it's a good thing to have folks like Tim and John and all their teammates making sure our buildings are clean environments for both kids and staff. It's a good thing that we have an inhouse team who can take care of basic issues with our building mechanical systems.

For me, contracting for outside services makes the most sense when we have a temporary need for an extraordinary quantity of work, or when we have occasional need of certain special skills.

For example, if the IT department was asked to develop software giving us a certain valuable capability, and we don't have the skills or capacity inhouse to get the work done within the desired timeframe, then it makes sense for the IT group to contract with an outside software development company to get the work done. When the work is done, the cost for the extra capacity stops as well.

A few School Board meetings ago, the Board granted the Superintendent the authority to use the Educational Service Center of Central Ohio as the provider of substitute teachers, tutors, and various other roles. An ESC is a public entity defined by Ohio law as a provider of shared services to school districts, and is funded predominately by the fees it charges its member districts. So it's not a for-profit corporation, but rather a resource that allows public school districts to consolidate functions when and where it makes sense.

We'll see how this works out. There is concern that because we will be drawing from a larger pool of subs, our teachers might not have the same opportunities to request particular individuals for their kids. I don't know the nuances of the new system yet, but trust that we'll be able to work out the kinks.

As important as I feel the sense of team is when running a services organization, which certainly describes a school district, we can't ignore the economics. I think most for-profit companies would rather do everything inhouse too, but they have to be able to compete for customers on value, and as the Wal-Mart example has shown us, consumers may say they think it sucks that millions of American jobs have been outsourced to China, but the vast majority prefer lower prices over "Made in America."

If any segment of our school ecosystem feels they need to "win" economically - be that teachers, administrators, staff, school board members, suppliers, or taxpayers - then we'll lose as a team, and we will have failed each other. More functions will get outsourced, more labor actions will be taken by the unions, taxpayers will get angry, levies will fail, and property values will suffer.

More tragically, we will have failed our kids.


  1. I'm also not a huge fan of outsourcing. I grew up in Kiev, Ukraine, our classroom was our pride. Students were responsible for cleaning classrooms and other designated areas.

    We took turns to clean/water plants. It worked out nicely. It wasn't always pleasant to sweep and mop the floor, but it was our classroom and we had to make sure it looked good. So I can definitely see your point.

    I'm a big supporter of local economy. I wish we were more self sufficient here... But that's a whole new argument.

    I'm also a student at OSU and an employee at the Wexner Medical Center. I was kind of surprised about the bid as well. It seemed a bit much but then again who knows. Students and employees pay a fortune for parking.

    Parking situation is very complicated at OSU. Its virtually impossible to get a parking spot after 9am during the week. That's why I ride the OSU/Hilliard Express bus. I gave up paying over $300 a year for a parking spot that wasn't even guaranteed in the end.

    Thanks for a great article. I enjoy reading your blogs

  2. Thanks for your comment. Interesting that in Ukraine, the children were assigned the responsibility of keeping their classroom clean. I saw some of this when I visited a high school in Dresden, Germany about ten years ago. I wonder if it is a holdover from the Soviet era.

    Today in America, folks would be outraged if their kids were expected to clean up their own messes. Can't tell you how often I pick up pieces of trash in the hallways when I'm walking through our buildings - stuff others just walk by.

    My wife and I both went to OSU, and understand the parking issue. It was no different 30 years ago.

    I'll have to admit not thinking about the primary form of parking at OSU - the many lots where students and staff park. I wonder how much those lots are 'oversold'? That is, how many more stickers do they sell than there are actual parking spots? It's reasonable to do this - not everyone who might want to park on campus is actually there at any given time. It could be that if the 'oversell' ratio is raised only slightly, a ton more revenue is generated. But it would also mean more difficulty find a space to park at 'prime time,' whenever that might be.

    Or they could reline the parking lots, making each parking space x% narrower. The space between rows could be shortened. Since both would make things more difficult for larger vehicles, the operator could potentially charge extra for larger parking spaces.

    Fifty years is a long time. I'll not be around when this contract expires, nor I suspect will be the people who sign it. Is this another case of taking the money now, and shifting a problem to the next generation?

  3. Paul,

    I fear the outsourcing done by HCSD is going to have a negative impact on the substitute pool. A substitute aide must pay $50+ to have another criminal background check done and $25 a year to receive an aide certificate. He/she only makes $10 per hour ($10.50 after so many days) before taxes & related so those are significant costs. That, on top of the 52 page application, is enough for some I know to re-evaluate if they should work in the schools. Hopefully the outsourcing agency will hire good replacements. Don't get me wrong, there are some less-than-stellar subs out there but I suspect the majority are doing way more work than the pay of $10 per hour reflects.

    In addition, as I understand it, substitute teacher pay will drop from $105 to $93 a day. Since the school offers so many professional, personal, and sick days to teachers, I know our girls have A LOT of substitute teachers throughout the year (I have to ask why the professional days cannot be addressed in the summer so teachers are in the classroom when the students are there but I digress). I personally worry that the pool of good substitute teachers will decline with this switch so again, I hope the agency hires good subs. Time will tell I'm sure.

    To your point in the post, I am not sure the substitutes will feel a "part of the team" if they now work for the outsource company. I wouldn't.

    By the way, when I say sub, there are some long-term subs that have been working for HCSD for several years every single day without the benefits of being a full-time employee. For example, check at the preschool & in the SN classrooms around the district. I don't understand how they can still be subs rather than their positions be made permanent but I am not HCSD management.

    I guess I am saying that I understand the need to outsource and have understood it in the corporate world for many years. The thing is, are we really saving that much money? Enough to cause good subs to leave and all subs to not feel a part of the "team".

    It all sounds like a slippery slope to me but I'm just a taxpayer...

    1. We'll have to observe the new sub system and see how it works out. I haven't heard the numbers for this year, but last year we heard that there are sometimes challenges finding enough subs, especially in the Spring when most teachers try to take the three personal days granted in their collective bargaining agreement.

      Of course, many other school districts have similar provisions in their teachers' contract as well, so we all end up competing for the same subs at the same time.

      Columbus City Schools has an approach where they have a certain number of fulltime substitute teachers. A friend of mine is one of them. Those teachers get all the same comp and benefits as a regular classroom teacher, and in fact are included as members of the collective bargaining agreement.

      We have somewhere around 700 regular classroom teachers, meaning that we could have to fill upwards of 2,000 personal days each year (some teachers choose to take $85 for each unused personal leave day).

      The contract limits the number of HEA members who may take personal leave on any given day to 5% of the total members, which numbers about 1,000 (as it includes many other roles besides classroom teachers). So there can be 50 out at a time, which is probably the number who are out every day in the springtime.

      Does it make sense to have fulltime substitute teachers on the payroll when the demand is so concentrated? We could probably justify 5-10 such folks, but does that just make life more complicated than using ESC personnel for all sub assignments - not to mention more expensive?

      Clearly, I can't claim that I'm categorically opposed to outsourcing in all circumstances. It's my preference not to outsource, but I've spent enough time on the front lines of organizations to know that you have to do what works within the constraints of what you can afford - and there's no end to the economic pressure.

  4. That's a good point. I'm kind of curious to see what they will do when the new Wexner Center is finished. I heard a rumor that more parking spots will be created outside of campus and a shuttle will transport employees back and forth. I guess time will show. Campus is a disaster right now. I see more orange than red... It's growing very fast. I'm seeing so many building go up. I probably wont recognize campus after 10 years.

  5. Kicking the can says ......
    What needs to be outsourced is all the outlaying City of Columbus Apartments and Residents which happen to be attending the Hilliard schools. I have just read about a new complex going in across from Able's Golf of about 150 units. Who will bear this burden ?? Dublin , Hilliard , or Columbus City Schools ? Also, Hilliard in its great wisdom... wants to add a Giant Eagle and an absurd amount of Apartment Units over where Dana Corp. once was located. Can anyone tell me why ?? There are big empty buildings right down the road at Mill Run ( the old Big Bear and also the old K-Mart ). The added students from such new developments are choking the lifes blood out of you and I the taxpayer. If you want to outsource something , outsource that !!!

    1. As I've been explaining for several years, the boundaries of the Hilliard City School district was set many decades ago. Our district has actually been shrinking as tracts of undeveloped land, small and large, have been annexed into the City of Columbus, according to the terms of the Win-Win Agreement.

      I understand your point in regard to the Giant Eagle. While the old K-Mart building in Mill Run is now occupied by a flooring retailer, the old Big Bear remains empty. Why wouldn't the Giant Eagle want to go in there?

      A number of reasons. Perhaps the best one is that according to the Franklin County Auditor's website, that building is owned by Kroger, who bought it in 2005. Obviously Kroger hasn't put a store in there. Did they buy the building just to keep competitors, like Giant Eagle, out?

      Another is that Giant Eagle will make its decision based on whether it thinks it can make a profit, and that will be significantly influenced by what it has to pay in rent. So if a developer (Continental Real Estate in this case) is willing to build a new structure and charge a more attractive rent than with an existing structure, then why wouldn't Giant Eagle go for the new structure?

      And those rental rates will be influenced by what the developer has to pay for the raw property, how much has to be spent developing it according to city requirements, and how much will have to be paid in annual property taxes.

      Of course, municipalities like the City of Hilliard like new commercial operations because they generate income taxes - the mechanism by which cities are funded. But cities also have to bear the cost of adding the infrastructure (e.g. roads) necessary to support the new development. Sometimes, they require the developers to take on these costs in order to gain approval for zoning changes or building permits. That's the case with this Giant Eagle/apartment development.

      But cities have an interesting tool at their disposal: the Tax Increment Financing option. This allows them to redirect 75% of the property tax revenue which otherwise go to the local schools (and other recipients of property taxes) into those infrastructure projects.

      So while the developer will have to pay for the infrastructure improvements, they'll be getting an offsetting credit on their property taxes.

      And the school district is left empty-handed. So if school age kids show up in those apartments - city officials say they won't - all the rest of us will end up paying the community share of the cost of educating those kids, the City will get some free roads and sidewalks, and the developer will get approval from the City to build what they want.

      As I've said, the School Board has stated that it is in support of TIF deals for new commercial development, as it is a good long-term strategy to give up a little revenue today to increase our commercial property tax income in future years (TIFs expire, typically around ten years). But it makes no sense to us to grant TIFs to residential development, like apartments, which immediately generate cost for the district.

      The city government claims these apartments aren't of a design that will attract families with school age kids. I think that's a mistaken assumption - with the single family housing market in turmoil, more families are choosing apartment life in a great school district, and this development on the old Dana property might be quite acceptable to families for the short term.