Gotham Gazette

The Place for New York Policy and politics

Government by Contract

The Pentagon had its $640 toilet seats. The New York City Department of Education has its infuriating bus routes.

During the Reagan administration, the furor over the Pentagon’s purchase of pricey hammers and toilet seats, to say nothing of the $2 billion B-2 Stealth bomber, led to outrage over a Defense Department that had grown fat, lazy and wasteful on years of multibillion budgets.

Now in New York City, the school system’s awarding of a $16 million contract to management consultant Alvarez & Marsal has fueled protests that the education department operates without the accountability it expects of its own teachers and principals. It is only one of thusands of contracts awarded every years by the New York City government and various agencies. But for anyone seeking to go after the Bloomberg administration, Alvarez & Marsal offers a tempting target. Reporters discovered the firm had previously advised St. Louis to slash its bus routes – sending children along sometimes unsafe streets – while the highly paid consultants took cabs for trips of only a few blocks.

When New York’s education department hired the firm to offer suggestions on improving efficiency, it reportedly charged the city $500 an hour for one of its employees working on the deal. “There is a disturbing irony here,” City Comptroller William Thompson has said, “namely that a consultant hired to eliminate waste is being paid almost six times the statutory salary of the mayor.”

Some observers have gone so far as to predict that the controversy over the contract – and over Alvarez’s recommendation that the city sharply reduce school bus routes -- could help spell the < ahref='>beginning of the end for mayoral control of schools.

Overall, the city government gave out more than $11 billion in contracts in fiscal year 2006, the majority of which involved some kind of competition. Some of the city contracts went for goods, but the largest chunk -- more than a third -- paid for social and health services, such as job training and administering foster care programs. Substantial sums also went to construction related contracts, for goods, and for what the Mayor’s Office of Contract Services calls other services, such as environmental protection.

This $11 billion does not include an estimated $4.5 billion in education department contracts for an array of goods and services, including busing for students, cafeteria food, and textbooks. Only $27 million of those contracts, according to Thomson, were awarded without competition.

As government by contract has become standard operating procedure, the practice continues to grow. But some critics question whether contracting procedures have improved to keep up with the increased demand and with change in technology. Beyond that, contracting raises a number of fundamental issues. What should government do itself and what should it contract out. How should contracts be awarded? And how can the city government prevent contracts from becoming tools for waste, fraud and abuse?


Contracting occurs when the government hires a private entity – either a nonprofit organization or a business – to provide the government with specific goods or services.

The practice in New York dates back to the 19th century when the city government hired contractors to clean the streets. That arrangement ended because the contractors did not get the job done, according to Columbia University professor Moshe Adler. When contractors cleaned the street, Adler said, “there were vigorous complaints by the [City] Council members that they were unacceptably filthy and, in almost all cases, the contracts were abrogated…When the streets were cleaned by government employees, in most instances there were no complaints at all about the cleanliness of the streets.”

Despite its checkered past, contracting gained steam in the 1990s as part of a general push to bring more competition to government, purportedly to reduce costs and improve efficiency. While privatization involves contracts – the private organization taking over a private school, say, or running Central Park signs a contract with the government -- contracting and privatization are not the same thing. “In privatization, the government usually sells off or otherwise completely abandons functions that it believes belong more properly in private hands,” Seth Forman wrote in Gotham Gazette. “In contracting, the government maintains a fair degree of control, setting out specific requirements for the contractors and, in theory at least, monitoring their performance.”


The practice of contracting has received increased scrutiny and attention lately, and not just on the city level. During the Bush administration, federal contracts, which totaled about $207 billion in 2000, have almost doubled, reaching about $400 billion in 2006. Some of this has been fueled by the conflict in Iraq, which has introduced a new concept: war by contract. Nearly as many contractors -- 120,000 -- as U.S troops work in the war zone, doing an array of tasks normally handled by soldiers, including watching prisoners, guarding buildings, cooking meals and analyzing intelligence. By the end of 2006, 769 of these civilians had died in the war.

The reliance on contracts has increased in New York City as well. In 1996, contracts accounted for about 8 percent of the city budget. Ten years later, city contracts make up about 23 percent of the budget.

The city government gave out more than 46,000 separate contracts adding up to more than $11 billion last year. The Administration for Children’s Services awarded the most contracts of any city agency covered (i.e. not including the Department of Education, the Health and Hospitals Corp. or the City University), with more than $1.8 billion. Many of these went to private agencies for foster care. In fact, according to the Center for City Law at New York Law School, of the 100 largest contracts awarded by the city in 2006, 30 were for foster care services.

The largest single contract -- worth more than $470 million -- went to the Medical and Health Research Association of New York, an independent nonprofit corporation that focuses on the health needs of underserved New Yorkers. Under the contract, the association manages the federal Ryan White CARE program providing health care and medication to people with AIDS and HIV, and delivers other services to people with HIV. The second biggest contract – about $465 million – went to a quasi public entity – the New York Economic Development Corporation – which in turn would hand out construction contracts for projects such as the High Line in Manhattan and the Flushing Meadows Pool and Ice Rink.

The third largest contract is perhaps more what people think of when, or more accurately if, they think about government procurement. It was a $380 million deal with Hewlett-Packard to provide and improve various emergency response systems including 911.

A number of contracts went to firms that get rid of our garbage. Fourteen of the top 100 contracts involve transporting municipal wastes to distant, mostly out of state sites, where the garbage gets put in landfills or otherwise disposed of, City Law found.


Since many contracts involve competition – some considering price alone, others taking additional factors into account as well – contracting is intended to save money while still letting government provide needed services. With employee salaries, health benefits and pensions accounting for a rising share of the city budget, contracts give the government a way to maintain or even increase what it does without adding staff. They also afford government the flexibility to bring in people who may only be needed for the short term.

But there are risks as well. Contractors, who can soon move on to another project and another city may not have the commitment to city services that full-time staff does. The contractors’ main concern, particularly if it is a private business, is making money. This prompted Harry Truman, then a senator, to observe in 1941, “I have never found a contractor who, if not watched, would not leave the government holding the bag.”

The system can lead to questionable deals if not outright corruption, with contractors giving money to public officials hoping to win business, a system known as pay to play. According to a report (in pdf format) by the city Campaign Finance Board, 22.3 percent of campaign contributions for the 2005 municipal election cycle came from people or entities that do business with city officials, including contractors.

Many contracting successes or failures rely not so much on the abstract idea but in how well the procurement program is run. New York State government gets fairly high marks in this area. Its “contracting and purchasing processes are far more rational than in the majority of states,” the Government Performance Project concluded. The project praised the state for initiating a program that gives contractor incentives to finish work on time or even early.

The project did not consider city government.

In the city, contracting got a big push during the Giuliani and some credit the practice, part of an overall privatization effort, for saving the city billions of dollars.

But there were problems in how the city awarded and monitored some of those contracts.

In 2000, Mayor Giuliani gave a $104 million contract to social service company Maximus to manage New York City's welfare-to-work program. Maximus was the nation’s largest company of its kind, and it also had ties to Jason Turner, Giuliani’s commissioner of human services. Calling the arrangement "corruption, favoritism, and cronyism," Alan Hevesi, then city comptroller, tried to block it. But an appeals court ruled the comptroller was overstepping his authority.

Through all this, the Manhattan district attorney's office probed Maximus' hiring of several people with close ties to the city administration and relevant officials balked at testifying about the matter before City Council. "I saw an amazing amount of corruption, unnecessary bureaucracy, and political games," Kathryn Freed, then chairwoman of the council's contract committee, said at the time.

During the Giuliani administration, New York City “was notoriously poor at monitoring the hundreds of contracts with non profits providing unemployment and training services,” Mary Bryna Sanger, then with the Brookings Institution, wrote in 2001.


The have been few reports of such improprieties during the Bloomberg administration. Much of the focus on contracting during Bloomberg’s tenure has been on how to make it operate more quickly and economically.

On average, it takes 125 days for a city contract to go from being put out for bid to being awarded. Agencies vary greatly in their speed, City Law discovered. It takes the Department of Sanitation 58 days to complete awarding a contract while the Department of Human Services needs 339 days.

Such delays can create problems for government and contractor alike. In 2002, the Citizens Budget Commission issued a report concluding that “the city’s rules and procedures governing procurement create a challenging environment in which to deliver services,” with contract purchasing taking as long as four to eight months to complete. The report recommended the city make its procurement process more centralized and move to an electronic procurement system. This, the group said, could save the city a minimum of $135 million a year – and this was in 2002, when the city had fewer contracts than it does today.

In 1993, City Counci offered 13 recommendations to make the city government's purchasing more efficient. The council passed a bill on the matter, which centering on using electronic procurement. The proposed system, an aide to City Councilmember Gale Brewer said, would be like “an eBay for government.” A vendor would go on-line to see what service or product the city is seeking. Unlike on eBay though, where the highest bidder gets the goods, here the lowest bidder wins the prize: a city contract.

According to Brewer’s office, the city conducted a pilot e-procurement project but has not moved beyond that.


While the Department of Education has the largest budget of any city agency, it is not subject to some city government requirements for contracts. Education officials and Bloomberg administration lawyers agree that schools are technically a function of the state, meaning some municipal laws do not apply to them. Few dispute the legality of this contention, but many find it ironic since Bloomberg readily proclaims that he – not the governor – controls the city’s public school system.

David Ross, director of the department’s division of contracts and purchasing said that the absence of city jurisdiction in some areas does not mean the department operates on its own. The office is guided by state education law and by municipal law, he said, adding “we adhere to the laws that apply to us. ” And he continued, even without legal requirements, competitive bidding would be “the gold standard we would always try to achieve…. I’ve been in public procurement for a while and I don’t need to be told that competition is a good thing.”

But Ross said competition, desirable though it may be, is not always possible. In some cases, only one provider may exist, a grant or City Council action may require the schools to deal with one particular contractor, or there may simply not be time to put a contract out for bid.

Some think the department may be too quick to resort to no bid contracts. According to Comptroller Thompson, the number of no-bid contracts mushroomed after the Board of Education was abolished and the Department of Education created. It has since gone down somewhat, and now the department lets about $25 million in no bid contracts a year.

City Public Advocate Betsy Gotbaum also thinks that mayoral control has made it easier for the department to award contracts without competition. “The dissolution of the school board in 2002 has weakened the system of checks and balances that made it difficult for the administration to circumvent the standard bidding processes for education-related contracts,” she has written.

Thompson is proposing that the state pass a law making the education department subject to the same contracting rules as any other city agency.

While apologizing for the bus route fiasco – and reinstating some of the routes, Klein has stood by the decision to work with Alvarez & Marsal. “The reason you bring in consultants is to look at all these issues and see where you can do a better job,” he told City Council.

The department is currently awarding contracts related to its latest plans to make teachers and principals more accountable and to give schools more autonomy. After what Ross called “a robust competition,” the department awarded IBM the task of developing an $80 million system to provide detailed information about student performance and schools.

And officials at Tweed are reviewing 36 proposals from private groups seeking to become so-called Partnership Support Organizations – private groups that will provide support and assistance to the newly autonomous schools.

As they review these proposals, education department officials are confronted with a constant reminder of the pitfalls of government by contract. They occupy the Tweed Courthouse, a building that remains a monument to contract corruption run amok. The courthouse, the project of Tammany boss William Marcy Tweed, was 5000 percent over budget when it was completed. Much of that money went to Tammany members in the form of kickbacks from contractors who were then able to gouge the city for the goods and services they provided.

“$460,000 went for lumber later estimated to be worth $48,000. Then $350,000 went for carpeting—an overcharge, The New York Times estimated, of $336,821. Cuspidors cost the city $190 each…. “Brooms, etc.” cost $41,190. Plastering cost $2.87 million, including nearly $1.3 million for “repairs” before the building even opened,” Peter Baida wrote in American Heritage.

The project paved the way for the Tweed Ring’s decline and to Tweed spending much of the rest of his life in jail.


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