Michigan’s roads are in terrible shape.
It’s something on which just about everyone who travels on them can agree.
Finding the money to address what have been called the worst roads in the country has, however, proven to be a challenge.
But what if the state was overspending many millions of dollars every year to privatize work that the Michigan Department of Transportation used to do on its own? The implications from a new study suggest that money could have been available instead for road repairs.
Think about that the next time you blow out a tire on I-75, bust a rim on Gratiot or spill your coffee dodging a crater on Telegraph.
An analysis by a University of Michigan researcher has found that the state spent $90 million more to hire private contractors for engineering and design work than it would have if it had maintained that work in-house over just one three-year period.
Roland Zullo, director of the Center for Labor and Community Studies at the University of Michigan-Dearborn and associate research scientist at the University of Michigan School of Social Work, reviewed contracts from 2011 to 2014 and determined that the state overspent for engineering and design services in order to make up for “self-inflicted” staffing shortages at MDOT.
Isabella Huetter’s front tire was shredded as the 20-year-old was driving from her home in Fraser to Oakland University when she hit a pothole in the middle lane of I-75. Work crews close all but one lane on I-75 north of Big Beaver to patch pot holes that shredded tires Tuesday, Jan. 22, 2019. This tire was shredded when the driver of the car it was on hit a pothole on I-75 in January. (Photo11: Mandi Wright, Detroit Free Press)
Zullo, who has also reviewed service privatization efforts at Michigan’s state prisons, said the numbers were surprising.
“It really shocked us on the amount of money spent on the private consultants. It’s hard to imagine how that money was justified,” Zullo said.
Zullo said he worked with the Service Employees International Union Local 517M, which represents Michigan public employees, to structure a study and then requested data under the Michigan Freedom of Information Act, which he submitted in 2015. The union paid the bill for the $2,990 FOIA, but Zullo said he was not compensated by the union.
“A MDOT employee (and Local 517M member) helped make the match between the consultant titles and comparable MDOT employee. … I am responsible for the rest of the research,” Zullo said in an email.
The sad state of Michigan’s roads has been front and center in recent weeks, with Gov. Gretchen Whitmer painting a bullseye on the issue during her first State of the State address Tuesday and the new head of MDOT, Paul Ajegba, telling a Senate committee last week that $1.5 billion more is needed to address road funding deficiencies.
Tiffany Brown, Whitmer’s press secretary, was asked about the governor’s view on privatization of government-provided services — a sometimes controversial process often pitched as a money-saver — in light of the report, but Brown said to stay tuned.
“The governor will discuss more about her roads plan when she presents her executive budget March 5,” Brown said in an email.
‘Overhead’ and ‘fixed fees’
Zullo’s analysis, dated December 2018, showed that the vast difference in cost between the private contractors and MDOT was connected to “overhead” and “fixed fees” in the contracts. An average consultant contract cost more than $140,000, but if MDOT employees had performed the same work, the estimated project cost would have been less than $68,000, according to the study.
“Clearly, where the MDOT has a large cost advantage is in overhead, followed by the guaranteed profit (set at 11 percent of the total and with no parallel in MDOT). Overhead expenses for the private contractors exceeded their charges for direct labor. When taking into account overhead and profit, the cost of private consultants became roughly double the cost of comparable MDOT output,” Zullo wrote.
Zullo noted that “at one time MDOT engineers performed nearly all design and engineering work for state projects,” but that began to change in the mid-1990s. Early retirements were encouraged and new hiring was frozen even though the required work did not go away, leading to more contracts.
“Our analysis indicates that Michigan pays a premium for this service model. Outsourcing this work roughly doubles the cost to the state of Michigan. Given popular demand to fix Michigan roads and the slim prospects of new taxes to pay for road and bridge improvements, a question moving forward is whether Michigan should reconsider this service delivery option,” Zullo wrote.
MDOT spokesman Jeff Cranson noted that Michigan is not unique in the use of consultants. He provided statistics showing design work by contract dollar is higher in Florida (85 percent), Maine (83 percent) and Idaho (79 percent) than in Michigan (52 percent). On the other end of the spectrum are states such as Montana (15 percent), Ohio (30 percent), Missouri (30 percent) and Delaware (40 percent).
He noted that “through the budget process, the Legislature has significant influence on (full-time employee) counts. Under those guidelines, this is the effective way to do the work.”
He also provided a link to a blog post on the Michigan State University website from 2017 that referenced the possible elimination of 150 positions from MDOT’s design and engineering section in the then-proposed 2018 fiscal year budget. That report noted that the estimated $20 million in savings from the entire proposal would be “put into the roads.”
It was not immediately clear if those positions were eliminated as proposed.
State Rep. Shane Hernandez, R-Port Huron, who is now chair of the Michigan House Appropriations Committee, was quoted in the post, weighing in on the state’s “pavement crisis” and the need to reallocate funds to roads.
Asked about the study, Hernandez noted that he has “consistently favored more scrutiny on how Michigan spends” its money on road and bridge improvements.
“MDOT uses a mix of in-house and contracting, and I strongly believe this process should always be scrutinized with a goal of continuous improvement. This particular study appears to look at one narrow slice of that overall strategy and draw conclusions based on data bought by a union representing public employees, and I would need to know more about exactly where the numbers involved came from and are based on. But I will always consider and review any information and research with the goal we should all share — improving our state’s roads in the most cost-effective way possible,” Hernandez said.
James Hohman, director of fiscal policy at the conservative Mackinac Center for Public Policy, raised a couple of issues with the analysis, noting the use of data purchased by the union as an odd choice as a method for study and stating that it’s not clear whether the comparisons cover the same kinds of work, although they might.
Hohman disputed the figures used in the analysis to account for health insurance costs and referenced pension underfunding as a drag on employment costs, but he said those things would not account for the cost differences found. He said it’s possible MDOT might find the information to be useful.
“The managers at MDOT try to spend public dollars the best they can. If these findings are useful then they’ll likely be incorporated. The people at MDOT have worked on decades of research on how to improve, after all,” Hohman said.