Public-Private Hybrids Raise Accountability Questions

Tuesday, March 10, 2015

By Auditor of State Dave Yost

There’s a messy place where the public and private meet, and the old ideas about accountability aren’t good enough to sort it out. The subject is lurking in the background of the debate over charter-school reform, but it’s wider than that and needs some hard thinking.

The distinction between what’s public and private drives many things in the law. A public entity is subject to open-meetings laws, public-records requirements, public audit and stringent ethics requirements. A purely private entity, such as a sole proprietorship or your family, is not.

But that neat set of labels doesn’t work as well when a thing is both public and private. Lawmakers here and elsewhere are deliberately blending the two — and it seems to be the trend, not the exception.

So, when an entity is a little private and a little public, which rules apply?

For example, a government office generally is cleaned by a contract service, not by government employees. Joe’s Janitorial Service shouldn’t have to open its books to public audit or abide by public-records law. The government is buying services from Joe, and as long as he provides the promised quality of service, it’s no business of anyone’s how he does it or how he spends his money.

On the other hand, if Brave New World, Inc., contracts to be the police department for your town … well, that’s a different story. Brave New World is no longer simply selling services; it is functioning as the government. Lawyers and political philosophers would say it is exercising the sovereign power of the state — and Brave New World probably ought to be subject to the traditional transparency requirements we impose upon our government.

And in between, there are all these other entities that aren’t quite private, but aren’t really public, either.

There are good reasons for blending the public and the private. Government, because its decisions apply to all of us, is designed to go slow. We shouldn’t make decisions at the speed of business when it’s about liberty, or education, or spending money that was collected by law (taxes).

On the other hand, the private sector has the freedom to move quickly, to react to market forces, to innovate — and to fail. So in certain areas where the government process has become bogged down, it makes sense to bring those private-sector virtues into the mix. That’s the idea with many hybrid organizations empowered by state government (and our tax dollars), from charter schools to privatized prisons to the Ohio Air Quality Development Authority.

But then, what does accountability look like?

In Ohio, like elsewhere, the answers are all over the board. There are custom mechanisms drawn into contracts, such as the contract with the state’s private prison contractor. Charter-school management companies are required by statute to provide certain financial information to their schools. The schools then import that information into their own financial statements — which are subject to public audit.

But it varies from program to program — and we really don’t have a comprehensive way of thinking about public accountability for partially or mostly private entities doing public business.

If we were to require such entities to comply with the accountability measures that apply to the public sector, we would lose most of the benefit of using a hybrid structure. Innovation, speed and nimbleness simply don’t happen in a government structure.

At the same time, it’s mostly or all our money and, therefore, the public’s business. Somehow, treating these entities — usually private corporations — as though they were a sole proprietorship, operating in private, doesn’t seem right, either.

The ongoing debate over charter-school reform is going to happen smack in the middle of this disorganized space in our public life. How do we protect the public interest while harnessing the best qualities of a mostly private-sector actor? I don’t have a comprehensive answer, but meaningful reform will have these characteristics:

  • Information. Although making all the papers of a private corporation public is the wrong answer, the law should require certain relevant information to be provided at particular intervals.
  • Independent verification. Some information needs external, independent verification. This could be provided by a firm’s certified public accountants or subject to review by another body. But corporations are used to dealing with this — banks require audited financial information to ensure the numbers are adequate. It’s not growing government to make sure that the information is true. As President Ronald Reagan urged: trust, but verify.
  • Segregation of duties. Businesses and governments both make sure that certain duties are done by different people. The IRS has published some criteria for how to think about segregation of duties, which I cited in our report on charter schools earlier this year.
  • Governing Board independence. “Outside directors” — board members who are not otherwise affiliated with the organization — have become a best practice in the private sector, ensuring divergent points of view and oversight of management decisions.

How to approach these factors, and how much weight should be given to them, should be driven at least in part by how much discretion the entity has in exercising the authority of the state. In our examples, Joe’s Janitorial exercises no government discretion, and Brave New World exercised a huge amount.

The details are matters for serious debate. One thing seems utterly clear to me, though: the oval peg of accountability for these hybrid organizations fits neither the square nor the round peg holes we already have. We owe it to Ohio taxpayers and families to fill that hole and repair their doubts about this public-private part of our system of government.

This commentary was published in The Columbus Dispatch on March 10, 2015.