This analysis was updated on March 19, 2019, to clarify which funds from Philadelphia's budget were used to perform this analysis.
Philadelphia city government is slated to spend nearly $3.8 billion this fiscal year to purchase a wide range of services through outside contracts, about the same amount it spends on salaries and benefits for its own employees. These arrangements include paying nonprofit organizations to shelter the homeless; utilities to provide heat, water, and electricity to city buildings; and service providers to place children in foster care.
An analysis of the fiscal year 2019 budget by The Pew Charitable Trusts shows that 43.4 percent of $8.7 billion in planned expenditures across all city funds--including the general fund--are for the “purchase of services,” defined as “contracts with external for-profit and non-profit organizations.” Salaries and benefits of city workers, classified as “personal services” in city budget documents, account for 43.8 percent. The remainder pays for a variety of needs, including equipment, materials, and supplies.
Whether spending such a percentage of a city’s budget on outside contracts is unusual is hard to determine. Making comparisons among cities is challenging, given differences in budget categories, government structure and responsibilities, and revenue sources—and studies of city budgets have produced a range of results. A 2016 study by two analysts from the Harvard Kennedy School found that Boston and Fort Worth, Texas, each spent close to 50 percent of annual city expenditures on contracts.
Philadelphia’s spending breakdown, shown in Figure 1, has not changed substantially since the early 2000s. In addition to the purchase of services, the city buys materials and supplies—accounting for roughly 2 percent of expenditures—which also require contracts with vendors.
Most contract spending falls into one of four categories. As shown in Figure 2, the largest is mental health and intellectual disability services (35 percent), followed by professional services (24 percent), other expenses not classified (17 percent), and payments for care of individuals (8 percent). Professional services includes a variety of consulting services not otherwise captured by other spending categories. The remaining contracts cover engineering, janitorial, and legal services, among others.
Within city government, some departments contract out services far more than others. As Figure 3 shows, two departments—the Department of Behavioral Health and Intellectual disAbility Services and the Department of Human Services—account for more than half of all budgeted contracting in fiscal 2019.
Behavioral Health and Intellectual disAbility Services is budgeted to spend nearly $1.6 billion on contracts, nearly 85 percent of that for mental health and intellectual disability services. This primarily funds Community Behavioral Health, the nonprofit entity that provides mental health and substance use disorder treatment for Medicaid recipients.
Human Services is slated to spend almost $570 million on the purchase of services, half of that for the direct care of individuals. The department issues contracts for foster care placement and to community umbrella agencies—nonprofits tasked with handling child welfare cases in defined geographic areas. Other departments budgeted to spend at least $100 million on contracts include prisons, commerce, planning and development, water, public property, and public health. Among the others, most were to spend less than $25 million.
Another way to look at contracting is the degree to which each department relies on the practice. Those that spend more than 70 percent of their budgets on contracts are shown in Figure 4. Most other departments, including police and prisons, spend less than half of their budgets on outside contracting.
Philadelphia’s contracts cover either professional services or commodities. Contracts for commodities—which also include some services, such as landscaping, maintenance, and construction—are generally subject to the lowest, responsive, and responsible bidder requirements stated in the city’s Home Rule Charter. That means the contracts are offered to the lowest bidder that meets the specifications and is considered capable of the work. Voters in 2017 approved a ballot measure that allowed for the approval of commodities contracts using a “best value” approach, which looks at other factors in addition to price, though this has been used only a few times thus far. Professional services contracts also undergo a competitive process, with multiple criteria considered in addition to price.
At any time, the city has more than 1,500 active professional service contracts, most of which are valued at less than $250,000. (See Figure 5.) Philadelphia limits professional services contracts to one year in length, with up to three one-year renewals.
There are more than 750 active commodities contracts at any time. While professional services contracts are primarily issued by individual departments, the procurement department handles commodities contracts. These arrangements are, on average, for higher dollar amounts than professional services contracts, mainly because they can cover more than one year. (See Figure 6.)
How effectively this money is spent is difficult to determine, partially because there is no consensus among public officials and experts on government operations about how to make such assessments. Contract evaluation can be based on performance, cost, and/or other metrics, and the criteria vary substantially from department to department and contract to contract.
Some of those assessments in Philadelphia are made public. For example, Human Services recently released its evaluations of the performance of community umbrella agencies. Some reviews, however, are not shared with the public. And some departments have more capacity to conduct contract evaluations than others.
Research has shown that policies and decisions throughout the contracting process can have an impact on performance—beginning with deciding whether a service is appropriate for contracting in the first place. Capacity within the government at each stage can affect performance, too.
In a statement to Pew, the Chief Administrative Office said: “[T]he city is invested in ensuring that our contracts provide the best value to the residents of Philadelphia. Monitoring vendor performance, evaluating the quality of the services being provided, and ensuring contractors meet established deliverables is paramount to this goal.”
City Controller Rebecca Rhynhart, upon taking office in 2018, made examining the Department of Behavioral Health and disAbility Services—with its heavy dependence on outside contracts—one of her first major projects. She said at the time that the department had never been subject to a full performance review. Her office has not yet issued its report.
Larry Eichel is director and Jason Hachadorian is a senior associate with The Pew Charitable Trusts’ Philadelphia research initiative.
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