What is Public? Big Questions Emerging from the Clash of Legal and Policy Paradigms

Abstract

This article draws on three main sources to define the constitutional boundaries for outsourcing public goods and services in the age of new governance: (1) public administration research related to public–private distinctions; (2) Office of Management and Budget (OMB) Circular A-76, federal policy on “inherently governmental” functions; and (3) the State Action Doctrine, the judiciary’s approach for distinguishing state actors from non-state actors for the purpose of redressing constitutional infringements. While these three sources have developed independently, approach the public–private debate from different vantage points, and allow significant ambiguities to remain, we contend that common ground can be leveraged theoretically to derive criteria to resolve many government outsourcing decisions in a way that is efficient and effective. Our main contribution is in providing first steps toward the development of a modern legal and administrative framework that aligns outsourcing theory and practice with the realities of new governance.

Introduction

Market-based solutions vis-à-vis outsourcing and privatization go back a long way (Nelson 2012).¹ However, the scope of outsourcing has changed over time. While in the past private actors have administered core governmental programs in areas such as education, welfare, and criminal justice, third-parties now perform many essential governmental tasks such as developing standards and regulating private activities (Metzger 2003). The expanded scope of outsourcing raises an important question for public accountability. Specifically, what laws and/or policies define the constitutional boundaries for outsourcing public goods and services?

This article draws on three main sources to address questions of accountability in the age of new governance: (1) public administration research related to public–private distinctions; (2) Office of Management and Budget (OMB) Circular A-76, which sets out federal policy on “inherently governmental” functions; and (3) the State Action Doctrine, the judiciary’s approach for distinguishing state actors from non-state actors for the purpose of redressing constitutional infringements. These sources have developed independently and approach the public–private debate from different vantage points. Consequently, scholars, practitioners, and the courts all tend to acknowledge—but do not systematically incorporate—perspectives originating from outside their own silos. For example, the duty to supervise contractors and to account for the cost of that supervision is addressed in OMB procurement policies and policy definitions of “inherently governmental,” but not in public administration research. No doubt, public administration researchers are explicitly concerned with performance implications associated with public organizations, including efficiency (Rainey 2014); however, with the exception of a few legal scholars, they do not go as far as to claim that government has a constitutional duty to supervise contractors. The lack of such an obligation, however, invites negative consequences. First, government can easily overlook the fact that keeping services in-house can be more efficacious and efficient than outsourcing. Second, when oversight is not treated as mandatory, government officials will find it more difficult to argue the need for in-house expertise. If and when contract failures occur, it is the government agency that is deemed responsible despite having lacked the resources to properly supervise the contractor in the first place.

Just recently the United States Department of Education’s Federal Student Aid Office failed in its duty to oversee the contractors servicing the $1.4 trillion portfolio of student loans (Douglas-Gabriel 2019). The agency’s failures were not limited to one administration; the inspector general tracked problems in federal student loan servicing from early 2015 through 2017, a span that covers both the Obama and Trump administrations. Unfortunately, government failures of this scale are not anomalies. Light (2014) reports on 41 major government failures between 2001 and 2014, and finds a common underlying cause is lack of government oversight, often a result of inadequate funding, staff, or “collateral capacity” such as technical expertise or information systems (11). With failures like these so often on the front page of our newspapers, it is no surprise that public confidence in government continues to decline.

Government agencies concerned with avoiding these failures should consult the above-referenced sources for outsourcing guidance. Although areas of ambiguity remain, our review reveals considerable common ground among them. For example, all three sources either explicitly or implicitly reserve coercive authority for government. We contend that this common ground can be leveraged theoretically to derive criteria to resolve many government outsourcing decisions in a way that is efficient and effective. The overview of the literature, policy, and case law is itself of value to researchers and practitioners who need to understand the different rationales for establishing outsourcing boundaries and who need to be informed of the most recent contributions in each forum; however, we believe our main contribution is in outlining foundational steps toward the development of a modern legal and administrative framework that aligns outsourcing theory and practice with the realities of new governance.

First, we conduct a review of the literature. Specifically, we describe the main ideas and the current state of the debate from each of the three different vantage points (i.e., public administration literature, policy, and case law). The subsequent section discusses the common ground shared across sources and explicates the questions that still need to be answered. We then propose a path forward, a decision schema derived from combined sources that informs theory and practice. We conclude by emphasizing the important implications of the public–private debate for the efficacy and efficiency of outsourcing.

SOURCES THAT CONSIDER PUBLIC–PRIVATE DIFFERENCES²

The Public–Private Distinction in Public Administration Research

Assertions about what makes an organization public or private go back a long way and vary. In 1945, Appleby argued that public administrators have a duty to the broader needs of society, and that what distinguishes government is its focus on the interest of the public, rather than the interests of any particular set of customers. Similarly, Blau and Scott (1962) introduced the term “commonweal organizations” to distinguish those organizations concerned with the public good from private organizations that primarily benefit their owners. Scholars acknowledge government is unique in its coercive authority. In 1953, Dahl and Lindblom suggested the justification for public organizations lies in the use of political hierarchy for social control; that is, that government has the authority to get people to do what they otherwise may not do. Similarly, Max Weber described the modern state as having a monopoly on the legitimate use of force (Weber 1946). Arguably, we do not allow private actors to make critical policy decisions nor do we allow them to expose the government to an international threat because they cannot be held accountable at the ballot box. This point is reflected in Dahl’s (1971) discussion of “polyarchy,” literally translated as “rule by many.” Thus, the idea that some authority is reserved for government if sanctioned by voters is central to American public administration.

In 1976, Rainey, Backoff, and Levine initiated a stream of research (e.g., Blumenthal 1983; Murray 1983; Perry and Rainey 1988) with their synthesis of literature comparing public and private organizations. A key point in this literature is that different organizational attributes have different implications for performance. According to Rainey and his colleagues, several core factors commonly surface in the literature. In short, public organizations lack economic markets; public organizations rely on political authority and are constrained by regulations; the goals of public organizations tend to be more complex, more ambiguous, and more conflicting; and public organizations have a broader scope of impact as they must account for the public interest as well as democratic norms such as responsiveness, transparency, and fairness. Following this line of research, Nutt and Backoff (1993) unpack the strategic management implications associated with an organization’s core attributes, specifically considering performance effects as they relate to environmental factors (e.g., market, constraints/obligations, political influence), transactional factors (e.g., coerciveness, scope of impact, scrutiny, ownership), and organization processes (e.g., multiplicity of goals, authority limits, performance expectations).

Not surprisingly, researchers from different traditions who are concerned with public–private distinctions commonly discuss implications for efficiency. Competitive markets can provide an efficiency advantage (Savas 2000). However, markets fail to deliver on efficiency under certain conditions, namely when competition is lacking, when services incentivize free riders, when externalities are present, and when buyers and sellers lack information to make informed choices (Lindblom 1977).³ The coercive authority of government is understood as an efficient mechanism for collective action (Dahl and Lindblom 1953); however, regulatory constraints put public organizations at an efficiency disadvantage (Rainey 2014). For example, an organization required to provide a forum for public participation will necessarily be more inefficient in its decision-making than an organization not required to do so. Research approaching the debate from a transaction cost framework stress the costs associated with factors such as oversight, especially in the presence of complex services that elude performance measurement (Williamson 1991).

Wamsley and Zald (1973) conceptualize a continuum where combinations of ownership and funding determine whether an organization is more public or more private. In a similar vein, Bozeman (1987, 2002, 2007) employs what he refers to as the “dimensional approach” to describing the character of an organization. According to this way of thinking, every organization has a degree of publicness, characterized by the extent to which it is subject to political (versus economic) authority (i.e., government ownership, government funding, government regulations) (see also Antonsen and Jorgensen 1997; Lan and Anderson 2000; Merritt 2019; Moulton 2009).

A recent strand of research on public values takes on the public–private debate from a different angle by considering what the public expects of government that it may not expect from a business (Bozeman 2007, 14; see also Nabatchi 2012, 2018; Jørgensen and Rutgers 2015; Van der Wal, Nabatchi, and De Graaf 2015). Bozeman (2007, 13) defines public values as, “those values providing normative consensus about (1) the rights, benefits, and prerogatives to which citizens should (and should not) be entitled; (2) the obligations of citizens to society, the state, and one another; and, (3) the principles on which governments and policies should be based.”⁴ In a recent empirical application, Bozeman (2019) elicits citizens’ views on what does and does not count as public values. Using a stipulated list of 14 candidate values and the definition of public values cited above, responses from the Bozeman study indicate a high level (above 90%) of consensus regarding what constitutes public values, among them: freedom of speech, liberty, civil rights, equal pay, freedom of religion, and safety and security. Additionally, a majority (between 62% and 86%) agreed that public values include the protection of minority interests, access to health care, economic opportunity, and rights of privacy.

The importance of preserving democratic norms is also highlighted by legal scholars concerned with the implications of privatization. Making this same point, Minnow (2003, 1246) describes government as a guarantor of freedom and equality, and Rosenbloom and Piotroski (2005) describe guarantees of due process afforded to government personnel that are not extended to nonprofit employees doing government work. Likewise, Metzger (2015) and Verkuil (2007, 2017) argue that government outsourcing can imperil norms of transparency and provide unconstitutionally broad grants of discretion to private actors.

What can we conclude about public administration literature on public–private distinctions as a whole, including where it stands today? First, it is fair to say that researchers remain interested in the topic. For example, Rainey (2014) dedicates an entire chapter to public–private distinctions in his textbook, Understanding and Managing Public Organizations. Yet, it is also true that identifying the core attributes of public organizations continues to challenge scholars. Demarking is hampered by the fact that organizations of both types often perform similar functions, as in the case of hospitals, which can be either public or private. In addition, collaborative approaches to service delivery involving both sectors, for example, public–private partnerships (P3s), can involve a high degree of interdependence; this form of sectoral blurring makes it difficult to determine where one organization begins and the other ends. What Appleby (1945, 1) argued more than a half a century ago is still relevant today; that is, it may be exceedingly difficult to identify what makes government different, but no serious discussion about public affairs can begin without acknowledging the significance of the dissimilarities. Indeed, the topic can hardly be disassociated from questions about the appropriate role and limits of government, as well as questions on the proper limits of privatization.

The research on publicness does not provide a clear point of demarcation. For example, political and economic authorities are included in previous discussions on public–private distinctions, as is apparent Rainey’s (2014) summary of the literature. However, a valuable aspect of this research is the recognition that any organization, public or private, can operate in a manner that is consistent with democratic principles and norms (Moulton 2009; Merritt, Kennedy, Kienapple 2019).

Considered collectively, the public administration literature reveals several common assertions, including key issues that we consider settled, or at least uncontested. (1) Certain powers are preserved for government or for the “sovereign,” an idea that is emphasized in classic works of public administration and just as accepted today. (2) A main objective of public administration research on public–private distinctions is to understand the factors that drive organizational performance (e.g., Nutt and Backoff 1993a). Although scholars may differ on the comparative value of efficiency among a list of public value indicators, there is no disagreement that performance imperatives should include efficiency, as well as other criteria that the wider public agrees must be preserved (e.g., Savas 2000; Sclar 2000; Williamson 1991). (3) Public administration research consistently implicates the source of authority as an important attribute for distinguishing public from private. On the one hand, coercive authority is reserved for government, but on the other hand, citizens expect limitations on governmental authority, for example, in the right to privacy. It follows that citizens would expect these limitations to be honored whether that authority is exercised by government itself or by some other entity acting in government’s stead. Thus, bringing together scholars’ discussions on authority, efficiency, and public values reveals an important point relevant to privatization decisions: The duty to preserve democratic norms is a duty nonetheless—whether the cost arises in association with direct government activity or in the form of supervising a surrogate. When government transfers authority to a contractor, it retains the responsibility to ensure that such authority is used in a constitutional and accountable manner (Metzger 2015). This is important because public administration researchers and contracting officials do not interpret the duty to supervise as a constitutional imperative. As a result, the make-buy decision may consider, but not require, a thorough analysis of comparative transaction costs related to monitoring. (4) Relatedly, traditional public administration literature and more contemporary work both acknowledge the broader impacts and broader responsibilities of public organizations. In other words, citizens expect government to do more than just provide services; government is subject to unique expectations (Verkuil 2017; Bozeman 2018). With these points in mind, the decision between direct government supply and outsourcing then becomes one of comparative efficacy (i.e., the capacity to deliver what is expected) and comparative efficiency (i.e., the preservation of norms at the least cost).

The next section is an overview of the Executive policy on “inherently governmental functions,” namely OMB Circular A-76, which addresses some of the same themes for guiding federal agencies’ commercial procurement.

OMB Circular A-76 and the Policy of “Inherently Governmental”

Two main sources provide guidance on the term “inherently governmental,” for purposes of distinguishing activities that agencies may outsource: The Federal Activities Inventory Reform (FAIR) Act of 1998 and OMB Circular A-76. The FAIR Act directs agencies to determine whether a commercial activity that is performed by a governmental source should instead be performed by a private-sector source.⁵ The FAIR Act identifies inherently governmental functions as those that will “require either the exercise of discretion in applying Federal Government authority or the making of value judgments in making decisions for the Federal Government, including judgments relating to monetary transactions and entitlements” (31 U.S.C, Section 501). These admittedly broad parameters are supposed to provide a framework for determining what is inherently governmental rather than listing specific activities that must be considered inherently governmental.

The second key source is the Office of Management and Budget’s Circular A-76, “Performance of Commercial Activities.” This is the federal document intended to provide guidance on the implementation of the FAIR Act.⁶ It is focused upon enhancing productivity and efficiency and advises with respect to the determination as to whether it will or will not be appropriate to rely on the for-profit sector for service delivery. OMB Circular A-76 requires executive agencies to report their commercial activities to both Congress and the public. Notably, in OMB Circular A-76, inherently governmental functions are defined in contrast to commercial activities; specifically, an inherently governmental function is “an activity that is so intimately related to the public interest as to mandate performance by government personnel.” Like the FAIR Act, OMB Circular A-76 does not provide a list identifying inherently governmental functions.

Not surprisingly, over time OMB Circular A-76 has been subject to various efforts at clarification, ostensibly to align practices with political priorities. For instance, in 2009, President Obama asked OMB to clarify when outsourcing is and is not appropriate.⁷ OMB’s Office of Federal Procurement Policy (OFPP) responded with Policy Letter 11-01. Policy Letter 11-01 established two tests: an exercise of discretion test and a nature of the function test. Under the exercise of “discretion test” a function is inherently governmental if it involves exercising (substantial) discretion in applying government authority.⁸ Specifically,

Under the “nature of the function test,” a function is inherently governmental if it involves exercising sovereign powers of the United States, for example, entering into a treaty with another country on behalf of the United States. In addition, Policy Letter 11-01 explained what agencies must do when work is closely associated with inherently governmental functions, required agencies to identify critical functions and to ensure they had sufficient internal capabilities to sustain the agency’s mission, outlined agency management responsibilities to strengthen accountability for effective implementation of these policies.¹⁰

Various agencies have attempted to clarify these guidelines by issuing Acquisition Letters under the authority of the agency’s senior procurement executives. Acquisition Letters go a step further than OMB Circular A-76, providing illustrative lists of functions considered to be “inherently governmental” and lists of functions “closely associated with the performance of inherently governmental.” One such example is the Acquisition Letter by the Department of Energy (AL 2015-06) listing these and other functions as “inherently governmental”: the direct conduct of a criminal investigation; the control of prosecutions; the performance of adjudicatory functions (other than alternative dispute resolution); determination of what supplies or services are to be acquired by government; the award of contracts; and the termination of contracts. The Acquisition Letter also includes a “Responsibilities Checklist” for functions closely associated with inherently governmental functions. For example, the agency is advised to: limit or guide contractors’ exercise of discretion by contractually establishing specified ranges of acceptable decisions and conduct; establish an advanced process for subjecting the contractor’s discretionary decisions and conduct to meaningful oversight and final approval by an agency official, where necessary; assign a sufficient number of qualified government employees with expertise to administer or perform the work and give special attention to contractors activity to ensure it does not expand to include inherently governmental functions; ensure a level of oversight needed to retain government control of contractor performance and preclude the transfer of inherently governmental responsibilities to the contractor; take appropriate steps to mitigate conflicts of interest, for example, by conducting pre-award conflict of interest reviews and developing a conflict of interest mitigation plan.

The current version of OMB Circular A-76 requires the government to outsource commercial activities that can be performed less expensively by the private sector but also prohibits the outsourcing of inherently governmental functions.¹¹ Thus, the policy attempts to strike a balance between the value of efficiency and the preservation of the agency’s mission, which is duly authorized by Congress and, by extension, the people. The policy can also be interpreted to include a duty of oversight that is not typically acknowledged and perhaps not well understood by public administration researchers and by contracting officials. Viewed in this light, the underlying values of OMB Circular A-76 are wholly consistent with those values that surface in the public administration literature (e.g., Dahl 1971). In addition, the federal government continues to recognize the “exercise of discretion test” and the “nature of the function test” for defining tasks that are “inherently governmental.” Thus, the FAIR Act, along with OMB Circular A-76 and related policy guidance, underscore the importance of certain values to be considered when deciding whether to outsource, including efficiency, the preservation of the agency’s critical functions, necessary constraints on a supplier’s exercise of discretion, and government’s duty of oversight.

In the next section, we consider how the judiciary distinguishes state actors from non-state actors for the purpose of assessing constitutional infringements. The State Action Doctrine developed over time, through litigation, and independently of both public administration research and OMB Circular A-76, yet has produced compatible principles that inform and constrain public management decision-making.

The State Action Doctrine

In the United States, the legal system draws a constitutionally significant distinction between the public sector, defined as government and its agencies and officials, and the private sector, including civil society, defined as the multitude of nongovernmental, voluntary communal and religious associations through which individuals may act and connect. Since the Bill of Rights restrains only government action, it is essential that citizens and public managers alike be able to identify when government has acted (Kennedy 2006). Moreover, the American Constitution does not grant affirmative rights; instead, it limits the power of the state to infringe private ones. This is not the case in many other Western democratic states, where it is common to have a constitutional system that both restrains and empowers government, and where social entitlements frequently are embedded in the constitution. As a result of the United States’ approach, sometimes called “negative liberty,” a transfer of authority to nongovernmental agents is more than merely a management problem, as it is in many other countries, because constraints on the use of governmental authority are fundamental to the United States’ political and constitutional order (Kennedy 2012).

The legal principle used by the courts to distinguish between public and private actors is the state action doctrine. The state action requirement is derived from the text of the 14th Amendment, specifically section 1, “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws” (emphasis added). Since the text of the Amendment does not preclude private actors from abridging citizens’ rights, the requirement of distinguishing public and private is a perquisite to assessing constitutional compliance and liability. Specifically, the court first determines whether state action is present, which requires either the finding of “public function” or a combination of other factors indicating significant state involvement. If the answer is no, the inquiry stops there. If the answer is yes, the court determines whether there has been a constitutional violation.

The judicial interpretation of public function (and the birth of the state action doctrine) began with cases implicating civil rights, especially the right to vote. In two foundational cases, the court held that the conduct of elections is “exclusively a state function and invalidated racial discrimination by nongovernmental groups (political organizations or parties) who exercised effective control over the selection process of candidates in a primary or pre-primary process” (Hunter, Shannon, and McCarthy 2013, 67). In Smith v. Allwright (1944), the Democratic Party of Texas, a voluntary organization, was held to be a state actor when Smith, a black man, was denied the right to vote on the basis of his race. Because the state of Texas governed the selection of party leaders at the county level, the practice of racial discrimination in elections was held to be a violation of constitutional rights by the state. In Terry v. Adams (1953), a private association denied a citizen the right to vote on the basis of race. The Supreme Court upheld the precedent in Smith: if a private political party is authorized to influence the outcome of an election, which is a function of government, the private actor will be found to be an agent of the state subject to the Fifteenth Amendment. Smith v. Allwright and Terry v. Adams established that most, albeit not all, election functions, which have traditionally been performed by government, will be deemed to be public functions.

Court rulings grounded in the First and Fourteenth Amendments (and on two occasions in the simultaneous violation of both), notably Marsh v. Alabama (1946) and Amalgamated Food Employees v. Logan Valley Plaza (1968), expanded upon the “traditionally performed by government” condition and extended the doctrine to encompass functions that the Court deemed “governmental in nature.” In Marsh v. Alabama, a Jehovah’s Witness disseminated religious literature near a post office in Chickasaw, Alabama, a company town, without obtaining permission from the Gulf Shipping Corporation, the owner and operator of the town. The question before the court was whether the State of Alabama violated Marsh’s constitutional rights under the First and Fourteenth amendments when she was arrested for distributing religious material. In a 5-3 ruling, Justice Hugo Black emphasized that owners of privately held bridges, ferries, turnpikes, and the like may not operate them as exclusively private entities. Rather, because these facilities are built and operated primarily for the benefit of the public and are governmental in nature, they will be subject to state regulation and required to operate in a constitutionally appropriate manner. Even though Chickasaw, Alabama was a “company town” owned and operated by a private corporation, the court emphasized the town’s numerous public attributes, including the fact that the town’s policeman was a deputy from the Mobile County Sheriff’s Department. In Evans v. Newton (1966), the Court built upon the precedent set in Marsh and held that prior governmental involvement in the operation of the public space compelled a finding of state action; the case revolved around the use and maintenance of a tract of land which had been willed to the City of Macon, Georgia in 1911, to be used as a park for white people only.

Freedom of speech was the central constitutional issue in Amalgamated Food Employees v. Logan Valley Plaza (1968). The Court was faced with a case concerning a protest occurring at a shopping center that maintained common areas, including parking lots and driveways; the question was whether the premises were public or private for purposes of evaluating protestors’ Free Speech rights. The Court concluded that individuals could peacefully protest based on their First Amendment rights since the shopping center was the “functional equivalent” of the business district of a town. Citing Marsh, the Court used the case to further clarify its application of the state action doctrine and the degree to which it will consider such common areas sufficiently public to justify constitutional analysis. The more an owner opens private property to public use, the more the owner’s private rights become limited by the rights of the individuals who use it (Amalgamated Food Employees v. Logan Valley Plaza). Legal scholars consider the precedent set in Amalgamate Food Employees v. Logan Valley Plaza the high-water mark of the public function theory (Huss and Simmons 1976). However, the difficulty of balancing the competing public and private rights involved became apparent in subsequent litigation. The Court would limit the Amalgamated precedent 4 years later in Lloyd Corp. v. Tanner (1972) and would reverse course in Hudgens v. NLRB (1976).

The court held in Lloyd Corp v. Tanner (1972) and Hudgens v. NLRB (1976) that private property does not become public just because the public is invited to use the property for its intended purpose. In Lloyd, a shopping center that had allowed a variety of political and civic activities refused similar permission to a group distributing handbills; in Hudgens, striking union members picketed a store located within a shopping mall, and the mall’s manager threatened them with arrest for trespassing. In both cases, the Court distinguished Marsh, and held that a privately owned shopping mall is not the functional equivalent of a town.

In West v. Atkins (1988), a Fifth Amendment case in which a private contractor provided health care services to prisoners for a state hospital, the contractor was operating under state authority and was thus found to be a state actor performing a public function. In Edmonson v. Leesville (1991), the Court held that the right to trial by a fair and impartial jury is a guarantee issued by government, and private litigants’ dictation of race-based exclusions would not be allowed as such action could deprive the defendant of that constitutional guarantee. When private actors participate in the selection of jurors, they serve a vital function within the government and are agents acting under its authority.

At least two points are significant regarding public functions. First, if the court determines the function is a “public function” this is enough to satisfy a finding of state action even though the interpretation of a public function is quite narrow (Blum v. Yaretsky, 457 U.S. 991, 1982). Second, although the cases that expand upon the definition of public function are often viewed as outlier cases, they nonetheless reflect the import of public values by the court, for example, the right to vote shall not be denied on the basis of race (Terry v. Adams 1953).

The other criteria for finding state action considers the relationship between government and the private actor. The degree of involvement is key to the Court’s analysis. On the one hand, when one person enters into a contract with another or performs such a contract, this factor alone does not constitute state action (Rendell Baker v. Kohn 1982). Justice Clark articulated the standard in Burton v Wilmington Parking Authority (1961), stating “Private conduct abridging individual rights does no violence to the equal protection clause unless to some significant extent the State in any of its manifestations has been found to have become involved in it.” Nor does the fact that a business is subject to state regulation convert private action to state action; in Moose Lodge v. Irvis (1972), Justice Rehnquist opined “the operation of the regulatory scheme enforced by the Pennsylvania Liquor Control Board does not sufficiently implicate the state in the discriminatory guest policies of Moose Lodge to make the latter state action.” And in Rendell Baker the Court found no state action despite the state providing the school about 90% of its funding. In Flagg Bros v. Brooks (1974), the court held that due process guarantees do not apply to a plaintiff in situations where the state merely acquiesces to private actions; and in NCAA v. Tarkanian (1988) and San Francisco Arts & Athletics v. US Olympic Commission (1987) it refused to require due process where it found no “symbiotic relationship” between the state and a private party.

On the other hand, the Supreme Court has generally found that a private party will be considered to be a state actor when government was significantly involved in the action at question (emphasis added). For example, a defendant’s enforcement of a restrictive covenant by suit in state court constitutes state action. In 1982, Lugar v Edmonton Oil the Court found state action to be present when the State created a system whereby state officials attached property on the ex parte application of one party to a private dispute. In Brentwood Academy v. Tennessee Secondary School Athletic Association (2001), the US Supreme Court considered whether the actions of a Tennessee interscholastic sport-association could be regarded as a state action for purposes of the First Amendment and Due Process. The Court held that the sports association could be sued as a state actor because its actions and history had been sufficiently “entangled” with state activity. In addition, state action has been found when the government and private actors are interdependent. In Burton v. Wilmington Parking Authority (1961), the Court upheld an injunction prohibiting racial discrimination by a privately owned restaurant leasing space in publicly owned parking facility. In the words of Justice Clark, “The State has so far insinuated itself into a position of interdependence with Eagle that it must be recognized as a joint participant in the challenged activity...” The Burton case broadened the reach of the Equal Protection Clause to include not only direct government action, but also actions by private companies acting in close relationship to a government agency. Later, in Moose Lodge v. Irvis the Court limited the application of the holding to situations where government support of the business was substantial.

A discussion of where the state action doctrine stands today is not complete without consideration of a 2015 Amtrak case. In Department of Transportation v. Association of American Railroads (2015), the United States Supreme Court held “for purposes of determining the validity of the metrics and standards, Amtrak is a governmental entity.” Reasonably interpreted, this means the court recognizes that certain policy-making duties are reserved for government. Justice Kennedy, who wrote the opinion for the court, makes several noteworthy points. First, the court rejected the Court of Appeals’ reliance on a Congressional declaration that Amtrak “is not…an instrumentality of government” (49 U.S.C. §24301(a)(3)) and “shall be operated and managed as a for-profit corporation” (49 U.S.C. §24301(a)(2)). The court said congressional pronouncement was not dispositive of organizational status. Important factors that led to the court’s decision included considerations of ownership, funding, and authority. Amtrak’s ownership and corporate structure vest control in the political branches of government, although some common stock is publicly held. Also, the court noted that the political branches exercise substantial, statutorily mandated supervision. Many aspects of Amtrak’s day-to-day operations are mandated by Congress, and Amtrak is required by statute to pursue broad public objectives. With respect to funding, the court noted Amtrak has been dependent on federal financial support throughout its existence. Again, there is congruity of factors important to the courts and those acknowledged in public administration research on public–private distinctions. In clarifying the holding, Kennedy wrote, “the combination of features plus Amtrak’s significant ties to government [led to the decision] Amtrak [is] not an autonomous private enterprise.” A concurring opinion by Judge Alito is equally telling; Alito highlighted the Oath and Commission clauses in the US Constitution, writing “those who exercise the power of government are set apart from others because of the oath to the Constitution.” (Justice Alito’s opinion begs the question of what effect an oath to the Constitution might have on a private entity’s status as a state actor.)

In sum, as the practice of contracting out has grown, courts have increasingly been faced with cases in which the presence of state action sufficient to impose legal liability is less than clear-cut. As Justice Scalia stated in the case of Lebron v. National Railroad Passenger Corporation (1992), “it is fair to say that our cases deciding when private action might be deemed that of the state have not been a model of consistency.” Yet the doctrine persists, which is an indication of its continued relevance. As the term “doctrine” implies, there is some level of agreement on underlying principles, even if certain of those principles cannot be easily articulated. The following points may serve to summarize the current status of the state action doctrine: (1) There is a constitutionally required distinction between state and non-state actors, and the determinants of that distinction resemble many of the factors identified in early PA research (Rainey, Backoff and Levine 1976), although the degree to which those factors are relevant is not measurable (Malatesta and Carboni 2015). (2) The Supreme Court has confirmed the principle that some governmental activities are, in fact, “public functions,” albeit the identity of those functions is generally confined to those traditionally and exclusively provided by government. (3) Courts continue to evaluate whether the state’s involvement is “sufficiently significant” to find state action, despite differences in opinion as to when that point is reached. (4) Decisions regarding state action have been guided by public values (e.g., Shelley v. Kraemer and Evans v Newton). (5) The Amtrak case points to the continued importance of ownership, funding, and authority, as well as the interdependent relationship between government and the private-sector party. The ruling is also consistent with the position that regulatory authority is preserved for government.

The foregoing analysis has examined the current state of the debate on public–private distinctions from the vantage point of the public administration literature, executive policy, and judicial decision-making. Each approach focuses on different questions and employs different analytical strategies. Yet, the underlying questions all focus on organizational performance and on the appropriate role of government, albeit from different perspectives. It is important to recognize that the current state of debate in each forum continues to evolve, and to inform the decision-making of public managers, making it important for scholars and practitioners to understand the nuances of the debate, and the manner in which these discrete approaches contribute both to clarification and confusion.

Discussion

Despite the fact that each source has developed independently and from differing theoretical perspectives, common ground can be leveraged to advance both theory and practice. For example, there is general agreement across all three forums that there are functions that should be reserved for government employees. That would include, but not be limited to, exercises of coercive power and authority reserved for the sovereign, such as entering into treaties, arresting or charging a citizen with a crime. There is consensus that rulemaking and lawmaking are governmental in nature, as are decisions about the mission of a government agency. Policy making, as well as agency goals and values, should be debated and ultimately established by government officials.

Most scholars and practitioners agree on the importance of efficiency and view competition, where it exists, as key to achieving efficiency. The public administration literature does not dispute this but emphasizes the implications of organizational attributes for efficiency. Moreover, research on transaction cost, frequently employed in public management contexts, reveals contract hazards that render outsourcing inefficient, for example, when services are highly customized, when performance is difficult to measure and when parties are required to make asset-specific investments (Williamson 1991). OMB Circular A-76 policy encourages the goal of efficiency by specifying procedures for comparing costs for different delivery modes. Moreover, those who authored the policy clearly recognize that a large driver of efficiency is transaction costs; specifically, the exercise of discretion tests target functions that implicate substantial supplier discretion, which can necessitate costly oversight. Assuming a main goal of outsourcing is increased efficiency, questions about the level of competition and the nature and complexity of the service must be considered. As to performance criteria other than efficiency, it is hard to disagree on the importance of preserving democratic values, whether service delivery is direct or by proxy.

Public administration research and OMB policy emphasize pragmatism. Public administration research, especially, is concerned with practical implications for management of public organizations. O’Carroll (2017) describes the exercise of discretion test as pragmatic and empirical and intended to make sense for those concerned with the costs of accountability mechanisms when third-party surrogates exercise broad discretion (See also Policy Letter 11-01 at 56, 237–38). According to a textual analysis by Anderson (2015) the principle of pragmatism is consistent in all versions of OMB Circular A-76 from 1966 to 2009 (63–65). On the other hand, the nature of the function test is deontological and theoretical as it reflects the view that certain functions should not be privatized because of inherent and important differences between the public and private sectors (O’Carroll 2017). As to this same point, Anderson’s (2015) historical analysis of OMB Circular A-76 text finds consistent use of language implicating democratic values; Anderson concludes there is evidence of a constitutionalist paradigm across versions of OMB Circular A-76. Thus, both an efficiency theme and a public values theme appear common to public administration and OMB Circular A-76 policy.

The OMB definition of “inherently governmental” differs from the state action doctrine definition of “public function,” and the differences introduce a measure of ambiguity that public managers must recognize, especially since it is clear that the former is more encompassing than the latter. In 2002, the Comptroller General listed warfighting, judicial enforcement, regulatory functions and policymaking as within the scope of “inherently governmental” (GAO 2002) In state action doctrine cases, the courts have established a high (and not particularly consistent) bar for determining which functions are sufficiently “public” to make a contractor a “state actor.” Traditionally, only exclusive functions qualify. (Jackson v. Metro Edison Co. 1974).¹² Both definitions, administrative and legal, should be consulted. OMB Circular A-76 provides initial guidance to public administrators as to whether something is a government function for purposes of determining the propriety of contracting out. But recognition of the circumstances in which courts have assessed liability and applied the State Action Doctrine should also inform contract negotiations and drafting, in order to avoid inadvertent assumptions of liability. Understanding this jurisprudence may help both government and those with whom it contracts to insulate private actors from constitutional claims that would apply if government performed the same functions (Buchanan et al. 1997) without inadvertently depriving citizens of constitutional protection.

For State Action purposes, too-substantial involvement of government with a private contractor, signaling a close or even symbiotic relationship between the public and private sectors, may result in a finding of state action. This is an area where the ambiguities at the intersection of legal and managerial concerns need to be carefully considered; government has an obligation to oversee and manage private contractors acting on its behalf, but too-much government oversight could lead to a finding of state action and the imposition of constitutional constraints (See Brentwood Academy).¹³

Lastly, the importance of public values is acknowledged either implicitly or explicitly across all three sources. Public administration research approaches public values theoretically and empirically (e.g., Bozeman 2018). Legal scholars writing on public administration topics do the same (e.g., Metzger 2005). OMB Circular A-76 includes consideration of the impact of outsourcing on the agency’s ability to carry out its mission, which can be viewed as preserving public values duly authorized by Congress. As for the judiciary, application of the state action doctrine acknowledges the importance of public and constitutional values.

Unanswered Questions

Some questions remain unanswered. Public administration research is a valuable source for determining the implications of a whole host of attributes for organizational performance, but it does not give us a clear sense of what is public in practice. Moreover, research on public values does not settle how performance criteria should be prioritized. When is efficiency most important? How do other public values, such as equity, fit into the public–private debate? When are public values most important? Nor does it tell us how a public values list might be adjusted for different populations. Donahue (1989, 11) asks the main question yet to be resolved: are there some values inherent in publicness or privateness?

With respect to OMB Circular A-76 policy on the definition of inherently governmental, some scholars concede it is “muddy” (Laubacher 2017). And, although there is general agreement on classifying some functions as inherently governmental, they do not all agree on what functions should be on the list. Nor does the policy tell us at what point the duty to supervise renders outsourcing comparatively inefficient. Also, the recognition that policymaking is an inherently governmental activity does not make the line between policymaking and implementation any clearer. This issue is a main point of contention in debates about the appropriateness of outsourcing social services, which involve determinations of eligibility on a case by case basis.

The state action doctrine directs attention to circumstances that turn private actors into state actors, but it makes no attempt to acknowledge the realities of the administrative apparatus, specifically the broad delegations of discretionary authority that are common to new governance (Metzger 2015). Legal decisions rest on the rule that critical policy decisions must remain in the purview of agencies, rather than being contracted out, but the courts are not well equipped to recognize the extent of discretion that is being outsourced in different policy domains.

ANALYSIS: A PATH FORWARD

Having established that all three sources, public administration research, OMB Circular A-76 policy on inherently governmental, and the State Action Doctrine, inform the debate on public versus private and have implications for outsourcing decisions, what is the path forward? At a minimum, public administration scholars and practitioners should be aware of new developments from each source in order to make more informed decisions about contracting out. For example, the importance of efficiency and the association between competition and efficiency is explicit in the public administration literature and in the OMB Circular A-76 policy. In the Amtrak case, the court considered the lack of competition as one factor in finding state action, suggesting at least an implicit acknowledgment of market condition in its analysis. Consequently, the question: “Is there a lack of competition” is relevant to determining both whether outsourcing is advantageous and whether it might impel a finding of state action.

Table 1 collects relevant questions from the various sources discussed in this article. Entries to the right of the question indicate the underlying principle is either explicit (E) or implicit (I) in the source. The table also makes clear that all three sources share a substantial degree of common ground, despite the acknowledged ambiguities.

Answers to these questions yield important implications for compliance with law and policy, and in turn, the decision to outsource. This is evident in table 2, where the questions that will guide the outsourcing decision appear in the left column and implications for “yes” answers are in the right column. Note that four questions are highlighted in table 2. If any of these questions are answered in the affirmative, the decision should be to insource, as contracting out will lead to a violation of established law or policy. Implications for the remaining questions in table 2 (not highlighted) are also indicated in the table.

Importantly, table 2 is intended to be a short-hand tool and not a replacement for law or policy. In other words, researchers and practitioners should still refer to primary source documents to understand the many nuances of the public–private debate. For example, the question in row 4 references inherently governmental functions. The FAIR Act and OMB Circular A-76 Policy are the primary sources associated with this question. For these questions, the discretion test and the nature of the function test become relevant. If discretion is or may be broad enough to include policy formulation, the activity should not be outsourced. If the function is preserved for government, it should not be outsourced. Also, according to OMB Circular A-76, discretion must be substantial to be defined as inherently governmental. However, OMB’s “nature of function” test is not as limited as the “public function” test under State Action Doctrine. In fact, functions may include services required by statute (see Scalia’s dissent in Richardson v. McNight 1997).

Row 5 references inherently governmental functions that may have been defined by the agency. The contracting official can access a list of examples to assist with this determination that has been used by federal agencies. Row 9 asks about the level of oversight and whether it is limited. Ironically, extensive oversight by government was a main determinant of state action in the Amtrak case. State actors are constitutionally constrained. However, the lack of oversight is the main problem for most issues of accountability in contracting. This contrast underscores the Court’s difficulties with the evolving realities of contracting. Row 10 concerns the State Action Doctrine’s narrow definition of public function. A more complete understanding of traditionally exclusive functions that have been treated as state action is contained in Jackson v. Metro Edison.

Drawing on information from tables 1 and 2, we develop a decision schema that divides questions and outcomes by source (figure 1). Figure 1 provides a visual representation of questions and outcomes. The decision schema begins by asking a question at the core of public administration research on public–private distinctions: Is the good/service produced by a public entity? However, because of the blurring of sectors resulting in large part from modern-day governance, one must ultimately turn to administrative and legal practice and answer outsourcing questions fundamental to OMB Circular A-76 and/or the State Action Doctrine. In doing so, contracting officials using the schema should determine the focal questions and goals. For example, if the main goal is to maintain the agency’s capability to carry out its mission, OMB Circular A-76 policy is the primary guide for outsourcing decisions. If the main goal is to preserve constitutional protections, the state action doctrine is the primary mechanism for establishing whether outsourcing is a plausible solution. Following the approaches used by the judiciary to determine state action, the two primary questions become: Will the exercise of discretion be constrained or limited?¹⁴ Is the public function limited to the very narrow list established by precedent? Answers to these questions determine if there is state action for the purpose of establishing constitutional protections, or infringements, depending on one’s vantage point. An outcome of non-state actor implies that the goals of preserving constitutional protections is at risk if the activity is outsourced, unless the contract itself is used to accomplish this purpose.

To be sure, none of the sources we have reviewed offer a perfect solution. However, the questions at hand, even if unanswered, are too important to give up on the challenge. As Peters (1996, 28) proclaims: “If the distinction between public and private is artificial, government outsourcing of most, if not all, public services should not be controversial.” Likewise, Diller (2002, 503–4) reminds us of the constitutional risks at issue, specifically the leading public values and expectations of “due process, equal protection, freedom of information, and public participation [that could be] jeopardized by privatization of public services.” And, in discussing OMB Circular A-76 policy, Anderson (2015) argues that the concept of inherently governmental is “fundamentally about the relationship and boundary between the public and private sectors and what a government must do, may do, and must not do…. and central to the normative perspective that the US constitution should guide public administrative practice” (48) (see also Markusen 2003). As for state action, the doctrine has everything to do with the appropriate reach of government and the extent of constitutional protections available to the citizens.

In a perfect world, we could offer one comprehensive decision framework that operates as a mechanism for determining the propriety of outsourcing. This is not possible given that each main source—public administration research, OMB Circular A-76 policy, and the state action doctrine—offers a unique vantage point and approach to distinguishing public versus private debate. Nevertheless, in this article we take important steps toward developing a modern administrative regime that combines the values from each forum: literature, policy, and the courts. We do this by identifying the areas of common ground across sources and offering a decision schema that guides outsourcing decisions based on shared values of democratic principles and efficiency. In essence, this is a call for a new way of thinking about the propriety of outsourcing—one that draws from sources we already rely on and has roots in public law, yet one that also avoids the pro-market versus pro-government ideological impasse.

We contend that, if common values are emphasized, pro-market and pro-government advocates will often arrive at the same decision with respect to outsourcing. For example, a hallmark of conservative thinking (and a premise of the state action doctrine) is that government is constitutionally limited in its authority to reach into private affairs. That being the case, constraints on unlawful exercises of authority are just as necessary regardless of whether the actor is characterized as public or private. It follows that oversight of contractors is a constitutional imperative. In addition, under conditions well-established in transaction cost research, oversight can be costlier when functions are outsourced than when kept in-house. Thus, given that pro-market advocates typically emphasize the value of efficiency, comparative costs that include constitutional oversight should be an acceptable component of the make-buy analysis. A constitutional theory of outsourcing can appeal to pro-market advocates. Viewed this way, the Constitution is not only a source of legitimacy for public administration, as argued by Rohr (1985), but also a source of legitimacy for outsourcing and privatization. In short, we can connect democratic principles to economic principles. As Waldo (1948, 134) proclaimed, “a real democratic government is responsible to the people and is also efficient.”

Cases cited

Department of Transportation v. Association of American Railroads, 135 S. Ct 1225 (2015)

Smith v. Allwright, 321 U.S. 649 (1944).

Marsh v. State of Alabama, 326 U.S. 501 (1946).

Terry v. Adams, 345 U.S. 461 (1953).

Evans v. Newton, 382 U.S. 296 (1966).

Flagg Bros., Inc. v. Brooks, 436 U.S. 149 (1978).

Garcia v. San Antonio Metropolitan Transit Authority, 468 U.S. 528 (1985).

Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974).

Blum v. Yaretsky, 457 U.S. 991 (1982).

Rendell-Baker v. Kohn, 457 U.S. 830 (1982).

San Francisco Arts & Athletics v. United States Olympic Committee, 483 U.S. 522 (1987).

Hudgens v. NLRB, 424 U.S. 507 (1766.)

National Collegiate Athletic Association v. Tarkanian, 488 U.S. 179 (1988).

West v. Atkins, 487 U.S. 42 (1988).

Edmonson v. Leesville Concrete Co., 500 U.S. 614 (1991).

Amalgamated Food Employees Union Local 590 v. Logan Valley Plaza, Inc., 391 U.S. 308 (1968)

Lloyd Corp. v. Tanner, 407 U.S. 551 (1972)

References

Footnotes