by Geoffrey F. Segal, Adrian T. Moore, and Adam B. Summers*
Reason Public Policy Institute
When faced with insufficient revenues, state governments typically have four options: increase taxes, scale back expenditures, spend down reserves, or seek ways to provide services more efficiently through contracting with private providers. Massachusetts, however, has only the first three options available; it is the only state in the nation that has virtually outlawed the privatization of public services.
The Pacheco Law was enacted by the Massachusetts legislature in 1993. The law, now M.G.L. ch. 7 sections 52-55, set up a series of tests that a state agency must pass before it can award a contract to a private company to perform services that had been previously performed by state employees. The law presents both statutory and political roadblocks to efficient government operations. Its provisions essentially slam the door on many opportunities that have been shown to improve services and save money in other places, as the law disregards all potential benefits other than lower costs.
Reducing costs is only one of many reasons agencies in other states choose to contract with private service providers. Well-designed contracts allow agencies to improve quality, accommodate peak demand, speed project delivery and meet deadlines, gain access to expertise, improve efficiency, spur innovation, and manage risk more effectively.
The Pacheco Law essentially prohibits Massachusetts agencies from contracting out to improve service quality, increase the number of people served, or reduce an existing backlog. A proposal to contract out cleaning and maintenance of bus shelters–which would have brought several million dollars annually to the state from new advertising revenues–was rejected because the contractor did not specifically calculate the difference in cleaning costs.
When a Massachusetts agency entertains bids for the right to deliver a service, public employees have the opportunity to submit bids to keep the work in-house. The Pacheco Law gives state workers significant advantages.
- The cost and quality of service offered by private contractors must be compared not to existing cost and quality but to the hypothetical situation of public employees working in the most cost-effective manner and providing the highest quality possible. At no time are state employees held to these standards. If public employees win the contract, they are not held to any concessions made as part of the bid.
- The contractor must add lost tax revenues to the cost of the bid if any work is to be performed outside Massachusetts. No such adjustment is made to the public sector bid for the loss of tax revenues that would be realized if the work were to be performed by a private business subject to state taxes.
- Private bids must also include estimated costs of monitoring contractor performance, while no such monitoring takes place in the public sector. The likely benefits of monitoring are not considered.
Even if a private contract scales these hurdles, the State Auditor may reject any proposal he deems not to be "in the public interest," without providing a definition or reason. The rulings are final and may not be appealed.
Prior to the passage of the Pacheco Law, the Weld administration issued 36 privatization contracts, saving taxpayers an estimated $273 million. The procedure Massachusetts agencies must follow under the Pacheco Law is so onerous that only eight proposals have been submitted to the Auditor since its adoption in 1993. Only six were approved.
Over the last decade, federal, state, and local government agencies nationwide have contracted with private vendors to provide services from data processing to prison operations to adoption. According to the Government Contracting Institute, the value of federal, state, and local government contracts to private firms is up 65 percent since 1996 and exceeded $400 billion in 2001. Massachusetts law should not continue to prohibit agencies from taking advantage of this tool for reducing the cost and increasing the quality of state services.
Ideally, the Pacheco Law should be repealed. Short of repeal, it should be amended such that privatization can become a useful policy tool for legislators and agency managers.
- Allow for best-value contracting, in which clear value to taxpayers replaces cost savings as the sole criteria. When costs are compared, the cost of the private bid should be compared to the current actual cost of public employees delivering the service rather than to a hypothetical cost.
- Require that agencies use a uniform set of thoughtful assumptions in calculating costs that are clearly explained and transparent in their implications.
- Require that all contracts, with private firms or state employees, be performance-based, specifying what will be accomplished, how it will be measured, what incentives will be used, and the consequences for performance failure.
- Hold public employee groups accountable to their bids. If a union chooses to bid on a contract, public workers should be expected to provide services at the cost and level of quality indicated in the bid. In practice, this also means (1) requiring union bids to include contract monitoring and its associated costs and (2) including in contracts with winning employee groups provisions for re-competition if the performance goals and cost savings are not met, with a specific length of contract and re-bid schedule.
- Hold agencies accountable for managing successful privatization projects that meet agency performance goals. Enforce accountability through agency budgets.
- Remove the elements of the law that dictate the process agencies must follow to privatize.
- Shift the Auditor’s role to reviewing privatization proposals for clear violations of the law, and create an appeals process for disagreements between the Auditor and agencies, paid for out of both budgets to reduce incentives to appeal.
General and service-specific surveys of privatization all reach the same conclusion. The use of contracting by government agencies is growing. Cost savings are always a key motive, if not the sole one; states with privatization experience are achieving their goals and generally plan to expand their use of it.
As January 2003 approaches, Massachusetts faces its worst fiscal crisis in over a decade. Contracting with private providers for services should be an option for agencies as they adapt to tighter budgets. Amending the Pacheco Law would free agency managers to provide public services in keeping with the law’s stated intent, to "ensure that the citizens of the Commonwealth receive high-quality public services at low cost, with due regard for the taxpayers of the commonwealth and the needs of public and private workers."
* Geoffrey F. Segal, Adrian T. Moore, and Adam B. Summers are affiliated with the Los Angeles-based Reason Public Policy Institute as, respectively, director of privatization and government reform policy, executive director, and visiting policy analyst. Each has written extensively on government performance and privatization issues. This analysis is the work of the Pioneer Institute for Public Policy, and is reprinted herein by permission of the Pioneer Institute. The fulll report is available on the Pioneer Institute's web page: www.pioneerinstitute.org. Back to Text