Out of Control Policy Blog

Privatization Battle Underway in Rhode Island

As detailed in Reason's Annual Privatization Report 2008, privatization in state government has become a volatile political issue in Rhode Island over the last two years.

Faced with the challenge of closing a record budget deficit, Governor Donald L. Carcieri stated in May 2007 that he would privatize "every state service that could possibly be performed more efficiently by the private sector." He included sweeping plans in his FY 2008-09 state budget proposal to replace several hundred unionized state employees–including janitors, food service workers and prison counselors–with private sector contractors.

In response to labor union pressure, the state General Assembly passed an amendment to the FY 2008 state budget in June 2007 containing sweeping revisions to the state's contracting procedures. What has come to be described in state media as the "anti-privatization law" directs state agencies to conduct detailed cost comparisons before awarding contracts to private sector firms. It also requires that cost savings to the state through privatization be "substantial" (though the term is not defined in statute). Further, before privatization, current employees would first be given a chance to present new cost estimates for their work to reflect any new business practices they could incorporate. Finally, the law gives "affected parties"–program recipients, state employees or labor unions–60 days to appeal state privatization decisions to a Superior Court judge.

Undaunted, in August 2007, the Carcieri administration selected the contractor Hurley of America, Inc. to replace dozens of housekeeping employees at Eleanor Slater Hospital in an effort to save an estimated $13 million over a five-year period. According to the Governor's office, the state Department of Administration reviewed the new law and concluded that it didn't apply to this particular contract since negotiations began before the anti-privatization law passed in June.

In March 2008, Gov. Carcieri formally asked the Rhode Island Supreme Court to rule on the constitutionality of the law and determine whether it violates the separation of powers clause in the state Constitution, exceeds the legislature's constitutional authority and intrudes upon the authority of the executive branch. In a letter to Chief Justice Frank Williams, Gov. Carcieri argued that the new law "makes it virtually impossible to privatize any governmental services or renew contracts of existing services being rendered by private vendors," disrupting dozens of critical state services across agencies and rendering the governor's office unable to reduce state spending to address the current state budget crisis.

He also argued that the law gives standing to an excessively large number of people to challenge privatization decisions, which could clog the state's judicial system with frivolous lawsuits. As Gov. Carcieri wrote to Williams, "capable vendors will be dissuaded from bidding on new or renewal contracts when faced with the possibility of enduring a process that could be held up for years in internal analysis and litigation."

As recently as July, it looked like the 2007 anti-privatization law may not survive 2008. According to press reports, the General Assembly appeared poised near the end of the session to approve a bill (not yet been introduced at press time) that would give the governor more flexibility in replacing unionized state workers with private contractors. The new bill–reportedly compromise legislation negotiated late in the session between the governor's office and labor leaders–would effectively roll back the 2007 law. Given this development, a Carcieri spokesman indicated in late June that the governor's office will likely withdraw its request for a state Supreme Court advisory opinion on the anti-privatization law.

However, more recent developments have complicated matters. In late July, we saw this:

It was no secret that the budget passed before the state's part-time General Assembly recessed last month was based on rosy scenarios. To be balanced, it required the aggressive implementation of unprecedented changes to the state's health-care system. It assumed the state's economy wouldn't sink further into recession. And it required state government's unionized work force to voluntarily concede tens of millions of dollars in salary and benefit reductions.

All three are now in question.

Most notably, Rhode Island's largest state employee union announced last week it had rejected a contract that would have saved the state more than $10 million this year by delaying pay raises and increasing employee health-care contributions. The savings are included in the state budget.

[. . .] As part of the [Carcieri/union] deal, the governor agreed to rescind layoff notices for hundreds of workers he sought to replace with private contractors. [. . .] The agreement also gave the governor more flexibility to replace state workers with private contractors by weakening the state's "privatization" law.

Other highlights include: pay raises of zero, 2.5 percent, 3 percent and 3 percent during each of the next four years; a one-day pay reduction in the current year that employees can recoup as a paid leave day; and escalating increases in the percentage of the premium the employees will be required to pay for their health insurance.

And then today, we see this:

The contract dispute between Rhode Island's Republican governor and its largest state employees' union may span the next year.

That's the word from Governor Carcieri's legal team, which spent several hours shuffling from courtroom to courtroom yesterday as the case with substantial implications on the state budget and the paychecks of thousands of state workers trudged through Rhode Island's legal system.

"This whole thing, once it's all said and done, could take 12 months," Carcieri deputy legal counsel Daniel Majcher argued in Superior Court yesterday, shortly before lawyers for the governor and Council 94, American Federation of State, County and Municipal Employees, were sent to the Supreme Court three floors above.

The future of the case now rests with Supreme Court Chief Justice Frank J. Williams.

The governor wants Williams to overrule Superior Court Judge Patricia Hurst, who again yesterday insisted that Carcieri cannot unilaterally impose higher health-care costs on nearly 5,000 state employees whose unions rejected a tentative four-year contract last month.

With Rhode Island one of about a dozen states currently in a recession, this battle has profound implications for the state's fiscal health and will be an interesting situation to watch.

Reason's Privatization Research and Commentary

Leonard Gilroy is Director of Government Reform


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