Thank you for the opportunity to address the committee this morning. My name is Leonard Gilroy, and I am the director of government reform at Reason Foundation, a public policy research and education institute based in Los Angeles. Reason first began researching privatization and government reform in the late 1970s, and we published the first book on government privatization—Cutting Back City Hall—in 1979. Our experts have advised numerous presidents and state and local governments on how competition and privatization efforts can improve government services and reduce costs.
Kansas, like most other states, is in the midst of a fiscal crisis that demands immediate attention. And with organizations like the National Governors Association and the National Association of State Budget Officers predicting a fiscal "lost decade" for the states, fiscal pressures in Kansas are likely to linger for some time.
Though there are many causes of the current fiscal woes, one contributing factor is that over the years governments at all levels have expanded into hundreds of activities that are commercial in nature. Many of these are support functions that service the bureaucracy. However, most of these functions are not inherent or unique to government; in fact, they can be found in the Yellow Pages in towns all over America. This trend should concern those of us who believe that government should be focused on performing its core functions well and should not be in competition with its own citizens to perform non-core functions. From servicing vehicles to running print shops, and from building convention centers to providing IT services, Kansas's state and local governments are literally cutting into the business of business.
In fact, if the experience of other states holds true in Kansas, then policymakers can reasonably assume that thousands of Kansas state employees are engaged in activities that are commercial in nature and could be delivered by private sector firms at a lower cost and higher level of quality. Identifying areas where the private sector can perform government functions more efficiently and at a lower cost can be an important part of the budget solution. A wealth of studies by government agencies, academics and think tanks like Reason Foundation have consistently shown that privatization can lower the costs of government service delivery between 10 to 25 percent, on average.
However, individual privatization proposals tend become quickly politicized, as they often a lack a functional bureaucratic support structure to separate myths from facts, to conduct due diligence on agency privatization proposals and to develop business cases outlining the rationale for potential outsourcing projects. Without such support, it becomes difficult to engage in an informed policy discussion on whether privatization makes sense or not in any given case.
A central lesson learned from global experience in privatization is that it works best when governments develop a centralized, independent decision-making body to manage privatization and government efficiency initiatives—a state "center of excellence" in procurement. HB 2403, which would create a new Council on Efficient Government along these lines, represents a critical step in this direction for the state of Kansas.
Experience from other states that have implemented versions of this state competition and efficiency council concept has demonstrated that having a standardized method for procuring and managing contracts will result in more accountability, transparency and competition. Further, having a dedicated unit manage the process on an enterprise-wide scale ensures that the benefits of lessons learned and best practices are shared among agencies. Altogether, a sound privatization policy framework is essential for de-politicizing outsourcing and maximizing cost savings and value for money in the delivery of state services.
Florida's Council on Efficient Government, for example, was developed during former Governor Jeb Bush's tenure and was a key component of a strategy that ultimately helped his administration realize over $550 million in cost savings through over 130 privatization and managed competition initiatives. Virginia's Commonwealth Competition Council has put forth privatization recommendations that are estimated to be saving state taxpayers at least $40 million per year. And as reported in Reason Foundation's Annual Privatization Report 2008, Utah passed legislation in the spring of 2008 to strengthen that state's Privatization Policy Board and give it more tools to advance sound privatization policy.
With widespread state fiscal crises deepening across the country, other state policymakers are increasingly looking to the example set by Florida and the other states that have pioneered this concept as they struggle to close large budget deficits. For example, Louisiana policymakers established a Commission on Streamlining Government to review and evaluate government activities, functions, programs and services to eliminate, streamline, consolidate, privatize or outsource them, and in December 2009 the Commission released a set of 238 government downsizing recommendations—including a recommendation for a "center of excellence" in privatization, as well as over a dozen specific privatization proposals—that would be estimated to save over $1 billion. Policymakers in Arizona, Virginia and Oklahoma also advanced major privatization board proposals that passed one or both legislative houses in 2009.
A. Rationale for State Competitive Government Commission
To help keep state budgets in check and promote efficiency in government, it is critical to eliminate wasteful, non-essential government functions by continually challenging state entities to identify and focus on their core functions and competencies. Competitive sourcing is a vital tool in this process and involves looking at everything government agencies do and determining whether private firms could do the same things more efficiently and effectively. Additionally, minimizing government competition with businesses will help states retain (and grow) private sector jobs and increase state revenue by shifting tax-exempt properties and activities to the taxable sector.
A sound process is essential to fostering competitive service delivery and to ensuring a transparent, accountable, ethical, performance-based and competitive environment. Competitive sourcing works best when governments develop a centralized, independent decision-making body designed to manage competitive sourcing/efficiency initiatives—i.e., a state "center of excellence" in procurement. This center of excellence should:
- Develop a standardized, enterprise-wide process for identifying and implementing competitive sourcing;
- Develop rules instituting performance-based contracting and business case development as requirements for state procurements;
- Disseminate lessons learned and best practices in competitive sourcing across state government;
- Assist agencies in developing business cases for any proposed privatization initiative—before any RFP/RFQ is issued—that clearly outline the rationale for the initiative (cost savings, service quality improvements, changing antiquated business practices, etc.);
- Conduct an annual or biannual inventory of all functions and activities performed by state government, distinguishing between inherently governmental activities (e.g., those that only a government body can or should perform) and commercial activities (e.g., those that are routinely performed in the private sector);
- Create a uniform cost accounting model to facilitate "apples-to-apples" cost comparisons between public and private sector service provision (critical to ensuring a level public-private playing field), and
- Review and take action on complaints regarding inappropriate government competition with the private sector.
Having a standardized method for procuring and managing contracts will result in more accountability, transparency and competition. Further, experience from Florida and Virginia—which have both implemented versions of the privatization "center of excellence" concept—suggests that this approach has increased the public's confidence and has mitigated perceptions of impropriety (a common public concern with any privatization initiative).
HB 2403 would create a new Council on Efficient Government—modeled after Florida’s—that would perform many of the above functions and offer public officials in Kansas a powerful, new tool to prioritize limited resources and identify opportunities to seek more efficient and effective means of service delivery through outsourcing and privatization.
Applying similar thinking, Congress passed the Federal Activities Inventory Reform (FAIR) Act in 1998. Its purpose was to identify which activities within the federal government are "inherently governmental" (i.e., it is a job only government can do?) and which are commercial in nature. A "commercial activity" is a service or good that can normally be obtained from private enterprise. In the federal law, agencies perform inventories annually and identify both commercial and inherently governmental positions. With this information agencies can identify services that can be competed or privatized.
As a result of the FAIR Act, agencies have identified more than 800,000 federal employees engaged in activities—such as data collection, administrative support, and payroll services—that could be provided by the private sector.
The Commonwealth of Virginia has adopted a similar process at the state level. Under the direction of the Commonwealth Competition Council (CCC), a survey of state agencies was conducted in 1999 to determine what commercial activities were being conducted by state personnel. In the 1999 survey alone, the CCC identified 205 commercial activities that were being performed by nearly 38,000 state employees. According to the CCC’s first director, actions taken at the Council’s recommendation (based on the inventory results) currently are estimated to be saving Virginia taxpayers at least $40 million per year.
B. Case Studies
1. Florida's Council on Efficient Government
During former Florida Governor Jeb Bush's term (1999-2007), Florida engaged in over 130 privatization/managed competition initiatives saving taxpayers over $550 million in aggregate. When many other states were raising taxes, these initiatives helped Florida shed almost $20 billion in taxes during Bush's term.
Midway through his term, some of Bush's major privatization successes became overshadowed by the media spotlight on a few major outsourcing projects that experienced difficulties in implementation. Recognizing the need to improve (a) state procurement and (b) the state's ability to monitor the procurements, Gov. Bush signed an executive order in March 2004 directing the Department of Management Services to create a "center of excellence" authorized to conduct a statewide evaluation of Florida's competitive sourcing efforts. The new Center for Efficient Government (CEG, subsequently codified by the legislature as the Council on Efficient Government) was empowered to "identify opportunities for additional [competition] initiatives, and oversee execution of future [competition] projects."
The CEG's mission is "to promote fair and transparent best business practices in government in order to foster accountability, competition, efficiency and innovation in the way state agencies serve Florida's citizens." It serves as the enterprise-wide gateway for best business practices in competitive sourcing and standardizes how the state identifies opportunities, conducts competitions, and awards and manages contracts for government services.
Prior to 2001, Florida had a total of 16 outsourced projects reported by state agencies. From 2001 to 2006, the state initiated an average of 37 projects annually (see figure below). For FY2008, state agencies identified 551 projects currently being outsourced with a lifetime value of over $8 billion. Notably, the CEG was initially created in 2004, which coincides with the tremendous ramp-up in state privatization.
Since Bush's departure, the CEG is still humming along. In 2008 alone, it reviewed a total of 21 business cases valued at more than $94 million, identifying more than $29 million in potential savings to the state. The value that CEG is delivering for taxpayers is so evident that even Bill Cotterell, a Tallahassee Democrat editorialist and frequent critic of state privatization initiatives, recently wrote, "For return on investment, no Agency can beat the Council on Efficient Government. Each of the council's four employees saved the taxpayers about $7.25 million last year."
2. Utah Privatization Policy Board
Nearly two decades ago, the Utah state legislature established the Privatization Policy Board (PPB) to evaluate and make recommendations to state agencies concerning effective privatization of government services and to address concerns regarding unfair government competition with the private sector. But with its membership heavily tilted toward public sector representation, the lack of clearly defined duties in its statutory mandate and no dedicated staff, the PPB's efforts prior to 2008 have been piecemeal at best. Only two successful privatization initiatives have been completed to date: contracting with Staples for procurement of the state’s office supplies and contracting with Xerox to provide state printing services.
However, two bills passed the 2008 legislative session to give the Privatization Policy Board powerful new tools for advancing privatization and in the process elevate Utah to the upper echelon of state privatization leaders. Both bills passed overwhelmingly in both houses and were signed into law by Governor Jon Huntsman, Jr. in May 2008.
House Bill 75 expanded the membership of the PPB to include more private sector members and requires the PPB to develop a biannual inventory of "inherently governmental" and "commercial" activities and services performed by state agencies, develop an accounting method to facilitate accurate cost comparisons between public sector and private sector service providers, and investigate citizen complaints of unfair government competition with a private enterprise. HB75 also requires the governor’s office to recommend at least three potential services or activities for potential privatization every two fiscal years.
Senate Bill 45 went even further by requiring Utah cities and counties of the first and second class—which includes the majority of Utah's local governments—to submit biannual commercial activity inventories to the PPB, similar to those that will be prepared at the state level. Also, the bills created a new, full-time staff position to serve the PPB.
One year later, the state's first commercial activities inventory is in development and nearing completion, and the newly revamped PPB is planning to resume its regular meetings in the fall of 2009.
There are no easy solutions for Kansas' current budget deficits, and policymakers need the sharpest tools in the toolbox at their disposal. Implementing a state competition and efficiency council would help the state regain its fiscal health, deliver higher quality services at a lower cost, and revive the state's economy.
The declining fiscal situation in Kansas demands that policymakers take a deep look for opportunities to shop around. Most Kansans, like people everywhere, want their tax dollars spent in the most effective and efficient manner possible. If there is one thing to learn, it’s that competition works to promote efficiency and restrain costs. Governments at every level have embraced it and will continue to do so.
Just because government is tasked with providing Service X doesn't mean the public sector offers the cheapest means of delivering it—it often does not. If taxpayers would get a better deal by contracting with a nonprofit firm or private company, it should behoove policymakers to use similar opportunities before resorting to tax hikes or service cuts. In challenging economic times, families routinely become "smarter shoppers," shopping around for the best deal in order to stretch their family’s dollars to achieve the maximum benefit. Kansas state government should do the same, and HB 2403 would help achieve that.
Under HB 2403, policymakers and agency managers would have a powerful new tool to allow them to concentrate on their core functions of providing "inherently governmental" services while partnering with the private sector for commercial activities. Applying competition to non-core activities would free up valuable resources for agencies to complete their missions and provide the greatest value to taxpayers.
Thomas Jefferson's words from 1808 ring as true, if not more so, today as they did then: "It is better for the public to procure at the market whatever the market can supply; because there it is by competition kept up in its quality, and reduced to its minimum price." HB 2403 would honor Jefferson's words and represent an important step towards more effective, efficient, transparent, and accountable government.
As the think tank that has done the most research on privatization and government reform, Reason Foundation welcomes the opportunity to be of further assistance to this committee. Please feel free to call upon us.
Leonard C. Gilroy is the Director of Government Reform at Reason Foundation.