Annual Privatization Report 2005 - State Privatization Update

State Privatization Update


Florida

Florida continues to be a hotbed of activity. Opponents of competition and privatization have launched an all-out attack against competitive sourcing. Over the years, not every initiative has gone perfectly�with 138 since 1999 there are bound to be a few bumps along the way. Recently, some high-profile projects have been criticized for disappointing results.

The target of most of the criticism is the state�s massive human resources outsourcing to Convergys. Under the contract, Convergys administers almost all of its routine personnel functions, including payroll, insurance benefits, employee training and recruiting.

Initially, the contract was touted to save $173 million over seven years has fallen to �only� $103 million. Included in that is an $80 million cost avoidance in capital spending to replace an aging computer system.

Implementation has not been perfect. The full rollout was at least a year behind schedule, diminishing some of the savings. In addition, total functionality and user satisfaction remain lower than originally anticipated. However, after working out some initial kinks, service in all contract areas is to standard and beyond �acceptable.�

Despite the negative press, the state has pressed forward with new initiatives. In March the state finalized a major contract turning over all foster care and adoption programs in Miami-Dade and Monroe Counties to private administrators in likely the largest child welfare privatization project in the nation. In a prepared statement, Florida Department of Children & Families Secretary Lucy Hadi said, �This agreement brings to reality the prospect of improved outcomes and services for children in Miami-Dade and Monroe Counties. The entire state will now benefit from qualified experts that are equipped to know and meet the needs of their communities.�

The 14-month $75 million contract makes Florida the first state in the nation to fully privatize its child welfare programs. DCF hopes that the move will dramatically improve a foster care system often described as one of the worst in the United States. Miami's child welfare system has, through the years, spawned heartbreaking scandals, including the disappearance�police now say murder�of Rilya Wilson from the home of a department-approved caregiver and the alleged killing last year of Angel Hope Herrera by her mother, herself a former foster child.

Furthermore, a study co-produced by Reason and the James Madison Institute finds that Florida has a long bi-partisan tradition of competitive sourcing stretching the past three administrations and party lines. The study also found that recent efforts to modernize the competitive sourcing process have led to the creation of the most robust, transparent, and accountable process in the nation. Given the tremendous wave of initiatives over the years, there was much to learn about what has worked and what has not. The review of Florida's competitive sourcing experience identified challenges and lessons not unique to Florida that needed improvement�all of which were addressed in the Center for Efficient Government�s GATE Process. Some of the more prominent challenges (and the inherent lessons) include:

  • A general lack of understanding or purpose. Either through a failure of communication, lack of transparency, or dissemination of misinformation, employees and the public often fail to understand why initiatives are put in place.

    Lesson: Communicate and document processes to help employees, other stakeholders, and the legislature understand and appreciate the process.

  • A failure to define goals and/or desired results upfront. Without clearly defined goals it is difficult to communicate and conduct comparisons to identify the bid that provides the best value.

    Lesson: Before a competition initiative begins, document goals and desired results.

  • A lack of transparency for stakeholders. Too often stakeholders have been left in the dark regarding competition initiatives. Their input has not been sought, the lines of communication have been unclear, and they�ve lacked access to relevant public records.

    Lesson: Seek stakeholder input, establish clear, standard lines of communication, and make public documents readily available.

  • A lack of trained or specially skilled workforce to manage contracts. Procurement staff members are often inadequately trained and/or inexperienced in conducting competition initiatives.

    Lesson: Develop a core group of procurement officials who assist other agencies in developing their procurement and competition documents.

  • A weak mechanism for setting acceptable performance metrics and measuring the success of an initiative. Similar to the problem of failing to define goals, some initiatives failed to use performance-based contracting or adequately develop monitoring and evaluation mechanisms.

    Lesson: Think about how to monitor the service contract before issuing the request for proposals or signing the contract. The monitoring plan defines precisely what a government must do to guarantee that the contractor�s performance complies with the contract. The better the performance standards, the easier it will be to monitor the contract effectively.

  • A lack of consistency and a centralized enterprise-wide approach to competition. Over the years, several different standards and processes have been used in identifying competition initiatives and carrying out the competitions themselves, preventing agencies from sharing best practices, or applying lessons learned. Finally, a lack of a comprehensive approach limited the possibility of enterprise-wide solutions.

    Lesson: Establish a coordinated, standard process to guide future competition initiatives and identify deficiencies in existing contracts. In addition, create a central point of accountability and responsibility for overseeing initiatives to manage the process and build up a critical mass of knowledge to identify best practices and adopt lessons learned.

  • A lack of focus on changing antiquated business processes. Competition provides a unique opportunity to reevaluate and redefine how services are provided. Contracts should focus on results, not the process.

    Lesson: Make flexibility and innovations central to competition initiatives and don�t constrain ingenuity by basing initiatives on current agency practices. In addition, technology has enormous power and potential to change the way governments operate and change antiquated business practices. Its power should be harnessed.

The study focused on the Center for Efficient Government (CFEG), created by Executive Order last year by Governor Bush (discussed in 2004 APR). In the current legislative session, Senate Bill 1146 was passed to codify that order into statute. Governor Bush vetoed the bill because it would create "an overly cumbersome process." In his veto letter, Bush noted that under the provisions of the bill, procurements could be substantially delayed waiting for legislative approval, resulting in ineffective and inefficient operations. Furthermore, Bush felt the bill would have created an additional bureaucracy that would have complicated rather than simplified and strengthened the procurement process. Since the center was not created in statute, it does not have authority to enact rules. In addition, under the current organization CFEG�s reach does not extend beyond those agencies whose heads are appointed by the governor; it does not affect the entire executive branch. But this statutory authority signals the state�s commitment to continuing to find opportunities for competition and privatization.

Yet, a couple of sections of the legislation are especially troubling. For starters, it requires agencies to receive specific authorization from the legislature before entering into any contract. Second, it gives the state�s Chief Financial Office broad oversight authority to review state agency contracts�an extra level of transparency and accountability is good, however, the CFO in Florida is an elected official.

The Reason/James Madison study noted that competitive sourcing is purely a management decision and should not become part of the political process and/or debate. Both examples above open the door to the politicization of competitive sourcing decisions. Elected officials, while keeping the best interests of the state in mind, inherently are political. Their job is different from that of managers�and their efforts often include an agenda or a conflict of interest. This is a road Florida should want to avoid. In this case, the extra layer of administration would have politicized the process.


Georgia

The General Assembly passed legislation and a resolution in the 2005 session that would encourage additional privatization. Senate Bill 270, signed into law on May 2nd, refines the state's 2-year-old law governing public-private road-building partnerships like the proposed expansion of state route 316. More importantly, however, was the study committee created to explore ways for the Georgia Department of Transportation to privatize highway maintenance functions. In addition, the Senate passed Resolution 503 "urging the Department of Transportation to proceed with the initiation in 2005 of a pilot performance based asset maintenance project for highway maintenance." A study committee will evaluate whether or not the Department of Natural Resources can contract out the construction and environmental permitting process. However, not every privatization measure fared so well. SB 5, which would have expanded the public-private road building law to include all types of infrastructure projects, failed to pass.


Indiana

Former U.S. Office of Management and Budget (OMB) director Mitch Daniels was elected and sworn in as governor. One of his first executive orders was the creation of a state OMB. One of their first tasks included a top-to-bottom review of competition and privatization opportunities. In addition, OMB is reviewing the state�s procurement procedures and asset portfolio to find cost-saving opportunities.

Chuck Schalliol was appointed as director and commented that Gov. Mitch Daniels wants to introduce "zero-based budgeting" for the next spending plan. That means instead of building off the previous budget and making adjustments, every agency would start with a clean slate. Schalliol says baseline budgeting sometimes leaves line items withering on the vine, since they've been cut too much in past budgets to accomplish their goals. He says that means the money they are receiving is wasted.

While zero-based budgeting is at least a year away, numerous other projects have been initiated. In his second day in office the governor signed an executive order ending collective bargaining rights for state employees. In addition, he cancelled existing agreements with unions already representing state employees.

Daniels noted that collective bargaining agreements would make it more difficult to make changes in state government, suggesting that the changes his administration wants to make "would have been delayed�for months and months." Many of the settlements included restrictive work rules including the times employees could work. New child welfare chief James Payne noted that work rules in his agency meant that most caseworkers could only work from 8:00 am to 5:00 pm; even though "we know from research, that most of the abuse doesn�t happen between 8:00 am to 5:00 pm and that�s when the workers work." The change will also make it easier to fire some state employees who fail to perform.

Another of Daniels' early moves was to privatize the Commerce Department. The Indiana Economic Development Corp., a public-private body, was established when Daniels signed HB1003. Daniels said the new corporation will be a "much more nimble and effective enterprise" than the now-defunct Indiana Department of Commerce, which was hampered by some state rules and regulations the new corporation will not have to follow.

Similar to his tenure at the federal OMB, Daniels has instituted a competitive sourcing initiative. Several projects are already underway with many more to come in the near future. For example, the dietary department at Logansport State Hospital was forced to compete. The employees were given an equal opportunity to participate. Indeed, simply by thinking outside the box, with a focus on the bottom line, state employees found many cost-savings ideas; three rather elementary changes will save $40,000 annually. In the end, the employee team was able to identify enough savings to win the bid and save about $1 million a year.

Food service at the Department of Corrections was also put out to bid. The state was able to cut meal costs from $1.41 to only 99 cents by contracting with Aramark to operate the food service�a savings of nearly $12 million a year. Both of these examples demonstrate the importance and value of using competition to save taxpayer dollars.

The Department of Corrections has also issued an RFP for operating the New Castle Correctional Facility. The facility is currently underused and a funding shortage has prevented full use. The corrections commissioner hopes that the RFP will bring significant interest from the private sector and that a partnership could lead to full utilization of the facility.

Daniels and his team are also considering leasing the 157-mile Indiana Toll Road. The road runs east-west across north Indiana. It is a westward extension of the Ohio Turnpike and leads into the Chicago Skyway (which was recently leased by the city of Chicago netting $1.8 billion).


Kentucky

State leaders were considering convening a panel to review the possibility of privatizing state functions in Kentucky. The panel would have conducted a review of other states' experiences with privatization and a calculation of potential cost savings to Kentucky. Unfortunately, funding for the review was stripped during budget negotiations�leaving the likelihood of privatization in Kentucky in doubt.

The idea for the panel was largely due to debate about privatizing the state's new $92 million prison, the Little Sandy Correctional Complex. However, in mid-March Governor Fletcher pulled the plug on the idea, announcing that the state would operate the facility. He further added that he "absolutely has no plans for going back" to study the privatization of the prison again.

Officials in the Fletcher administration have already taken steps to privatize functions such as prison food service and are considering turning certain jobs in state parks over to contractors. However, one must wonder about the political feasibility and political will given recent developments.


Pennsylvania

The Rendell administration continued its stellar record with strategic sourcing in 2004 and early 2005. The announcement of a new contract for medical services (bringing the total of strategic sourcing contracts to 20) will bring annual savings to Pennsylvania taxpayers upwards of $140 million (see graphic for list of savings). The commonwealth has become a leader in strategic sourcing among states.

Temporary medical staffing at commonwealth healthcare facilities statewide will fall under the new contract with Pennhurst Medical Group; it should save $2.7 million annually. In addition, the administration recently awarded a contract for commissary services for the state�s 26 correctional institutions. Previous to the award, each of the facilities separately purchased goods and supplies. Using the volume of the entire prison system, Keefe Supply Group was able to generate $3 million in annual savings.

The state also expanded its use of best-value contracting, making it standard practice for all construction contracts worth $5 million or more. Under the arrangement, price will consist of 60 percent of the weight with technical qualifications consisting of about 30 percent. The final criteria could be any number of factors including timeliness of delivery, minority participation, or quality guarantees. Best-value contracting has been an emerging trend for a number of years and gives governments a great deal of flexibility to achieve multiple goals and needs beyond simple, low-cost contracts.


South Carolina

Under Gov. Mark Sanford's leadership, the governor's office offered a new approach to budgeting. It's a process that focuses on outcomes and achieving state priorities and goals. Fifteen hundred different activities were divided into purchasing priorities regardless of the agency performing them. By focusing on the programs that delivered the greatest results, and purchasing those, the administration was able to shave $160 million from the budget (based on a total annual budget of $16.9 billion) resulting in the suspension or elimination of about 67 activities (or 4.4 percent of the total number of activities) currently performed by government.

Essentially, available dollars are spread across the goal and priorities areas (i.e., what the state wants to purchase or achieve). Spending was allocated from the top of the priority list working down until they "ran out of money." Using this approach, some activities and programs will not be funded or fall below the "spending line." In other words, they do not provide as good a public investment relative to other programs. Some will disagree with this method of prioritizing spending. However, we believe that it is the most responsible way to spend taxpayers' dollars.

Unfortunately for Sanford, the legislature doesn�t see eye to eye with his administration's effort. In fact, the legislature passed a budget that swelled with pet projects or "pork," leading one state senator to describe the budget as having more pork than a bar-b-que. With his emphasis remaining on fiscal restraint, Sanford issued 163 budget vetoes of $96 million. While the method starkly contrasted the previous year's budget veto process, the outcome was the same. All but 10 of the governor's vetoes were overridden in a very slow, methodical process (compared to the previous year where 105 of 106 vetoes were overridden in only 99 minutes).

In addition to the budget, the legislature took up other measures to limit the governor's authority and ability to use alternatives to current service delivery�primarily competitive sourcing and privatization. One of the veto overrides severely limits the administrative flexibility and management options of the state Parks, Recreation, and Tourism (PRT) department. A budget proviso requires the agency to seek approval from the legislature and budget control board before moving forward with a competitive sourcing initiative. The proviso was introduced in reaction to an RFP issued by PRT to explore the feasibility of contracting-out the operation of a golf course at Cheraw State Park.

In his veto message, Governor Sanford argued that this reaction to one proposal "would tie the hands of the agency from pursuing any kind of competitive sourcing arrangement for any activity, no matter how minor, at any of its parks."

Prior to this proviso, PRT had contracted-out the campsite and cabin reservation system state-wide. The new system was developed by ReserveAmerica, which also provides reservation services for the National Forest Service and the U.S. Army Corps of Engineers. The reaction from most of the park's customers has been positive as the contractor has improved services, lowered costs, and led to higher revenue for the state.

Last year, APR reported that a task force had been formed to study the feasibility of privatizating the state�s school bus fleet. South Carolina is the only state in the union that owns and operates the entire school bus fleet (two individual districts have privatized their fleet). After months of study and careful review the school bus privatization task force determined that privatization was feasible in South Carolina school districts. The recommendation requires the legislature to support it; only one house has passed the initiative at press time.


Virginia

For the second straight year the Virginia General Assembly was a leader in the privatization movement. Under the leadership of Delegate Chris Saxman, the Cost Cutting Caucus offered several bills aimed at making Virginia's government less obstructive, more transparent, efficient and effective. Working with Reason, Saxman and the caucus saw passage of several key bills while forcing the debate on a few unsuccessful initiatives.

Two victories are more significant than the other small concessions. First, HB 1948, the Administrative Process Act, requires the state to periodically review regulations and eliminate overly burdensome and costly regulations to minimize the economic impact on small businesses. Both the National Federation of Independent Businesses and U.S. Small Business Administration have advocated for similar legislation around the country.

Second, HB 1945 expands the definition of a qualifying project under the existing Public-Private Education Facilities and Infrastructure Act to include any undeveloped or unused ("surplus") state-owned land, thereby allowing for expanded asset divestiture or public-private development projects throughout the state.

Additional legislation made changes to the state's gainshairing program and 'fast tracked' initiatives under the state�s Public Private Transportation Act.





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