Two proposed bills introduced in the Louisiana legislature-and passed by a House committee earlier this week-raise serious barriers to fiscal responsibility, as the bills would effectively shut down the ability of the current and future governors to use the proven tool of competitive contracting to lower the costs of state government.
House Bill 240 (sponsored by Rep. Kenny Havard) and House Bill 519 (sponsored by Rep. Cameron Henry) are two alternative versions of a “Privatization Review Act” designed to place significant hurdles in front of routine, sensible privatization efforts used by governors of all political stripes across the country. Given the similarity to a 1993 law enacted in Massachusetts at the behest of government employee unions-and which has stymied privatization efforts in that state for two decades since-a more appropriate title for the proposed Louisiana bills would be the “Louisiana Government Employee Protection Act.”
Specifically, HB 240 and HB 519 would prohibit agencies from entering into privatization contracts without prior legislative review and approval, and they would subject routine contracting decisions to onerous pre-procurement and contract review processes clearly designed to protect state employee jobs and elevate the interests of government employee unions over those of taxpayers at large.
The proposed bills are modeled nearly word–for–word after Massachusetts’ “Pacheco Law” (named for its legislative sponsor) that “has basically shut down all privatization efforts in state government,” according to an April 2013 Boston Globe editorial, which also noted that, “the purpose of state government isn’t to be a jobs program, particularly one that turns a blind eye to opportunities for savings.”
Government employee unions originally championed the Pacheco Law in response to 36 privatization initiatives undertaken by former Governor William Weld in the early 1990s that saved taxpayers an estimated $273 million. In the first 17 years following its passage (1993-2010), the law’s strict provisions prevented all but 12 privatization contracts from moving forward. Worse, it has prevented an untold number of worthy privatization opportunities from ever being proposed by agencies in the first place, given how painful it made the privatization process.
Over the last decade, a bipartisan mix of Massachusetts state legislators have attempted numerous times to loosen or repeal this counterproductive law to provide the executive branch more latitude to enter into cost-saving privatization contracts, but these efforts have been largely stymied by government employee unions. According to some estimates, repealing the law would facilitate savings of up to $100 million annually.
In January 2011, the Globe‘s editorial board wrote that the anti-privatization Pacheco Law “doesn’t just keep government agencies from saving money by hiring outside contractors to perform certain services. It also sends a broad message: In Massachusetts, the demands of special-interest groups – in this case, public-employee unions – can outweigh the obligation to run government efficiently.”
Louisiana taxpayers would be right to question why some of their own state legislators are trying to replicate the law that has been so counterproductive in the Bay State for decades. Does Louisiana really want to become a profligate, big-spending state like Massachusetts and remove proven cost-cutting tools from the toolbox?
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HB 240 and HB 519 would be a major step back for fiscal responsibility and smart public management in Louisiana, as discussed in the table below and in the sections that follow.
Proposed Bill Comparison: HB 240 and HB 519
|HB 240||HB 519|
|Contract Threshold||Contracts costing $5 million/year or above (excluding engineering and design services).||Contracts costing $1 million/year or above (excluding engineering and design services), as well as asset lease agreements over $500,000/year.|
|Pre-Procurement Mandates||Before initiating a procurement, agencies must submit a written statement of proposed services to be contracted (including specifications on the quantity and quality of services) to the Legislative Auditor and appropriate standing legislative committees. Mandating such standards in advance of procurement would potentially limit the innovation discovered through competitive bidding by lowering the bar for contractors on cost and quality and reducing the competitiveness of bids ultimately received by the state.||Same provisions as HB 240|
|Mandated Provisions to Protect State Employees and Control Private Contractor Wages||Every privatization contract would require contractors to offer positions to former state employees that previously handled the activity subject to privatization. Would also require agencies to set minimum wage rates for outsourced positions prior to initiating the procurement process.||Every privatization contract would require contractors to consider offering positions to former state employees that previously handled the activity subject to privatization. No minimum wage rate requirements.|
|Unfair Public-Private Cost Comparisons||Would require agencies to provide written estimates of the direct and indirect costs of “state employees providing the subject services in the most cost-efficient manner,” regardless of whether or not the “most cost-efficient manner” is actually achieved (or is even achievable) in reality.||Same provisions as HB 240|
|Unfair Tax Impact Analysis||Would require agency cost comparisons to explicitly account for potential loss of income tax and other revenue from eliminated state employee positions. However, cost comparisons would not similarly credit contractors for any new income, property or sales tax revenues generated for the state and local governments as a result of the proposed privatization.||Same provisions as HB 240|
|Legislative Approval Requirements Lengthen Procurement and Increase Political Risks||Before adoption, all affected contracts would be subject to a review by the Legislative Auditor within 30 days. Then, contracts would be required to be approved by appropriate standing committees in each chamber of the legislature, which have 45 days to review and approve/disapprove contracts.||Before adoption, all affected contracts would be subject to a review by the Legislative Auditor within 30 days. Then, contracts would be required to be approved by appropriate standing committees in each chamber of the legislature, which have 45 days to review and approve/disapprove contracts. If standing legislative committees in each chamber do not disapprove the contract, agencies would be required to receive final contract approval from the full legislature via concurrent resolution in the next regular session of the legislature.|
Bills Would Increase, Not Decrease, Costs to Taxpayers
According to the fiscal notes attached to HB 240 and HB 519 by the Louisiana Legislative Fiscal Office, passage of either bill “may result in an indeterminable increase in state expenditures.” The Legislative Auditor estimates that each contract reviewed would cost taxpayers $30,000, equating to 300 audit hours. At a time when fiscal prudence and responsibility should be at a premium, why would Louisiana legislators propose new laws that: would (a) increase spending, and (b) prevent sensible initiatives designed to save taxpayers’ money?
Bills Would Require Comparison of Real-World Contract Costs to Costs of Mythical, Idealized Public Sector Comparator
The proposed Louisiana bills steal a page from the Massachusetts Pacheco Law playbook by requiring state agencies to provide written estimates of “the costs of state employees providing the subject services in the most cost-efficient manner,” regardless of whether or not the “most cost-efficient manner” is actually achieved (or is even achievable) in reality. Presumably, legislators would likely reject any privatization contract that incurred higher costs relative to in-house provision, even if the estimated in-house costs were artificially low, based on an assumed maximum efficiency that doesn’t confirm to reality.
As some of my Reason Foundation colleagues wrote in a 2002 study for the Massachusetts-based Pioneer Institute on a similar provision in the Pacheco Law:
“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.”
In other words, under the proposed Louisiana bills, policymakers could reject contracts based on mythical public sector costs that assume away all inefficiencies, but then they would have no way to then hold the public sector accountable for actually living up to their promises to maximize cost efficiency. Among the many perverse outcomes that could occur is the very real possibility that government employees could game their own cost numbers (to appear cheaper than they really are), avoid privatization and then continue doing business just as normal, with no accountability for driving improved efficiency and cost savings. The proposed bills essentially promote the status quo in “good enough for government work” service delivery, which would be a real disservice to taxpayers.
Bills Would Inject Political Risk into Procurement and Limit Competition
HB 240 and HB 519 would inject a tremendous amount of political risk into procurement in Louisiana state government and will be seen as a “deal killer,” scaring away private sector service providers that would otherwise be willing to enter competitive procurements that lower the costs and improve the delivery and quality of state services.
Why would a private service provider bother trying to compete on a procurement in Louisiana-and incur the very significant upfront costs of developing bids and contract proposals, which can range in the tens of thousands up to millions of dollars expended out of pocket, depending on the nature of the procurement-knowing that the legislature could subsequently render their time and money expended in the process moot on a political whim, after a competitive procurement process has concluded? Why would these companies not simply avoid Louisiana entirely and opt to compete for projects in other states where there’s less political risk in procurement?
As I wrote in a 2010 blog post on other proposed Louisiana anti-privatization bills (which ultimately failed to pass):
[I]f you, as a business owner, knew that you could jump through all of the existing procurement hoops (and cover all of the necessary costs along the way, out-of-pocket) to win a competitive bid and then still face a 50-50 shot that the contract wouldn’t proceed to close, would you be more or less likely to bid? Ideally, the risk of project approval would decline as the competition nears completion, not peak at the very end.
Legislators should ask themselves a simple question: if they were a contractor, would they bid on state services under the proposed laws? It’s likely that very few would answer in the affirmative. It’s more likely that they would shun Louisiana and pursue opportunities in other states that actually want their business. And with a thinner pool of contractors potentially willing to do business in Louisiana, any procurements that do proceed are very likely to yield less competition, less competitive pricing (equating to higher costs), and less value for taxpayer money.
Bills Would Create Costly Delays in Contract Implementation
Time is money in the real world of government procurement. Every day of delay implementing a contract is a day where taxpayers incur higher costs than necessary and where contractors aren’t creating jobs, spending money in the economy and-in the case of public asset leases-aren’t generating revenue to cover principal and interest for any private debt incurred to facilitate the transaction.
Unfortunately, both of the proposed bills would drag out the procurement process longer than it is currently. Before they can be implemented, affected contracts would be required to be submitted to the Legislative Auditor for a review that could take up to 30 days. Once the auditor’s findings are submitted to appropriate standing committees, then the appropriate standing committees have 45 more days to review and approve/disapprove the contract. HB 519 goes one onerous step further by then requiring agencies to receive final contract approval from the full legislature via concurrent resolution in the next regular session of the legislature, which would likely be the following year.
Few contractors are going to be willing to wait months-much less over a year-for approval on a contract that they have already won through competitive bidding. And since agencies know this, why would they even bother to launch a procurement in the first place, knowing that the hurdles to actually signing a contract are so insurmountable in practice?
Bills Would Create an Uneven Playing Field for Contractors Relative to Government Employees
Let’s assume for a moment that despite the aforementioned problems, an agency is somehow successful in getting a privatization contract across the goal line. Under the proposed bills, agencies would be required to prepare annual reports to appropriate standing committees of the legislature on each approved contract detailing:
- the number of contractor employees and consultants, plus each individual’s annual pay and hourly wage rates for current and previous fiscal year;
- an analysis of contractor’s performance measures; and
- all complaints received and the agency and contractor response to each complaint.
Taking aside the question of what business it is of the legislature to know what a private contractor pays each of its employees, when does the legislature require this type of information on its own state employees? For example, is every state agency today required to submit reports to the legislature detailing every complaint received and the agency’s response to each? The answer is clearly no, so it should make one wonder why the bill sponsors see fit to hold the private sector to a far higher standard than their own state workforce.
Bills Represent a Legislative Power Grab and Would Politicize Procurement
The proposed bills represent a legislative power grab and would politicize procurement. Procurement and contracting are long-established responsibilities held by the executive branch at every level of government in this country. While legislatures are properly responsible for enacting laws, appropriating funds and providing oversight, it is not a legitimate legislative branch function to serve as procurement officials and contract managers. These are management functions that are properly undertaken by the executive branch. As I wrote back in 2010:
“The legislature already has some contract review authority in the regular appropriation process, where contracts are itemized in the budget request. From a public administration standpoint, direct legislative approval of contracts works at cross-purposes to the day-to-day management and administration work performed by agency directors and staff. It becomes hard for them to make decisions and accomplish their goals when the political process sits waiting in the corner to potentially undermine them as they approach the goal line. [The proposed bill] would allow procurement decisions to be easily hijacked by political aims, rather than guided by smart policy. Isn’t that the very same sort of banana republic stuff that Louisiana’s been trying to move away from in the 21st Century?”
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Perhaps the most disturbing aspect of the proposed bills is that they would effectively put an end to the sorts of privatization efforts implemented by Gov. Bobby Jindal’s administration in recent years (see recent editions of Reason’s Annual Privatization Report for details of his wide-ranging, and mostly successful, privatization efforts). These efforts have been saving the state millions of dollars during a period of fiscal distress. Further, the bills would place a permanent roadblock in front of the types of sensible privatization proposals recommended by the Louisiana legislature’s own Commission on Streamlining Government in recent years.
It is natural for legislators to seek some degree of oversight over privatization decisions made by the executive branch, but there are far better ways to achieve that goal without taking a valuable policy tool-privatization-off the table. See here, here and here for some discussion of ways to ensure transparent and accountable decision-making on state contracting without placing unnecessary and counterproductive political barriers in front of it. Examples include:
- Establishing a competitive contracting council to identify privatization opportunities, prepare business cases for proposed privatizations, and drive best practices in privatization across state government: As discussed in the links above, some examples of this approach include Florida’s former Council on Efficient Government, Texas’ Council on Competitive Government and Utah’s Privatization Policy Board. Notably, Louisiana’s streamlining commission endorsed this concept back in 2009. And just last week, the Oklahoma legislature passed a new law creating a one-stop privatization best practices center to be housed in the state’s Office of Management and Enterprise Services.
- Maximizing the use of performance-based contracting across state government agencies: Performance-based contracts are an important tool that specify the performance outcomes desired by public agencies and hold contractors accountable for achieving those results. Performance-based contracts should specify the desired outcomes, define how those outcomes will be measured, and include incentives for contractors to exceed the desired standards, as well as financial penalties in the event of underperformance.
- Using a business case evaluation process to document the rationale for privatization and serve as an implementation roadmap: Smart privatization should be based on an impartial, apples-to-apples business case analysis that compares the status quo to what may be available in the private sector, across a range of cost, quality, performance and other key factors. It should be based on the fully loaded, current costs of in-house government service delivery and current performance benchmarks, as opposed to the hypothetical and distorted “most cost-efficient manner” cost comparison envisioned in the proposed Louisiana bills, as discussed above. For more on the value of having a fair and impartial privatization business case analysis, see the discussion here and here.
- Shifting away from “low-bid” contracting in favor of “best-value” contracting: The lowest bid for a contract may not be the best bid in terms of overall value for taxpayer money. For decades, governments have increasingly shifted to the use of “best-value” contracting that allows the selection of bids offering the best combination of price, service quality, risk allocation and other key factors, rather than just the lowest cost alone.
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Unfortunately, HB 240 and HB 519 as written work at cross-purposes to fiscal responsibility and are designed to protect the interests of government employee unions and maintain the status quo in the state bureaucracy. The proposed anti-privatization bills represent bad procurement policy, run counter to the principles of good public management and government efficiency, and would be a bad deal for Louisiana taxpayers for generations to come.
Leonard Gilroy is director of government reform at Reason Foundation.