Anti-Privatization Pacheco Law Continues to Hamstring Massachusetts Budget

My colleague, Len Gilroy, did an excellent post the other day on efforts to repeal or amend the anti-privatization Pacheco Law in Massachusetts. Reason has been critical of the Pacheco Law for many years. Back in 2002, Reason VP for Research Adrian Moore, former Reasoner Geoffrey Segal, and I wrote a white paper for the Pioneer Institute for Public Policy Research on privatization and the effects of the Pacheco Law in Massachusetts. Here is an excerpt from that paper:

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 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.

Sadly, the Pacheco Law remains on the books seven years later. The silver lining of the state’s current fiscal straits is that at least now there seems to be some momentum to weaken or eliminate the law and use the efficiency of the private sector to help balance the budget while providing high-quality services.

Other Resources:

” Pioneer Institute for Public Policy Research White Paper: Competition & Government Services: Can Massachusetts Still Afford the Pacheco Law?

Reason Foundation’s Annual Privatization Report 2009 (See page 19 for discussion of the Pacheco Law)

Reason Foundation’s Privatization Research and Commentary