Policy Study

Private Competition for Public Services

Unfinished Agenda in New York

Executive Summary

The benefits of opening public services to private competition-in terms of cost savings and quality-are potentially enormous, as George Pataki recognized when he first took office as Governor nearly a decade ago. Despite Governor Pataki’s early advocacy, however, competitive contracting has not taken root as the preferred approach to providing public services in New York. Given the dimensions of the state’s current fiscal crisis, there’s never been a better time for the Governor to pursue his original agenda by allowing private providers to challenge New York’s entrenched public-sector monopolies.

For example, New York currently spends more than $3 billion in state funds on highway maintenance, bus transit subsidies, mental health facilities, motor vehicles record-keeping, human resources management, prisons, and welfare and Medicaid administration. In just these areas, efficiency gains at the low end of the 5 to 50 percent range (gains typically attributed to competitive sourcing) could translate into annual savings totaling hundreds of millions of dollars. The savings potential is even larger when viewed in the context of the more than $100 billion in total annual operating expenses by New York’s state and local governments. By establishing an effective, permanent institutional framework for competitive sourcing, the state can provide much-needed practical guidance to counties, municipalities and public schools as well.

Impetus for competitive sourcing reforms should begin with the Governor issuing an executive order establishing a new oversight agency, the Empire Competition Council, as a vehicle for instituting competitive contracting as the standard way of doing business for every level of government in New York. The Council would include representatives from both the executive and legislative branches of state government, the state comptroller’s office, and local governments. Public employee unions and the business community would be invited to designate observers on the panel.

The Council would conduct an annual inventory of all services and activities provided by New York State agencies and public authorities, as well as common activities of local governments. This would allow public authorities to distinguish between inherently governmental functions and potential commercial activities. The Council would also develop accounting models for determining the fully allocated and unit costs of commercial activities, since productive competition between suppliers depends on accurate and rigorous cost comparisons. Finally, the Council would establish priorities for competitive outsourcing of services and manage competitions between in-house workers and private firms to provide services. The Council would be staffed by the Governor’s Division of the Budget (DOB), which is the executive agency with the greatest involvement in both the day-to-day operations and strategic direction of state government. Agency managers should be given the strongest possible incentives to participate fully in the competition process.

Competition is ultimately aimed at getting better results for the taxpayer’s money. To bolster this initiative, New York should also create a permanent Sunset Review Commission to recommend ways the government can cut costs, reduce waste, and improve efficiency and service levels. Specifically, the Commission would review 20 percent of state programs each year, assess the importance of each agency functions and recommend the elimination or consolidation of unneeded or outdated programs.

Working together, the Empire Competition Council and Sunset Review Commission would help the Governor and legislature eliminate redundant or outdated programs and services through a transparent public process. This would allow New York state and local governments to take advantage of the competitive mechanisms and efficiencies that drive private sector success.