2004 May Sclar Privatization in Massachusetts
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Privatization in Massachusetts: An Evaluation of the 1993 Privatization Law (“The Pacheco Law”)

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In 1993 Massachusetts passed a law requiring state agencies (excepting some specifically exempted organizations) to concretely establish a cost savings to taxpayers prior to contracting out any service previously provided through in-house labor. This law, the first of its kind, essentially mandated that good management practices had to accompany privatization. The law required subject agencies to submit contracting plans to an independent audit, conducted by the Office of the State Auditor (OSA). Furthermore, the Privatization Law (Chapter 296 of the Acts of 1993, sometimes also called the Pacheco Law or the Pacheco-Menard Law) required that a cost comparison, that would accurately establish the savings taxpayers could expect to derive from any such contracting out action, accompany any proposal to outsource work currently done by state employees. The privatization solution to which this law was responding was born of a time when state budgets were being squeezed by simultaneous economic downturn and Federal reductions in fund transfers. A similar economic climate today may account for the renewed focus on privatization and points to the need for the Privatization Law to continue to bring rational order to privatization efforts.

Privatization, as it emerged in the early 1980s, held out the promise that taxpayers could have their cake and eat it. That is to say that by substituting private service providers for public employees, it would be possible to have high quality public services and lower costs and presumably lower taxes. This view, rooted in a libertarian ideology that distrusts government in general and views public employees in particular as inefficient, turns to a simplified model of a competitive market to justify the approach. But government is neither simply “good” nor “bad” and public employees do not go to work everyday to do a bad job. The vast majority of them are hardworking citizens dedicated to promoting the common good through their public service. Moreover the contracting out that would substitute for public service is itself not free from inefficiency and corruption. However in the 1980s and early 1990s the attraction of this simple solution was very powerful. Since then as difficult and costly experiences with privatization have accumulated both domestically and internationally a more balanced view has emerged. It holds that privatization is sometimes a good thing and sometimes not. But regardless of which way a service is delivered its effectiveness depends upon good public management. Even the World Bank, an early and ardent proponent of privatization has begun to change its stance. It now argues that more important than the way the service is delivered is the managerial quality of the public agency responsible for its delivery. The Massachusetts Privatization Law was an early exemplar of how to achieve this balance in public contracting. In an era when public managers are looking with a more critical eye at privatization, the Massachusetts Privatization Law stands as a first-in-the-nation attempt to legislate sensible contract decision making for public agencies. The law has effectively helped the state save over $1.2 million per year and, more importantly, to avoid at least $73 million in bad contracts. The process set up by the law effectively provides state agencies with assistance in measuring the likely impact of contracting decisions and helps them to ground privatization in reality.

Since 1993, various subject agencies and organizations have attempted to contract out 8 separate services.3 Of these, the OSA approved six applications and two were rejected based on either a failing to adequately comply with the Privatization Law, or a failure to adequately establish true cost savings to the taxpayers. A review of the cases demonstrates that winning approval for contracting out a service is not a matter of institutional size, ability to hire consultants, or contracting experience. Rather the Privatization Law process simply rewards good management and good management processes. Operations as large as the Massachusetts Highway Department and as small as Holyoke Community College have successfully negotiated the required process and have contracted out services with a subsequent financial benefit to state taxpayers. A review of the various proposals submitted to the OSA demonstrates that the process works; it creates an atmosphere that encourages good management. The process does not discourage good contracting decisions, but avoids bad ones. It compels public managers to enter into a dialogue with an independent and competent public auditor to justify change in the name of either cost savings and/or improved services.

This report reviews the Privatization Law and its consequences. Four of the cases reviewed by the OSA are examined in-depth (two approved and two denied cases). These case studies and the general review of the impacts of the law are used to determine the efficacy of the law as it stands, and to derive recommendations for improvements to the current review system.

This report clearly demonstrates that the Massachusetts Privatization Law is effective. The Law enables agencies that have a compelling, cost-saving way to effectively contract out a public service without sacrificing quality to do so. The Law avoids being too cumbersome for smaller agencies to handle. Agencies can successfully complete the review process without outside legal or accounting assistance. The Privatization Law is effective because it forces state agencies to carefully consider the fiscal and service impacts of contracting decisions, just as any private firm would do. Taxpayers are spared the cost and service burden of privatization experiments, and agencies that have not carefully examined the impacts of a potential contracting solution are discouraged from doing so without first examining the finer detail.

It is easy to understand why managers in the public and private sectors can become excited over new ideas. Often the fight to implement change then pushes managers to oversell the value or cost savings associated with these ideas. The Privatization Law provides a needed counter balance. It gives subject agencies a workable process through which to ground their concepts and ideas in fact, and to ensure that a simple basic, “back of the envelope” calculation is not substituted for a careful managerial and financial analysis. The privatization law has created an atmosphere where state agencies are forced to think like private firms as opposed to assuming that a private provider working under contract will automatically solve any problem at a lower cost. It compels state agencies to think through the pitfalls that lie ahead and prods them to be sure they are making the highest and best use of scarce resources in difficult fiscal times. It avoids the squandering of public funds on untested ideas that has plagued privatization efforts in so many other places. Massachusetts voters and legislators should be proud of their ground-breaking law.