Massachusetts Is Only State to Lose Millions Because We Have Virtually Outlawed Privatization

By Geraldine A. Hawkins
November 18, 2002

Massachusetts is the only state in the nation that has virtually outlawed the privatization of public services, according to a new study by the Pioneer Institute.

As a result we will spend millions of dollars in the next budget that could have been saved through competitive contracting, says Charlie Chieppo, Director of The Pioneer Institute's Shamie Center for Restructuring Government.

"The Commonwealth of Virginia has about the same size budget and population as Massachusetts," Chieppo tells MassNews. "In 1995, they created the Commonwealth Competition Council," which resulted in the privatization of many agencies. "They saved $100 million."

Chieppo tells MassNews that even if most agencies in Massachusetts were privatized, workers would still be unionized employees.

"The fact is that more than 50% of union employees work in the private sector. This is not a rank-and-file issue," Chieppo contends. "This is not a union-members' issue, it's a union leaders' issue," he says. "It's about membership and dues."

Massachusetts is the only state in the union burdened by a law that is so prohibitive to free enterprise that many private contractors have been scared away from the state, according to the study.

The restrictive law is known as the Pacheco Law. It is named for State Senator Marc Pacheco (D-Taunton) and was enacted by the Massachusetts state legislature in 1993. The ostensible reason for the law was to review proposals to contract out the provision of state services so that citizens would "receive high quality public services at low cost, with due regard for the taxpayers of the commonwealth and the needs of public and private workers."

While there were abuses that led to passage of the law, the law itself has done much more harm than good, according to the study

"The Pacheco Law created a process so obviously hostile to privatization that agencies have every incentive to avoid it no matter the fiscal and performance woes they face," the study contends.

The worst part of the law is that it has been used by leaders of public employee unions to scare their membership, who fear that privatization will lead to the loss of their jobs.

"The simple reality is that laying people off is politically unpalatable," Chieppo tells MassNews. "When agencies are privatized, some people work for the new contractor, and the others find comparable jobs in government."

According to the study, privatization tends to shift rather than displace employees. In Illinois, when several agencies were turned over to private contractors, only 3% of 516 cities surveyed reported that they had experienced layoffs. In Wisconsin, only 6% of workers were laid off. Others transferred to different government positions, retired or took jobs with the private contractors.

"In Indianapolis, the Mayor allowed the unions and the private sector to bid for the services," Chieppo says. "The final result was that people who worked for the contractors made twice as much as the Indiana state workers."

In the nine-year history of the Pacheco Law, private contractors have been hired in only six instances for services in Massachusetts. These involved the Massachusetts Highway Department (routine highway maintenance in Essex County), records and storage management at the Department of Employment and Training, bookstore operations at UMass/Amherst, real estate belonging to the MBTA, food service at Holyoke Community College, and opening and sorting of the returns at the Department of Revenue.

"Imagine what could be done with private operation of the MBTA routes, even with maintenance of bus shelters," says Chieppo. "The Pacheco Law locks Massachusetts law in place. It requires a focus on low bidding only. No other state has anything like the Pacheco Law. No state has a law as heavy-handed or onerous as the Pacheco Law. The issue with the Pacheco Law is not even that the private sector does things better than the public sector. The issue is that competition provides a better result than monopoly, and monopoly is what we have here in Massachusetts."

Essentially, the Pacheco Law requires private contractors to jump through hoops in order to have their services utilized by the citizens of Massachusetts. Some of the hurdles agencies must face include: 1) Establishing quantitative performance measures to be met in the areas of quality, timeliness, and effectiveness; 2) Paying wages not lower than the minimum wage rate that had been paid to state employees or the average private sector wage rate for comparable positions; 3) Paying the same percentages of its employees' health insurance premiums as the state; 4) Adding lost tax revenues to the cost of the private bid if any part of the work is to be performed outside Massachusetts; 5) Bidding must be compared not to the actual cost of providing the service, but to the cost that would result if employees were working in the most cost-effective manner; 6) Demonstrating that the quality of service likely to be provided by the private contractor will equal or exceed, not the existing quality of service, but the quality that "could be" provided by public employees.. The list goes on and on, says the report.

In addition, the State Auditor has interpreted the law regarding cost savings to mean strict comparison of costs that does not allow for privatization based on the flow of revenue. The State Auditor reviews all proposals for compliance with the law and can kill the contract if it fails to meet any of five different tests, the most fundamental of which is that the adjusted private cost be lower than the hypothetical public cost.

These restrictions may not seem like unreasonable requirements at first glance, but taken together they are cumbersome and have provided a disincentive for agencies to even consider privatization.

The name of the study is "Competition and Government Services: Can Massachusetts Still Afford the Pacheco Law?" by Geoffrey Segal, Adrian T. Moore, and Adam B. Summers of the Reason Public Policy Institute, undertaking a special project for Massachusetts's Pioneer Institute for Public Policy Research. More info is available at www.pioneerinstitute.org.

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