Making Democracy Work

Surveying State Laws Addressing Privatization

by Diane Dilanni


In the first few years of Governor Weld's administration (1990-1992), 36 government services were contracted out, according to the Pioneer Institute, and such contracts were reported to have saved roughly $273 million.9 The Weld administration was hailed as seeking to improve the business climate in Massachusetts by reducing taxes and state regulations of the private sector. However, in 1993, the state legislature, realizing the need to regulate privatization contracts, passed the Taxpayer Protection Act. The Taxpayer Protection Act, more commonly referred to as the "Pacheo law," established strict requirements for detailed prior review of all privatization proposals. By 2002, the Pioneer Institute was referring to Massachusetts as "home to the most restrictive state privatization law in the nation." It noted that since the Pacheo law was enacted, "only six state services have been contracted out to private service providers, while similar efforts have dramatically expanded in other jurisdictions."10 On these facts, both proponents and opponents of aggressive state privatization programs might well agree that the Massachusetts law has been effective in impacting the course of state privatization. Thus, a closer look at the Massachusetts law is warranted.
The intent of the Massachusetts privatization law, M.G.L.chapter7, 52-55, is perhaps best described by its legislative preamble:

Section 52 Privatization contracts; need to regulate. The general court hereby finds and declares that using private contractors to provide public services formerly provided by state employees does not always promote the public interest. To ensure that citizens of the commonwealth 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, the general court finds it necessary to regulate such privatization contracts in accordance with [this act]...
The law goes on to define "privatization contract" as "an agreement or combination or series of agreements by which a non-governmental person or entity agrees with an agency to provide services, valued at $500,00011... which are substantially similar to and in lieu of, services theretofore provided, in whole or in part, by regular employees of an agency..."12 The essence of the law, however, is in the specific, rigorous procedures that must be followed prior to acceptance of any privatization deal. Under the law, an agency must prepare a detailed statement of services to be privatized, a document that becomes a public record and is transmitted to the state auditor for review. A competitive sealed bid process then is conducted based upon the statement. The state agency proposing privatization also must prepare a detailed analysis of the costs it would incur in providing such services (such analysis becomes a public record on the final day to receive sealed bids), and must provide resources to encourage and assist present agency employees to organize and submit a bid to provide the subject services.
The term of any such privatization contract, by law, is limited to five years (although there may be renewals). In addition, where a bidder will employ a person whose duties are substantially similar to those performed by a regular agency employee, the law establishes a minimum wage and certain minimum employer-paid health insurance requirements for each position. Compliance is monitored closely as contractors must submit detailed quarterly payroll records to the agency and failure to comply with the employee-related provisions may result in the attorney general bringing a civil enforcement action against the contractor in state court.
The law further provides that every privatization contract must require the contractor to offer available employee positions pursuant to the contract to qualified regular employees of the agency whose state employment is terminated because of the privatization contract, and such offers must be made on a nondiscriminatory basis in order to ensure equal opportunity for all.
Upon awarding the bid, the agency then must prepare a comprehensive written analysis of the contract cost based upon the designated bid, which specifically includes the costs of transition from public to private operation, of additional unemployment and retirement benefits, if any, and of monitoring and otherwise administering contract performance. If the designated bidder proposes to perform any or all of the contract work outside the boundaries of the Commonwealth, the contract cost shall be increased by the amount of income tax revenue, if any, which will be lost to the Commonwealth by the corresponding elimination of agency employees.
The agency head and the state administration commissioner each then must certify in writing to the state auditor that the services so contracted are likely to equal or exceed the quality of services that could have been provided by the agency; that the contract costs will be less than the estimated cost taking into account all comparable types of costs; and that due diligence has been conducted regarding the successful bidder. The state auditor then conducts an independent review of all the relevant facts (and may summon the attendance and testimony under oath of witnesses and the production of books, papers and other records relating to such review). If, within 30 days, the state auditor objects to the deal in writing (due to failure to comply or incorrect facts), then the privatization contract is not legally valid. The objection of the state auditor, moreover, is final and binding on the agency.

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