COFAR Blog | By David Kassel | July 13, 2015
In what has been widely viewed as a setback for state employee unions in Massachusetts, state legislators last week approved a state budget for Fiscal Year 2016 that includes a provision freezing the Pacheco Law for three years with regard to the MBTA.
The Pioneer Institute apparently had a lot of influence on the Legislature in approving the Pacheco Law suspension. The Institute and other long-time opponents of the Pacheco Law claim the suspension, or better yet, an outright repeal of the law, will allow the T to operate without “anti-competitive” restraints on privatization, and thereby improve transit service and save taxpayers millions of dollars.
We have waded through the Pioneer Institute’s report, which is filled with charts and financial analyses. You don’t have to go too deeply into the numbers, though, to see that there are a number of apparent holes in the methodology and logical conclusions drawn in the report.
The Pacheco law basically says you have to prove you will save money before you can privatize state services. The Pioneer Institute has had to twist the numbers, logic, and the facts to persuade legislators and the public to draw the opposite conclusion.
In at least one instance, which I’ll get to below, the Pioneer report appears to have misquoted the actual language of the law. It’s an unusually acrobatic performance even by the standards of the Institute.
(Note: While the Pacheco Law does not appear to have had a role in preventing the past privatization of human services, which we are primarily concerned with, the Baker administration’s next step, with the support of the Pioneer Institute and like-minded organizations, might well be to exempt future privatization of human services from the law.)
I’ll begin by noting that the Pioneer report says, without any attribution, that several “anti-competitive elements” in the Pacheco Law “combine to create the nation’s most extreme anti-privatization law.”
What the Pioneer report doesn’t say is that the Pacheco Law is based on a federal Office of Management and Budget (OMB) requirement that federal functions be subjected to a competitive cost analysis before they can be privatized (OMB Circular A-76). As I’ll discuss below, at least two of the top three supposedly anti-competitive requirements in the Pacheco Law are also requirements in Circular A-76, while a third is a requirement of the Defense Department in complying with A-76.
The Pioneer report makes no mention whatsoever of Circular A-76, which has public-private cost-comparison elements that date back to the Reagan administration and even before. That’s not surprising since an analysis of the requirements of A-76 would seem to cast doubt on Pioneer’s claim that the Pacheco Law is the nation’s most extreme anti-privatization law.
Far from complaining that the cost analysis requirements of Circular A-76 would prevent public agencies from saving money through privatization, most of the critics of A-76 have contended that its real purpose has been to encourage privatization of federal functions by introducing cost competitions for what had been publicly provided services. As a result, a moratorium has actually been placed on A-76 cost competitions at the federal level since 2009 as a means of slowing the rate of privatization of federal agency services.
It is apparently only in Massachusetts that a law setting conditions for competitions to privatize services can be seen as an impediment to privatization. We view the Pacheco Law only as an impediment to privatization if the case hasn’t been made that privatization will save money and that it will not diminish the quality of services.
The Republican Bush administration maintained in 2003 that the competition provisions in A-76 would save taxpayers money. As an online Bush administration document noted:
At the Defense Department, a survey of the results of hundreds of (A-76 public vs. private service) competitions done since 1994 showed savings averaging 42 percent…It makes sense to periodically evaluate whether or not any organization is organized in the best possible way to accomplish its mission. This self-examination is fundamentally what public-private competition is intended to achieve.
The Pioneer Institute’s apples-to-oranges comparison
The Pacheco Law authorizes the state auditor to compare bids from private contractors to a calculated cost of continuing to perform specified work by regular state employees “in the most cost-efficient manner.” If the auditor determines that the cost of continuing to provide the services in-house would be less than the bids, or if he or she determines that the privatized service would not equal or exceed the in-house service in quality, the auditor can reject the bids and the service will stay in house.
The main complaint raised in the Pioneer report about the Pacheco Law is that the the auditor used the law’s provisions to deny a proposal by the MBTA to sign two contracts in 1997 with private companies to operate 38 percent of its bus and bus maintenance service.
The Pioneer report concludes that had the Pacheco Law not been in effect, the MBTA would have saved $450 million since 1997 through the privatization of those bus services. But in making this claim, the Pioneer report compared bids proposed by the two prospective bus service vendors with actual costs incurred by the MBTA in that and subsequent years, and applied a cost-escalation factor to the bids.
The problem in doing that is that even though the Pioneer Institute claims it is being fair in applying that cost escalation factor, it is still comparing apples to oranges.
Under the Pacheco Law, the state auditor compared the bids from the vendors with a calculated cost of in-house operation at the MBTA based on operation in the most “cost efficient manner.” Based on that comparison, the auditor found that the MBTA operation would be less expensive than the proposed bus contracts.
The Pioneer report takes great exception to the Pacheco Law’s requirement that the cost comparison be made between contractor bids and a projection of the “most cost efficient” state operation. That is a key “anti-competitive element” that the Pioneer Institute cites. But the Pacheco Law is not unique in setting the comparison up that way. Circular A-76 also states that a federal agency can base its costs in a privatization analysis on what is referred to as a “most efficient organization.”
In fact, we think the Pacheco Law and Circular A-76 establish a true apples-to-apples comparison. While calculating costs based on operating in the most efficient manner may not reflect an agency’s actual operating costs, neither do bids necessarily reflect a vendor’s true operating costs. Bids are often lowballed, as we well know. As a result, contracting out for public services can prove to be much more expensive in actuality than it appeared in the plans or bids.
The Project on Government Oversight (POGO) found in 2011 that the federal government was paying billions of dollars more annually to hire contractors than it would to hire federal employees to perform comparable services.
We think that much of the high cost of human services contracting at the state level is due to a hidden layer of bureaucracy consisting of executives of corporate providers to the Department of Developmental Services. Our own survey showed that those executives receive some $85 million a year in taxpayer funding in Massachusetts.
So, in that regard, the Pioneer’s entire calculation of a $450 million in foregone savings in rejecting the MBTA vendor contracts is suspect, in our view.
A second major complaint about the Pacheco Law in the Pioneer report is that the law requires the winning bidder to offer jobs to public agency employees whose jobs are terminated by privatization. But that requirement is also in A-76.
Apparent misquote of the language in the Pacheco Law
The Pioneer report claims that under the cost analysis requirements of the Pacheco Law, any outside bidder must offer to pay the same wage rates and health insurance benefits to its employees as the incumbent state agency. This, according to the report, “neutralizes any potential advantage the outside bidder may have based on cost of labor.”
The Pioneer report, in fact, appears to be quoting from the law verbatim in including the following statement under the heading “Restrictive Elements of the Pacheco Law”:
Every privatization contract must include compensation and health insurance benefits for the contractor’s employees no less than those paid to equivalent employees at the public contracting agency; (my emphasis)
But I could find no such language in the Pacheco Law! Regarding wages, the Pacheco Law states that the outside bidder must offer to pay the lesser of either the average private sector wage rate for the position or step one of the grade of the comparable state employee. That could mean that the bidder could stipulate a lower wage cost in its bid than the state’s wage.
Regarding benefits, the Pacheco law says the bidder must offer a comparable percentage of the cost of health insurance plans as the state agency. This is consistent with the policy of the Defense Department, for instance, which prohibits private bidders in A-76 competitions from offering to pay less for health benefits than the DoD pays for its employees.
Despite his chamber’s action last week to freeze the Pacheco law, Senate President Stanley Rosenberg has appeared to be less than enthusiastic about the efforts to discredit the law and either freeze or repeal it. “There’s an ideological-slash-political component to this,” Rosenberg said. “We ought to be driving policy based on outcomes and data and how things actually work.”
Unfortunately, the latest attacks on the Pacheco Law seem to be more about ideology and politics than about real outcomes and data.
In 2010, I wrote a defense of the Pacheco Law, noting that it was already a major political target of the Pioneer Institute and Charlie Baker, who was making his first bid for governor at the time. If anything, the hyperbole and misrepresentations used to attack the Pacheco Law have only intensified since then.