When Privatization Isn't an Option

A dose of outsourcing could go a long way toward fixing some of the Boston-area transit system's problems. But a state law makes that practically impossible.
June 10, 2015
By Charles Chieppo  |  Contributor
Principal of Chieppo Strategies and former policy director for Massachusetts’s Executive Office for Administration and Finance

In the aftermath of the enactment in 1993 of the nation's most restrictive state privatization law, introducing competition to the delivery of state services was a hot-button issue in Massachusetts. More recently the issue has receded, with the Bay State's public managers adapting to an environment in which privatization has been, for the most part, a tool unavailable to them.

But privatization is back in the headlines in the wake of the collapse of the Massachusetts Bay Transportation Authority (MBTA) under the weight of the snowiest winter in Boston's recorded history. Republican Gov. Charlie Baker's proposed plan to fix the transit agency includes exempting it from the so-called Pacheco law, which is named for its main sponsor.

There is strong evidence that there are areas where privatization could yield savings for the MBTA. In 2012, the authority's chief procurement officer told the MBTA board that completing mid-life bus overhauls in-house costs 50 percent more than outsourcing the work. She should know; under an exception to the Pacheco law that allows contracting out during temporary shortages of in-house capacity, huge savings have been realized. But most of the time the law makes it nearly impossible to outsource the overhauls.

When it was facing a $161 million deficit in 2012, the MBTA developed contingency plans that included cuts to under-used bus routes. A more cost-effective way to serve customers along those routes would be to contract with operators of vehicles that are smaller than the MBTA's full-sized buses, but the state privatization statute also makes that unlikely to happen.

Rather than a straightforward public-private cost comparison, under the Pacheco law the cost of a proposed privatization contract must be compared to what the cost would be were public employees to work "in the most cost-efficient manner." Public employees are never held accountable to perform to that standard.

The law also regulates the pay rates of private employees working on the contract and limits reimbursement for compensation of the private company's officers and managers. Another provision adds foregone tax revenue to the private bid price if any portion of the work is performed outside Massachusetts. There is no corresponding allowance for the tax revenue that would be generated from having taxable private entities perform the work.

Once these adjustments are made, the proposal goes to the state auditor, who can reject it for reasons as vague as his or her determination that the contract is "not in the public interest." The auditor has 30 days to review a proposal, but can request an automatic 30-business-day extension.

For two MBTA privatization requests, then-Auditor Joseph DeNucci demanded more than 3,000 pages of documentation. In one of them he raised a series of objections, then reserved the right to raise more if his initial concerns were successfully addressed. The auditor's decision cannot be appealed.

As you've probably figured out, the Pacheco law creates a process that is so burdensome and unpredictable that privatization attempts are few and far between. There has been approximately one proposal per year in the more than two decades that the law has been in place.

Every state should have reasonable privatization guidelines. But in contrast to the framework created by the Pacheco law, "reasonable" ought to mean holding private bidders and public employees equally accountable for their performance, focusing on outcomes rather than inputs such as employee and officer salaries, and having reasonable limits on the review of a proposed contract.

In the absence of reasonable guidelines, reinvigorating the Massachusetts Bay Transportation Authority will require exempting it from the state's onerous privatization law. If a Republican governor can pull that off in a blue state in which unions are particularly powerful, it'll be one for the public-management record books.