Home > Uncategorized > The Pioneer Institute does acrobatic logical twists re the Pacheco Law

The Pioneer Institute does acrobatic logical twists re the Pacheco Law

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.)

Unsupported statement

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 do not view the Pacheco Law as an impediment to privatization if the case has been made that privatization will save money and ensure 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.

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  1. July 15, 2015 at 1:05 am

    I am the author of the above-cited Pacheco Law study, Greg Sullivan of Pioneer Institute. Here a three quick observations about the above-analysis. The critique argues that OMB Circular A-76 is as restrictive as the Pacheco Law. This is not true for one critical reason. The analysis strategically leaves out the central difference. OMB Circular A-76 requires that if federal agency employees claim that they can increase their cost efficiency to beat the bid price of a proposed contractor, they “must perform the work promised in the agency’s winning bid, and achieve the specific levels of service for the price (cost) it committed to in its competitive bid.” As my report accurately explains, the MBTA employees asserted in 1997 that they could beat the price of the two winning bus vendors by $5 million by becoming more efficient. After the work was kept in-house, that never happened. Over the five-year term of the contract, costs increased dramatically, adding up to more than $80 million above the contract rate. OMB Circular A-76 actually enforces the cost bid of government employees; the Pacheco Law does not. Second observation: OMB Circular A-76 was created to prevent inhibitions to contracting of federal government services; the Pacheco Law has the opposite intention for state services. Here is language from OMB Circular A-76: “The Executive policy regarding the performance of “commercial activities” [is] that the Federal Government should not be in competition with the private sector.” Finally, the critique ignores the real-life economic outcome of the Pacheco Law in this case: the MBTA employees did not beat the cost of the two contractors or come remotely close to doing so. The numbers in my report come from self-reported data of the MBTA to the Federal Transit Administration. They show that the Pacheco Law’s mandated requirement of comparing bids to “regular agency employees performing the work in the most efficient manner” proved to be an $450 million dollar mistake. The reason is that the Pacheco Law lacks the central protection of OMB Circular A-76, which is holding the government employees to their proposed efficiencies. This is why the Pacheco Law is the most restrictive anti-privatization law in the US, including the anti-discrimination against privatization OMB Circular A-76.

    The difference between the Pacheco Law and the federal OMB Circular A-76 procedure is that the federal procedures result in a binding Letter of Obligation, executed by the agency employees and the federal contracting officer that established a binding contract with an enforcable budget.

    This is completely absent in the Pacheco Law. In the Pacheco Law process, the agency employees make a proposal to beat the bid price made by the outside contractor. This happened during the 197 Pacheco Law process. The big difference is that in Massachusetts that offer becomes meaningless, is not tracked, is not enforced, and has no force after the outside contract is prohibited.

    Here are some links discussing this:

    “The Most Efficient Organization is performance-based. That is, it must perform the work promised in the agency’s winning bid, and achieve the specific levels of service for the price (cost) it committed to in its competitive bid. Most of the bids are based on administrative consolidations, process reengineering, and new degrees of automation—and they promise very substantial savings, particularly in personnel reductions. The MEO results from an “acquisition” process that is conducted under the Federal Acquisition Regulations (FAR),and it is governed—and its success is tracked—under the terms of a Letter of Obligation (LOO) that is similar to a contract. Any deviations from the LOO are allowed only in accordance with official modifications of the LOO approved by the contracting officer (CO) responsible for the individual LOO. And, the LOO modification is roughly equivalent to a contract modification.” Source: Proceedings of a Symposium Convened by the National Academy of Public Administration. http://www.napawash.org/wp-content/uploads/2006/06-13.pdf

    The LOO reflects the commitments made by the Contracting Officer (CO) for the Government and the official who is responsible for executing the Agency Tender (the ATO or MEO Team Leader) to perform the services described in the solicitation within the costs contained in the Agency Tender. http://www.dhs.gov/sites/default/files/publications/mgmt_directive_0476_performance_commercial_activities.pdf

    Anybody who thinks that outsourcing at the T is a right wing conspiracy should remember that Barney Frank, the greatest state rep in MA history, included it in the 1980 MBTA Management Rights Act. Parting thoughts: best comments: mark-bail. As always dave-from-hvad is a thoughtful person, but in this case off-base. He thinks that the Pacheco Law was modeled on a pro-privatization law in Washington, OMB Circular A-76. Think about it Dave, Pacheco was put through explicitly to block these two contracts. You have got to know that. It isn’t really the Taxpayer Protection Act. You think that it is impossible to know what the five-year bus contracts would have cost, but you overlook the fact that these were a fixed price contracts. Add up what it finally cost the T and the total is a finite amount: $80 million plus for five years. I escalated the contracts at the T’s actual rate of increase. That is very conservative. A congressionally mandated study concluded that purchased bus service costs 40 percent less than agency-provided service on average in large transit agencies. My numbers showed closer to 30 percent. Do the math. Do you really think that outsourcing of T bus service would not have saved money? At the time of the Pacheco decision in 1997, the T had the least expensive purchased bus service in the US and the sixth most expensive agency provided bus service. At the end of the day, the Pacheco Law has been suspended at the T for three years. Contracts executed during the three-year period are exempt from Pacheco going forward. A smart new MBTA control board is coming in. Smart, big-thinking, talented urban democrats like House Speaker Bob DeLeo want to see what can be done. We will see.

    • July 15, 2015 at 1:26 am

      Thanks for your comment, Greg.

      But you really haven’t responded to the points that my post makes that:

      1. Both the federal A-76 process and the Pacheco Law compare bids from vendors with public agency costs operating in the “most cost-effective” manner. Your report raised this as a unique problem to the Pacheco Law.

      2. In asserting $450 million in foregone savings due to the Pacheco Law, you are making an apples-to-oranges comparison between actual MBTA costs and vendor bids (which are not actual costs). This renders the $450 million number meaningless. There is no way you can say what amount would have been saved if the bus companies had been hired.

      3. Your report misquotes the Pacheco Law in asserting that the law requires the outside bidder to propose wage rates that are equal to the state agency rate. The law allows the bidder to use an average private-sector wage rate, which could well be lower than the state wage rate.

      4. Your report fails to cite any sources in making the claim that the Pacheco Law is the “the nation’s most extreme anti-privatization law.” Any good editor would have asked for some attribution for a statement like that.

      5. In your report’s section on the history of the Pacheco Law, there is no mention of the fact that it is modeled after the OMB Circular A-76. That is a rather glaring omission, given that at least two of the supposedly unique anti-competitive elements of the Pacheco Law that your report complains about are also in Circular A-76.

      I think your report would have been more useful if it had examined questions that haven’t been hashed over politically for years. For instance, what has the record been of A-76 competitions and competitions in other states that may hold them? How could those competitions be improved, and what implications would that hold for the Pacheco Law?

      I’m not claiming the Pacheco Law is perfect. It may well need improving. But it seems all we’re getting are political attacks against it.

      • Eliminate the middle class
        July 15, 2015 at 1:20 pm

        Greg-

        Just admit your a liar!

  2. July 15, 2015 at 1:39 pm

    I think in the final analysis, decisions about privatization should consider both cost and quality. Cost and quality are actually inseparable. If you cut one of those two, it will affect the other, and not necessarily in a good way. However, if you do consider both of these factors together, I think it is possible to deliver high-quality service at low costs through contracting.

    The problem with the Pioneer report is that it focuses entirely on cost, and doesn’t consider quality; and it doesn’t deal honestly with cost. Other than that, it’s a fine report!

    Greg Sullivan argues that the MBTA would have saved money via the bus contracts because these would have been fixed-cost contracts. The trouble is, fixed-cost contracts do not guarantee quality service. Neither do they guarantee fixed costs over time.

    The Pioneer report tacitly admits that quality is not a consideration in their argument against the Pacheco Law. The report complains (inaccurately) that a key problem with the Pacheco Law is that it requires outside bidders for state services to offer wages and benefits equal to what the state offers. In other words, the Pioneer folks see a major opportunity for savings in cutting workers’ wages and benefits. Not a prescription for quality; and, in the long run, not a prescription for cost savings.

    The same problem exists with regard to the privatization of human services. Operating under a cost-cutting mindset, the state places very little emphasis on ensuring quality of those services through contracting out. Human services contractors pay lower wages and benefits to direct-care workers than the state does. Yet, there is little oversight of the large amounts of money pocketed by contractor executives.

    As I’ve said a couple of times, the Pacheco Law may not be perfect. But it does focus on ensuring both cost and quality. To that extent, it has the potential to ensure a thoughtful and ultimately cost-effective process of contracting out for services. The opponents of the Pacheco Law simply want a playground without rules.

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