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New academic paper defends the Pacheco Law, which has been vilified for 25 years for the crime of protecting taxpayers

January 23, 2019 2 comments

The Pacheco Law in Massachusetts is a textbook example of how a good piece of public policy can be trumped and misrepresented for political and ideological reasons.

Now, a new paper published on a website called In the Public Interest has attempted to set the record straight about the 25-year-old law, which has unjustly been used as a political punching bag for almost that length of time.

Full disclosure: I’m one of the three authors of the paper, which is titled, “The Pacheco Law: 25 Years of Taxpayer Protection.” The Pacheco Law, which is also known as The Taxpayer Protection Act, requires a detailed cost analysis prior to privatizing government services.

As a one-time newspaper reporter who covered the legislative debates over the law, and now as a research and communications director for COFAR, I have long been interested in the far-reaching efforts in this state to privatize human services, in particular. In the past two decades, during which I worked for the state Inspector General’s Office and then became an adjunct instructor in public policy at Framingham State and other universities, I’ve become a fan of the Pacheco Law.

lakeville hospital

Lakeville State Hospital — one of many state-run human services facilities that were closed in Massachusetts. A loophole in the Pacheco Law allowed the closings without invoking the law’s cost analysis requirement.

The lead author of the paper is Elliott Sclar, an economist who is professor emeritus of urban planning at Columbia University. Also authoring the paper was Michael Snidal, a doctoral student in urban planning at the university.

Dr. Sclar and I were among a group of people who were asked last year by state Senator Marc Pacheco of Taunton to write the paper as part of a larger project to examine both the history and political future of the 1993 Taxpayer Protection Act, of which Pacheco, of course, was the chief author and sponsor.

In the Public Interest describes itself as “a comprehensive research and policy center on privatization and responsible contracting.”  As the Center notes, our paper presents evidence that the Pacheco Law has saved the taxpayers hundreds of millions of dollars in the past quarter century.

Thus far, Senator Pacheco’s project has received some preliminary funding from a public employee union in New York, the Amalgamated Transit Union. I should note that the funding the project has received pales in comparison with the huge amounts of money that have been spent to have organizations such as the Pioneer Institute vilify the Pacheco Law.

As I’ve noted on this blogsite in the past, the opponents of the Pacheco Law, which include Massachusetts Governor Charlie Baker, The Boston Globe’s editorial page, the Pioneer Institute, and many others in neo-liberal political circles, claim the law has almost completely stifled innovative efforts to privatize public services in Massachusetts.

But as we pointed out in the paper, what the Pacheco Law has really done has been to ensure in several cases that a comprehensive cost-benefit analysis was undertaken before state-run services in Massachusetts could be privatized. It’s not innovative if taxpayers end up paying more for a service, and it’s not innovative if the quality of the service is worsened rather than improved.

Privatization, of course, has been the focus of a long-running debate between those who claim that government is inherently inept and wasteful, and those who claim that the sole purpose of privatization is to enrich corporate interests that want to make easy money from government contracts. In Massachusetts, arguments over the Pacheco Law have usually been cast in those mutually exclusive terms.

Left out of the discussion, however, has been a third view, which is that privatization can work if it is subject to adequate competition, analysis, and oversight, and that policy measures such as the Pacheco Law provide the necessary analysis.  That’s the view we took in our paper.

Privatization proponents have benefited from a loophole in the Pacheco Law 

The basic requirement of the Pacheco Law is that before services can be outsourced, the state auditor must affirm that the move will actually save money, and that the resulting privatized services will be equal or better than the services provided by state employees.

Opponents of the Pacheco Law never mention the fact that 75 percent of the privatization applications made to the state auditor since the law’s inception have been approved. In addition, a major push for privatization in the field of human services has taken place in Massachusetts without triggering the Pacheco Law at all.

As we noted in the paper,  successive administrations from Governor William Weld onwards have exploited what is essentially a loophole in the Pacheco Law with respect to human services.  The loophole stems from language in the law implying that services can be privatized and subject to the law’s cost analysis requirement only if the services are currently performed by state employees.

That language has allowed successive administrations to assert that they are not outsourcing if they simply close a state-run residential center for the developmentally disabled, for example, and subsequently send either the former residents or others waiting for services to a privatized residential facility.

The Pioneer Institute erroneously contended the Pacheco Law lost money for the MBTA

As our paper points out, the Pacheco Law was invoked when the MBTA tried to outsource the operation and maintenance of Boston area bus lines in 1997. The state auditor concluded, after a review required by the law, that the agency had failed to prove that privatization would save money, and in fact, that outsourcing the bus service would actually cost the state $73 million more than keeping the function in-house.

We have calculated that without the Pacheco Law, the MBTA would have gone ahead and outsourced the bus service, resulting in compounded losses exceeding $200 million over the ensuing years. Those calculations were based on my own finding in 2015 that the cost of contracted commuter rail services at the MBTA actually rose faster since 2000 than did in-house bus service costs.

Our paper’s combined findings stand in sharp contrast to a claim made in an influential report by the Pioneer Institute in 2015 that the failure to privatize the bus service ultimately cost the MBTA $450 million.

In fact, the Pioneer study had inappropriately compared  bids proposed by the two prospective bus service vendors with actual costs incurred by the MBTA in 1997, and applied the same cost-escalation factor to the bids and in-house costs between 2003 and 2013.

The Pacheco Law requires agencies like the MBTA to compare “apples to apples” bids under which both numbers represent a projection, i.e. a contracted projection against a projection of in-house services delivered in a “cost efficient manner.”

Ultimately, as we pointed out in our paper, both our cost calculations and the Pioneer’s report were based on back-of-the-envelope calculations that, even if done correctly, fell far short of the comprehensive cost analysis required by the Pacheco Law.

Recent history of privatization in Massachusetts 

Our paper attempts to place the Pacheco Law in the context of the history of privatization in Massachusetts from the 1980s onward. The law was a response to a worldwide privatization trend beginning in the 1980s. And one of  the most ardent proponents of the trend was William Weld, who became governor of Massachusetts in 1991 “with an unabashed conviction that less direct government service provision guaranteed better outcomes.”

But while outsourcing in itself wasn’t new when Weld took office, the difference now was that “neoliberal contracting or privatizing had become a matter of ideology, a belief that the private sector is always competent and the public sector inherently deficient.”

In Massachusetts and elsewhere, a major effort was begun to privatize governmental services and functions with little supporting analysis and few checks or balances.

Among those working under Weld to carry out the rush to privatize was Charlie Baker, at the time secretary of human services and later secretary of administration and finance. Baker came highly recommended to the administration by the Pioneer Institute.

Privatization proposals “flew in from near and far” – from local think tanks like the Pioneer Institute and from “antigovernment hard hitters” like the Heritage Foundation and the Cato Institute, the latter declaring Weld the best governor in America.

Weld’s subsequent closings of the state-run Paul A. Dever State School in Taunton and nearby Lakeville Hospital “hastily pushed families dependent on chronic care away from places they had called home for decades.” The equipment at Lakeville was given away to the private Parkwood Hospital in New Bedford at no cost.

As a Globe Spotlight series in 1993 showed, the Weld administration and its privatization arrangements “were deeply conflicted by special interest money, lobbyist motivated lunches, and massive corporate campaign donations.”

In this context, Pacheco, whose Senate district included Dever and Lakeville, first proposed his legislation while he was a member of the House in 1992. It didn’t pass then, but did pass the following year after Pacheco had been elected to the Senate.

As noted above, however, Weld and subsequent governors, Republican and Democratic, continued to shut facilities for the developmentally disabled and to expand the private system of corporate, provider-run group homes without invoking the Pacheco Law.

Costs misrepresented

Both the Romney and Patrick administrations claimed that privatized care for the developmentally disabled was cheaper per resident than state-run care by comparing the average cost per resident in privatized residences to a calculated cost of care in state-run developmental centers such as the now-closed Fernald Developmental Center.  This comparison was disingenuous; Fernald served a population with a much more profound level of intellectual disability and more severe medical needs than the population in the privatized community system.

Their cost comparison method also overstated the state costs per resident. The administrations simply divided the total Fernald budget by its population of residents to determine the cost of care, overlooking the portion of Fernald’s budget that went to programs that benefited community-based residents.

In bypassing the Pacheco Law, these administrations never seriously considered proposals to operate developmental centers more efficiently, something the law explicitly calls for.

Had the cost and quality analyses required by the Pacheco Law been used in the contracting of services for the developmentally disabled in Massachusetts since the 1990s, a better understanding of the costs involved in that process and higher quality care would have resulted.

The Pacheco Law would have:

1) ensured that all potential costs were fully analyzed prior to closing state-operated facilities, and

2) ensured the quality of care run by corporate providers be equal or better that state-run facilities.

Privatization can work if it is subject to competition, analysis and oversight 

Our paper concludes with the observation that governments may be able to maintain quality of service and reduce their bottom line if there exists a competitive private market that has a known quality and price. In those instances, it can often be shown that costs can be reduced by privatizing services.

However, unproven generalizations about the cost effectiveness of privatization must be subject to scrutiny.

In sum, as we noted, the Pacheco Law’s 25-year anniversary, which occurred last month, “provides a ripe occasion to start a national dialogue about how we restore vibrancy to a public sector that has been badly damaged by ideological attacks on government.”

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Most of the mainstream media skipped class last week on privatization and the Pacheco Law

January 11, 2016 1 comment

It’s amazing how little real understanding the mainstream media has of the issue of privatization and of legislative responses to it such as the Pacheco Law.

You only have to read this Boston Globe editorial from 2011 to begin to realize how many misconceptions supposedly savvy journalists have about these issues.  (More about that below.)

Privatization is one of the most important and controversial aspects of state and federal policy. When I googled the phrase “privatization and public policy,” I got 2.7 million results.  The state auditor’s administration of the Pacheco Law has become a key item of controversy in Massachusetts politics as well.

In that light, the State Auditor’s Office and the Boston Bar Association organized a forum directly across the street from the State House this past Thursday afternoon to discuss and debate the Pacheco Law and its impact on privatization, and invited the media to attend.

I was invited to present the pro-Pacheco Law side in the discussion, and Charlie Chieppo, a senior fellow at the Pioneer Institute, presented the anti-Pacheco Law side.  A number of top people from the Auditor’s Office presented information on how the law works, highlights of its 23-year history, and key areas of litigation involving the law. Michael LaGrassa of UMass Dartmouth discussed the university’s experience with the Pacheco Law in privatizing the campus bookstore operations in 2014.

In addition to the lineup of speakers, the State Auditor’s Office had put together three-ring binder notebooks filled with helpful information on the Pacheco Law and what it actually does and requires, in addition to materials we had submitted stating our positions on the law. (Included in the binder was our report, “Setting the record straight about the Pacheco Law.”  I’ll post that report here this week.)

As I understand it, two members of the media showed up at the Thursday forum — a reporter from Massachusetts Lawyer’s Weekly and a reporter from The Boston Business Journal.  I haven’t yet seen anything published from them, but at least they were there.

Neither the Globe nor Herald sent anyone to the event.  Notably absent was Globe columnist Scot Lehigh, who has been described as someone who “has been the most consistent and vociferous critic of the (Pacheco) law…”

From my vantage point, there appeared to be some 50 to 60 people in attendance at the forum.

Among the little-known and discussed facts about the Pacheco Law that I tried to point out during the forum were that:

    1. The Pacheco Law was based on federal policy (OMB Circular A-76)
    2. The law never barred or banned the award of bus contracts by the MBTA, and the law has not stopped privatization of most human services in Massachusetts

Chieppo of the Pioneer Institute argued that the Pacheco Law is different than A-76 because A-76 requires a binding letter of obligation if the public employees win the bid competition with the private sector.  (I disagreed with his assertion that no such obligation binds state employees under the Pacheco Law.)

LaGrassa of UMass said the Pacheco Law review that the university did to privatize their bookstore helped them to better understand the costs involved in running it.  He said that the process involved a lot of work and back-and-forth with the auditor’s office; but in his words, “you should do a lot of work” if you are going to privatize a public service.

Regarding the 2011 Globe editorial referred to above:

Memo to Globe editorial writer: Contractors bidding to privatize services don’t have to pay public sector wages under a Pacheco Law review.  They can pay the lesser of the lowest public sector wage or the average private sector wage for the equivalent position.

And no, a privatization initiative doesn’t have to “produce savings” over what the state employees could achieve under ideal conditions.  The privatization initiative must project such savings, but no one has to — or is expected to — actually produce them.   The Pacheco Law requires a competition between private and public sector bids, both types of which are based on projected results that might be achieved under ideal conditions.

The bottom line, it seems to me, is that people in the mainstream media still occupy influential positions as opinion makers regarding politics and government, in particular.  As such, they have an obligation to get their facts straight on these matters.  The state auditor’s “Primer” on privatization last week presented a convenient opportunity to do that.

But with two exceptions, the mainstream media blew their opportunity by missing the class.

DDS vendor executives not sharing the pain of their workers

February 13, 2012 2 comments

Direct-care workers in the state’s contracted human services system have seen their wages stagnate in recent years, but the executives who run the largely nonprofit contractor agencies that employ those workers do not appear to have been feeling that same pain.

We examined compensation to both CEOs and direct-care workers in a sample of 30 service vendors to the Department of Developmental Services, both large and small, from around the state in Fiscal Years 2008 and 2011.  This information is available in Uniform Financial Reports, which are submitted to the state Operational Services Division by the vendors and are posted online by the OSD at www.mass.gov/ufr

The CEO compensation of our sample increased by an average of 16.6 percent during the four year period while the direct-care salaries decreased by an average of 2.17 percent during that time.  (See Vendor Compensation Table.) 

Among the 30 vendors, the average CEO compensation in FY 08 was $197,068.  It increased to an average of $229,872 in FY 11.  In FY 08, the average direct care salary for the sample was $33,508.  It decreased to $32,780 in FY 11.   In FY 11, direct-care workers were earning an average of 14 percent of what the CEOs of those vendors were earning, down from 17 percent in FY 08.

Among the sample, nine CEOs received compensation increases in the four year period reviewed while the direct care workers employed by those same vendors actually saw their wages cut.  In two of those cases, the CEOs received increases exceeding 100 percent. 

That many CEOs have taken hefty pay increases and the direct-care workers have gotten little or nothing, or in many cases decreases, raises  questions about repeated calls from the vendors to add $28 million to a state budget reserve fund to increase those direct care salaries.

If the Association of Developmental Disabilities Providers and its member vendors are really concerned about their direct-care workers’ pay, why have these companies given raises only to their CEOs?  Should the state be called upon to bear the entire burden of raising direct-care wages?

“The vendors appear to have it in their own power to give their direct-care workers increases,  but they’ve chosen not to,” said Colleen Lutkevich, COFAR executive director.   “Instead, they’re looking to the Legislature.”

If the Legislature does step in to fund the direct-care salary reserve account, it will not be at the urging of Governor Patrick.  Despite the ADDP’s appeals, the governor’s budget for the coming fiscal year proposes zero for the reserve fund.

Note: We were not able to use data from one of the vendors, Massachusetts Mentor, Inc.   Massachusetts Mentor is a subsidiary of NMH Holdings, Inc., a for-profit corporation that provides residential and other services for intellectually disabled persons in 36 states.  NMH Holdings was incorported in Delaware, according to its audited financial statements, though it actually appears to be headquartered in Massachusetts.  (NMH Holdings appears to be referred to as The Mentor Network on its national website.)

Massachusetts Mentor’s  UFR  and other reports filed with the state OSD employ what appears to be an unusual method of listing only partial salaries of top executives.  The compensation listed is apparently the amounts of the executives’ salaries that are attributed to Massachusetts.  For instance, total compensation for Edward Murphy, CEO of both Mass. Mentor and The (national) Mentor Network, was listed as only $14,830 in FY 10, in a filing with OSD).  (The company does not appear to have filed a UFR report in Massachusetts for FY 11.)  Murphy is a former commissioner of both Mental Health and Youth Services in Massachusetts.

Greg Torres, chairman of the Board of Directors for both Mass. Mentor and The Mentor Network, earned a total of $2,484 in compensation in FY 10, according to the OSD filing.  Torres, a former chief of staff of the Massachusetts Senate Ways and Means Committee, is also currently president of MassINC, the nonprofit civic think tank in Massachusetts that publishes CommonWealth magazine.  (CommonWealth frequently advocates for more transparency in governmental finances and operations.)

Also working for Mass. Mentor is Gerald Morrissey, a former commissioner of DDS in Massachusetts.  Morrissey’s total compensation as a vice president at Mass. Mentor was listed in the FY 10 OSD filing as $5,113.  None of these clearly partial compensation listings could be reliably compared with other CEO and direct-care compensation in Massachusetts.

NMH Holdings earned more than $1 billion in revenues in FY 10, according to filings with OSD, while Massachusetts Mentor took in $3.7 million from DDS and $19.4 million from the Department of Social Services in FY 10, according to its UFR report.

Calls and emails to OSD with questions about Mass. Mentor’s and NMH Holdings’ partial compensation listings for their executives were not returned.