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Has the Globe just shown a newfound, if inadvertent, support for the Pacheco Law?

August 20, 2018 Leave a comment

Although we are an advocacy organization that focuses on human services, we have at times waded into the ongoing controversy over the operation of the MBTA in Boston.

The reason for that has to do with a now decades-long debate over privatization of public services and the implications of the Pacheco Law in that regard.

On Sunday, The Boston Globe reiterated its support for the privatization of T functions with an editorial that defended the current contracted operation of the T’s problem-plagued commuter rail system.

As a supporter of privatization, the Globe has, in recent years, been at the forefront of the long-running criticism in political and journalistic arenas of the Pacheco Law. But in calling on Sunday for a cost-benefit analysis prior to any proposed move to bring the T’s commuter-rail system in house, it seems to us that the Globe is also endorsing, if inadvertently, the principles and intent of the law.

The Pacheco Law requires state agencies seeking to privatize existing operations to do a cost-benefit analysis that demonstrates that the cost of privatizing the service would be lower than continuing to do the service in-house, and that the quality of service would be equal or better if it were privatized.

The Pacheco Law, which was enacted in 1993, has been a lightning rod for political criticism and controversy over the years. Much of the state’s political establishment and prominent journalistic institutions have been harshly critical of it.

We have supported the law because we see it as providing a potentially important layer of oversight and analysis in the ongoing privatization of services for the developmentally disabled in Massachusetts.

In a 2011 editorial, the Globe called the Pacheco Law “an affront to common sense,” and charged that it was allowing public employee unions to place their “demands” above “the obligation to run government efficiently.”

But in its editorial on Sunday, the Globe actually put forth an argument that appears, without directly admitting to it, to endorse the precepts of the Pacheco Law. In criticizing calls by Democratic candidates for governor for in-house operation of commuter rail when the current contract with Keolis expires in 2022, the editorial states:

Whoever is in charge in 2022, though, here’s a suggestion: Since in-house management is an idea that refuses to die, [and I would add, so is privatization, for that matter!] the state should ask the T to submit a plan showing what it would entail. If nothing else, that would clarify for the public the costs and benefits, and bring some specifics to what is now little more than a vague applause line for Democrats. (my emphasis and insertion in brackets)

That is exactly what the Pacheco Law calls for when state agencies seek to privatize services. What the Globe is calling for is the same type of cost-benefit analysis, only in reverse — from privatized services to in-house. To me, it actually sounds like a good idea.

The Sunday editorial further states that while the state “can definitely do a better job with commuter rail after its current contract with Keolis expires in 2022…the goal of better service, not adherence to ideological precepts, should guide the next governor.” (my emphasis)

Agreed, and that is also the goal of the Pacheco Law, which is to ensure better service and lower cost rather than privatizing based on ideological precepts.

The editorial contends that:

…the T doesn’t have — and never has had — the in-house ability to operate the commuter lines itself, and dumping the commuter rail system directly into an already overburdened agency risks disruption. It could also raise thorny union issues, probably raising labor costs. And there’s no reason to expect running the commuter rail in-house would result in better service. (my emphasis)

Maybe not, but in-house operation of commuter rail might actually result in cost savings.

We reported in 2015 that the annual cost to the MBTA of contracting for commuter rail services had risen by 99.4 percent since 2000, compared with a 74.9 percent increase in the annual cost of the agency’s in-house bus operations, according to cost information we compiled from public online sources.

Finally, the Globe editorial suggests that rather than bringing management of commuter rail in house, the T should consider offering the next contractor “a longer-term deal, to better align the incentives of the contractor and the state and potentially bring in private-sector money for capital investments.”

I would note here that long-term contracts are not necessarily better deals for the state or consumers. It is difficult if not impossible to project financial risks over long periods of time. As a result, long-term contracts tend to have provisions that protect private contractors from those risks while transferring the risks to the public.

Also, private investments for capital improvements must be repaid by taxpayers and riders, and those deals can be very expensive to the public. Often there is little transparency in the terms and provisions of private investment arrangements in public infrastructure.

All of these are reasons why the Pacheco Law is necessary and important to the continued efficient and effective operation of government. The law provides for an open and detailed analysis and discussion of costs and benefits when public and private services and functions come together. 

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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.

Baker administration interpreting Pacheco Law to potentially benefit private company

January 4, 2016 Leave a comment

In what may be one of the first tests of the Pacheco Law in the privatization of human services, the Baker administration is seeking to contract out existing emergency mental health services in southeastern Massachusetts.

What concerns us about this situation is that the administration is reportedly interpreting the Pacheco Law to allow a for-profit company, the Massachusetts Behavioral Health Partnership (MBHP), to cut its proposed wage rates within roughly a year after starting to provide those services and potentially to pocket the extra profits.

This is not surprising given that a key executive from MBHP was appointed to a new position in the Baker administration that appears to have at least a supervisory role over contracts with the company. (More about that below.)

The administration’s interpretation of the Pacheco Law has drawn a rebuke from the law’s author, state Senator Marc Pacheco.

First, however, a bit of background: The Pacheco Law requires a state agency seeking to privatize services to submit to the state auditor a comparison of a bid or bids from outside contractors with a bid from existing employees based on the cost of providing the services in-house “in the most cost-efficient manner.”

If the state auditor concurs that the outside bidder’s proposed contract is less expensive and equal or better in quality than what existing employees have proposed, the privatization plan will be likely to be approved.  If not, the auditor is likely to rule that the service must stay in-house.

Two key provisions of the Pacheco Law that potentially apply here are:

    1.  Under the law, an outside contractor’s proposed bid must specify wages at the lesser of either the average private-sector wage for the equivalent position or the lowest public-sector wage level for the position. In other words, the law establishes a minimum wage rate that the outside contractor must propose.
    2. The Pacheco Law does not apply when contracts for privatized services are renewed.  In other words, if a private bidder wins a contract under the Pacheco Law process, that contractor does not have to undergo another review by the auditor in order to renew the contract.

The reason that Provision 2 above is pertinent to this case is that MBHP currently has an ongoing Primary Care Clinician (PCC) contract with MassHealth for separate clinician services that is scheduled to run through June 30, 2017.

As we understand it, the administration intends that the current PCC clinician services contract with MBHP will become the overall contract for the emergency services that the administration is now seeking to privatize.  And the administration’s interpretation of Provision 2 above is that if the privatization plan is approved by the auditor, all of the contract provisions in the contract bid will cease to exist when the current PCC contract is renewed.

Thus, it is reportedly the administration’s position that after the MBHP’s PCC contract with MassHealth officially ends in June 2017, MBHP will be legally free to cut the wage levels it is stipulating in its bid.  If so, we believe it is unlikely that the company would pass along the savings in cutting wages to state taxpayers, but would instead pocket those savings as profit. As a for-profit, MBHP has an incentive to pocket any operating cost savings as retained earnings.

The administration’s interpretation of the Pacheco Law is ironic because one of the main objections to the law from the law’s most vocal opponent, the Pioneer Institute, is that the bidding contractor in a privatization proposal is required to stick to the terms of its bid whereas there is nothing in the law to ensure that the terms of a state employee bid are enforced.

As Pioneer stated in an influential report last year (linked above):

 The Pacheco Law does not contain any requirement that agency employees subsequently provide service in the most cost efficient manner or in an improved manner if the proposed privatization contract is rejected.

But in fact, it appears that it is the administration’s interpretation that it is the outside contractor that doesn’t have to stand by its bid once its contract is renewed.

Sen. Pacheco himself has warned that the administration’s interpretation of the law that was named for him would “undermine” the intent of the law.  In a letter sent to Attorney General Maura Healey in November, Pacheco stated that:

Although renewal contracts for validly privatized work do not need to be resubmitted to the Auditor (for a Pacheco Law review), it was never my or the other supporters’ intent that wages and health benefits could sink lower than the “minimum wage” established by the Taxpayer Protection Act (the Pacheco Law) once the initial contract expired.  If that is permitted, the statutory purposes of preserving the quality of publicly funded services and providing minimum protections for private sector and public workers would be completely undermined.

Moreover, it seems to us that the Pacheco Law does prevent the state employees from submitting an artificially low bid and then subsequently ignoring it. The Pacheco Law states that if the employees want to submit a bid with wage costs that are lower than what are in a collective bargaining agreement, they must negotiate a change in that agreement with the applicable state agency.  That new collective bargaining agreement is binding on the state employees and cannot be changed unless the state agency agrees.

A potential decline in service quality

As we understand it, the Baker administration is projecting a savings of $5 million a year in privatizing the emergency mental health services in Southeastern Massachusetts.

SEIU Local 509, a state employee union, has put in a bid on behalf of the state employees currently providing the emergency services that envisions saving about $500,000 per year.  So, the state auditor may well determine that there would be a greater savings in privatizing the services.  However, the union is arguing that the quality of those services is likely to decline under the privatization plan because the financial savings will depend on major cuts in staffing.

The administration’s reported interpretation of the Pacheco Law’s contract renewal provision appears to bear out the SEIU’s concerns about a potential drop in the quality of the privatized services offered by MBHP. If MBHP or its subcontracting firms are legally free as of mid-2017 to cut the wage rates proposed in MBHP’s bid for the emergency services, it seems to us to be very likely that the quality of those services will suffer.

Political connections appear to have played a role in the MBHP case

It’s hard to overstate how politically connected MBHP is.  There appear to be a number of close relationships between the company and the Baker administration and with previous administrations — and in particular with the Executive Office of Health and Human Services, which will oversee the privatized mental health services.

Last April, Scott Taberner, previously the chief financial officer at MBHP, was named Chief of Behavioral Health and Supportive Care in MassHealth, the division of EOHHS that administers Medicaid and healthcare for low income and disabled persons.  Taberner’s position in Masshealth was created by the Baker administration.  MassHealth is seeking the privatized mental health services contract with MBHP.

Prior to that, in late May 2014, Beacon Health Strategies (Beacon) announced its plan to merge with ValueOptions, the parent company of MBHP.  Under the arrangement, Beacon will be 50 percent owned by Bain Capital and 50 percent owned by Diamond Castle Holdings.

Bain Capital was formed by former Massachusetts Governor Mitt Romney.  Last April, the same month that Taberner joined the Baker administration, former Massachusetts Governor Deval Patrick joined Bain as a “social impact” investment advisor.  That doesn’t appear to have any direct connection to the proposed MBHP privatization contract, but I thought I’d throw that in.

According to the Mass. Psychological Assn. (MPA), ValueOptions and Beacon both hold a large market share in programs in Massachusetts that are paid for through public funds.  As noted, MBHP manages benefits for the PCC program.  The MPA estimated that once the merger was finalized, Beacon would manage the behavioral health benefits of  78 percent of the Massachusetts Group Insurance Commission members and of 70 percent of MassHealth members.

A coalition of health care advocacy groups signed onto an MPA letter in August 2014 to the Mass. Health Policy Commission, expressing concern about the proposed merger of Beacon and ValueOptions.  The letter stated that the merger “will limit the already narrow choices offered to insured individuals whose primary diagnosis is related to behavioral health…”

It does appear that the merger went through.  Now it appears that MBHP is being primed by the administration to run the privatized emergency mental health contract via MassHealth; and Taberner, a former MBHP executive, appears to be involved in that effort or is at least in a position to oversee it.

The administration itself has described Taberner’s new position at MassHealth as follows:

…Taberner will lead reforms to better coordinate and integrate care for behavioral health, physical health and long-term services and supports for elders and persons with disabilities.

The Baker administration wants to make the emergency mental health services part of the MassHealth PCC contract with MBHP.  A former MBHP executive is now in a high-level position in the state agency contracting with his former company.  And now the administration is interpreting the Pacheco Law in MBHP’s favor by indicating that if the privatization plan is approved, MBHP will be legally free to cut wage levels as of June 2017 when its PCC contract up for renewal.

The Pacheco Law has borne the brunt of much bad press and political criticism over the years; but we have argued that most of that criticism has been based on misinformation about the intent of the law and what it actually does.  The proposed privatization of the Southeastern Massachusetts emergency mental health services demonstrates why the auditor’s scrutiny is needed of such privatization proposals and consequently why the Pacheco Law provides critically important protections for taxpayers and the quality of public services.

Governor’s MBTA panel provided virtually no support for its recommendation to restrict the Pacheco Law

The Governor’s Special Panel to Review the MBTA earlier this year made some reasonable proposals to better manage the MBTA.  But the Panel report’s recommendation to remove the MBTA from the Pacheco Law’s jurisdiction appears to us to have been a misstep; and the report spent less than a sentence in explaining the rationale for its recommendation.

Based in part on the Panel’s recommendation, the Legislature suspended the Pacheco Law’s provisions for three years with regard to the MBTA, thereby removing an important means of ensuring long-term cost-effectiveness in privatizing services at the T.

The Pacheco Law’s stated intent is “to ensure that citizens of the commonwealth receive high quality services at low cost.” The Special Panel’s report asserted, however, that “the MBTA is inhibited by the Pacheco Law from procuring private, cost-effective services…”

That latter statement, which appears to constitute the sum total of the Panel’s discussion of the Pacheco Law, appears to be at odds with the stated purpose of the statute. There is no additional comment in the report about the impact of the law — not even an explanation of what the law does.

Moreover, as discussed below, the Special Panel did not appear to have consulted with state agencies that oversee procurement of supplies and services in Massachusetts, in preparing its report.  Possibly as a result, the Special Panel’s report also appears to be incorrect in stating (in that same sentence) that the MBTA is “strictly limited by state law in its use of many procurement processes (e.g., CM at-Risk and Design/Build).”  More about that below as well.

The Special Panel has previously run into criticism from CommonWealth magazine for flawed methodology on which it based a separate finding concerning employee absenteeism at the MBTA.

What the Pacheco Law actually requires

As we’ve noted before, the Pacheco Law requires a state agency seeking to privatize services to compare bids from outside contractors with a bid from existing employees based on the cost of providing the services in-house “in the most cost-efficient manner.”  The bids from both contractors and existing employees are examined by the state auditor, who must determine whether:

1. the proposed contract cost is lower than the calculated cost of providing in-house services in the most cost-efficient manner; and

2. the quality of the proposed services will be equal to or better than the quality of the services proposed by the existing employees.

What this means is that both parties — the state employees and the outside contractors — can bid to provide the services; and, if the state auditor concurs that the proposed contract is less expensive and equal or better in quality than what existing employees have proposed, the privatization plan will be likely to be approved.

The Special Panel contends that the Pacheco Law “inhibits” privatization.  But State Auditor Suzanne Bump has stated that her office has approved 12 out of 15 privatization proposals presented to the office since the Pacheco Law was enacted in 1993.

The Special Panel did not consult key state agencies that regulate procurement of supplies and services in Massachusetts

Among the 38 organizations listed by the Special Panel in its report as having provided the Panel with input, most were special interest groups, ranging from the Mass. Association of Realtors to the Conservation Law Foundation to the Boston Carmen’s Union.  But not on the Panel’s list was anyone from the office of the state auditor, which, as noted, administers the Pacheco Law, or either the inspector general or attorney general’s offices, which oversee state procurement laws and regulations.

That may explain why the Special Panel’s report stated, apparently incorrectly, that the MBTA “is strictly limited by state law in its use of many procurement processes (e.g., CM at-Risk and Design/Build).”  In fact, this is the second half of the sentence cited above, claiming that the MBTA has been “inhibited” by the Pacheco Law.  Once again, a single sentence (or rather half a sentence) constitutes the sum of the report’s discussion of an allegedly serious problem faced by the MBTA — in this case, the alleged limitations on the MBTA’s procurement options.

Construction management at-risk (CM at-risk) and design-build services are alternatives to the traditional design-bid-build approach in managing public projects.  Under the traditional approach, construction contractors bid on fully completed designs.  The alternative approaches allow for fast-tracking some construction activities before design is complete.

Despite the Special Panel’s assertion, the state’s bidding laws do provide permission to the MBTA and other state agencies to use CM at-risk for building construction projects (MGL C. 149A, Section 4), and design-build for public works projects, estimated in both cases to cost $5 million or more (MGL C. 149A, Section 16).

If the Special Panel’s concern was that the MBTA should be allowed to use CM at-risk and design-build on projects costing less than $5 million, it wasn’t stated in the report.

Email query to Professor Gomez-Ibanez

On January 28, I emailed Jose Gomez-Ibanez, a professor at Harvard’s Kennedy School and a member of the Special Panel, to ask whether he concurred with the Panel’s recommendation on the Pacheco Law.

Gomez-Ibanez has written compellingly about economic and political issues involved in the privatization of governmental functions and services.  In a 2004 working paper, “The Future of Private Infrastructure,” he stated that:

…in retrospect it is clear that we severely underestimated the difficulties of privatization. We often failed to appreciate that the challenge of privatization was not primarily technical, but also fundamentally political.

In our view, the Pacheco Law implicitly recognizes those technical and political problems of privatization.

In my email, I stated that:

It is not surprising to us that a conservative think tank such as the Pioneer Institute might draw ideologically based conclusions about privatization.  But it was surprising to me that the Governor’s Special Panel, which included faculty of Harvard and Northeastern Universities, including yourself, would support a recommendation that appears to have no written rationale to support it.

To date, I haven’t heard back from Gomez-Ibanez.

Critics of the Pacheco Law overlook the costs of privatization 

In its single statement about the Pacheco Law’s impact, the Special Panel contends that privatized services are inherently more cost-effective than in-house services, and implies that even requiring a comparison between in-house and contracted services is unnecessary.

While the Special Panel provides no explanation for its assertion about the Pacheco Law, the Pioneer Institute, one of the chief critics of the law, argues that the major flaw in the cost-competition process under the law is the following: if the state employee bid is found to be lower than the contract bid, there is nothing in the law that requires the state agency to adhere to the state employees’ bid costs going forward.

But this argument overlooks the fact that there is little to prevent contract costs from rising over time as well.

As we pointed out previously, the cost of contracting at the T appears to have risen even faster than in-house services there.  The T’s budget history appears to bear this out as well.  The budget shows contracted commuter rail expenses rising by 122.5 percent between fiscal 2001 and 2016, compared with a 75.6 percent increase in-house wages during that same period. The budget also shows “purchased (contracted) local service expenses” rising by 336.3 percent between fiscal 2001 and 2016.

One of the reasons that privatization can be expensive is that the private sector tends to pay higher salaries than the public sector for upper-level management positions, and lower wages than the public sector for lower-level positions.  So, allowing unfettered privatization of an already quasi-privatized organization such as the T would seem likely to exacerbate the problem of high executive salaries.

The Special Panel appears to have played political games with its report

I would venture to guess that at this point, some members of the Special Panel are wishing they hadn’t signed on to the product that the Panel ultimately delivered.  Whenever the final report of a panel or commission is a PowerPoint presentation, as was the case with the Special Panel’s report, it may be a tipoff that the product isn’t first-rate.

I would also venture to guess that the single-sentence (or half-sentence) critique of the Pacheco Law in the Panel’s report may have been stuck in there at the last-minute — maybe at the request of the man who commissioned the report in the first place — Governor Baker — who has made the Pacheco Law a political target of his at least as far back as his first run for governor in 2010.   Is it really a coincidence that Baker’s hand-picked commission came up with the very same recommendation about that particular law that Baker has espoused for years?

Politics and public policy obviously go hand in hand, and that’s as it should be.  But major policy decisions should not be based solely on politics.  Recent developments in the long-running saga of the Pacheco Law show how major policy decisions can, in fact, be based on ideologically biased analyses and unsupported statements from prestigious commissions.

MBTA commuter rail contracts rose by a greater percentage than in-house bus costs

While proponents of privatizing the MBTA point to the rising cost of in-house operations there, the cost to the agency of contracting out appears to have risen even faster.

The annual cost to the MBTA of contracting for commuter rail services has risen by 99.4 percent since 2000, compared with a 74.9 percent increase in the annual cost of the agency’s in-house bus operations, according to cost information we’ve compiled from public online sources (see below).

In our view, the rising cost of the commuter rail contracts since 2000 casts further doubt on the claims by the Pioneer Institute and other privatization proponents that contracting out for services will automatically save hundreds of millions of dollars at the T.

In case you missed it, the Pioneer Institute issued a report earlier this month that compared the actual cost of MBTA bus operations to a proposal based on bids from outside contractors to undertake those functions.

The Pioneer report concluded that had the state auditor allowed the planned privatization of the bus operations to go forward, the MBTA would have saved $450 million between 1997 and 2015. The report claimed those allegedly foregone savings were the fault of the Pacheco Law, which the auditor had cited in objecting to the outside contract proposal.

(As discussed below, the state auditor did not definitively reject the MBTA’s contract proposal, but rather asked the agency to resubmit its proposal after addressing concerns raised by the auditor about its cost calculations. The MBTA never did resubmit its proposal, but instead chose to sue the auditor in state superior court to reverse the auditor’s decision, and lost.)

The Pacheco Law requires state agencies seeking to privatize existing operations to show that bids from private contractors would be lower than a calculated cost of continuing to perform specified work by regular state employees “in the most cost-efficient manner.”  The state agencies must submit their calculations to the state auditor, who has the final say as to whether the functions can be privatized.

Largely due to unrelenting political pressure from the Pioneer Institute and other privatization advocates, the Legislature approved a 3-year freeze earlier this month on invoking the Pacheco Law with regard to privatizing MBTA functions.

Last week, we raised a number of concerns about the methodology of the Pioneer report, including criticizing its comparison of actual in-house MBTA costs to bids.  We argued that it’s meaningless to compare actual costs to hypothetical costs over a nearly 20-year period.

We think it would make more sense to compare actual in-house costs to actual contract costs over a multi-year period.  An obvious candidate for an evaluation of actual contracting costs appears to be commuter rail.

The MBTA has contracted out for commuter rail service since the 1980s, according to a state audit report on the agency. Beginning in 1987, Amtrak began providing commuter rail services to the T under a cost-plus-overhead and profit contract. In 1995, this was changed to a negotiated fixed price contract with a three-year term and two one-year options.

In May 2000, according to the audit report, the MBTA was given permission by the federal government to extend the Amtrak contract without bidding for an additional three years.  The total cost of the three-year contract extension, plus additional work that was in included in subsequent contracts, came to $168 million per year.

The Massachusetts Bay Commuter Rail Company (MBCR) subsequently won a competitive RFP process to operate the commuter rail system, starting in 2003.  The cost per year of that fixed-price contract was $217.4 million, which amounted to a 29.4 percent increase over the cost of the Amtrak contract three years earlier.  In that same period, the in-house cost of MBTA bus operations rose by just 12.8 percent, based on the Pioneer report’s figures (See chart below).

MBTA cost chart

In 2008, the MBTA granted MBCR a three-year contract extension at a cost of $246 million per year, which amounted to a 46.4 percent increase in commuter rail contracting costs to the MBTA since 2000.  In that same time, the in-house bus operations cost had risen 40.4 percent.

In 2011, MBCR received a final 2-year commuter-rail contract extension costing $288.5 million a year.  By that time, the MBTA’s cost of contracting for commuter rail had risen by 71.7 percent since 2000, whereas the in-house cost of MBTA bus operations had risen by 55.7 percent.

Finally, the MBTA signed an eight-year contract last year with Keolis Commuter Services at an annual cost of $335 million, according to The Boston Globe.  (Note: the headline on the linked Globe story appears to be wrong.)  As a result, by the time Keolis began operations last July, its annual contract cost was 99.4 percent higher to the MBTA than the Amtrak contract cost had been in 2000. In contrast, the cost of in-house bus operations at the MBTA was only 74.9 percent higher in 2014 than it had been in 2000.

By the way, it may be only a matter of time before the Keolis contract cost rises above the $335 million annual amount, given that the company is reportedly already losing money operating the MBTA commuter system.

The Pioneer report characterized the in-house cost of MBTA bus operations as “inordinately expensive,” and concluded that for that reason, replacing that in-house service with contracted work in 1997 would have saved hundreds of millions of dollars.  But the Pioneer report failed to consider the actual experience that the MBTA has had with contracting.

One might argue that you can’t legitimately compare the cost of commuter rail operations to bus operations.  But at the same time, we think our comparison shows that entering into contracts for services doesn’t guarantee that the costs won’t rise dramatically.  Since 1995, the commuter rail contracts have all been fixed-price contracts.

The Pioneer report misrepresented the state auditor’s objection to the MBTA’s 1997 privatization proposal as a “ban” on the award of the contracts

The Pioneer report referred in different places to the state auditor as having “banned” or “blocked” or “barred” the MBTA’s proposal to privatize the agency’s bus services in 1997.  According to the report, this adverse decision, which was based on the Pacheco Law, not only thwarted the MBTA’s attempts to save costs and improve quality of its bus service, but the MBTA never again attempted to privatize that service.

But the actual decision by then State Auditor Joseph DeNucci did not ban or block or bar the MBTA from privatizing its bus services.  Instead, DeNucci invited the MBTA to resubmit its proposal after addressing a number of issues raised in his decision letter and in a previous letter regarding the proposal.   Among those issues were alleged failures by the MBTA to support specific cost savings in its bid proposal and to provide measurable indicators of service quality as a baseline for comparison, such as information about on-time performance.

It does appear that the MBTA was not happy with the issues and inquiries DeNucci’s staff was raising about the MBTA’s privatization proposal.  According to DeNucci’s letter, the MBTA objected at one point to the auditor’s questions about how claimed savings in contracting out functions at garages in Charlestown and Quincy could be achieved since a third facility in Everett was providing services to support the two other garages.

When the auditor inquired as to how costs would be reduced at the Everett facility, the MBTA responded that the auditor’s inquiry was “of no significance,” and “beyond the scope” of the Pacheco Law.

DeNucci’s final letter to the MBTA stated the following:

Recommendation:
We believe that the MBTA should seriously address each of the above substantive issues disclosed
by our review. A carefully considered objective analysis of these matters, such as the Everett and
Arlington facilities, quality of service, changes and extra work, pension costs, 13(c), and bid price
changes, should be undertaken prior to privatization. A hasty, ill-considered, rather than a thorough
analysis, would not well serve the MBTA’s ridership and the taxpaying public.

Conclusion:
Therefore, pursuant to Section 55(a) of Chapter 7, MGL, this office hereby notifies the MBTA of
its objection to the awarding of these contracts. In accordance with Section 55(d), this objection is final
and binding on the MBTA, until such time as a revised certificate is submitted and approved by this
office. As always, this office is available to discuss our findings and provide further assistance to the
agency. (my emphasis)

Whatever reasons the MBTA had for not answering the auditor’s questions, the fact that those questions remained unanswered was the reason that the auditor objected to the MBTA’s privatization proposal.  Nevertheless, the auditor clearly invited the MBTA to try again and to resubmit a revised privatization plan that addressed the issues in the auditor’s review.

The Pioneer report implies that it is somehow the fault of the Pacheco Law and the state auditor that the MBTA never did revise or resubmit its proposal, and never again attempted to privatize its bus services.  That seems to us to overlook the MBTA’s responsibility for failing to comply with the auditor’s reasonable requests for information.

If you want someone in authority to grant a request you’ve made, and they say they may well grant it, but first they would like some more information about it, do you then say “it’s none of your business?”  That, in effect, appears to be what the MBTA told the auditor in the the bus privatization case.

It was the MBTA’s choice not to answer the auditor’s questions and subsequently to sue the auditor rather than resubmit its proposal.  It was also the MBTA’s choice never to submit another privatization proposal to the auditor for those services.

Now, not only is the Pioneer Institute continuing to complain about the auditor’s 1997 decision, we think the Institute has failed to make the case that the decision cost the taxpayers money over the intervening years.

And one more thing about the Pioneer report’s calculation of the alleged foregone savings 

As noted above, the Pioneer report’s figure of $450 million in lost savings from 1997 to the present, due to the Pacheco Law, is based on comparing the T’s actual in-house operating cost for bus service to an outside contract bid.  The report stated that as a means of comparison, it escalated the proposed contract bid between the years 2002 and 2013, the last date for which in-house cost data on the MBTA was available. The Pioneer report escalated the contract bid by the same percentage rate that it escalated the in-house cost each year.

But why did the Pioneer report not escalate the contract bid for the first five years of the comparison (from 1997 to 2002)? For no readily apparent reason, the report lists the same hourly contract rate for those first five years of its comparison. Yet, the report shows in-house MBTA costs rising by over 18 percent during that same initial five-year period. Had the report applied the same escalation rate to the contract bid as it did to the actual in-house costs throughout the comparison period (1997 to 2015), it would reduce the alleged $450 million in foregone savings by about $72 million.

If there was a reason that the Pioneer report assumed the bus contract costs would remain flat for the first five years, but would escalate after that, it isn’t stated in the report, as far as I could tell. But even if the report had assumed the same escalation rate throughout the comparison period, we would still reject the entire comparison of actual to proposed numbers.