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How One State Protects Taxpayers From Privatization Pitfalls
(Photo: Josh Kenzer / Flickr)

How One State Protects Taxpayers From Privatization Pitfalls

(Photo: Josh Kenzer / Flickr)

Arguments for privatization too often hide its true costs.

One hundred years ago, New York state senator George Washington Plunkitt, a member of the Tammany Hall gang, became wealthy through what he called “honest graft” – or, what honest people would call plundering the public purse. Eventually, when the facts came out, the public was enraged and insisted on good government laws to put an end to the Plunkittocracy.

Today, state and federal “sunshine” laws give the public important anticorruption protection, such as open meetings acts, freedom of information acts and civil service regulations that require government decisions to hire or fire be based on facts and merit – not “honest” graft.

This December, Massachusetts can celebrate the 20th anniversary of another important sunshine law – the Pacheco-Menard Law. This law protects the state treasury and infrastructure – and the people of Massachusetts – from looting. But critics of the law treat the decision about whether public services or infrastructure should be private or public as if it were a choice of paper or plastic, or a team sport where you cheer on Team Privatization.

The Pacheco-Menard law is based on facts that will ensure that the “citizens of the commonwealth receive high quality public services at low cost, with due regard for the taxpayers of the commonwealth and the needs of public and private workers.” It creates an open process with fair standards to guide decision-making and ensure that privatization does not cost more. It stops destructive practices by contractors, such as lowering pay and benefits or moving jobs to other states or countries. While it may look as if money has been saved, the reality is that the state loses tax revenue, while the displaced workers draw unemployment and other benefits. The result is less money in the state treasury, no savings and greater costs.

The costs to the public of unemployment and retirement benefits and the monitoring and administering of contract performance add up, but they are often not included in decisions to privatize. The Pacheco law forbids hiding these costs. Before a bid can be accepted, a comprehensive written analysis of the contract cost must be prepared, and the bid must include “the costs of transition from public to private operation.” Other public protections include preventing contractors from making lowball bids based on cutting employee wages and benefits and requiring contractors to submit quarterly payroll records to show whether the contractor has underpaid its workers.

Private and Public Sector Accountability

Hard lessons led to some things being provided by the public sector, while others are provided by the private sector. These decisions come down to accountability, but different types of accountability are needed for the private and public sectors.

Private sector accountability is based on robust market competition that leads to better goods and services at lower cost. Services and infrastructure now provided by state and local government are the result of hard experience with poor service and graft. There is no reason to believe that accountability and quality problems will not recur if public services are privatized.

One privatization advocate claims that “Private firms have access to two federal subsidies that are not available to public agencies: tax deductions for accelerated depreciation on capital equipment and interest payments on borrowed funds” and that “under certain circumstances, the combined effect of these can enable a firm to deliver better services at a lower cost than a public agency can.”

But, a tax deduction to the private sector is a subsidy that shifts costs to the public and makes less money available for public needs. Moreover, if private contractors need a government handout to do the same job that the public sector does without a tax deduction, that is an admission that the private sector costs more.

It is possible to dream up many theories about why the private sector might do a better job than the public sector. But in the real world, facts are facts, and a law that promotes good decision-making is definitely in the public interest.

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