Editorial: Fix formula for privatization

Source: Lansing State Journal, February 19, 2017

The State of Michigan has nearly 1,700 privatization contracts. Undoubtedly, many of them are beneficial for taxpayers and for government. But not all privatization makes sense, which is why there is a process by which the Civil Service Commission determines whether privatization will result in significant savings. What happens, however, if the state’s system of vetting privatization opportunities relies on faulty math? In the case of several Michigan contracts, the projected savings don’t even come close to the actual realized savings. A Lansing State Journal analysis of 23 privatization deals approved last year showed the state saved nearly $61 million less than projected. That’s because the current formula is flawed, allowing agencies to include savings on retirement debt. The catch, however, is that debt must be paid whether the jobs remain with the state or move to a contractor. … The cost of the state’s pension and health care liabilities is a problem independent of privatization of services. But the fact that current calculations tip the scales in favor of privatization is troubling. The state, and Civil Service Commission by proxy, must make decisions in the best interests of taxpayers on the issue of privatization. That review must begin with a formula that makes sense – one that acknowledges long-term retirement costs don’t go away when state jobs do.  Privatization is not bad. Neither are state-worker jobs. It’s incumbent on the state to use clear, defensible metrics to determine which option is best in each circumstance.  The current formula is broken. Michigan must fix it.

Related:

Michigan’s privatization savings overstated
Source: Justin A. Hinkley, Lansing State Journal, February 17, 2017

State guidelines on privatization allow agencies to count savings on retirement debt that has to be paid whether or not the jobs are outsourced. If that debt were not factored in, a State Journal analysis showed three contracts OK’d by the state Civil Service Commission last year — worth more than $92 million — would never have been approved because they didn’t actually save enough money to meet the commission’s threshold for privatization. Those contracts affected 265 state-worker jobs. The State Journal analysis was based on what Roland Zullo, a University of Michigan researcher working with state-employee unions on this issue, said is the more accurate calculation.

Using Zullo’s method, the State Journal analysis showed the 23 privatization deals approved last year saved nearly $61 million less than what state officials reported, though most contracts still would have saved enough taxpayer money to be approved. No state employees were laid off through privatization last year; many of the 23 deals approved last year were re-analyses of previously approved outsourcing. That’s because, when Civil Service compares the cost of state employees against the cost of a potential contract, it includes on the state employees’ tab what the government pays into its employee pension system, which was closed to new hires starting in 1997. However, as the Senate Fiscal Agency explicitly warned in a 2013 white paper, the debt to that system “must be funded regardless of whether employees remain directly hired by State or local government, or privatization occurs.” Currently, Civil Service guidelines claim privatization saves departments about 50 cents of retirement costs for every $1 in state employee wages. Zullo says the true savings is only 9 cents on the dollar, the amount the state chips in to employees’ 401(k) plans and retiree health care. Only one employee affected by the 23 deals approved in 2016 was on a pension plan. …

Opinion: Privatization does not Work
Source: Ron Bieber, Michigan AFL-CIO President, Detroit News, March 9, 2016

Six years ago, Republicans swept into Lansing after promising to “make government run like a business.” It was a catchy slogan. The trouble is, we as voters didn’t do such a great job asking hard questions about what running government like a business actually meant. For Gov. Rick Snyder and the Republican-controlled Legislature, it meant privatizing vital public services in our schools, prisons and a state-run home for veterans. The goal of privatization, we were told, was to save taxpayers’ money. The truth is the state’s two biggest experiments with privatization have been huge failures.

First came the prison food contract with Aramark. The trouble started when the Legislature rigged the bidding process by giving Aramark a do-over after its initial bid came in too high, allowing it to low-ball competitors. The state approved Aramark’s contract even though it had a terrible track record — including a prison riot in Kentucky and rampant contract violations in Florida. Then came a steady stream of horrible news. There were persistent food shortages, maggots repeatedly found in food, drug smuggling, sexual contact with inmates and even a murder-for-hire plot. …

What happened at the Grand Rapids Home for Veterans was even worse. In 2011, the governor and Legislature privatized 150 nursing assistant jobs and awarded the contract to J2S, a company founded by two brothers — Tim and Chris Frain — who had no background in health care. The complaints of chronic staff shortages started immediately. One former J2S employee told a local TV station “there definitely were times where a member would sit in their urine or feces for extended periods of time because we were shorthanded.” A scathing report from the auditor general last month found employees routinely failed to respond to alarm checks, and J2S failed to investigate complaints of abuse and neglect. …

Unfortunately, Lansing Republicans might not have learned their lesson yet. Right now lawmakers are considering legislation to privatize mental health services, making it harder for people to get access to needed treatments and medications. This would be a big handout to insurance companies, and it’s another privatization disaster waiting to happen.