Privatization in State Government: Trends and Issues

very year, new privatization initiatives are being implemented in the states. To cite just a few recent examples, Florida Gov. Jeb Bush in August 2002 signed a seven-year, $280 million contract with a private firm to provide selected human resource services and save the state approximately $80 million during the contract period. In early 2003, New York Gov. George E. Pataki proposed to privatize certain state assets to lower the Medicaid cost and other government programs. Nevada Gov. Kenny Guinn reported to the Legislature that privatization of the state workers compensation system resulted in a reduction of nearly 800 positions in the state government and relieved the state of a $2 billion liability. He chose the state motor pool and printing operations as candidates for privatization. Virginia Gov. Mark R. Warner said he was planning to continue with public-private partnerships for education and transportation. Maine Gov. John Baldacci proposed privatizing wholesale and retail liquor operations for greater efficiency. Rationale for privatization is difficult to generalize. Former Michigan Gov. John Engler seemed to represent the prevailing opinion of state policymakers who initiate privatization when he said: It’s my belief that the private sector is often better at getting the job done than government. First, the competition promotes operating cost effectively, and the greater accountability helps ensure quality products and services. The private sector also excels at using innovative technology to solve problems, while government agencies do not always have the same latitude to innovate or take risks. Finally, the private sector has vast resources in computer technology, high volume proceeding equipment, and specialized personnel, plus the flexibility to assign them wherever they are needed most.1 Incumbent Michigan Gov. Jennifer Granholm in 2003 directed the state Department of Management and Budget to review all state contacts for cost overruns and potential cost savings. On the other hand opposition to privatization efforts has been persistent over the years. Since the early 1990s, AFL-CIO has led anti-privatization initiatives by saying, “Privatization/contracting must be stopped, the dismantling of our governments cannot be tolerated. ” Similarly, Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees (AFSCME), warns: For public employees and the people we serve, the price of privatization is high—and getting higher. For workers, privatization threatens job security, pay and benefits, working conditions and career opportunities. For the public, it means less quality, less access and less accountability. For local economies, because privatization is often non-union, it means fewer good jobs and a reduced tax base.2 The topic of privatization — outsourcing or contracting — seems to have re-emerged recently as a controversial management issue for state policymakers. Governors, agency directors and legislators in many states are asking for either further promotion or curtailment of such public-private partnership cooperation to deal with the faltering economy and dwindling revenues in the past two to three years. There appears to be no consensus as to the effectiveness of privatization in part due to the lack of empirical data as well as the complexity of the issue. This article reports findings of a recent national survey of selected agency directors in the 50 state governments, offers lessons learned from the previous experiences and raises key issues for future privatization activities.