Although the 2009 budget drama has subsided, the 2010 budget is just around the corner. It promises to be no less dramatic. While legislators work to break the snowballing budget cycle, they should consider new innovations such as privatization of some California infrastructure and functions.
For proof of success, look no further than The Reason Foundation’s recent findings in its Annual Privatization Report, which presents alternatives to the age-old battle over whether to raise taxes or cut spending. Instead, governments have the opportunity to reduce liabilities while modernizing and streamlining procurement practices, creating more transparent and simplified processes, and encouraging a new level of competitiveness among local businesses.
While California has barely dipped its toe into privatizing waters, many other states have jumped in with both feet.
One good example is West Virginia, whose privatization of its workers’ compensation insurance program. The move was considered a success in terms of handling of claims, lowering rates, and reducing the state’s liabilities.
Beginning in 2005, West Virginia spun off its Workers’ Compensation Commission to a private insurance carrier, BrickStreet Insurance. Three years later, it opened the market to competition, resulting in new bids from more than 140 different insurance companies.
Within two years of privatization, West Virginia reduced its outstanding unfunded liabilities from $3.2 billion to $1.9 billion. This cut has potentially accelerated payoff of the state’s liabilities by as much as two decades.
Meanwhile, workers’ compensation rates declined an average of 30 percent since privatization, saving employers more than $150 million annually. Protested claims also dropped more than 80 percent within two years.
Tennessee outsourced its child-support enforcement services for Shelby County to Maximus, Inc. The five-year, $49 million deal is reportedly the largest child-support services contract awarded to a private company in the nation. Maximus will handle all aspects of child-support services, including locating absent parents, establishing paternity, carrying out support and medical support orders, processing interstate cases, and providing customer service.
The report details many other state programs that have been privatized, detailing not only successes, but the political challenges state legislators face. Democrats and state workers’ unions have not widely embraced the idea of privatization, which represents a fundamental shift in the approach to economic policy.
California Take Note
The report references a recent report by the American Legislative Exchange Council (ALEC), titled Rich States, Poor States, which includes a special focus on California and its current fiscal crisis, offering an outside perspective with stark clarity. Specifically, the report offers a side-by-side analysis of California and Texas economic policies and the states’ respective outcomes.
What is notable in the comparison of these two large states are the vastly different results. In recent years, Texas’ economic policies have out-performed California’s even in the current economic downturn. The ALEC report compared the states in six general categories — taxes on labor income, taxes on capital income, taxes on consumption, overall tax environment, government spending policies, and government regulatory policies. Texas outperformed California in all six areas, and according to the report, the Longhorn state is a key example of how not only privatization can work, but how taxation alone does not.
California has entertained the idea of public-private partnerships for its infrastructure construction and maintenance. Legislation was passed in early 2009 authorizing an unlimited number of PPP projects for roads, courthouses, and prisons through 2017 and up to 15 transportation design-build projects through 2014.
The Public Infrastructure Advisory Commission was created to identify potential PPP projects and research best practices and to provide advisory and procurement services to Caltrans and regional transportation authorities. However, these efforts have yet to produce results due to litigation initiated by state workers’ unions.
Examples in the report, such as West Virginia and Tennessee, show that privatization in other areas of government can greatly ease state general fund burdens. Moreover, these case studies highlight various roadblocks faced by other states that face a steep learning curve in the world of privatization and opposition from legislators and labor unions.
As other states continue to adopt and perfect the practice of privatization, they will gain a competitive edge over California. Business opportunities in other states through government contracts and favorable tax policies coupled with an overall lower cost-of-living disadvantage California in the struggle for economic growth. The budget crisis is likely to worsen as the tax revenue California relies on remains static or falls. Perhaps then the notion of privatization will transcend politics and offer economic stability and competition.