SB71

Report Title:

Personal Services Contracts

Description:

Replaces the "nature of the services" test of Konno v. County of Hawaii with a balancing test to encourage the use of private contractors to perform public services. Balances the benefits of privatization against its impact on the civil service system. Requires contractors to assume liability for acts or omissions.

THE SENATE	S.B. NO.	71
TWENTY-FIRST LEGISLATURE, 2001
STATE OF HAWAII

A BILL FOR AN ACT

RELATING TO PERSONAL SERVICES CONTRACTS.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that there is an immediate need to legislatively overturn the Hawaii supreme court's decision in Konno v. County of Hawaii by replacing the "nature of the services" test adopted in that case with a more flexible balancing test.

Although the legislature sought to address the concerns of the State and counties raised by the Konno decision in part IV of Act 230, Session Laws of Hawaii 1998, that Act did not go far enough in resolving those issues. Moreover, parts III (relating to managed competition) and IV of that Act will be repealed on June 30, 2001, pursuant to section 17 of Act 230. The legislature finds that more decisive legislative action is necessary to resolve the lingering concerns resulting from that decision.

Ever since the Hawaii supreme court's 1997 decision in Konno, many state and county contracts with the private sector that were validly entered into pursuant to state laws have been under a legal cloud created by that case. The court in that case voided a contract between the county of Hawaii and a private contractor for the operation of a county landfill as a violation of civil service laws and merit principles. The court held that the civil service, as defined by section 76-77, Hawaii Revised Statutes, encompasses those services that have been "customarily and historically" provided by civil servants.

While the court's holding applied to the county of Hawaii under the facts of that case, it may be read more broadly as applying to both state and county privatization contracts. The counties of Hawaii and Maui have settled some of the disputed contracts that were challenged as violating civil service and merit principles under Konno, but the impact of that decision is far from over if nothing is done to resolve the issues in that case. Indeed, the court itself has urged the legislature to resolve the policy issues raised in that case:

As we have discussed..., privatization involves two important, but potentially conflicting policy concerns. On the one hand, privatization purportedly can improve the efficiency of public services. On the other hand, privatization can interfere with the policies underlying our civil service, i.e., elimination of the spoils system and the encouragement of openness, merit, and independence. Given the importance of these policy concerns and the potential conflict between them, clear guidance is indispensable.

Konno v. County of Hawaii, 85 Haw. 61, 74, 937 P.2d 397, 410, order modifying decision on reconsideration, 85 Haw. 79, 937 P.2d 415 (1997) (emphasis added). The legislature believes that it is reasonable to assume that state privatization contracts may also be challenged under Konno, and that it is necessary to act proactively rather than to wait for those contracts to be similarly challenged, thereby avoiding future litigation.

In the event that a current government function can be managed more cost-effectively and efficiently by the private sector, the legislature finds that the State and counties should have the option to contract out that service to private sector entities, whether through private bidding, competitive bidding between the public sector agency currently responsible for the delivery of that service in competition with the private sector, or through some other alternative service delivery.

However, the court's adoption of the "nature of the services" test -- that the protection of the civil service laws extends to those services that have been customarily and historically provided by civil servants -- leaves the State and counties with little flexibility in seeking to implement ways to increase government efficiency. While the legislature finds that there is a need to protect civil service and merit principles, the court's decision effectively removed privatization as an option available to state and county governments in optimizing efficient service delivery.

Moreover, the removal of this option comes at a difficult time for the State, which is only now beginning to emerge from nearly a decade of economic stagnation, in which the state and county governments must be prepared to use all available tools at their disposal in order to help boost the economy. While contracting out government services to the private sector may not be appropriate in all cases, the court's decision in Konno impedes the State's economic recovery by both effectively removing the privatization option as well as calling into question all existing privatization contracts between the state or county governments and the private sector.

The purpose of this Act is therefore to replace the "nature of the services" test in Konno with a more flexible balancing test that weighs the benefits of privatization against its impact on the civil service system. Based on Colorado law, the legislature finds that a balancing approach will provide the State and counties with sufficient flexibility needed to pursue new management techniques in government service delivery to assist in Hawaii's economic recovery.

SECTION 2. Chapter 76, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"PART . CONTRACTS FOR PERSONAL SERVICES

§76-A Legislative findings and purpose. It is hereby declared to be the policy of this State to encourage the use of private contractors for personal services to achieve increased efficiency in the delivery of government services, without undermining the principles of the state civil service system requiring competence in state and county government and the avoidance of political patronage. The legislature recognizes that such contracting may result in variances from legislatively mandated pay scales and other employment practices that apply to the civil service system. In order to ensure that such privatization of government services does not subvert the policies underlying that system, the purpose of this part is to balance the benefits of privatization of personal services against its impact upon the civil service system as a whole. The legislature finds and declares that, in the use of private contractors for personal services, the dangers of arbitrary and capricious political action or patronage and the promotion of competence in the provision of government services are adequately safeguarded by existing laws on public procurement, public contracts, financial administration, employment practices, ethics in government, licensure, certification, open meetings, open records, and the provisions of this part. Recognizing that the ultimate beneficiaries of all government services are the citizens of the State of Hawaii, it is the intent of the legislature that privatization of government services not result in diminished quality in order to save money.

§76-B Definitions. As used in this part, unless the context otherwise requires:

"Contract" means any type of state or county agreement, regardless of what it may be called, for the acquisition of services.

"Director" means the state director of human resources development or the corresponding county director of the agency having jurisdiction over civil service in that county, as the context requires.

"Personal services" means services acquired for the State's or a county's direct benefit in its operations.

"Purchased services" means the acquisition of services which directly benefit specific groups or individuals in the public at large as defined by law, from public or private entities licensed, certified, or otherwise authorized by statute to provide such services.

"Services" means the furnishing of labor, time, or effort.

§76-C Personal services contracts implicating state or county civil service system; no separation of existing classified employees; cost comparison. (a) Except as provided in this part, and notwithstanding any other law to the contrary, nothing in chapters 76 and 77 and section 46-33, including the merit principles, the classification system, or customary or historical past practices, shall be deemed to prevent, restrict, diminish, condition, limit, or otherwise qualify the authority of a department or agency of the State or a county to enter into a contract for personal services with a private sector entity to obtain services that were customarily and historically performed by persons or positions in the civil service, or functionally attributed to a government agency or program.

(b) Contracts for personal services that create an independent contractor relationship and that are not authorized under section 76-D are nevertheless permissible under this section to achieve increased efficiency in the delivery of government services when the director determines that all of the following conditions are met:

(1) The contracting agency clearly demonstrates that the proposed contract will result in overall cost savings to the State or county and that the estimated savings will not be eliminated by contractor rate increases during the term of the contract, subject to the following:

(A) In comparing costs, there shall be included the State's or county's cost of providing the same service as proposed by a contractor. The State's or county's costs shall include the salaries and benefits of staff that would be needed and the cost of space, equipment, and material needed to perform the function;

(B) In comparing costs, there shall not be included the State's or county's indirect overhead costs unless the costs can be attributed solely to the function in question and would not exist if that function were not performed in state or county service. For this purpose, "indirect overhead costs" means the pro rata share of existing administrative salaries and benefits, rent, equipment costs, utilities, and materials;

(C) In comparing costs, there shall be included in the cost of a contractor providing a service any continuing state or county costs that would be directly associated with the contracted function. These continuing state or county costs shall include, but need not be limited to, those for inspection, supervision, and monitoring; and

(D) In comparing costs, there shall not be included any savings to the State or county attributable to lower health insurance benefits provided by the contractor;

(2) The contracting agency clearly demonstrates that the proposed contract will provide at least the same quality of services as that offered by the contracting agency;

(3) The contract includes specific provisions pertaining to the qualifications of the staff that will perform the work under the contract;

(4) The contract contains nondiscrimination provisions required by law to be included in state and county contracts;

(5) The contract contains provisions for termination by the State or county for breach of the contract by the contractor; and

(6) The potential economic advantage of contracting is not outweighed by the public's interest in having a particular function performed directly by state or county government. In assessing the public's interest, the director shall take into account:

(A) The consequences and potential mitigation of improper or failed performance by the contractor;

(B) Whether performance of the contract involves the improper delegation of a policy-making function; and

(C) The extent to which the contracting preserves the principles of competence in government and the avoidance of political patronage. For this purpose, there shall be considered the applicability of other laws, including those as enumerated in section 76-F, that aid in safeguarding the fundamental principles underlying the civil service system.

(c) The director shall not approve a personal services contract under this section if the contract would result directly or indirectly in the separation of certified employees from state or county service. However, nothing contained in this section shall be construed to prevent the separation of certified employees from state or county service pursuant to any other provision of law for reasons other than privatization.

§76-D Personal services contracts not implicating the civil service system. (a) Personal services contracts for employees or independent contractors are permissible when the functions contracted are otherwise performed by persons exempt from civil service by section 76-16.

(b) Personal services contracts that create an independent contractor relationship are permissible when the director determines that any of the following conditions are met:

(1) The contract is for an existing state or county program that has never been performed by employees in the civil service system, or the contract is for an existing state or county program that involves duties similar to duties currently or previously performed by classified employees but the contracted program is different in scope or policy objectives from the programs carried out by those classified employees. For the purposes of this paragraph, an "existing state or county program" is a state or county program that was in effect and performed by contract prior to the effective date of this part;

(2) The contract is for a new state or county program, and the legislature has statutorily authorized the performance of the program by independent contractors. A program is not a new state or county program within the meaning of this paragraph solely because it is performed at a new facility of location;

(3) The services contracted are not available within the civil service system, cannot be performed satisfactorily by employees of the civil service system, or are of such a highly specialized or technical nature that the necessary expert knowledge, experience, and ability are not available through the civil service system;

(4) The services are incidental to a contract for the purchase or lease of real or personal property. Contracts under this criterion, known as "service agreements", include, but are not limited to, agreements to service or maintain equipment, computers, or other products that are entered into in connection with their original lease or purchase;

(5) The legislative, administrative, or legal goals and purposes cannot be accomplished through the utilization of persons selected pursuant to the civil service system. Contracts are permissible under this criterion to protect against a conflict of interest or to ensure independent and unbiased findings in cases where there is a clear need for a different, outside perspective. These contracts include, but are not limited to, obtaining expert witnesses in litigation;

(6) The contractor will provide equipment, materials, facilities, or support services that could not feasibly be provided by the State or county in the location where the services are to be performed;

(7) The contractor will conduct training courses for which appropriately qualified civil service system instructors are not available; or

(8) The services are of an urgent, temporary, or occasional nature.

(c) Contracts for purchased services, as determined by the director, that create an independent contractor relationship are permissible.

§76-E Liability and immunity. (a) The contractor shall assume all liability arising from its own acts or omissions under all contracts entered into pursuant to this part.

(b) The sovereign immunity and governmental immunity of the contracting agency shall not extend to the contractor, except as otherwise provided by law. Neither the contractor nor the insurer of the contractor may plead the defense of sovereign immunity or governmental immunity in any action arising out of the performance of the contract.

§76-F Applicability of other laws. In addition to the other provisions of this part that are intended to safeguard the fundamental principles underlying the civil service system, personal services contracts entered into pursuant to this part are subject to all other applicable laws, which may include but are not necessarily limited to the following:

(1) State procurement laws, including the Hawaii public procurement code, chapter 103D;

(2) Laws governing fiscal administration by the state controller;

(3) Laws governing the management of state moneys by the state director of finance; and

(4) Laws establishing standards of conduct for public officers and employees, including chapter 84, part II.

§76-G Conflict of interest. (a) In addition to any other applicable laws, this section shall apply to contracts entered into pursuant to this part.

(b) The following individuals shall not solicit or accept, directly or indirectly, any personal benefit or promise of a benefit from an entity or a person negotiating, doing business with, or planning, within the individual's knowledge, to negotiate or do business with the contracting agency:

(1) A member of, or any other person or entity under contract with, any governmental body that exercises any functions or responsibilities in the review or approval of the undertaking or carrying out of the project, including but not limited to any employee of the contracting agency or any person serving as the monitor of a personal services contract; or

(2) A member of the immediate family of any individual described in paragraph (1).

(c) No individual described in subsection (b) shall use that person's position, influence, or information concerning such negotiations, business, or plans to benefit that person or another.

(d) A contractor shall agree that, at the time of contracting, the contractor has no interest and shall not acquire any interest, direct or indirect, that would conflict in any manner or degree with the performance of the contractor's services. The contractor shall further covenant that, in the performance of the contract, the contractor shall not employ any person having any such known interests.

§76-H Intergovernmental agreements excluded. This part shall not apply to contracts between the State and its political subdivisions or the government of the United States, or any combination thereof.

§76-I Review of individual contracts by the director; when not required. The director may approve the use of contracts without the necessity of reviewing the individual contracts, if the contracts are of the same type and if the director determines that those contracts meet the requirements of this part.

§76-J Annual report of contracts. Using forms supplied by the state director of human resources development, every state agency shall submit to the state director, and every county agency shall submit to the appropriate county director, a report no later than September 30 of each year setting forth the types and dollar values of contracts for services approved during the preceding fiscal year. The report shall include information on any changes to the types or number of classified positions in the state or county agency as a direct result of contracts entered into by the agency. The county directors shall submit copies of the county reports to the state director no later than October 30 of each year. As used in this section, "state or county agency" means every board, bureau, commission, department, institution, division, or section of state or county government, including institutions of higher education.

§76-K Procedures. The state director, with the assistance of the county directors, shall adopt procedures to implement the policies of this part. The procedures shall include, but not be limited to, provisions for consideration of contractors that utilize a preference for hiring veterans of military service and an annual certification process for ongoing personal services contracts. In adopting procedures governing the analysis of cost savings pursuant to section 76-C(b), the state director shall consider the recommendations of the office of planning.

§76-L Rules. The state director, with the assistance of the county directors, shall adopt rules pursuant to chapter 91 that are consistent with the policies of this part.

§76-M Contracts of six months or less permitted. Contracts for a term of six months or less that are not expected to recur on a regular basis are permissible and are not subject to this part."

SECTION 3. Privatization task force. (a) There is created a task force on the privatization of personal services ("task force") within the department of human resources development for administrative purposes. The task force shall consist of the following members:

(1) Three members to be appointed by the governor;

(2) Three members to be appointed by the governor from a list of names submitted by the president of the senate, one of whom shall be a member of the minority party;

(3) Three members to be appointed by the governor from a list of names submitted by the speaker of the house of representatives, one of whom shall be a member of the minority party; and

(4) One member from each of the following labor organizations, designated by that organization:

(i) The American Federation of State, County, and Municipal Employees;

(ii) The Hawaii Government Employees Association;

(iii) The Hawaii State Teachers Association;

(iv) The United Public Workers;

(v) The University of Hawaii Professional Assembly;

(vi) The State of Hawaii Organization of Police Officers; and

(vii) The Hawaii Fire Fighters Association.

(b) The governor shall convene the task force no later than January 1, 2002. The task force shall meet as often as necessary.

(c) The task force shall investigate and study the success and failures of public and private performance of public services in the State and the counties. The task force shall report to the legislature on the results of that investigation and study and may make recommendations on personal service contracts, privatization of certain state and county services, and appropriate legislation. The report shall include, but not be limited to, the following:

(1) Whether personal services contracts increase efficiency in the delivery of government services in Hawaii;

(2) Whether there were overall cost savings to the State or county during the term of any such contract;

(3) The number of private entities that provide the personal services contracted for by the State or county; and

(4) Whether state or county employees are permitted to submit a bid or proposal to provide personal services contracted for in the State or county, and whether those bids or proposals are made jointly or in cooperation with a private entity.

(d) In carrying out its duties under this section, the task force may request staff assistance from the department of human resources development. The task force may also employ, without regard to chapters 76 and 77, and at pleasure dismiss such persons as it finds necessary for the performance of its functions and fix their compensation.

(e) The members of the task force shall serve without compensation, but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties.

(f) The task force shall report its findings and recommendations, including any proposed legislation, to the legislature no later than twenty days before the convening of the regular session of 2003, at which time the task force shall cease to exist.

SECTION 4. It is the intent of this Act not to jeopardize the receipt of any federal aid nor to impair the obligation of the State or any agency thereof to the holders of any bond issued by the State or by any such agency, and to the extent, and only to the extent, necessary to effectuate this intent, the governor may modify the strict provisions of this Act, but shall promptly report any such modification with reasons therefor to the legislature at its next session thereafter for review by the legislature.

SECTION 5. In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 6. This Act shall take effect upon its approval.

INTRODUCED BY:	_____________________________