Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2001

State of Hawaii

Sir:

Your Committee on Labor and Public Employment, to which was referred H.B. No. 620 entitled:

begs leave to report as follows:

The purpose of this bill is to allow for the privatization of government services, including the procurement of goods and construction.

Specifically, this bill permits any state or county official in whom appropriate authority is vested by law to contract with a private entity financed by public funds, to obtain services from a private entity when there is a reasonable basis to believe that the service can be provided at a lower cost and in quality that is equivalent to or better than that which could be provided by a government agency.

In determining whether or not to privatize a government service, this bill requires the state or county official to consider whether contracting with the private entity will jeopardize the government's ability to provide the service if the private entity fails to perform, or the contract becomes unprofitable or impossible for a private entity to perform.

In addition, this bill seeks to resolve the uncertainty created by the Hawaii Supreme Court's decision in Konno v. County of Hawaii, 85 Haw. 61 (1997), regarding the government's ability to privatize government services, by specifying that nothing shall be deemed to prevent, restrict, or otherwise qualify the authority of the State or a county to enter into a contract with a private entity for the provision of services that customarily or historically may have been performed by persons or positions in the civil service, or functionally attributed to a government agency or program.

Your Committee received testimony in favor of this measure from the state Director of Finance, the Director of Health, the Department of Accounting and General Services, the Mayor of the County of Hawaii, the Corporation Counsel of the County of Maui, the City and County of Honolulu, and the Hawaii Chamber of Commerce. Testimony in opposition to the measure was received from the Hawaii Government Employees Association and United Public Workers.

Your Committee agrees that privatization, while not appropriate for all government services, may be a useful tool in limiting the size of government and increasing efficiency and cost-effectiveness in the delivery of government services, while retaining or exceeding the quality of those services by the private sector. Your Committee further finds that the Konno decision has potentially limited the ability of the State and county governments to contract out government services to the private sector.

Your Committee finds that the areas of privatization, civil service, collective bargaining, and related issues raised by the Konno decision have already been addressed in the Legislative Reference Bureau's 1997 study on privatization. That study, which your Committee finds to have been comprehensive and thorough in its review, found that in addition for the need to resolve the issues raised by Konno, there was an equally pressing need to ensure that certain criteria were met before a public agency entered into a contract with a private vendor, in order to ensure the success of that venture. The first question to be asked before contracting out a government service to the private sector is whether or not that service is in fact an appropriate candidate for privatization.

In particular, the Bureau found that other jurisdictions had adopted specific criteria, first to make an initial determination as to the appropriateness of privatizing a particular government function, and, if it was found that the service could in fact be delivered more cost effectively by the private sector at the same or better quality, a determination as to ways to ensure the long-term success of that contract. For example, the Bureau's study suggested the need to review proposed contracts with private vendors for various criteria relating to cost savings, cost comparisons, quality of services, qualifications of workers, nondiscrimination provisions, and other areas. Contracts should also be monitored to ensure compliance with certain benchmarks to retain a degree of accountability and control over the private entity, and language should be included to provide for the termination of the contract if the private entity failed to achieve those benchmarks.

For example, the Bureau noted that a 1989 performance audit of state services in Colorado conducted by the Colorado Auditor included a recommendation that a "privatization profile" be used in determining whether a particular service should or should not be privatized. Specifically, the Bureau noted on page 69 of its report: "Such a determination should involve an objective and systematic decision making review process for each service or activity at issue, which may give agencies a better overall view of the strengths and weaknesses of the proposed privatization in a standardized format…. Generally, before making the decision to privatize a government function, agencies are asked to answer a series of questions based on criteria related to privatization, rate each criteria, and then proceed to a detailed cost analysis if the profile shows that the service is a good candidate for privatization."

Your Committee finds that, far from including criteria to determine the appropriateness of a service for contracting out, the implementation of privatization as provided in this bill leaves an enormous degree of discretion to individual state and county officials, without providing sufficient safeguards to ensure that it will be carried out successfully. Rather, your Committee finds that it would be preferable to implement a process of managed competition, also known as public-private competition, to ensure the most cost-effective delivery of government services that are appropriate to be contracted out.

The managed competition process, which was developed by the committee established for this purpose by section 6 of Act 230, Session Laws of Hawaii 1998, and set forth in H.B. No. 172 (2001), allows government agencies to compete with the private sector in bidding on contracts for the delivery of government services. In particular, the managed process:

Although your Committee is satisfied that a managed competition process as provided in H.B. No. 172 will provide an appropriate and effective way to increase cost-effectiveness in the delivery of government services, your Committee is nevertheless concerned about potential delays in the implementation of the single, uniform process for managed competition.

Your Committee is particularly concerned about the lack of a "hammer" or legal consequence in the bill if the state and county directors of finance, who are responsible for establishing the uniform system for identifying and quantifying the costs of providing the government services in-house, fail to implement that system within a reasonable period of time. Your Committee finds that there is a need to ensure accountability by the establishment of a timeline for implementation of the managed competition process.

Accordingly, your Committee has amended this bill by:

1. Inserting the contents of H.B. No. 172, relating to the managed competition process, including a new chapter "A" in part II of the bill;
2. Designating the privatization provisions of this bill as a new chapter "B" in part III of the bill;

1. The managed competition provisions of chapter "A" (section 2 of the bill, which takes effect upon approval) are repealed on January 1, 2003;
2. The privatization provisions of chapter "B" (section 7 of the bill, which takes effect on January 1, 2003) are not to be repealed; and
3. Section 6 of this bill is repealed, and section 89-19, Hawaii Revised Statutes, is reenacted in the form in which it read on the day before the approval of this bill;

1. The managed competition provisions (chapter "A", section 2 of the bill) are not to be repealed; and
2. The privatization provisions (chapter "B") are repealed January 2, 2003; and

(5) Making technical, nonsubstantive changes.

As affirmed by the record of votes of the members of your Committee on Labor and Public Employment that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 620, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 620, H.D. 1, and be referred to the Committee on Finance.