The Price and Pitfalls of Privatization

Sunday, June 24, 2012 at 4:00 PM by

Does New Jersey experience offer lessons for Wisconsin?

A column by Paul Krugman in the June 22nd New York Times offers some interesting perspectives on the growing push to privatize public services.  Although the impetus for the column (Prisons, Privatization, Patronage) is a recent series of articles on the effects of privatizing halfway houses in New Jersey, Krugman’s commentary is worth pondering as Wisconsin moves closer to fully privatizing administration of the Wisconsin Works (W-2) program. (See our June 8 blog post.)

Although I don’t think all of the Krugman critique of the New Jersey privatization and “halfway house hell” is relevant for W-2, some of it strikes me as very pertinent – including his argument that privatization often has little to do with cost-savings; instead it may be about deferring or shifting costs. As the column notes:

“….privatization can serve as a stealth form of government borrowing, in which governments avoid recording upfront expenses (or even raise money by selling existing facilities) while raising their long-run costs in ways taxpayers can’t see. We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.”

In some cases the economic disadvantages of privatization are clear cut. For example, a WI Legislative Audit Bureau report in 2009 concluded that the state DOT could have saved $1.2 million by doing more of its engineering work internally.  In other cases, such as the New Jersey halfway houses, the higher price to contracting out the work can be less obvious and may require hindsight. Although the full costs of privatizing social services are sometimes difficult to identify in advance, we can learn from the track record in states such as Indiana and Texas, where contracting out the administration of public benefits had very negative consequences for program applicants and taxpayers. (See Jessica VanEgeren’s Capital Times article.)

As we noted in a June 8th blog post, the Department of Children and Families (DCF) has been moving quickly to implement a regional plan for W-2 administration, and a number of counties are very concerned that the DCF plan would preclude them from continuing to administer W-2.  Although not all counties administer W-2, many of those that do want to maintain that role because they might have to pay much more for other human services if W-2 isn’t implemented well.  In addition, ending their W-2 contracts and revenue may make it difficult for counties to continue related services, such as their job centers.

One argument for the DCF plan is that it should save money by consolidating administrative services that are now divided among different counties or smaller private entities. I think there’s probably some validity to that argument – just as consolidating Wisconsin’s 400+ school districts into a handful of regional districts could reduce total administrative spending; however, consolidation reduces local accountability and the ability to adjust to local conditions, and privatization may cost taxpayers more in the long run.

Our hope is that DCF and the Governor will take time to allow a more deliberative public process to consider all the potential costs and benefits of consolidating W-2 administration and turning all of it over to private entities.

To read more about a “good government checklist” of questions that ought to asked before contracting out government functions, see our June 2011 blog post.  Although it doesn’t appear that DCF is going to pause in its rush to change the administration of W-2, there will be ongoing debates about privatization, and all of us need to insist that the full costs are being considered and the right questions are being asked and answered.

Jon Peacock

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