NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

The LFC is only preparing FIRs on bills referred to the Senate Finance Committee, the Senate Ways and Means Committee, the House Appropriations and Finance Committee and the House Taxation and Revenue Committee. The chief clerks are responsible for preparing and issuing all other bill analyses.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Room 416 of the State Capitol Building.

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files; General Services Department (GSD); Energy Minerals and Natural Resources Department (EMNRD), Department of Public Safety (DPS); Department of Finance and Administration (DFA); State Department of Public Education (SDE); and Children Youth and Families Department (CYFD)

SUMMARY

Synopsis of Bill

Senate Bill 53 provides requirements and conditions for privatization efforts if a state agency proposes to privatize any of its functions. The bill also requires legislative approval prior to privatizing a function. The bill also provides that an agency shall not consider for privatization: (1) any function that consists of planning or making public policy; (2) a function that directly or significantly affects the investigation or prosecution of a criminal act; (3) a function that makes judgements or recommendations relative to the fiscal policy of the state; and (4) a function that regulates a business or occupation or profession.

Significant Issues

The bill requires agencies:

• •perform a cost-benefit analysis if considering to privatize and demonstrate that the private sector can provide the function for an aggregate five percent less than the agency; and



• •report its findings to the Department of Finance and Administration (DFA) and the Legislative Finance Committee (LFC) by October 1 preceding a regular session of the legislature.

The bill prohibits an agency from delegating its authority or responsibility and requires the DFA and LFC include their recommendations in the agency's budget.

Requiring a cost benefit analysis will ensure that agencies do not spend more privatizing a function than it would cost if the agency performed the function itself. The analysis must include: (1) potential one-time savings and the potential annual recurring savings from privatization; (2) the impact of possible reduced services on citizens of the state; and (3) the potential market for privatization, etc.

The Council of State Governments (CSG) issued a report on Privatization in State Government which indicated that a systematic approach contributes to success. The CSG survey indicates that states should compare costs through a systematic process to build trust. The CSG survey suggests that currently seventy one percent (71%) of states do not use a standard decision-making process, overall fifty five percent (55%) of state respondents predict that privatization of government services will increase in next five years and states need to have a standard decision-making process and fair policies to compare state employee and private contractor costs. Virginia, Michigan and Kansas are among the few states that have taken a systemic approach to privatizing. According to Mary Kornwolf, program coordinator of the Virginia Government Employees Association, " if this (competitive government) is the wave of the future, Virginia is doing it the right way"

A 1997 study by the U.S. Government Accounting Office (GAO) concludes that the most successful efforts use a standard implementation structure and a systematic process to select government activities to privatize. A standard decision-making process typically provides criteria for selecting privatization candidates, methods to determine and compare costs, and procedures for monitoring the performance of private providers.

Senate Bill 53 provides the opportunity for New Mexico state government to implement a systematic decision-making process to this privatization notion. For example, certain construction industry functions were most recently privatized to achieve cost savings; however, instead of cost reduction the Regulation and Licensing Department requested appropriation increases. The privatized activity is costing approximately $221.1 more than previously state run program. Additionally, the state is also losing indeterminate amounts of interest income earnings. Another example of privatization that did not achieve cost savings is: last year Florida spent approximately $4.5 million of taxpayer dollars to collect $160,000 to locate parents, mostly fathers, who were not making child support payments.

FISCAL IMPLICATIONS

Agencies that adequately demonstrate that privatization has the potential to reduce operational costs by five percent would result in a five percent savings to the general fund. Implementation of this bill would encourage agency personnel to become cost conscious, which may result in a reduction in costs.

According to the DFA, the market will drive the cost of services which may mean higher costs in future years. DFA also includes in their analysis that the workload of the budget analysts would increase because of the need to review proposals to make budget recommendations, but would have no fiscal impact on DFA.

ADMINISTRATIVE IMPLICATIONS

Requiring a cost benefit analysis for the proposed privatized function, and supervision to ensure that the function continues as anticipated and the quality of services to the public is not diminished may require additional administrative resources.

According to the CYFD, the bill would significantly impact executive discretion and would require agencies to perform cost-benefit analysis before privatizing. If privatizing approval is not granted, the CYFD services would be impacted as would staff.

According to the GSD the bill may place an unwarranted and undesirable statutory restraint on the powers of the executive branch to carry out its programs.

TECHNICAL ISSUES

The effective date may be too soon for both DFA and LFC to develop guidelines for the agency to follow in conducting cost-benefit analysis. An alternative would be to conduct a pilot project on one agency before it is fully implemented.

A definition for "supplantation" with regard to privatization is needed so that the bill excludes government contracts that do not involve the reduction in the number of full-time state employees.

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