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Letting the State Use the Money at Expense of Contractors

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By Lowell L. Kalapa

Although there has been quite a bit of discussion about privatizing certain public services, not much progress has been made on the subject as a result of substantial resistance from public employee unions.

Issues such as displacement of public workers, lesser benefits and lower compensation for contracted workers form the core of the arguments against privatizing certain public services. And while debate will continue, there is another issue that needs closer examination if indeed privatization of certain public services is ever going to happen.

Believe it or not, there are already certain public services which are privatized. These are services contracted for by government under the purchase of services laws. Usually these are services that government is not capable of performing because it does not have the trained staff or is a new service which would otherwise require the retraining of public employees.

These services occur largely in the health and human services areas and are usually performed by nonprofit organizations which are already providing similar, if not identical services. Each year, hundreds of contracts are put out to bid and RFP’s (or requests for proposals) are circulated asking service providers to describe the services that they would provide to meet the parameters of the contract. And each year, service providers submit proposals offering to provide those services for the amount that has been appropriated for those services.

And each year, there are successful bidders for these contracts who are then asked to start providing these services with the start of the new fiscal year on July 1st. However, more often than not it takes weeks, if not months, before the state agency gets around to signing a contract. And if there is no contract, the service provider cannot bill for the services and therefore cannot be paid for the services.

While there are a variety of reasons for the delay in getting contracts, more often than not they get lost in the shuffle on some bureaucrat’s desk or like many other contracts demand the review of the attorney general. Granted, it would seem that such close scrutiny might be appropriate for a brand new type of service or form of providing services, but more often than not the contract requirements and parameters are the same as the old contract.

So it seems incredulous that it should take months for a state agency to sign a contract for services that it wants provided on day one of the new fiscal year. Perhaps one motive for delaying the signing of the contract is that the state receives the services but is able to delay paying for those services. The result is that the state has the use of the money for that time period from the first day of services provided to the time it actually signs a contract.

The agency, on the other hand, still has to pay its workers for providing the services, pay the rent for facilities, and pay for the goods used in providing those services. In order to meet payroll and other expenses, the agency has no choice but to borrow the money, paying interest on the amount borrowed to pay for the services that the state wants.

Although there is a state law that provides first for prompt payment within 30 days, and for interest if the payment is late, but that law doesn’t apply if there is no contract. So holding up the contract benefits the state. They can get the services they want, but they don’t have to pay for them because there is no contract. Because the penalty provisions for lack of prompt payment don’t run until a bill has been submitted, the state could have as much as three to six months of services provided without having to pay any interest or penalties because the contract was not signed.

As a result, this inefficient practice is driving many nonprofit service providers to the wall. For those providers who do not have the means, it could mean having to close down operations. For those who need the services, it will mean having to do without those services. For those who can borrow the funds until the state contract is signed, it means a higher cost of doing business for which the state is not about to compensate them.

While privatization may be opposed by public employee unions because it may mean a loss of jobs for public employees, service providers ought to be just as wary if it means waiting around for months before being paid. This kind of government inefficiency is the reason why people don’t trust state government.

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