Legislators must allow for more privatization


By Cliff Slater


Last year’s Hawaii Supreme Court Konno decision halting privatization efforts must be nullified by legislators this year. It is the only way we are going to revitalize our economy. Here’s why.

At the time the Clinton Administration was trying to introduce a National Health Care program, humorist P.J. O’Rourke warned us, "If you think health care is expensive now, just wait ‘til it’s free!"

He was saying that when government provides a service that is free, like residential garbage collection, for example, we taxpayers stop eyeing costs which then get out of control. Then legislators raise taxes to pay for these cost increases. This has led to the ratcheting up of government that we have experienced in Hawaii for the last 20 years.

Were state and county governments spending at the same rate as 20 years ago, allowing for inflation and population growth, we would today have an astounding $1 billion annual surplus. (1) Instead, we are scrambling to make up shortfalls.

It is average Hawaii families¾ those with incomes of $75,000 or less¾ who pay 75-80% of all Hawaii taxes. (2) They need to see costs back under control if they are ever to get tax relief. Privatization will do that by using competition between private and public operators to lower costs.

We forget that much of what today we take for granted as government services, from schools to garbage collection to bus service were all once privately provided. Socializing these services then became fashionable until about 25 years ago when some Europeans proposed reprivatizing and introducing competition to help curb government growth.

Reprivatizations began in the 1970’s and then became a torrent in the 1980’s and 1990’s. So far, around the world, over $800 billion dollars of government enterprises have been reprivatized¾ at great relief to taxpayers. A recent World Bank study called, The Privatization Dividend, spells out these successes. (3)

In the United States, prisons, waste treatment plants, airports, among many others, are now being privatized with great savings to taxpayers. These successes are well documented in a recent U.S. General Accounting Office study. (4)

Here in Hawaii we had begun making some small headway in privatization with landfills and garbage collection and other services. They were producing significant savings. And then early last year our Supreme Court issued their Konno decision. (5)

The Cayetano Administration complained, "it has thrown up a roadblock to a more effective, efficient and less costly government." All our mayors have concurred with that, as has our Legislative Reference Bureau. (6) However, legislators can easily nullify the Konno problem by passing appropriate legislation during this session.

With Konno out of the way, we can adopt the principles used so successfully in Indianapolis and supported by their union leaders: No layoffs of workers, incentive pay and the firing of ineffective supervisors. Workforce reductions will come through voluntary early retirement and attrition. (7)

So how does privatization produce results? It is not necessarily from paying lower wages. As the LRB study says, "State privatization case studies ... (show) ... private companies can provide services at lower costs without lowering wages."

You get results from having the right tools and working smarter with quality managers.

First, you introduce business accounting and management information systems¾ so that managers can know what services really cost. (8) As Mayor Goldsmith of Indianapolis put it, "Government accounting systems do prevent people from stealing money, but they do nothing to prevent people from wasting it." And whether people are stealing it or wasting it, it is all money out of taxpayers’ pockets.

Some examples of working smarter are:

  • America Works, Inc. winning welfare work all over the U.S. by charging governments a lump sum of $5,000 per welfare client. But they are only paid when they successfully place that client in a job where they stay for at least six months. (9)
  • Indianapolis changing its contracts for mowing grass in city parks by simply specifying that grass must never be longer than 4". Contractors were able to bid less by planning to mow frequently at rainy times but less during dry spells¾ with better results and at lower costs for taxpayers. (10)
  • CCA, the world’s largest private prison operator, says that overcrowding stresses both inmates and guards and thus drives up costs. So it designs prisons to minimize guards and maximize space. That’s one reason our Hawaii inmates prefer private prisons¾ even when they are in Texas¾ to the deplorable prison conditions here in Hawaii. (11)

We cannot reduce taxes without downsizing government and we cannot do that without privatizing. There are no other alternatives. That is why we must pass the legislation to nullify Konno this session.



(1) I have used $1 billion in the text despite the much larger $2.0 billion and $1.4 billion calculations shown below. The smaller figure allows for any possible objections to be brought up by opponents of this view.

I had asked the Tax Foundation of Hawaii to verify that my $2 billion estimate was correct which they kindly agreed to do. They also approached the problem using TPI (total personal income) and came up with a $1.4 billion difference.

The following tables, supplied by the Tax Foundation of Hawaii, compare Hawaii’s 1974 and 1994 aggregate spending for the State and Counties:


Memo from Tax Foundation of Hawaii:



State Operating Expenditures ($1,000s)




County Operating Expenditures ($1,000s)




Total state and county expenses ($1,000s)



Total resident population




Expenditures per capita



Honolulu CPI-U



Expenditures per capita in $1994



$ Difference


Multiplied by 1994 population


A) 1996 Government in Hawaii (revised totals)

(B) 1989 State Data Book (revised estimate)

Just to give you another perspective, many public finance experts gauge the level of government spending as a percentage of total personal income (TPI) or gross state product. From the 1996 State Data Book:



Using TPI and per capita personal inc.



State and county expenditures as

Percentage of per capita personal inc.



Difference in percentage points




Difference in 1994 dollars


This indicator is complicated by fact that federal transfers should be deducted to reflect an accurate state and county only expenditure estimate.

A similar factor can be obtained for GSP but Tax Foundation doesn't have direct access to DBEDT's GSP accounts for 1994;



GSP (in millions)





State and local government (in millions)




Percentage of GSP spent for

State and local government



(C) Hawaii's Income and Expenditure Accounts 1958-1983 (1972 dollars)

(D) 1997 State Data Book, page 362; and Quarterly Statistical & Economic Report, June 1997 Tax Foundation of Hawaii: 4/9/98



(2) Estimation by the author from two sources:


B) Miklius, Walter, James Moncur, & Ping Sun Leung. Distribution of State and Local Tax Burden by Income Class. 1990 State Tax Review Commission. Table 9. Taxes paid by income class as percent of income.

(3) The Privatization Dividend. World Bank Note No. 66. 1996.

The study showed significant increases among newly private firms in profitability, output per employee, capital spending and employment. p. 4.

(4) Privatization: Lessons Learned by State and Local Governments. General Accounting Office. 1997.

The GAO report details the following:

  • Veterans Home savings of 57% from private operation. (GAO p. 27.)
  • State maintenance of autos provided a 40% savings. (GAO p. 27.)
  • Social services revenue management privatization showed better service and 30 percent savings. (GAO p. 27.)
  • Private provision of physical security at military facilities showed a 70 percent savings. (GAO p. 29.)
  • Child support enforcement showed a 60 percent lower cost of collection and better service. (GAO p. 31.)
  • Outsourcing wastewater treatment showed 42% savings and improved quality. (GAO p. 31.)
  • Street maintenance showed a 30 percent savings over government operation. (GAO p. 31.)
  • Privatizing audio-visual services provided a 54 percent savings and eliminated backlogs. (GAO p. 31.)
  • Vehicle maintenance provided 21 percent in savings and fewer labor grievances. (GAO p. 33.)
  • Private prison operations showed not only considerable savings but other advantages: Ten of twenty state prisons now meet National Commission on Correctional Health Care Accreditation standard whereas previously none of the prisons met these standards. Trips by prisoners to outside hospitals have been reduced from over 100 per day to 100 per week, an 85 percent reduction. (GAO p. 27.)

The Indianapolis airport privatization contract specifies a $32 million savings and anything over that is split between the city and the operator BAA USA, Inc the UK private airport operator.

(5) The Hawaii Supreme Court's Konno decision essentially found that all work that had "customarily and historically" been performed by government workers must continue as such. However, the Court’s opinion encouraged the Hawaii Legislature to change it by revising state statutes. The full Konno decision is available from the Hawaii Bar Association.

(6) "(The Konno decision) has thrown up a roadblock to a more effective, efficient and less costly government." (Robert Takushi, 2/25/98. Head of the Dept. of Human Resources in testimony on HB 3199 on behalf of the Administration).

"... it has the potential to aggravate the State’s already dismal economic situation." Rosen, Mark J. Privatization in Hawaii. Legislative Reference Bureau, State of Hawaii. December 1997. This URL leads to the text of the report but not the appendices.

(7) "Public employee union leaders in Indianapolis, in which the city and its union recently earned an American Excellence Award from the Ford Foundation for their joint participation in a competition program, identified the following key factors in that program, which resulted in increased communication, better management, worker empowerment, and incentives rather than threats:

  • No layoffs;
  • Institution of incentive pay;
  • Abolishment of a wage freeze;
  • Reclassification and upgrading of city jobs;
  • Empowerment programs for city workers;
  • The release or firing of ineffective supervisors, as well as the retention of the better ones; and
  • A system that encourages city workers to communicate directly with city leaders."

Rosen, Mark J. Privatization in Hawaii. Legislative Reference Bureau, State of Hawaii. December 1997. p. 36. http://www.state.hi.us/lrb/rpts97/priv.pdf

(8) Most government agencies use inflexible annual or biennial budgeting systems that do not allow mid-year modifications to reflect changing conditions. On the other hand independent business managers closely monitor detailed monthly financial statements in order to make continual changes.

Nor does typical government accounting allow anyone to easily determine unit costs. For example, no one in government knows the cost of keeping a prisoner in prison, or the cost collecting Honolulu’s residential garbage. Often the direct labor cost is known but not the cost of workers’ benefits, the capital costs of buildings, the legal costs covered by the Attorney General’s Office, among other costs, all of which should be allocated to these activities.

(9) "America Works of New York, Inc., a for-profit organization, places welfare recipients into jobs and is paid $5,000 per recipient by the state of New York - but only if the recipient stays on the job for seven months.

  • America Works provides each client with a counselor and there are about 20 to 30 clients per counselor.
  • A recent report found that 80 percent of its clients remained off welfare one year after entering the program, compared to an 8.6 percent average for traditional job-training programs.
  • The average annual cost to the state for keeping a person off welfare and at work for a year was $23,923, compared to the flat $5,000 at America Works."

National Center for Policy Analysis study at: http://www.public-policy.org/~ncpa/hotlines/juvcrm/jj4new/d2.html

See also PRESIDENT CLINTON'S WELFARE-TO-WORK JOBS CHALLENGE: "This initiative relies on proven job creation/job placement models, such as … America Works, a successful private job placement firm for hard-to-place recipients in New York, Indiana, and Connecticut which provides intensive job search and private sector job placement to move recipients into jobs as quickly as possible." Available at: http://www.acf.dhhs.gov/news/welfare/wr/weltowk.htm

(10) See Eggers, William D. Performance-Based Contracting. Reason Public Policy Institute. May 1997. Executive Summary: "Performance contracts clearly spell out the desired end result expected of the contractor, but the manner in which the work is to be performed is left to the contractor’s discretion." Similarly, New York’s successful crime reduction program focuses not on arrests and convictions but rather crime rate reduction.

(11) Moore, Adrian T. Private Prisons: Quality Corrections at a Lower Cost. Reason Public Policy Institute. Policy Study #240. April 1998. (See also footnote 4.)