Commonwealth Competition Council, P. O. Box 1475, Richmond, VA 23218 Vol. 2, No. 4 September 1997

On June 26, 1997, the Department of Social Services released House Document No. 2, "Privatization Study of the Division of Child Support Enforcement", to the Governor and the General Assembly. The report constitutes a summary and evaluation of full-service and collection privatization initiatives of the Division of Child Support Enforcement which awarded a contract to Lockheed Martin IMS in January 1994 to establish and operate two full-service child support enforcement offices in Chesapeake and Hampton. The privatized offices began operating in May 1994. The study compared the two privatized offices with two state-operated offices - Portsmouth and Fredericksburg - which are urban offices whose caseloads most closely match the caseloads of the privatized offices.

Using various performance measures, the study concluded that:

• The privatized offices collected $1,147,817 more than the state-operated offices in FY 1996;
• From FY 95 to FY 96 the privatized offices increased total collections by 26 percent while the state-operated offices increased by 10 percent;
• Based on the collections per obligated case, the privatized offices outperformed the state offices by 2 percent in FY 95 and 7.3 percent in FY 96;
• The privatized offices produced more locates in FY 95, but the state-operated offices exceeded the privatized offices in FY 96, and also increased the number of locates, while the privatized offices decreased in the number of locates.

The study states that in analyzing the cost-benefit of the privatized offices compared to the state-operated offices, all major costs of the offices were utilized. The cost-benefit ratio is expressed in terms of dollars collected for every dollar spent. The cost-benefit in FY 95 was: private - $4.46 vs. state - $3.93. For FY 96 the cost-benefit was: private - $5.62 vs. state - $4.70. Clearly, based on the cost of the contract with Lockheed Martin IMS, the privatized offices were more cost effective than the state operated offices and shows that the privatized offices collected more child support for every dollar spent than the state-operated offices. The study concludes that privatization of full-service child support offices is a viable alternative which should continue to be used on a pilot basis in order to continue to evaluate its value for wider implementation.

J. R. Beyster, Chairman and CEO of Science Applications International Corporation (SAIC), loves to talk about the company's recruiting and retention challenge. SAIC, based in San Diego, California, is a $2.4 billion company that is entirely employee-owned by its 23,000 employees.

Mr. Beyster also recognizes that in addition to new opportunities, entrepreneurial employees want to be rewarded for their efforts--they want ownership in what they are doing. SAIC's philosophy has been "those who contribute to the company should own it, and ownership should be commensurate with employee contribution and performance as much as feasible." The company goes to great lengths to ensure that all employees are encouraged to own SAIC stock through stock purchases, their 401(k) plan and their ESOP. This ownership philosophy has built employee rewards, incentives, company commitment, future leadership, and has provided SAIC with a significant competitive edge.

On August 28, 1997, Secretary Thomas and Chairman Brown co-chaired a meeting of the participants of the three study groups working on SJR No. 284 (1997), the ESOP study. Excellent progress has been made to date and the groups' research indicates that there is no legal or statutory impediment in the Code of Virginia to prohibit a government ESOP privatization. Secretary Thomas encouraged the groups to complete their final progress reports in September and to begin drafting the final report in October. The final report to the Governor and the 1998 General Assembly is due December 15,1997.

Congress continues to support employee ownership through ESOPs. Several pro-ESOP provisions are included in "The Taxpayer Relief Act 1997" (TRA '97), signed into law on August 5, 1997, that will expand employee ownership through Subchapter S corporations. TRA'97 makes important technical corrections to the provisions of the Small Business Job Protection Act of 1996 (the "1996 Act") that allow S corporation stock to be owned by tax-qualified retirement plans, such as ESOPs. The changes are effective in 1998.

Congressman James Traficant of Ohio recently introduced the "Employee Ownership Enhancement Act" that will require, if passed, an employer closing a manufacturing plant to offer the employees a chance to buy the business through an ESOP.

Ireland has passed legislation to create "employee stock ownership trusts." The legislation is similar to employee share ownership laws in England.

The House Task Force on Privatization, chaired by Representative Scott Klug of Wisconsin, held its first meeting of the 105^th Congress on July 2^nd to organize a legislative agenda. The task force consists of 19 House members and organizations supporting privatization. In order to proceed more effectively with privatization legislation, Representative Klug will consider introducing legislation that would reconfigure an unfair "scoring" system by the Congressional Budget Office in evaluating government assets.

On June 12^th, Representatives Thomas Bliley of Virginia and Edward Markey of Massachusetts introduced the "Communications Satellite Competition and Privatization Act of 1997" which would privatize monopoly-like satellite organizations. The intergovernmental satellite organizations INTELSAT and INMARSAT own and operate the world's largest fleet of communication satellites. Representative Bliley said, "This bill brings competition to outer space, and the result will be better and cheaper international satellite communications."

Senator Craig Thomas of Wyoming has introduced Senate Bill 314, "The Freedom From Government Competition Act of 1997", which if passed, will require every federal agency to procure from sources in the private sector all goods and services that are necessary or beneficial to the accomplishment of the functions of the agency. The bill directs the OMB to determine which government activities are commercial in nature. Federal agencies will then be required to purchase those goods and services from the private sector. The proposed law will not apply to goods and services deemed inherently governmental by existing law or the OMB. Exemptions will apply where there is no reasonably competitive commercial market, or if commercial sources cannot offer higher quality or lower price, and also exemptions are allowed for national security reasons.

In 1996, the Florida Department of Revenue enlisted the help of Lockheed Martin IMS and RSI Enterprises to assist in tracking down many of the state's biggest child support violators. Last year, the companies were given more than 156,000 unresolved cases, and were able to recover unpaid child support totaling more than $50.3 million. The money retrieved is then used to replace funds used in welfare support for children whose parents neglect to pay, or it goes directly back to the children. Lockheed Martin IMS and RSI Enterprises are reimbursed from a fund used for the enforcement of child support payments. Because of the program's success, the Florida legislature renewed the contract for fiscal year 1998.

The Clinton administration rejected a Texas plan to privatize its welfare system. The state had proposed a five-year contract worth $500 million to $2 billion, which would have provided "one-stop shopping" for assistance programs. However, the federal Department of Health and Human Services ruled that states cannot hire private contractors to make benefit eligibility determinations. The Texas government has decided to push ahead with a two-pronged approach. First, the Texas delegation in Congress has introduced bills in the House and Senate that would allow states to use private sector employees to determine eligibility for welfare benefits. Second, the state legislature passed a bill that will authorize privatization of the welfare system's information management modernization and it will also authorize full implementation of the privatization initiative if federal law is enacted to allow it. The Texas bill also creates a special committee to oversee any privatization decisions and contracts and requires a cost-benefit analysis before privatizing any element of the welfare system.

In Tennessee, the state senate is considering a plan to privatize the entire state prison system--a total of 21 facilities. Legislative budget analysts estimate the move would save the state $60 to $100 million a year.

In Connecticut, Governor John Rowland has proposed that the state privatize a number of functions including: data processing with an estimated annual savings of $50 million; homes for the mentally retarded with an estimated annual savings of $1.6 million; and pharmaceutical and contract health care for low-income and indigent patients with an estimated savings of over $25 million per year.

In Delaware, the University of Delaware has released Competition and Privatization Options: Enhancing Efficiency and Effectiveness in State Government. The report includes a survey of state agencies and finds that 80 percent of state agencies have sustained or increase their use of privatization over the past five years. Key conclusions of the study include: 1) Delaware's need for a state level office or commission to collect and disseminate information on privatization to state and local agencies, and 2) legislative resistance is a key barrier to privatization initiatives. (Copies of the report are available by calling 302/831-8971.

The Alaska legislature approved with a veto-proof majority a bill authorizing a 13-member panel to study privatizing state government functions. The functions of the Departments of Transportation, Corrections, and Health and Social Services would be first studied by the Task Force on Privatization with its findings reported to the governor and legislature by November 15, 1997. The remaining government functions will be studied in the second year.

Few successful concepts are as solidly founded as the idea that positive reinforcement--rewarding behavior you want repeated-- works. In today's business climate, rewards and recognitions have become more important than ever for several reasons:

• Managers have fewer ways to influence employees and shape their behavior. Coercion is not an option; managers must serve as coaches to indirectly influence rather than demand desired behavior;
• Employees are increasingly being asked to do more and to do it more autonomously. To support looser controls, managers need to create positive and reinforcing work environments;
• The new generation of employees has different values and expect work to be both purposeful and motivating;
• Rewards and recognition provide a low cost way of encouraging higher levels of performance from employees.

Here's an example of how to reward employees. At D'Agostino's supermarkets in New Rochelle, New York, every employee, including part-time workers, is eligible for the gainsharing program. The concept is simple: stores that exceed their budgeted profit goals for the quarter share most of the excess with their employees. Gain sharing funds are allocated by department, so that if one department pulls in 25 percent of the excess business, its employees receive proportionally more than a department that pulls in less. The vice president of human resources says this is an incentive to work together to improve performance and also to push each department to its potential.

"Fostering empowerment and feelings of ownership results in a self-fulfilled work force that performs beyond management's expectations."-- A finding from a survey by Quality Educational Development Growth Dynamics."

"Our philosophy is to share success with the people who make it happen. It makes everybody think like an owner, which helps them build long-term relationships with customers and influence them to do things in a different way."-- Vice President of Human Resources, Starbucks Coffee Company.

"We work under a management but we are part-owners. So everything doesn't come from the top down. A lot comes from the bottoms up. I try to give my best. The better the company does, the more money that goes in my little kitty."--Purchasing Agent, Lowe's Companies.

"An employee of one company thinks and performs differently than someone who has ownership in a company's operations. One of the reasons for Marion's continued strong performance and high productivity is that its associates participate as part-owners of the company." -- Marion Laboratories annual report.