LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Contracting Out for State Services

Based on provisions in the California Constitution, services provided by state agencies generally must be performed by state civil service employees. Article VII, Section 1, of the Constitution provides for the establishment of the state's civil service system:

(a) The civil service includes every officer and employee of the State except as otherwise provided in this Constitution.

(b) In the civil service permanent appointment and promotion shall be made under a general system based on merit ascertained by competitive examination.

While this article does not expressly prohibit the state from contracting out, the courts have held that it restricts the use of non-state employees in many circumstances. Consequently, case law and state statute have established parameters for contracting out state services. State law requires that proposals for contracting must, at a minimum, meet the following criteria:

In November 2000, Proposition 35 added Article XXII to the Constitution to explicitly allow for the contracting out of services for architectural and engineering services. These are the only types of state services with such authorization.

Administration's Proposal

The administration proposes a constitutional amendment to expand the circumstances in which the state can contract with private entities. While the administration has not yet released the specific language of its proposal, the stated purpose of the amendment will be to permit the state to "contract with non-state entities for ministerial functions whenever doing so will reduce costs, improve efficiency, or improve services." The constitutional amendment, if approved by the voters, is intended to provide greater legal certainty and therefore opportunities to contract out for services. In conjunction with this constitutional amendment, the administration is also proposing in the 2004-05 Governor's Budget to contract for services currently provided by state employees. For instance, the administration proposes such changes in the Departments of Developmental Services and Veterans Affairs.

Key Considerations

In The 1996-97 Budget: Perspectives and Issues (please see pages 173-189), we discuss the advantages and disadvantages of the privatization of state government functions. Contracting for services is one of the more common means of privatizing state government. The evidence suggests that carefully managed privatization can, under the right circumstances, provide specialized expertise, save money, and/or result in improved service delivery. It also shows, however, that poorly managed privatization, or privatization under the wrong circumstances, can lose money and result in poor service delivery.

In the report, we also discuss the challenges that governments face when they privatize. Understanding the potential problem areas and being aware of the risks involved are important for maximizing the likelihood that privatization will be successful. As the Legislature evaluates the administration's proposed constitutional amendment and the specific contracting proposals, it may want to consider the following:

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