Fee on outsourced work goes to pension fund

When the dust settled after the General Assembly’s historic vote on a sweeping overhaul of the state pension system, one piece of language added quietly to the bill hours before passage set the nerves of many pension-reform supporters on end.
Located in the second-to-last section of the 114-page law, the amendment creates a new 5.5 percent charge, or tax, on most state-government work outsourced to a private vendor. The proceeds from the charge, to be paid by the state, will go directly to the state pension fund.
Some supporters of the measure, including Gov. Lincoln D. Chafee, acknowledge a key benefit is to limit the use of contractors by state departments by in effect assessing a penalty fee to each contract awarded.
Others, however, see the fee as an unnecessary and potentially costly increase in state expenses.
“In studying the bill this morning at our board meeting, it raised a number of questions and concerns,” Greater Providence Chamber of Commerce President Laurie White said the day after the Nov. 17 vote. “It is not clear how it will be enforced and how it will apply and exactly who will be making this payment.”
Grafton “Cap” Willey IV, managing director of accounting firm CBIZ Tofias and chairman of the Rhode Island chapter of the Smaller Business Association of New England, said the amendment will likely increase the state’s operating costs and cause corresponding pressure on the budget.
“I know what they are trying to do but I don’t know about the way they chose to do it,” Willey said. “They are trying to address a premium on outsourcing and did it at the behest of the unions. It is certainly going to increase the cost of providing services for the state.”
Gary Sasse, who led the R.I. Department of Administration under former Republican Gov. Donald L. Carcieri, said he understands the need to monitor the use of contractors, but is concerned the added charge will raise costs and create an “anti-contractor bias.” “Assessing a fee that is aimed at curbing the use of contract employees could unnecessarily increase costs when the state does not have the in-house capabilities to administer specialized tasks,” said Sasse, director of the Bryant University Institute for Public Leadership, in an e-mail.
But within a contentious pension-reform debate, the amendment gathered broad support among the state’s political leadership who describe it as a curb on rampant over-privatization during the Carcieri administration.
“One of the reasons we had such a large unfunded [pension] liability was the number of layoffs under Carcieri,” said Rep. Larry Valencia, D-Richmond, the author of the amendment. “And a lot of people opted for retirement over being laid off. So we have fewer people paying in and more retirees.”
Valencia described the amendment as a tool to put money back into the pension system while creating a mechanism to prevent an over-reliance on contract work in the future.
“What this would do is say going forward, when the state has to hire someone temporary, they have to pay 5.5 percent into the retirement system,” Valencia said. “I think it is a self-correcting mechanism and it is coming from agencies, not businesses.”
Addressing some of the confusion surrounding the amendment when it was first passed, Valencia said the outsourcing charge will be paid directly by the state government into the pension system and will not be levied on the contractors themselves.
Department of Administration Director Richard Licht estimates that, based on current spending, the state contracts out between $35 and $40 million that would be subject to the charge, which takes effect at the beginning of the next budget year, July 1. Using those figures, Licht said the amount being paid into the pension fund in a year would be around $2 million.
Public work that has historically been performed by contractors, such as construction projects, or truly short-term work, will be exempt from the charge, Licht said, and added that he had some level of discretion in deciding what qualified.
Licht said his office has been in the process of analyzing what the optimal use of contractors for state work is, but rejected the suggestion that the amendment will create cost-raising inefficiencies.
“First of all, it goes into the pension plan, which is good,” Licht said. “Secondly, we want to analyze if [outsourcing] is the best practice to begin with. If it is not then we should abandon it in time.”
This year the state employs 1,813 contract workers, based on a quarterly report provided by the governor’s office.
Other supporters of the amendment include Treasurer Gina M. Raimondo, the architect of the pension overhaul, who backed it because it resulted in a net positive cash flow to the retirement system, said spokeswoman Joy Fox.
Chafee spokeswoman Christine Hunsinger said the amendment would help the state “use contractors where we should use them and not use them in place of full-time employees.
“Sometimes in the past the state has hired consultants and they have stayed long term, where state employees could have done the work instead,” Hunsinger said.
The amendment was also popular with union leaders, who opposed the pension-reform bill as a whole, but saw the amendment as a step in the right direction.
“This is an initiative we were supportive of to say there should be some assessment to contractors, because when the state goes out and hires them, they are not putting that money into the retirement system,” said George Nee, president of the Rhode Island AFL-CIO. &#8226