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Friday, Mar 29, 2024

Capitol Punishment: Price Fixing in the Public Sector

Capitol Punishment: Price Fixing in the Public Sector Guest Column by Gregory N. Lippe The U.S. economic system of “free enterprise” which dates back to the birth of our nation is envied throughout the world because it works extremely well providing economic strength, assuring all citizens of a continuous supply of needed goods and services and allowing a fair profit to business owners. The system operates according to five main principles: the freedom to choose our businesses, the right to private property, the profit motive, competition and consumer sovereignty. In general, the concept of “free enterprise” does not apply to government entities, however, I believe that two of the principles of “free enterprise” are applicable, those of consumer sovereignty, the freedom to purchase from one entity vs. another, and competition. Because of the pressure of competition, companies must constantly try to provide the best services and create the best products at the lowest possible prices. Since government entities purchase in large quantities, the principle of consumer sovereignty would enable them to take advantage of the competition among vendors and thus contain costs. Also, because of the legislature’s propensity to increase benefits to government employees without regard for affordability and without being subject to a profit motive, the achievement of cost containment is more likely to be attained by utilizing outside contractors in a free competitive environment. Although government entities do not operate with a profit motive, it is government’s responsibility to avoid interference with the private sector’s ability to generate profits. In this regard, it is also government’s responsibility to contain its costs to enable lower taxes on citizens and their businesses thereby minimizing interference in the free enterprise system’s ability to generate profits. When government fails to discharge this responsibility effectively, a negative business environment is created resulting in businesses closing or relocating and jobs being lost. Also, when businesses close or relocate, the tax base shrinks causing a reduction in government revenues resulting in decreased services or increased taxes to those businesses that remain. This perpetuates the negative business environment. When consumer sovereignty is taken away from government entities by legislation that restricts competition, the opportunity to contain costs is threatened or lost by government’s interference with “free enterprise.” The system is also severely impeded when the legislation prevents private sector businesses from qualifying to perform a contract for services unless they maintain a cost level equal to the government entities’ internal costs. The private companies are unable to earn a profit and must forego competing for the contract. This kills competition and is tantamount to “price fixing,” a practice that restrains trade and is illegal for companies to utilize in the private sector. Why should the legislature be able to employ a practice that would be illegal if employed by the business community? This practice forces companies out of business and causes a loss of jobs. SB 1419 authored by Sen. Richard Alarcon is a prime example of legislation that restricts competition and thereby takes consumer sovereignty away from government entities. It was referred to in Gov. Schwarzenegger’s “State of the State” address as legislation that needs to be repealed. This bill, enacted in 2002, restricts the ability of school and community college districts to utilize outside contractors to achieve cost savings. It provides a list of conditions under which contracting is permissible. Some of these conditions include: (1) Proposals to contract out work shall be eligible for approval if the contractor’s wages are at the industry’s level and do not undercut school district pay rates, (2) The contract does not cause the displacement of school district employees, (3) the potential economic advantage of contracting is not outweighed by the public’s interest in having a particular function performed directly by the school district, (4) The services contracted are not available within the district, cannot be performed satisfactorily by school district employees, or are of such a highly specialized or technical nature that the necessary expert knowledge, experience, and ability are not available through the school district, (5) The contract is for new school district functions and the legislature has specifically mandated or authorized the performance of the work by independent contractors. Estimates provided by the Coalition for Local Control of School Spending, whose members include the California School Boards Association, the California Association of School Business Officials, The Association of California School Administrators, School Services of California, Inc., Community College League of California and several hundred local education leaders throughout California, indicate that repealing SB 1419 would allow public schools to save up to $300 million every year without a single budget or service cutback. Additionally, Gov. Schwarzenegger stated in his address: “Because of SB 1419, many school districts are spending between 10 and 40 percent more than necessary to provide non-instructional services.” Based on the percentages of spending for non-instructional services indicated in the governor’s address, it would appear that the elimination of SB 1419 could help to make significant funds available for instructional services and still allow for a potential reduction in taxes or a reduction in the budget deficit. We must urge our legislators to repeal SB 1419 and to avoid passing future legislation of this type. -Voting information regarding SB 1419: Valley legislators voting for bill: Senate, Alarcon, Kuehl; Assembly, Cardenas, Frommer, Hertzberg, Koretz, Pavley. Valley legislators voting against bill: Senate, Scott, Margett, McClintock; Assembly, Richman, Strickland. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lever, Lippe, Hellie & Russell LLP (LLHR) and a director of the Valley Industry and Commerce Association (VICA).

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