Auditor Of Public Accounts
State Auditor Crit Luallen Releases Assessment of Kentucky's Privatization Efforts. Statutes Ineffective; Oakwood Case Study Shows Problems with Kentucky’s System; 22 Recommendations

Press Release Date:  Thursday, October 19, 2006  
Contact Information:  Jeff Derouen
Phone: (502) 573-0050
Fax: (502) 573-0067
Pager: (888) 222-5670

State Auditor Crit Luallen today released a performance audit of Kentucky’s method of privatizing government functions. The audit, the third and final in a series on state contracting, shows that Kentucky needs a process that will ensure stronger oversight and accountability of the Commonwealth’s privatization contracting.

The audit found that Kentucky’s main privatization statute is ineffective. The statute requires contracts in which a private vendor provides services “similar to, and in lieu of, a service provided” by at least ten state employees to go through a more stringent procurement process. The statute requires a detailed cost – benefit analysis and an annual performance evaluation for larger contracts.

However, the statute exempts fifteen different types of contracts. Because of the defined criteria and exemptions found in the statutes, every contract for privatizing state services is eligible to be excluded from the statutory oversight scheme. In fact, according to the Finance and Administration Cabinet, only one contract has been implemented under this privatization statute since it became effective in 1998.

In addition to the general privatization law, another law applies to private prisons. That law requires private prisons show a 10% savings over state run facilities. The audit found that these savings determinations are inconsistent and need increased accountability and independent review.

State Auditor Crit Luallen said, “In the past, I have been a proponent of privatization as a useful tool to deliver services and increase government efficiency. However, as we see an increased effort to privatize government services, Kentucky must demand that our contracting processes ensure adequate oversight and accountability. No better example exists of this need than the experience the state has had at Oakwood.”

The audit includes a case study of the Communities at Oakwood, an intermediate care facility for the developmentally disabled in Somerset. It describes the Oakwood experience as an example of “piecemeal privatization.” Various aspects of the facility’s operations have been contracted out to private vendors over time until the facility will become totally privatized next month.

Between fiscal year 2003 and fiscal year 2006 the total expenditures on Communities at Oakwood have increased 30% while the number of residents has decreased 28% (see chart 3.1b on page 24). During that time, the cost per resident rose 82%. In December 2005, 29 private contracts totaling $17 million were in place at the facility. By May 2006 the number of contracts had grown to 36 at a cost of $22 million. The report also showed that during an eight-month period private contract workers rose by 247 while state employees dropped by 160. As the spending on outside contracts escalated, serious type A citations showed a dramatic increase, threatening the facility with the loss of federal funds.

“The situation at Oakwood has been a travesty. Kentucky has taken a serious government function, the care of our most vulnerable citizens, and attempted to hand off our responsibility without adequate oversight. The results have been disastrous. We spent more money as the population went down and citations for life threatening situations increased. Government can contract with the private sector to provide services, but it should not attempt to contract away its responsibilities. If we make the choice to contract out vital services we must demand stronger oversight and more accountability to ensure that our responsibilities are being met. As downsizing government and privatizing government functions becomes more prevalent, we must learn from the Oakwood experience ” Luallen said.

“I recognize that management problems have existed at Oakwood for some time. In fact, the first private management contract was instituted under the Patton administration. However, as the audit shows, problems have escalated in recent years,” Luallen continued. She added that she is hopeful that recent developments leading to a new management contract will improve the situation at Oakwood.

The audit offered 22 specific recommendations for improvement in Kentucky’s oversight of privatization. These include changes in the privatization statute to delete the numerous exemptions that limit the types of contracts covered and instead specify the types of services that would be subject to the statute. Contracts above $500,000 should be subjected to the review process. In addition, vendors who receive sole source contracts should not be able to subcontract the primary service provided. Overall responsibility of government functions, and the expertise to carry out the responsibility, must remain within the cabinets.

This report, along with a responses from the Finance and Administration Cabinet, Department of Correction, Health and Family Services Cabinet, and the Transportation Cabinet, is posted on the internet at the following site: