Wilson’s Privatization Effort Marred by False Start

In its first step to implement an ambitious and controversial privatization effort, Gov. Pete Wilson’s administration was forced to back away from plans to close a pair of state warehouses last summer after an internal dispute erupted about whether the action would save any money.

Wilson’s staff had boasted that its proposed government overhaul could generate a 30% savings by transferring many wasteful operations to private control. But nobody had calculated how much the warehouse closing might save when the decision was first announced to employees in September, according to interviews and documents obtained by The Times.

When the idea was blasted by warehouse managers and workers as being rushed and premature, the governor’s aides were forced to backpedal. They ordered six more months of study and reported last month that a modest 5% in savings was possible if 45 warehouse jobs were eliminated.

That savings estimate is still disputed by an employee task force assigned to evaluate the study. But it was enough for Wilson to shut down the Sacramento and Fullerton warehouses last month and hold up the decision as a sign of things to come.

Meanwhile, Wilson aides have spent nearly twice the estimated annual warehouse savings of $1.3 million for a consultant hired in 1994 to study that change and other government downsizing ideas. The consulting contract has been sharply criticized by legislative officials because it was amended three times in one year, more than quadrupling its original price of $562,000.

“There are a lot of red flags flying up all over the place,” said an employee who served on the committee that examined the consultant’s warehouse study.

“They had their decision made way back in September and they went through the process of allowing us to dispute everything and then they wind up with the same conclusions six months later.”

Wilson officials say the report last month proves that their previous plan in September was sound. But critics of the privatization effort said the warehouse example fuels their case that the governor was rushing to obtain a political trophy and treating the financial impact as secondary.

They said they were especially suspicious because the ill-prepared September announcement came just as Wilson’s presidential campaign was making an important push.

“This was done under the guise of being cost-effective, but it was pretty politicized because we are the first ones to be reviewed” for privatization, one warehouse employee said.

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Wilson officials dismissed the complaint as public posturing by labor unions trying to thwart their effort. But the controversy is an ominous sign for Wilson as he launches a major political initiative that--if successful--would require him to battle California’s powerful labor machinery, Democrats and hundreds of potentially displaced civil servants.

Wilson announced the warehouse decision last month during a meeting in which he told state department heads to search their own territories for similar possibilities and submit proposals later this year.

Essentially, his action eliminated warehouse operations that purchase office supplies in bulk and distribute them to state agencies. Over the next year, they are to be replaced by a system that allows agencies to buy their supplies at bulk prices directly from private vendors such as Office Depot.

But Wilson’s ultimate plan requires extensive new legislation. Democrats have warned the governor they are skeptical about whether privately run substitutes for government services are as cost-effective as Wilson believes.

The warehouse managers were raising that same concern at least as early as July. Then, the lack of attention to the financial impact of a warehouse closure prompted a stinging internal memo from Dale Garrett, head of the Material Services Section, which oversees the state’s two warehouses and other procurement areas.

“This . . . recommendation was made without input from Material Services program management nor any study or cost-benefit analysis as substantiation,” Garrett wrote July 24. “[It] offers conclusions regarding Material Services operating programs based on questionable statements and misstated costs. When and if reform or change is needed, it should not be made in this way under these kinds of processes and reports.”

Garrett is on vacation and was unavailable for comment.

A month later, Wilson appointed a new boss for Garrett and the Material Services Section. He was Charles F. Grady, a former McDonnell Douglas executive from Georgia who specialized in corporate downsizing but never worked in government.

In September, Grady told the warehouse employees for the first time that their operation was targeted for elimination. But when the news triggered an uproar, Grady said he agreed to reconsider the action.

“The employees were up in arms,” Grady said. “They said there is data you haven’t seen [and] there is some data you probably haven’t done proper analysis on. We think you are making the decision prematurely and we’d like you to reconsider. So I said, ‘I will.’ ”

Grady subsequently directed the state’s private consultant, Ernst & Young, to conduct a detailed comparison of the price differences between the warehouse and two private companies on the 29 most popular office items. The consultant, which was hired in August 1994 to study a wide range of privatization and downsizing possibilities, had already been examining the warehouse operation at least since the beginning of the year.

Grady also convened a task force of about a dozen warehouse workers and managers to evaluate the consultant’s work.

Grady said the task force was provided with all the research Ernst & Young had compiled, including its estimate of the cost savings the closure would generate. But when asked for that estimate, Grady changed his statement in a subsequent interview by saying that no projection of cost savings was ever made before his September announcement that the warehouses should be closed.

“I went in with a loose analysis that said it just made sense to do this,” he said. “We were dealing with imprecise conclusions. . . . [But] there definitely was no comparable number to the $1.3 million” savings estimate the department reported last month.

Later, concerned about a negative news story about the privatization effort, the governor’s office convened a telephone conference call with The Times in which Grady changed his statement again by saying that the decision to close the warehouses was not made in September.

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But Grady’s comment conflicted with several earlier statements he had made in tape-recorded discussions with The Times and the warehouse employees. Grady had told The Times that before he talked to the employees in September, the case for closing the warehouses was so overwhelming that he did not believe further study was necessary.

“The bottom line [was] so significantly in favor of going to the private sector . . . we could probably spend a lot of time adjusting all of this and still come up with exactly the same answer,” Grady said about his calculation in September.

Asked specifically whether the closure decision was made before the September employee meeting, Grady said: “The Ernst & Young people had done a significant amount of analysis. My predecessor had looked at it and said, ‘Yes, that makes sense.’ So the in-house team had come together and said pretty well--’yes.’ ”

The Times also obtained a tape-recording of Grady’s first meeting with employees at the warehouse in Fullerton in September in which he told workers that he decided to close their operation. On the tape, Grady said his superiors recommended that he consider closing the warehouses when he was hired in August.

“I did that,” he told the workers. “And I arrived at a conclusion that said there is enough merit there to make that change.”

Regardless of Grady’s actions, Wilson press secretary Sean Walsh said the governor did not consider the warehouse decision to be final until the consultant’s report was completed in February.

By November, the employee committee issued a report on the warehouse closure that said the consultant inflated the overhead cost and did not compare identical office products in calculating the price differences. In summary, the committee said the state operation would be cheaper and provide better service.

But there was never a written response to the issues raised in the committee’s report and employees now charge that their effort was ignored.

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Grady said he examined the committee’s report and ordered some changes to the final study of the warehouse operation. But instead of a written response, Grady said he went through the report with the committee members and explained verbally why he considered the findings inaccurate.

Last year, among all of the difficult decisions Wilson officials faced in deciding which areas of state government should be turned over to private companies, the warehouse transition appeared on paper to be an attractive target.

The size of the staff was small enough that layoffs were unlikely because the employees could be absorbed into vacancies on the state’s 276,000-member work force. And the operation had been sharply criticized in a 1992 state auditor general’s report for being woefully inefficient.

As a result of that report, Ernst & Young indicated in a February 1995 report that the warehouses were high on their list of targets for either streamlining or elimination.

But the auditor general’s report was also a wake-up call for the warehouse staff, prompting it to reduce its line of products and improve efficiency. Last summer, in a survey of state agencies by officials considering the warehouse closure, only one department recommended the operation should be closed. Others recommended changes instead of elimination.

Wilson’s privatization plans are expected to receive a substantial hearing in the Legislature this year when lawmakers consider a series of bills necessary to lift restrictions that prohibit such changes.

Legislative staff said they hope to examine the warehouse experience. They also expect to review the controversial contract that was awarded to Ernst & Young consultants to find places for the government to shrink.

Assemblywoman Debra Bowen (D-Marina del Rey), who has been a contract watchdog in the Legislature, said she was disturbed that the agreement was amended three times in one year, more than quadrupling its value to almost $2.4 million.

“I’m very concerned about this pattern that I’m seeing of these contracts that expand from a lap dog to a great Dane without justification and sometimes without authority,” Bowen said.

As for the governor’s program to downsize the government, Bowen also promised it would receive a thorough review. “Private or not private is not the issue,” she said. “Good management practices are the issue.”