Vetoing the Legislation Against Outsourcing in California

© 2004 Greg Short. All Rights Reserved.

Politics and Outsourcing

    Quite evident in the recent presidential campaign, as well as in numerous legislative campaigns across the country, was the issue of outsourcing and whether curbs should be placed on this business practice in both the public and private arenas.  In the months leading up to the elections, the media filled hours of air time and reels of newsprint (and pages of cyberspace) reporting on and debating about the latest outsourcing initiatives and trends, and their effects, real or imagined, on the US economy in general and on the plight of the American worker in the industries, businesses and practices being, actually or potentially, outsourced. 

    In addition, in the run up to early November 2004, numerous state legislatures, as well as the US Congress, debated bills introduced during the prior legislative calendars that focused on trying to prevent or limit outsourcing in some form or other, particularly with respect to public contracts and services.  Most state proposals will never be enacted, at least in their current forms. 

    Perhaps in no state was the interplay of the current political and business agendas over outsourcing more evident than in California. In the last days of the state’s 2003-04 legislative session, Governor Arnold Schwarzenegger faced a number of proposed bills that were aimed at controlling the off-shoring of California jobs and services and that would become law without the Governor’s veto.

Mix of Focuses and Arguments

    These “anti-outsourcing” efforts generally encompassed three broad categories: 

• Requirements that state contracts be performed within U.S., by U.S. citizens and/or by authorized workers in U.S.;
  

• Preferences or incentives to businesses restricting outsourcing activities; and
  

• Restrictions on the transmission of personally identifiable information abroad.

    The arguments against enacting them similarly centered on three main themes: 

• Protectionist public policy invites retaliation; 
  

• State outsourcing restrictions may unconstitutionally impinge upon the federal government’s role in regulating foreign commerce; and
  

• Outsourcing limitations may violate existing trade agreements. 

    Therefore, without analyzing in detail the history of the various bills seeking to limit certain types of outsourcing initiatives in California, it is nonetheless interesting to review, in light of the above categorizations, the reasoning stated in Governor Schwarzenegger’s issuance of three vetoes of such bills that came before him for signature at the end of the legislative session in late September 2004.[1] 

Proposals and Vetoes

    Governor Schwarzenegger vetoed three bills. 

• SB 888 (prohibiting the off-shoring of essential state homeland security work);
  

• AB 1829 (prohibiting state agencies or local government from contracting for services to be performed by workers outside the U.S.); and
  

• SB 1492 (prohibiting health care businesses from transmitting personally identifiable information outside the U.S. without authorization). 

    The intended prohibition of each vetoed bill mirrored generally the three types of efforts to limit outsourcing taking place around the country. Expressing apparent distaste for restraints on business, the wording of the Governor’s vetoes similarly echoed the broader category of positions against  arguably unconstitutional bills that create artificial barriers to economic growth and unnecessary hurdles for businesses and government.

Existing Laws and Regulations

     The veto of SB 1492 (medical information) was short and to the point. “Existing [state and federal] laws prohibit the sharing of an individual’s medical information… [and] provide mechanisms to protect the confidential information and remedies against those who violate the acts.” The veto message did not touch on the issue of outsourcing per se.

    A more measured explanation addressing the topic was given for the veto to AB 888 (homeland security). While describing that bill as “unconstitutional under the commerce clause” and “overly broad,” on a more practical point the Governor’s veto noted that there is “no guarantee” that the performance of the essential homeland security work will be somehow less safe if performed in another country. He concluded that the implementation of adequate security measures to protect sensitive information in this area is the appropriate requirement.  Also, by placing additional restrictions on contractors, the veto indicated that the bill “will, ultimately, result in higher prices for services without increasing homeland security.”

Restriction and Competition

    The most significant address of the outsourcing issue came in the veto of AB 1829 (state contracts).  The bill would have required contractors to certify that work on state contracts would be performed in the US. 

    Gov. Schwarzenegger first noted that California, with its innovative and entrepreneurial businesses, are a part of “the global marketplace,” which benefits both California citizens and those of the rest of the world. Then, in vetoing, Governor Schwarzenegger stated that “our focus should not be on erecting artificial barriers that thwart” such economic activities.  Indeed, in announcing the veto, the Governor determined that rather than saving jobs, the bill “would actually be detrimental to our economy and the creation of new jobs in this state,” as well as negatively impacting state and local competition, implementation of more efficient government purchasing systems, and prices paid by government entities for services. 

    Arguing that the bill would “restrict trade, invite retaliation or violate the United States constitution and our foreign trade agreements,” the Governor sought to make clear that his veto was against “punitive policies restricting [the] ability [of businesses] to make decisions on how best to perform and provide goods or services for state government and our consumers.”  Finally, in stating that continuing California ’s position in the global economy was necessary to “create new opportunities and better jobs for our citizens,” and after earlier noting the hundreds of thousands of jobs created in California from foreign investment, the Governor surmised that “[t]hese restrictions will drive business out of California.”

    In short, he concluded the legislation would harm more than help domestic jobs, investment and consumers.

Future Legislative Efforts

    Based on earlier raised arguments and pronouncements, perhaps there was nothing really unexpected in the content of the vetoes issued for the “anti-outsourcing” bills in California. There was certainly a public pronouncement of the state Republican administration’s path and reasoning in the face of legislative efforts to curb the outsourcing trend, at least in the public contracts arena.  No doubt there will be further legislative efforts undertaken, in California and elsewhere. Perhaps it will require approval of additional federal legislation in the future to create a toe hold from which the state legislatures may hang their efforts with more success.