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PSG had a three year contract to be the State of Iowa's "Reinvention Partner." Under this agreement, PSG supported the State through a variety of projects each with its own performance based fee arrangement.
In preparing his FY04 budget, the Governor was faced with having to make $63 million dollars in cuts. Wanting to avoid the usual across the board and "slash and burn" cuts of previous years, Governor Tom Vilsack turned to his Reinvention Partner for suggestions on a new approach. The Governor, (Democrat), legislative leaders (Republicans) and PSG forged a unique share in savings agreement.
PSG examined the general fund budget looking for ways to spend smarter. The hypothesis was that by redesigning the way services are delivered customers of the service could receive greater value and simultaneously less money could be spent. So PSG's fee was based on these two outcomes: a) less money spent; b) better results for customers of the service. The contingency fee was based on a maximum of 10% of the net savings for each service that was redesigned. In several cases, PSG recommend the investment of one-time money in order to implement a newly redesigned system. This investment is subtracted from whatever savings are achieved in calculating the base for PSG's 10% contingency fee. The fee is capped at a maximum of $6.3 million.
Over the course of the legislative session PSG briefed the Governor weekly on the latest thinking about opportunities for smarter spending, the Governor brought those ideas to the legislature every week. From among numerous possibilities, the Governor and legislature chose three systems to redesign: the child welfare system, the state/local relationship, and the creation of charter agencies. These reforms were imbedded in a bill passed by the legislature and signed by the Governor in May of 2003.
Collectively, the redesign of these three systems involves spending $85 million less than the Governor's FY04 budget. One time investments including technology, employee training, PSG's fee, and some special grants totaled about $12 million. So the net savings are about $73 million; $10 million more than the target of $63 million upon which PSG's maximum fee was based.
To earn this fee, a) the savings must be realized (5%); and b) the results for customers must be measurably improved (5%). Baseline measures were developed in June of 2003. How much of the maximum fee will be earned remains to be seen as of the time of this writing.
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