Privatization & Government Reform Newsletter
Issue No. 7 — May 2014
By Leonard Gilroy
Director of Government Reform, Reason Foundation
In this issue:
BUDGETS: Reports Find State Budgets Steady, But Future Uncertain
Two new reports—one by the National Conference of State Legislatures and the other by the Pew Charitable Trusts—suggest that while state budgets have continued their slow fiscal recovery since the end of the Great Recession, significant threats still loom.
» FULL ARTICLE
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TRANSPORTATION: FAQ on Toll-Financed Interstate Reconstruction
Many governors and state DOTs are asking Congress to remove the federal ban on charging tolls on Interstate highways. The President's transportation budget proposal calls for doing this, for the purpose of reconstructing aging Interstates. Reason Foundation supports this idea in principle, as long as highway users are protected in specific ways. In a new brief, Reason Foundation's Robert Poole offers answers to a number of frequently asked questions about this idea.
» FULL REPORT: Frequently Asked Questions on Toll-Financed Interstate Reconstruction
» ARTICLE: President Obama's Proposal to Allow Tolling to Rebuild Interstates Is the Right Move
» POLICY BRIEF: Value-Added Tolling: A Better Deal for America's Highway Users
» STUDY: Interstate 2.0—Modernizing the Interstate Highway System Via Toll Finance
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WATER: Congress Passes Water Bill Promoting Public-Private Partnerships
Recent action in Congress may catalyze more private investment in water and wastewater infrastructure in the U.S. Last week, the House and Senate both passed the bipartisan Water Resources Reform and Development Act (WRRDA) of 2014 by overwhelming margins. If signed into law by President Obama, the legislation will create a new five-year pilot program—the Water Infrastructure Finance and Innovation Act (WIFIA)—offering low-interest federal loans and loan guarantees to help finance significant water and wastewater projects through public-private partnerships (PPPs), and it created a separate pilot authorizing the use of PPPs for 15 Army Corps of Engineers projects.
» FULL ARTICLE
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PENSIONS: Did Pension Reforms in Alaska & West Virginia Fail?
Pension reform critics around in the country have claimed that Alaska and West Virginia—two states that have shifted from defined-benefit pensions to defined-contribution, 401(k)-style systems—have seen their pension finances continue to deteriorate in the years after implementing reforms. However, recent analyses by Reason Foundation's Anthony Randazzo and Victor Nava explain why critics' claims that supposed cost increases occurred because of these states' shifts to defined-contribution plans are in reality cost increases in spite of the reforms, and they write that absent the pension reforms, these states would be even deeper in debt.
» FULL ARTICLE: Did Pension Reform in Alaska Fail?
» FULL ARTICLE: Lessons and Myths of West Virginia's Pension Reform
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CONTRACTING: California Assembly vs. Outsourcing
Last month, the California Assembly passed House Resolution 29, a union-sponsored resolution stating that, "the Assembly opposes outsourcing of public services and assets." Dozens of organizations representing local governments registered opposition to the resolution, fearing that it could be the first step towards limiting local governments' ability to address ongoing fiscal challenges through solutions like privatization. In a recent Orange County Register column, I highlight several reasons why this concern is justified.
» FULL ARTICLE
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INNOVATORS IN ACTION: Reducing Bridge Maintenance Costs in South Carolina
The latest installment of Reason Foundation's Innovators in Action monthly interview series—which profiles innovative policymakers in their own words, highlighting good government efforts delivering real results and value for taxpayers—examines examines the South Carolina Department of Transportation's (SCDOT) adoption of an innovative bridge monitoring system that uses Advanced Condition Assessment Technology (ACAT) to supplement or replace certain bridge inspections as one way to reduce expenses. The bridge monitoring system uses sensors installed on specific bridges to track bridge performance, and the sensors enable bridge life to be extended on structures that would otherwise need to be replaced. Limited budgets, federal mandated asset management planning, and litigation may spur other states to adopt the technology. Reason Foundation's Baruch Feigenbaum interviewed SCDOT State Bridge Maintenance Engineer Richard "Lee" Floyd to discuss the technology behind ACAT bridge monitoring, its expansion, and other advantages to the technology.
» FULL INTERVIEW
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NEWS & NOTES
New Research Examines Pension Underfunding and State Constitutions: A forthcoming University of Illinois Law Review article by University of Minnesota law professor Amy Monahan examines how state constitutional provisions impact the dynamics of public pension funding. Monahan finds that "even where explicit constitutional funding requirements are in place, plans often continue to be underfunded both because of political and financial pressures, and also because of the distinct lack of an enforcement mechanism," according to the abstract. The article explores ways that fiscal constitutions can be modified to create effective and enforceable pension funding requirements that are effective and enforceable, while also being flexible enough to allow for adjustment—via supermajority overrides or fiscal triggers, for example—in the event of fiscal distress. The full article is available here at SSRN.
New Jersey Senate Approves Anti-Privatization Bill: As reported in last month's newsletter, New Jersey legislators are currently considering a new version of a bill vetoed last year by Gov. Chris Christie that would place roadblocks in front of future privatization efforts. On May 12th, the New Jersey Senate approved Senate Bill 770, which, for any proposed privatization contract totaling $250,000 or more, would impose a range of restrictions that include:
• a five-year limit on state privatization contracts;
• requirements that the public not be subject to any fees, fares or other charges greater than those currently charged; and
• requirements that wages and employee benefits for each contracted position not be less than those for comparable agency employees (making it virtually impossible to lower labor costs).
The bill was approved by the Assembly Labor Committee on May 15th and awaits a floor vote. "While the sponsors of the bill should be commended for their attempt to bring transparency and accountability to the process of privatizing public services, this bill as currently drafted is clearly designed as an impediment to the potential efficiencies that can be gained through privatization," Assemblymen Jay Webber and Parker Space wrote in the minority statement issued by the Assembly Labor Committee, "This bill raises a fundamental question for the members of this body: whom are we serving, the taxpayers, or the people who work for the taxpayers?"
Oklahoma Legislature Passes Pension Reform Bill: Last week, both chambers of the Oklahoma legislature passed House Bill 2630 , the Retirement Freedom Act, which establishes a new defined contribution retirement system for new state employees hired after November 1, 2015. The measure does not apply to district attorneys, assistant district attorneys, other employees of the district attorney's office, correctional officers, probation and parole officers, or fugitive apprehensions agents who are employed by the Department of Corrections. The bill sets a minimum employee contribution rate of 3 percent and sets a minimum employer match of 3 percent (and maximum match of 7 percent). Current state employees and teachers will remain under their current defined benefit plans. The state has an estimated unfunded liability of between $11 billion and $44 billion, according to OklahomaWatchdog.org.
Illinois Launches First Pay for Success Project : In early May, Illinois Gov. Pat Quinn announced the launch of the state's first pay for success (PFS)/social impact bond contract, making it the third state—after New York and Massachusetts, which launched similar programs in recent months—to experiment with this emerging performance-based contract model. Illinois' PFS project seeks to improve outcomes for at-risk youth by reducing their dependence on the state's child welfare and criminal justice systems. The state plans to partner with One Hope United and the Conscience Community Network to improve placement outcomes and reduce re-arrests through providing evidence-based community alternatives to institutional care, and the PFS project will serve approximately 800 youth cared for by the state's Department of Children and Family Services with histories of justice-involvement. More information on the project is available at payforsuccess.illinois.gov.
Louisiana Senate Kills Anti-Privatization Bill Second Year in a Row: There's been some déjà vu in the 2014 Louisiana legislative session, with State Rep. Kenny Havard seeing the House unanimously pass a bill he sponsored (House Bill 128) modeled after Massachusetts' Pacheco Law—widely regarded as the most onerous anti-privatization law in the nation—only to be rejected by the Senate Finance Committee . A similar bill introduced by Havard in 2013 also passed the House unanimously and then stalled in the Senate committee. HB 128 was designed to prohibit state agencies from entering into many privatization contracts without prior legislative review and approval—significantly increasing political risks to potential bidders and politicizing what are traditionally decisions made at the discretion of executive agencies—as well as subject routine contracting decisions to onerous pre-procurement and contract review processes, including a required analysis assuming the hypothetical costs of public employees continuing to provide the service "in the most cost-efficient manner" (presumably to facilitate required cost comparisons with real-world bids received from private firms). My analysis of the 2013 version of this bill is available here.
Michigan Prison Food Service Outsourcing Survives Union Challenge: Earlier this month, Michigan's Civil Service Commission rejected a public employee union challenge to the state's three-year, $145 million contract with Aramark Correctional Services to provide food services throughout the state prison system. Aramark took over the food service operation in December 2013, a move state officials expect will save between $12 million to $16 million per year. The transition to private operation has had some transition issues, with the state fining Aramark $96,000 in penalties in March for incidents where workers fraternized with prisoners, for making unauthorized menu substitutions, and for not preparing the correct number of meals as specified in the contract. State officials report that the company's performance has steadily improved since imposing the penalties. "Over the past couple weeks, we've seen improvement," Michigan Department of Corrections spokesman Russ Marlan told the Detroit News in April. "Our plans are to step up our monitoring and increase communication with the vendor."
PennDOT Launches Procurement for Wireless Telecom Project : The Pennsylvania Department of Transportation has launched a procurement for telecommunications tower development and management services on state properties. In mid-May, the agency issued a request for qualifications (RFQ) seeking interested, qualified firms with experience in providing turnkey facilities and services to support agency's Wireless Telecommunications Partnership Program. Services include the design and implementation of a revenue-generating program and managing the usage of property for wireless telecommunications infrastructure. The selected firm will pay the state a percentage of revenue generated from contracts with leaseholders, licensees or permittees. The RFQ is available here.
Queensland Sells Toll Road Operator: Late last month, The Wall Street Journal reported that the Australian state of Queensland had sold Queensland Motorways—a state-owned toll road operator—to a consortium led by the private infrastructure firm Transurban for $7.06 billion AUD ($6.56 billion USD), the latest deal in a trend of Australian states divesting assets to pay down debt and generate revenues for new public works projects. The article cited analyst speculation that the higher-than-expected sale price for the toll road operator may prompt other Australian states to seek additional government asset divestiture opportunities, including power generation facilities.
University of Kentucky Begins Campus Dining Service Contract Negotiations : University of Kentucky officials began negotiations with Aramark this month on a public-private partnership to provide on-campus dining services. The deal is expected to include the investment of tens of millions of dollars in renovation of existing facilities and construction of new facilities to improve access to dining, reducing the cost and expanding options in student dining plans, job offers for all 107 current dining employees, and increasing the annual investment in the current locally-sourced food program, among other provisions. "We have the opportunity to improve service, provide healthier food at lower cost to our students, invest millions in facilities and enhance our commitment to locally sourced food," UK President Eli Capilouto said in a press release.
Roanoke, VA Privatizing Parking Enforcement: Roanoke officials announced plans this month to privatize on-street parking enforcement, turning that function over to the same firm that already operates the city's parking garages and surface lots, according to the Roanoke Times. The company will receive a flat fee for the service, as opposed to a share of ticket revenues. The deal awaits final approval by the city council.
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"The political economic forces surrounding public pension funding make it nearly irrational for a politician to seek full, annual funding for pension benefits. In addition, the consequences of underfunding are not felt until decades in the future, thus making it nearly impossible for the electorate to hold politicians accountable for their funding decisions. There is not market pressure pushing against either of these forces. For reasons previously discussed, workers will generally not push hard for full annual funding because such actions may lower their overall compensation or risk their employment. Other market actors, such as credit markets, will generally only penalize states for underfunded pension plans once the funding level has reached crisis levels. [...] The stakes of consistently underfunding public pension plans are very high. Plan participants may lose their most significant form of retirement income, future taxpayers may face inequitable burdens, and it is not hyperbole to state that the entire state or city's future may be at risk."
—Amy Monahan, State Fiscal Constitutions and the Law and Politics of Public Pensions, University of Minnesota Law School, Legal Studies Research Paper No. 14-24, May 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2436587
"As budget decisions are made, government officials need to ask themselves more than ever - does the state need to own I.T.? With technology changing rapidly, does it make sense for government to purchase the hardware, the software and the storage capacity? Or should a state lease the necessary programs and software? There are a lot of advantages to not owning the software and hardware -- from a finance perspective, monthly fees might be preferable than needing the money and political push to get large appropriations for new systems. Plus, with technology changing so rapidly, the state government doesn't own something that may become quickly obsolete. [...] There's a certain temptation to the "security" and the control of owning, but in the case of IT in particular, state government needs to consider alternatives that might make more sense in our rapidly changing world."
—Scott Pattison, "State Information Technology: To Own or Lease?" National Association of State Budget Officers blog, May 14, 2014.
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