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New at Reason: Louisiana Provides Model for Closing Budget Deficit

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 17 Nov 2009 12:36:00 EST

Our friends at the Goldwater Institute published a new article of mine today pointing to Louisiana's government reform and streamlining efforts as a model for Arizona policymakers to emulate as they grapple with billions in projected deficits over the next several years. Of course, the same lessons would translate to the dozens of other states also facing severe fiscal crises:

Arizona policymakers need to accept the reality that there's no way to avoid government downsizing. The state is now second to only California in the severity of its fiscal crisis and faces over $5 billion in additional budget deficits through 2011. Yet, our officials remain distracted by Sacramento-style accounting gimmicks and a proposed sales tax hike that wouldn't come close to closing the gap. Worse, many policymakers seem more concerned with preserving agency largesse than trying to eliminate it.

Contrast this with Louisiana, the state taking the most thoughtful approach to solving its fiscal crisis. Pelican State policymakers, led by Governor Bobby Jindal, have embarked on a wide-ranging set of government reforms designed to reduce the size and cost of government.

They created a Commission on Streamlining Government this year to identify over $1.5 billion in cost savings through streamlining, consolidation, and elimination. They passed legislation granting more flexibility in cutting spending in protected "silos." Gov. Jindal has eliminated thousands of positions from the state budget and over 70 unnecessary or inactive state boards and commissions. The Louisiana Division of Administration is developing a range of privatization proposals within each of its departments, and it's also piloting a new budgeting approach designed to fund priorities and drive performance. And this is all just a start.

It's already paying off. Ratings agency Fitch upgraded Louisiana's bond rating last month, specifically citing the state's focus on spending control and streamlining as influencing factors. This alone will save taxpayers millions in avoided interest costs over time.

Arizona policymakers face a simple choice: remain lost in the fiscal forest with California or follow the lead of Louisiana, which is blazing a trail out.

Similar thoughts here and here.

» Reason Foundation's Privatization Research and Commentary

Private Prisons a Smart Strategy for Arizona

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 17 Nov 2009 12:22:00 EST

Letter to the Editor at the Arizona Daily Star

Susan Maurer's fears of prison privatization ("Privatizing prisons: A shortsighted fix, a long-term nightmare," Nov. 10, 2009) are based on myths, not facts.

Private prisons are helping federal, state and local governments deliver quality correctional services and programming amid tightening budgets. A 2008 Vanderbilt University study showed significant cost savings through prison privatization, and a recent Harvard Law Review article found that private prisons outperform public prisons on most quality indicators.

Moreover, private prisons are subject to strong government oversight and are held accountable to the standards set by the public sector and independent accreditation agencies. Private prisons also have strong track records on safety, security and the development of innovative inmate education and treatment programs.

Taxpayers should not be misled. With prison capacity needs growing and budgets shrinking, a greater reliance on private prisons is a sensible strategy for Arizona.

Leonard C. Gilroy
Director of Government Reform, Reason Foundation

Louisiana Provides Model for Closing Budget Deficit

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 17 Nov 2009 10:22:00 EST

Goldwater Institute

Arizona policymakers need to accept the reality that there's no way to avoid government downsizing. The state is now second to only California in the severity of its fiscal crisis and faces over $5 billion in additional budget deficits through 2011. Yet, our officials remain distracted by Sacramento-style accounting gimmicks and a proposed sales tax hike that wouldn't come close to closing the gap. Worse, many policymakers seem more concerned with preserving agency largesse than trying to eliminate it.

Contrast this with Louisiana, the state taking the most thoughtful approach to solving its fiscal crisis. Pelican State policymakers, led by Governor Bobby Jindal, have embarked on a wide-ranging set of government reforms designed to reduce the size and cost of government.

They created a Commission on Streamlining Government this year to identify over $1.5 billion in cost savings through streamlining, consolidation, and elimination. They passed legislation granting more flexibility in cutting spending in protected "silos." Gov. Jindal has eliminated thousands of positions from the state budget and over 70 unnecessary or inactive state boards and commissions. The Louisiana Division of Administration is developing a range of privatization proposals within each of its departments, and it's also piloting a new budgeting approach designed to fund priorities and drive performance. And this is all just a start.

It's already paying off. Ratings agency Fitch upgraded Louisiana's bond rating last month, specifically citing the state's focus on spending control and streamlining as influencing factors. This alone will save taxpayers millions in avoided interest costs over time.

Arizona policymakers face a simple choice: remain lost in the fiscal forest with California or follow the lead of Louisiana, which is blazing a trail out.

Leonard Gilroy is the director of government reform at Reason Foundation (reason.org) and resides in Fountain Hills. This article was originally published by the Arizona-based Goldwater Institute.

Learn More:

Pew Center on the States: "Beyond California: States in Fiscal Peril"
Louisiana Commission on Streamlining Government

Cash-Strapped North Texas Cities Embrace Privatization

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 16 Nov 2009 13:45:00 EST

Theodore Kim at the Dallas Morning News highlights the growing trend of municipal privatization/outsouring in North Texas cities:

Plano decided to eliminate its city printing and graphic design staff in September, farming out the work to Office Depot and Ricoh.

At Plano's Douglass Community Recreation Center, Kennedy Estrada, 10, runs in the gym. The Boys and Girls Club of Collin County may take over operating the center.

Leaders in cash-strapped Rowlett may contract out city planning services, tech support and other departments. [...]

In North Texas, Dallas officials hope to save some $1.5 million this year, as well as millions more later, by transferring the reins of the city zoo to the Dallas Zoological Society.

And Dallas County, by some estimates, could save up to $1 million by contracting out for certain legal services.

"In the environment we are in, cities are going to have to look at every option," said Chris Hoene, research director for the National League of Cities in Washington, D.C.

I couldn't agree more. Former Indianapolis Mayor and Harvard Kennedy School professor Stephen Goldsmith adds an important point—the trick for policymakers will be to ensure that the cost savings with privatization are accompanied by current or higher levels of service quality:

"The question becomes: How can you save money by outsourcing and managed competition while improving the quality of service, or at least keeping it the same?" Goldsmith said.

This is why performance-based contracting and good contract management and oversight are such critical skills for public administrators to cultivate internally, as these are the direct means through which to ensure that contractors deliver on performance. In a Governing column last month, Goldsmith offers similar thoughts from a different angle—the setting of arbitrary federal insourcing mandates by the Obama administration:

So rather than committing to insourcing 7 percent of existing contracts, let's ask some fundamental questions: What are the costs (activity-based costing) per unit of work accomplished? How are outputs and outcomes measured? How are high performing workers acknowledged and rewarded? How is citizen satisfaction measured and translated into accountability? What are the private and public benchmarks by which productivity is compared? Can a part of the service be tested in the marketplace for true comparisons?

In Indianapolis, we found that theoretical examinations of our public agencies were often way off the actual results produced by competition. For example, a consultant told us that we could save maybe 5 percent by privatizing our wastewater-treatment facility. We held a competition, and wound up saving 44 percent. Even in cases where we didn't contract out, public agencies that were exposed to competition found ways to reduce their costs.

Deciding what to contract out and what to do in-house requires hard facts. Are there private contractors or nonprofits that provide similar services? How recently was the market tested? Most important, many complicated services are neither wholly insourced nor outsourced, but rather are accomplished in partnership, with government responsible for quality management and a network of contractors providing the back-office and front-office support.

For the federal government, there will be certain activities that you may decide are inherently governmental. For reasons of national security, you may want to keep certain skill sets in-house, regardless of cost inefficiencies. That's fine. But as a general rule, a competitive process is the best way to discover whether insourcing or outsourcing makes sense. In every case, the goal should be "rightsourcing."

Read the whole thing for a sage perspective from a pioneer in competitive public service delivery.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Following California Down the Path to Fiscal Ruin

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 13 Nov 2009 17:43:00 EST

The NGA-NASBO reports issued yesterday—which predict a fiscal "lost decade" for states—weren't the only source of bad news for state policymakers. The Pew Center on the States also released a new report—Beyond California: States in Fiscal Peril—profiling the fiscal disasters in the worst-hit state, California, and nine others (Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin) that aren't far behind in the severity of their crises. The report is well worth a read for some insights into what's driving these fiscal trainwrecks.

As this Arizona Republic piece by Mary Joe Pitzl notes, these states share some common problems—overreliance on specific economic sectors, voter-approved spending mandates, and general lack of political will to create economically-sustainable fiscal policy, to name a few. But at a practical level the biggest problem, of course, is the mismatch between revenues and expenditures. Arizona's is pretty simple and stark:

...Currently, Arizona's budget calls for $10 billion in spending, but there is only $6.4 billion in projected revenue.

As I wrote yesterday, an imbalance of this scale is not something policymakers can simply tax, borrow and gimmick their way out of, in good economic times or bad.

There's no appetite for the level of tax increases, fee hikes and borrowing that it would take to sustain pre-recession spending levels. And those strategies are akin to shooting oneself in the foot, as they'd prolong and compound the recovery and kick the can down the road. Further, NGA and NASBO (among others) projecting tough economic times for states for the next decade so we're going to have to settle in for a long, difficult ride. Given all of these stark realities, there's no way for policymakers to avoid cutting the size and scope of government.

Privatization News Roundup, Nov. 13, 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 13 Nov 2009 08:12:00 EST

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"White House push to reduce contractors is at odds with expanding role of agencies," Government Executive
"Former Defense acquisition chief warns against 'global war on contractors'," Government Executive
"Federal procurement nominee outlines agenda," Washington Technology
"Balfour Beatty bases new division here," Nashville Post

STATE & LOCAL:

"State's risk agency looks at privatization," The Advocate
"Group divided on worker's comp privatization," The Associated Press
"Governor to submit plan to reduce prison crowding," Los Angeles Times
"Closing time for Virginia's ABC stores," Washington Post
"Conservative group calls for privatization of Iowa prisons," Iowa Independent
"Commission to submit fiscal-fix measures to Colorado Legislature," Denver Business Journal
"Public/private partnership deserves a second look," Belleville Times
"DOT: Atlanta Toll Lanes Top Priority for Privately Funded Program," Georgia Public Broadcasting
"Charlotte urban loop to be built with private funds," WRAL.com
"Team ends its bid to build, operate RTD line to airport," Denver Post
"Town officials tour prison, evaluate impact on town," Wickenburg Sun
"Possible State Prison Brings Hope to Jenkins County," Georgia Public Broadcasting
"ECU exploring partnerships for housing," Greenville Daily Reflector
"Bay City starts preliminary talks with company to take over water and sewer operations," Bay City Times
"County supervisors vote against privatization of Planning Department," Green Bay Press Gazette

INTERNATIONAL:

"The Coming Privatization Boom," MotleyFool.com
"Canadian pensions pounce on Aus toll road firm," Financial Standard
"Sweden Selects Bids From Local Groups in Pharmacy Privatization," Bloomberg.com
"Public-private partnership system in British Columbia keeps evolving," Journal of Commerce
"Saint John courthouse won't have private partner," CBCNews
"Lessons from India's port privatization," Livemint.com
"China Plans to Build, Manage Toll Road in Ugandan Capital," Bloomberg.com
"Parliament approves Privatisation of SLPA," Awoko
"Lebanese economic shake-up to focus on privatization," Daily Star
"Syria Pursuing partnership with private sector," Global Arab Network
"Peru port workers start strike over privatization," Reuters

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Banner Year for State Budget Gimmicks

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 12 Nov 2009 19:51:00 EST

In the November 2009 issue of Governing, Katherine Barrett and Richard Greene argue that this may be a banner year for state budget gimmicks:

Arizona is hardly alone in looking at "creative" ways to close its budget gap. This year may go down in the record books for the number of gimmicks used to balance state budgets—and the degree to which those gimmicks may come back to haunt the entities involved. We're not particularly aware of any new tricks out there. These are tried-and-true ways for governments to avoid confronting reality—at least for a while. They include deferring payments, accelerating revenues, changing accounting rules and, as in Arizona, borrowing from the future to pay for today.

California, as is often the case, takes the cake. In its efforts to resolve its nearly $60 billion budget imbalance over this year and last year, the state borrowed from local government property taxes and special fund accounts, added to payroll withholding, accelerated personal income tax and corporate tax estimated payments, and will be kicking the June payroll to July. That last one is particularly sneaky. Employees see virtually no difference. Their paychecks arrive a day late, maybe, and that's hardly cause for outrage. But for the state it moves those payments forward a full fiscal year.

"You can argue, ‘What's the big deal?'" says Mac Taylor, California's legislative analyst. "But our concern is that it's an expense we incurred this year, and we really should count it this year. We're getting out of sync on the reporting of what we're spending."

Read the whole thing for more examples of policymakers going to every extreme to avoid making the necessary budget cuts and reforms to address the pandemic of state fiscal crises.

NGA & NASBO: States Facing Fiscal "Lost Decade"

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 12 Nov 2009 18:23:00 EST

States' fiscal crises are going to stay put for some time. That's the word from the National Governors Association and the National Association of State Budget Officers, who released two reports today forecasting continued fiscal woe for states over the next decade. From the press release (emphasis mine):

The weakening of state fiscal conditions is reflected in the $250 billion in budget gaps faced by states between fiscal 2009 and fiscal 2011. Of the $250 billion, states closed $72.7 billion in budget gaps during fiscal 2009 and $113.1 billion before the enactment of their fiscal 2010 budgets to bring them into balance with drastically declining revenues.

"These are the worst numbers we’ve ever seen in the decades of putting together this report," said NASBO Executive Director Scott D. Pattison. "States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government."

Even after closing these gaps, an additional $14.5 billion in budget gaps remains in fiscal 2010, and states face at least $21.9 billion in budget gaps for fiscal 2011. To help close these gaps, 42 states cut their enacted fiscal 2009 budgets by $31.2 billion, and 33 states cut their fiscal 2010 expenditures by $53.5 billion. Additionally, states enacted tax and fee increases of $23.8 billion along with additional increases in other revenue measures of $7.7 billion for fiscal 2010.

According to an NGA analysis titled The State Fiscal Situation: The Lost Decade, the recent economic downturn, one of the deepest and longest since the Great Depression, began in December 2007. Although the recession likely ended in August or September 2009, states struggled in fiscal 2009 and will continue to struggle through most of the decade.

"States will continue to struggle over the next decade because of the combination of the length and depth of this economic downturn, the projected slow recovery and the overhang of unmet needs," said NGA Executive Director Raymond C. Scheppach. "The unmet needs are those postponed or deferred during the crisis including, replenishing retiree pension and health care trust funds and financing maintenance, technology and infrastructure investments. States will also need to rebuild contingency or rainy day funds. The bottom line is that states will not fully recover from this recession until late in the next decade."

More privatization has to be part of the solution here—it's unavoidable. Most state policymakers are extremely resistant to cutting existing spending and public jobs, but the severity of the problem makes these things necessary and inevitable. Banking on tax hikes and revenue enhancements to close the gap is a fantasy—even if there was the political and popular will to raise taxes in a tough economy (which there isn't), taxpayers would never stand for the level of tax increases it would take to close the massive budget deficits on the table for the next few years.

You can't avoid cutting the size and scope of government, regardless of what happens on the tax and fee side. Given that reality, privatization is a strong tool to deploy and will become a critical part of smart fiscal management in the near term. Done well, you can get more bang for fewer tax dollars while still ensuring the quality delivery of services. Win-win for the budget and taxpayers.

Louisiana has already figured this out. Hopefully other states will start to follow their lead.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Getting Virginia Off the Sauce

kmw@reason.com (Katherine Mangu-Ward) — Thu, 12 Nov 2009 11:56:00 EST

Ask an immigrant to tell you about her first impressions of America—especially someone who hails from a communist or socialist state—and eventually she’ll get to the part about the grocery store. After a lifetime of empty shelves, poor selection, and unreliable hours, the cornucopia of an American Safeway or Kroger is a revelation. The colors, the music, the lights, the people! Massive stores crammed to the gills with three-dozen brands of cereal and 17 kinds of frozen potato products seem like something out of a dream.

This is how I felt the first time I bought booze outside my home state of Virginia.

Growing up in Virginia, the only liquor store I knew was the ABC "package store" in the local Bradlee Shopping Center. The linoleum was dingy, the adjustable industrial shelving a grimy grayish off-white. Unlike every other store on the strip there was no music, just the hum of the florescent lighting and the consumptive coughs of the other patrons. The clerks wore smocks over their clothes, a practice that had been abandoned by virtually all other retail establishments by my 1980s childhood. Every shelf was tidy and completely full of liquor—no problem there—but the selection was abysmal, with rows and rows of identical bottles lining the walls.

There was a Giant grocery store next door—a convenient place for revelations about the glories of the capitalist system—and a wine shop a few doors down. But neither of them sold booze. Only the state-owned, state-run ABC was authorized to vend hooch.

Virginia is one of 18 states where the government is the monopoly rumrunner. Supermarkets, gourmet shops, and corner stores are all forbidden to sell liquor. But Bob McDonnell, the newly-elected Republican governor, has promised to end the monopoly on liquor sales in the Old Dominion.

This bold gesture isn’t because McDonnell is an especially thoroughgoing libertarian; there are plenty of other areas where he’d like to see more state involvement in the private lives of citizens, not less. This isn’t a 12-step program to help the commonwealth go cold turkey on alcohol money either. McDonnell has no intention of letting Virginia’s bottle-based income fall below its current levels of more than $100 million a year. In fact, part of the reason McDonnell is considering privatization at all is that he is looking for cash to spend on transportation infrastructure. He predicts that selling off the state’s 334 liquor stores to private players and gathering licensing fees from more private sellers will bring in $500 million in the short run, while leaving long-run income intact. (The Washington Post remains unconvinced, noting that McDonnell’s figures may be too optimistic.)

But no matter what the political and budgetary machinations, Virginians are unlikely to wind up paying more for their rotgut, and they are very likely to wind up with a better selection and a relatively skeeze-free shopping experience. Commonwealth officials can focus on governing a large landmass without having to fuss with the details of running a liquor empire. And the move may even represent a net gain for the state budget in the future when the state sheds responsibility for ABC employee benefits and pensions, and starts bringing in real estate and other tax revenue from the privatized stores.

And assuming they’re not regulated within an inch of their lives and hemmed in by the continued existence of a state-dominated wholesale system, the privately-run stores are likely to be more profitable. In addition to being able to compete with D.C. on price, they can expand their stock—80 proof and otherwise. Right now, high-margin novelty rim salt and Jimmy Buffet-themed blenders aren’t sold alongside the tipple in Virginia because the only thing stupider than a state selling intoxicants is a state selling Margaritaville Mixers to go with them. The number of stores will likely increase under privatization, although the cautious McDonnell has promised "a limit placed on the number of authorized retail outlets to reflect community concern."

Virginians haven’t suffered alone with terrible state liquor retail establishments. But the number of states with public provision for gin gimlets mixins’ is shrinking. Iowa, West Virginia, and Alberta, Canada have all privatized their moonshine vendors. Each of those states adopted revenue neutral privatization policies—meaning that they pledged to set rates to keep the flow of cash into state coffers from liquor sales steady. As it happens, the booze biz boomed and the tax money started flowing in, which meant those states had to reduce wholesale markup rates in order to keep too much money from flowing in to the state coffers and violating the terms of the deal. Washington State, North Carolina, and Pennsylvania are considering similar plans.

Another citizen-improving side effect of privatization: An end to the petty crime encouraged by the deprivations of a restrictive state monopoly. Turns out, for instance, that a friend of my family—a Virginia lady and veteran party thrower—has been violating state law for decades by popping up to Calvert Woodley Fine Wines & Spirits in D.C. to stock up the Bloody Mary bar. Bringing a case of Capital City booze into Virginia risks a $2,500 fine, a year in jail, and confiscation of her trusty Model A. But who can blame her? When I moved to D.C. as an adult, the liquor stores were a revelation. For starters, there are so many! Can’t find Old Overholt for your Manhattans in Rosebud on 17th and R? No problem, they probably have it at Cairo on 17th and Q. Sure, most of the clerks are still surly, but you can always choose to hit a different store next time if the checker gives you guff about your fondness for Malibu rum.

Katherine Mangu-Ward is a senior editor at Reason magazine. This column first appeared at Reason.com.

Belize Privatizes Management of National Lottery

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 11 Nov 2009 13:02:00 EST

Belize has privatized the management of its state-run lottery:

Following several months of rumored privatization, the Government formally announced today that it has awarded a 10-year contract to Brads Gaming Company Ltd. [...] to take over the management of the public lottery.

"Presently, collections from the sale of lottery books and license approvals net only about $0.9 million annually," the Government said via press release. "Therefore, the key conditions that Government decided to include in the outsourcing of the lotteries' management were the guaranteed collection of $2 million, annually, by way of a license fee; a profit sharing arrangement and business tax that the private company would be required to pay."

GOB claims that "to ensure transparency in the selection process," Cabinet had appointed a tender selection panel, chaired by Auditor General Edmund Zuniga, to recommend a company that would be able to administer the lottery for the next 10-year period, in the first instance, starting April 1, 2010. The arrangement should be assessed every two years. [...]

The release added that, "...in the first year of private management of the lotteries programs, nothing essentially will change as far as the purchase of lottery tickets is concerned. At the end of the first year, the transition to electronic sales will commence."

Meanwhile, lottery privatization remains largely stalled in the U.S., though Illinois is moving towards a lottery management contract that sounds similar in concept to Belize's approach. According to Reason Foundation's Annual Privatization Report 2009:

As recently as the summer of 2008, at least a dozen states were actively considering privatizing their state-run lotteries. But an October 2008 advisory opinion from the U.S. Department of Justice effectively stopped those efforts in their tracks.

In response to a request from Indiana Governor Mitch Daniels for a legal opinion on his proposal to lease the Hoosier Lottery and use the proceeds to fund a new state college tuition program, the department's Office of Legal Counsel determined that states would not be in compliance with federal law if they enter into long-term lottery-system leases with private consortia. The ruling found that while states may contract with firms to operate their lotteries, federal law requires that states maintain control over significant business decisions. The opinion also found that private management firms may not receive more than “a de minimus interest in the profits and losses of the business.” According to the opinion, the exemption state lotteries currently have from criminal prosecution under federal lottery laws would no longer apply if those lotteries were managed by private firms rather than the states. [...]

However, one state may have solved the question of how to monetize its lottery without running afoul of federal law. In July 2009, Illinois Governor Pat Quinn signed into law a $29 billion public works bill (House Bill 2424) that includes a partial privatization of the Illinois Lottery as part of the funding source. The bill calls for outsourcing the management of the lottery to a private firm that would be repaid with a five percent share of the lottery profits and the term of the contract would not exceed 10 years. Industry experts believe that since this deal would be structured more as an outsourcing contract—already common in many state lotteries—then a sale should pass federal muster. The bill sets March 1, 2010 as the deadline to ink a deal, so Illinois policymakers will need to move quickly on the procurement.

» Reason Foundation's Privatization Research and Commentary

Mary Peters on McDonnell's Transportation Agenda

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 09 Nov 2009 15:27:00 EST

In a new National Review column, former U.S. Transportation Secretary Mary Peters reflects on the role that transportation policy played in Virginia Governor-Elect Bob McDonnell's election victory last week:

Much has been written about the "pragmatic" platform of Virginia governor-elect Bob McDonnell. The common wisdom is true as far as it goes — McDonnell ran on "kitchen table" issues that were of special concern to suburban voters — but the media has paid too little attention to one of the election's most important topics: transportation. [...]

McDonnell did this, in part, by explaining his policies to voters in one of the most comprehensive transportation documents ever compiled for a statewide race. Whereas most transportation discussions concentrate on the need for new revenues and the completion of specific projects, McDonnell's plan laid out a fundamental policy shift. McDonnell presented "four primary pillars": 1) making investments based on projects' value to taxpayers, not political influence; 2) reducing the time it takes to deliver projects without sacrificing environmental protection; 3) advancing a new strategy to operate and maintain existing infrastructure (and reduce congestion) that relies more extensively on technology and private-sector partnerships; and 4) transitioning toward a funding model that reduces congestion and establishes a stable revenue stream.

The dirty little secret behind transportation funding is that the best projects are not always those that get funded. Often, political influence, the need for geographical balance in road building, and the desire to bring economic development to disadvantaged areas trump more meritorious criteria such as congestion reduction and highway safety. McDonnell's plan advanced the notion that transportation funds should be allocated to projects on a cost-benefit basis, using consistent metrics and focusing on the most acute challenges.

Read the whole thing here.

Arizona Prison Privatization Proposal Doesn't Jive with Market

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 09 Nov 2009 12:55:00 EST

Though it generated a lot of headlines in places like The New York Times, Arizona's ballyhooed proposal to turn over some or most of its prisons to private operators is revealing itself to be all smoke but no fire. According to the Arizona Daily Star:

Arizona's plan to turn over its prisons to private companies in exchange for a $100 million upfront payment is having trouble getting off the drawing board, with the plan behind schedule and prison operators showing little interest.

The privatization effort is required under a law enacted last summer as lawmakers struggled to close a huge budget shortfall. It directs the state to award a contract to one or more private companies to run an unspecified number of prisons for $100 million.

It emerged as Republican lawmakers cast about for alternatives to Republican Gov. Jan Brewer's proposal to increase the sales tax to avoid deep cuts.

The prison-concession provision doesn't specify which or how many of the state's 10 prison complexes would be included, what would happen to current state employees or the length of a contract. State officials were supposed to provide an initial batch of information to potential bidders on Oct. 1, but missed the deadline.

Corrections Corp. of America, the nation's largest private prison company, "is not focused on that," said Louise Grant, a CCA vice president, adding "it's very questionable whether or not we would participate."

It's easy to see why it's not attracting interest—it was a hastily developed proposal that failed to jive with the reality of the market. Here's why.

After several iterations through the spring and summer, the FY2010 budget signed into law in September included provisions requiring the Arizona Department of Administration to issue a request for proposals for a concession agreement allowing private vendors to operate any Arizona state prison complex or combination thereof (aside from the state prison in Yuma). But on top of that, the state also wants to get a $100 million upfront payment, which is the source of the problem.

Despite using the term "concession"—which typically implies a transfer of most risks and responsibilities associated with facility ownership, except for the title itself—what policymakers crafted here is nothing of the sort. It's just a glorified operations contract without the facility ownership component that would be such a value driver, as it's on the facility end that private prison operators can really drive down costs that could potentially be capitalized in the form of a large upfront payment.

So Arizona policymakers dropped the ball by crafting a proposal that few, if any, companies are interested in bidding on. If I'm a private prison company and I can get contracts in a variety of states, why would I bother bidding on a less-than-attractive proposal to operate facilities I don't and won't own, all while making a $100 million loan to the state (taking a huge chunk of my capital reserves) on top of it!? I'll go out on a limb and say, "not gonna happen."

The kicker with all of this is that the language in House Bill 2010 authorizing the prison(s) concession is immediately preceeded by the also-reknowned statutory language authorizing the sale-leaseback of dozens of state buildings, including several Capitol complex buildings and...you guessed it...state prisons!

So apparently policymakers are OK with selling a prison facility to an investor for 20 years, but not "selling" them to private prison companies as part of a concession to generate upfront revenue and drive cost savings over time. As much as I hate to say it, I don't think any of this was purposeful, but rather sloppy drafting amid tremendous budget pressures.

Lest I leave the impression that Arizona policymakers have utterly mangled their attempts to rejuvenate prison privatization, I would like to point out that there are two other lesser known prison privatization components of the budget that I believe may have some legs. The first is a requirement that the Arizona Department of Corrections issue a request for proposals and contract for 5,000 new private prison beds at new or existing in-state private prisons. The state certainly needs new prison capacity, and a "greenfield" project like this should not generate significant opposition from the state correctional officers union since no existing jobs are at stake. The second initiative requires the ADOC to issue a request for information, followed by a request for proposals, for the privatization of all correctional health services (including medical and dental services) that are provided in a state owned prison (facility not specified).

Still though, it's unfortunate to see policymakers generally fumble the ball on prison privatization when the budget crisis demands quick action to cut costs. Privatization is a powerful way to do that, as I argued in a recent appearance on Arizona PBS's Horizon show.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, Nov. 5, 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 05 Nov 2009 16:45:00 EST

Some privatization news highlights from the last two weeks that haven't been covered elsewhere on the blog:

FEDERAL

"VA will turn to a contractor to reduce backlog of GI educational benefits," NextGov.com
"Senators express concern about administration's contracting guidance," Government Executive
"OMB's new procurement guidance inadequate, lawmakers say," Federal Times
"OMB pushes more fixed-price contracts," Federal Times

STATE & LOCAL:

"Panel offers cost cuts," The Advocate
"Public vs. private: Should NC give up booze control?," WRAL.com
"State-run setup's benefit doubted," The Patriot-News
"FSSA chief outlines plan to create 'hybrid' welfare system," The Herald-Times
"Plan to privatize prison deserves consideration," Denver Post
"Missouri Department of Corrections calls prison population boom no problem," Columbia Missourian
"Privatization fears persist for public Macclenny hospital," Florida Times-Union
"Eliminate, privatize some state services," Sioux City Journal
"Walker makes direct budget pitch," Milwaukee Journal Sentinel
"Novato Sanitary referendum gets green light," Contra Costa Times
"Brown County to look at privatizing planning," Green Bay Press Gazette
"Somerville Mayor Curtatone reconvenes Financial Advisory Committee," Somerville Journal
"Cape May County Youth Shelter employees, parents oppose privatization plan," Press of Atlantic City
"Central Dauphin moving forward with bus outsourcing plan," The Patriot-News
"Staffing drives airport's quest to privatize," Daily Inter Lake

INTERNATIONAL:

"Brazil In Talks On Rio's Galeao Airport Concession," Wall Street Journal
"State mulls disposals, partnerships to release value from property portfolio (South Africa)," Creamer Media's Engineering News
"KDB takes one step closer to privatization," Korea Herald
"KDB plans for mergers ahead of privatization," JoongAng Daily
"Poland's privatization plan shall help to close budget gap," Poland.com
"Czech Airlines Privatization Off For Now," Aviation Week
"Serbia to Privatize a Number of State Enterprises in 2010," PropertyXpress.com
"Syria launches its first electricity privatization tender," Daily Star
"AZN 75 million invested in Azerbaijani privatized enterprises for Jan-Sept," Azerbaijan Business Center
"MP offers to start using private prisons in Kyrgyzstan," 24 Press Club

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

California to Send 2,300 More Inmates to Out-of-State Private Prisons

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 03 Nov 2009 12:43:00 EST

Per Southern California Public Radio, California has amended its contract with private prison provider CCA to increase the total number of contracted out-of-state prison beds by an additional 2,300 as part of the state's strategy to get a grip on its prison capacity crisis:

Back in 2006, Governor Schwarzenegger declared a state emergency in California's prisons due to overcrowded conditions he said threatened inmates and prison guards. That proclamation authorized the Department of Corrections and Rehabilitation to temporarily transfer 7,900 inmates out of state over the last 3 years.

The departments' Gordon Hinkle says the transfers enabled California to get rid of thousands of makeshift cells erected in prison day rooms and gymnasiums. "One of the things we've been trying to do in California is to shut down any of the 'bad beds' or dorm-type living situations which creates a higher security risk not only for the inmates but for also for the correctional officers that are working to supervise them."

Under an amended contract with the Corrections Corporation of America, one of the largest private prison operators in the country, California will be able to transfer an additional 2,300 high-security inmates to the company's facilities in Arizona, Mississippi, and Oklahoma. The transfers are expected to begin early next year.

The inmates are likely to be housed at CCA's North Fork Correctional Center in Oklahoma and its Red Rock Correctional Center in Arizona. This is now the fourth time that the contract has been amended since originally signed in 2006, representing a ten-fold increase in three years (from 1,000 in 2006 to 10,468 under the latest amendment).

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Corrections Privatization Research and Commentary

More Bad News for Pennsylvania Turnpike Commission, Part 2

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 29 Oct 2009 13:31:00 EDT

Following up on my post yesterday, the "he said-she said" discussion is over. Remember that yesterday, Pennsylvania Turnpike Commission representatives—including executive director Joseph Brimmeier—issued strong statements denying that the FBI had visited their offices and seized computer equipment and records. Here's what Brimmeier said yesterday afternoon (emphasis mine):

Turnpike CEO Joe Brimmeier today told the Pittsburgh Post-Gazette that "It never happened. The FBI did not visit any turnpike offices or confiscate any equipment belonging to the turnpike. (Toll Roads News) has a long history of sloppy or inaccurate reporting that reflects their efforts to malign the Pennsylvania Turnpike and its over 2,200 employees. Today they crossed the line between sloppy and reckless. The posting is false."

Just a few hours later though, the PTC changed their tune significantly. Per John Micek at The Morning Call:

In a brief telephone interview, [Turnpike] commission spokesman Bill Capone told us that the FBI is, indeed, investigating goings-on at the Valley Forge interchange. But that's because the Commission voluntarily called in the Feds after its own Office of Inspector General determined that the matter was too big for them to tackle on their own.

"These irregularities were to us first, and we, the Pennsylvania Turnpike Commission, contacted the FBI and asked them to get involved in it," Capone said this evening."

Capone said the Turnpike's OIG was put onto the matter after the agency "got a tip that something was going on with the Valley Forge widening project."

From a basic PR standpoint, wouldn't that have been a better statement to release right off the bat? Instead PTC played the deny-then-confirm game, which tends to make people question the details of the confirmation. When the director says, "The FBI did not visit any turnpike offices..." and then a few hours later the spokesman says that indeed the FBI did visit (for whatever reason), it starts to smell even fishier. With a flip-flop like that, how much faith is one supposed to have about the veracity of any statements that follow? Even if this all turns out to be all smoke and no fire, the sheer hubris of the PTC is stunning. I'd say they owe Peter Samuel an apology for trying to throw him completely under the bus, but I wouldn't hold my breath waiting. On a related note, Brad Bumsted at the Pittsburgh Tribune-Review confirms today that rumors of a state grand jury investigation of the PTC (for corruption, patronage, shady contracting, etc.; fairly stock stuff for the PTC) are indeed true:

A statewide grand jury based in Pittsburgh is investigating patronage and contracts at the Pennsylvania Turnpike Commission.

The involvement of Attorney General Tom Corbett's office surfaced Wednesday after reports that the FBI has been investigating matters at the agency. [...]

"It's an investigation we launched internally ourselves," [PTC spokesman Bill] Capone said. "It's an ongoing investigation."

Asked about the statewide grand jury investigation by Corbett, Capone said: "I have heard that unofficially. Officially, I have not been made aware of it."

Officials say the state investigation is looking at alleged "pay-to-play" contracts involving campaign contributions given by contractors or solicited from them.

I know that the scandalous aspects of this will be the primary media focus, but to me the larger issue at play is that the entire future of Pennsylvania's transportation system is now effectively in the hands of the PTC, thanks to the ill-conceived Act 44 a few years ago. This means Pennsylvanians are forced to trust that the corrupt PTC will act in citizens' best interests. Good luck on that. As I said yesterday, the $12.8 billion privatization offer last year would have taken the candy away from the bad guys, but state legislators had their blinders on. In retrospect, given today's markets that would have likely been the smartest move they could have made. I'd bet that some wish they could have a mulligan on that now.

Anti-Privatization Pacheco Law Continues to Hamstring Massachusetts Budget

adam.summers@reason.org (Adam Summers) — Wed, 28 Oct 2009 23:35:00 EDT

My colleague, Len Gilroy, did an excellent post the other day on efforts to repeal or amend the anti-privatization Pacheco Law in Massachusetts. Reason has been critical of the Pacheco Law for many years. Back in 2002, Reason VP for Research Adrian Moore, former Reasoner Geoffrey Segal, and I wrote a white paper for the Pioneer Institute for Public Policy Research on privatization and the effects of the Pacheco Law in Massachusetts. Here is an excerpt from that paper:

When faced with insufficient revenues, state governments typically have four options: increase taxes, scale back expenditures, spend down reserves, or seek ways to provide services more efficiently through contracting with private providers. Massachusetts, however, has only the first three options available; it is the only state in the nation that has virtually outlawed the privatization of public services.

The Pacheco Law was enacted by the Massachusetts legislature in 1993. The law, now M.G.L. ch. 7 sections 52-55, set up a series of tests that a state agency must pass before it can award a contract to a private company to perform services that had been previously performed by state employees. The law presents both statutory and political roadblocks to efficient government operations. Its provisions essentially slam the door on many opportunities that have been shown to improve services and save money in other places, as the law disregards all potential benefits other than lower costs.

Reducing costs is only one of many reasons agencies in other states choose to contract with private service providers. Well-designed contracts allow agencies to improve quality, accommodate peak demand, speed project delivery and meet deadlines, gain access to expertise, improve efficiency, spur innovation, and manage risk more effectively.

The Pacheco Law essentially prohibits Massachusetts agencies from contracting out to improve service quality, increase the number of people served, or reduce an existing backlog. A proposal to contract out cleaning and maintenance of bus shelters—which would have brought several million dollars annually to the state from new advertising revenues—was rejected because the contractor did not specifically calculate the difference in cleaning costs.

When a Massachusetts agency entertains bids for the right to deliver a service, public employees have the opportunity to submit bids to keep the work in-house. The Pacheco Law gives state workers significant advantages.

The cost and quality of service offered by private contractors must be compared not to existing cost and quality but to the hypothetical situation of public employees working in the most cost-effective manner and providing the highest quality possible. At no time are state employees held to these standards. If public employees win the contract, they are not held any concessions made as part of the bid.
The contractor must add lost tax revenues to the cost of the bid if any work is to be performed outside Massachusetts. No such adjustment is made to the public sector bid for the loss of tax revenues that would be realized if the work were to be performed by a private business subject to state taxes.
Private bids must also include estimated costs of monitoring contractor performance, while no such monitoring takes place in the public sector. The likely benefits of monitoring are not considered.

Even if a private contract scales these hurdles, the State Auditor may reject any proposal he deems not to be “in the public interest,” without providing a definition or reason. The rulings are final and may not be appealed.

Prior to the passage of the Pacheco Law, the Weld administration issued 36 privatization contracts, saving taxpayers an estimated $273 million. The procedure Massachusetts agencies must follow under the Pacheco Law is so onerous that only eight proposals have been submitted to the Auditor since its adoption in 1993. Only six were approved.

Over the last decade, federal, state, and local government agencies nationwide have contracted with private vendors to provide services from data processing to prison operations to adoption. According to the Government Contracting Institute, the value of federal, state, and local government contracts to private firms is up 65 percent since 1996 and exceeded $400 billion in 2001. Massachusetts law should not continue to prohibit agencies from taking advantage of this tool for reducing the cost and increasing the quality of state services.

Ideally, the Pacheco Law should be repealed. Short of repeal, it should be amended such that privatization can become a useful policy tool for legislators and agency managers.

Sadly, the Pacheco Law remains on the books seven years later. The silver lining of the state's current fiscal straits is that at least now there seems to be some momentum to weaken or eliminate the law and use the efficiency of the private sector to help balance the budget while providing high-quality services.

Other Resources:

» Pioneer Institute for Public Policy Research White Paper: Competition & Government Services: Can Massachusetts Still Afford the Pacheco Law?

» Reason Foundation's Annual Privatization Report 2009 (See page 19 for discussion of the Pacheco Law)

» Reason Foundation's Privatization Research and Commentary

More Bad News for Pennsylvania Turnpike Commission

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 28 Oct 2009 15:52:00 EDT

Corruption at the Pennsylvania Turnpike Commission is a well-known and unfortunate reality, and the scandals continue to mount. Already this year we've seen the conviction of former State Senator Vincent Fumo (the Turnpike's leading legislative patron during his tenure in office) and Ruth Arnao (wife of fired PTC chair Mitchell Rubin) on a combined 182 counts in a federal corruption case. Gov. Ed Rendell subsequently canned Rubin, who is now the target of a federal corruption investigation. Last week former PTC staffer Michael Palermo pleaded guilty to receiving $290,000 in state funds through bogus work contracts arranged with Fumo. And this summer a state grand jury began to investigate corruption at the Turnpike. As if that all wasn't bad enough, Peter Samuel at TollRoadsNews.com reports today in two separate posts (here and here) that the FBI showed up unannounced at the PTC offices last week, confiscating hard drives and documents as part of a criminal investigation:

A number of Pennsylvania Turnpike officers have lost computer hard drives to the Federal Bureau of Investigation. Last Thursday morning Oct 22, FBI officers showed up unexpectedly at the Turnpike offices in Harrisburg and apparently presented their authority (subpoena) to impound, examine and confiscate equipment and records as part of a criminal investigation. The agents returned and spent most of Friday at the Turnpike also. Nothing has been announced by either the FBI or the Turnpike.

Hypothetically speaking, if Abertis' $12.8 billion bid for a Turnpike lease was still on the table today, would the PTC still have the political clout to convince a majority of legislators to reject it? Rather than put the PTC out of business through a Turnpike lease (as I've argued should have been done), somehow a majority of legislators convinced themselves that a better option was to expand the PTC's power and role in state transportation funding. Smart move, eh?

For all state senators and reps who stood in the way of the lease I have one simple question—how's that decision working out for you?

For the USDOT folks currently evaluating the PTC's proposal to toll I-80—a critical lynchpin of the deal enshrining PTC's continued transportation monopoly, which was already rejected twice before by the Bush-era USDOT—I'd simply ask, can you ignore this? The Obama administration could certainly end up with no small degree of egg on its face if one agency (USDOT) were to approve the PTC's I-80 tolling plan while another agency (FBI) was investigating the PTC for corruption.

UPDATE: In fairness, PTC executive director Joseph Brimmeier is denying that an FBI raid ever occurred. Peter Samuel responded with a source on the record claiming that it did indeed occur:

Bob Dietz, 55 of Lancaster PA, construction supervisor for a Turnpike widening project near Valley Forge says we can quote him as saying the FBI were at the Turnpike's head offices in Harrisburg Thursday afternoon and that they went away with computers and other materials.

Dietz says he has been providing the FBI with details of corruption in connection with a $170m six lane widening in the Valley Forge area. The job was originally bid at $90m, Dietz says. (We're checking this out - editor)

So it's "he said-she said" at this point. More to come as this story develops.

UPDATE 2: Nathan Benfield at the Commonwealth Foundation offers a similar take (with a dose of sarcasm) here:

But hey, it's not your father's Turnpike Commission (despite the number of patronage hires). Rampant corruption is no reason not to give the Turnpike Commission greater authority and control over I-80.

UPDATE 3: In my original post, I mistakenly wrote that Mitchell Rubin was "up on federal corruption charges," when in fact he is currently the target of a federal corruption investigation. I corrected this in the text above. My apologies for this error on my part, and many thanks to the reader who pointed it out.

Time to Repeal Massachusetts' Pacheco Law

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 27 Oct 2009 12:56:00 EDT

Massachusetts State Senate Minority Leader Richard Tisei and State Rep. Jeffery Perry write in separate op-eds (in The Boston Globe and the Cape Cod Times, respectively) that the state's ongoing fiscal crisis demands real government reform, and they suggest that the state could save over $1 billion through a series of reforms that include repealing the state's anti-privatization Pacheco Law. As Perry writes:

Since this anti-privatization measure was approved during the Weld administration, the state has lost out on the opportunity to save hundreds of millions of dollars through the outsourcing of certain government programs and services. The law has effectively stifled state privatization efforts by keeping most work in-house, even when a private company could potentially deliver the same services more efficiently and at a lesser cost.

As I wrote in Reason Foundation's Annual Privatization Report 2009, the 2009 legislative session in Massachusetts saw increased interest in tweaking the Pacheco Law:

The state's "Pacheco Law"—a 1993 procurement statute that many observers say has created numerous procedural obstacles to the privatization of state services—came under scrutiny in May 2009 amid legislative negotiations over the state's FY 2010 budget, which will require closing a $1.5 billion deficit.

By an 11-28 vote, the Senate rejected a budget amendment that would have repealed the law. Amendment opponents argued that the strict law serves an important oversight function and that its repeal would threaten state jobs. Supporters countered with several arguments in favor of repeal:

•Repealing the law would help the state do more with less through privatization, potentially saving hundreds of millions of dollars that could support vital programs.

•The privatization of state services has effectively stopped as a result of the highly restrictive provisions of the law.

•One provision of the law requires state agencies to compare the cost of using private contractors to a hypothetical cost if state employees were to optimize the efficiency of current service delivery, ignoring the true costs of current service delivery.

•The state auditor already has the authority to unilaterally reject contracts he deems "not in the public interest."

But the Senate did approve, 24-15, a separate budget amendment that would exempt all contracts under $2 million in value from the provisions of the Pacheco Law, which currently applies to contracts over $200,000. According to amendment supporters, raising the cap would facilitate more privatization and help the state save millions of dollars.

Let's be honest about it—this law should have never existed in the first place and represents a cynical political attempt to appease public employee unions by stacking the deck against privatization from the get-go. At a time of record deficits, policymakers should be focused on removing unnecessary and counterproductive laws and rules that stand in the way of streamlining government. Ironically, with the law in place, the public employee unions that fought to pass and subsequently protect this law actually made their jobs a little less safe, which is precisely the opposite of what they intended. After all, if you're not outsourcing very many services (driving up costs) and government gets as bloated as it is in Massachusetts, then when it comes time to close a multi-billion budget deficit, by definition the public employees will automatically bear the brunt of the cuts.

Instead of fighting privatization, it might be more sensible to public employees to just embrace competition, as the costs savings generated by privatization will work to reduce the pressure on the state budget over time, which would be a win-win for both the public employees and contractor community.

» Reason Foundation's Privatization Research and Commentary

Oklahoma Corrections Report Ignores Costs to Make Public Prisons Look Cheaper

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 26 Oct 2009 13:31:00 EDT

Following up on my post last week, here are two more reasons to question the Oklahoma Department of Corrections' new report suggesting lower per diem costs in public prison beds relative to private prisons.

First, I just received a copy of the so-called "report" (a three-pager with few details, pretty underwhelming) and it appears that my original suspicion was correct—ODOC is selectively leaving significant costs out of their analysis. And they admit it on the very first page of their report! They start by explaining their new "revised" per-diem calculation, which reveals these major red flags:

"[T]his model does not consider indirect or adminstrative funding in the facility operating cost calculation."
"Similar arguments can be made for indirect costs."
"The revised model no longer reflects costs paid by other agencies..."

Translation—running prisons actually costs more than what's in the ODOC budget alone, so it relies on overhead, administrative and other funds from elsewhere in the state budget. The ODOC claims that they are "revising" their per-diem calculations for the purpose of making their numbers more comparable to how a private prison would calculate per-diem rates, when in fact government works very, very differently with costs smeared across various budgets and agencies.

Here's the kicker—ODOC justifies its revised methodology on trying to get more accurate comparisons in a situation where "each private facility is given a budget and expected to operate within that budget with no 'outside' operating monies." Then ODOC goes on to create a methodology where it removes all of the "outside" operating monies from its own side of the ledger! That's a 180 degree bait-and-switch.

Policymakers should not be fooled. If this isn't a blatant attempt to game the numbers to make ODOC look unrealistically competitive, I don't know what is. The ODOC made this very obvious by including in their new report what the per-diems would have been under their old methodology, and the private sector had lower per-diem rates than public prisons for both minimum and maximum security facilities. Tweak the methodology a little bit, ignore some costs, and viola...under the new methodology the ODOC magically becomes "cheaper." Hmmmm. Classic government obfuscation.

Second, the state's Legislative Service Bureau issued a lengthy, detailed performance audit of the ODOC in late 2007 that clearly found lower costs in private prisons (full report here):

Private prison beds currently cost the state $47.14 per bed per day, a rate significantly below the $51.94 cost of the most directly comparable state-run medium-security institutions (Exhibit 1-6).

The relative cost efficiency of the private prisons appears attributable to the fact that DOC institutions tend to be antiquated, poorly designed facilities that require higher staffing levels to compensate for severe security deficiencies inherent in their physical plant. The private prisons, by contrast, are relatively new institutions designed to facilitate the efficient use of staff resources and to enhance security.

To conduct a fair comparison of the state’s cost for private prisons versus state-operated facilities, we compared the expected cost of private operation of the new maximum-security facilities at Davis to the estimated amount DOC would spend to operate comparable facilities. Our analysis shows a per diem cost of $62.34 for private operation of the facility ($58 contract rate + $4.34 in associated indirect costs) versus a $65.36 per diem for government operation, a difference of 4.8 percent.

Private operation, then, appears cheaper for the state up to a contract rate of $61.03 per bed. Above that price, department management is the cheaper option.

Cost however, is only one of the many factors that require evaluation in a thorough assessment of privatization. The ability of the private sector to develop and open new facilities quickly is a critical advantage. On the other hand, relying upon private correctional capacity involves an element of risk, as demonstrated by DOC’s recent loss of critical bedspace due to Cornell's termination of its contract with the state. Even so, our report recommends improved systems for contract control and management, and an approach to procurement that emphasizes competition and diversification, to address this concern.

At a minimum, state policymakers should be seriously scrutinizing ODOC's new numbers, given that they're reportedly being used to justify why the private prisons should be asked to bear the brunt of a 5 percent budget cuts, while sparing state-run facilities the same. When a change in methodology produces a flip-flop in outcome, it deserves to be taken with a grain of salt until further vetted.

It seems pretty clear to me that the ODOC has decided that the old methodology wasn't working out in their favor, so viola...they just changed the methodology and problem solved. Yet another micro-example of a long-standing phenomenon: when the rules of the game aren't working for the public sector, the public sector tends to just change them.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Some Perspective on Virginia's IT Contract Controversy

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 25 Oct 2009 17:19:00 EDT

In a recent column I argued that the political controversy over Virginia's IT modernization contract with Northrup Grumman should not distract policymakers from the correct course forward—identifying the implementation challenges and working with the contractor to correct them and right the ship. Fairfax City Councilman Daniel Drummond (and former Northrup Grumman consultant) reaches a similar conclusion in this Richmond Times-Dispatch op-ed today that offers some important perspective on the project that shouldn't get lost amid the current kerfuffle:

To fix the problems, though, we need to understand why we are here in the first place. This deal wasn't about technology alone. In addition to fixing the state's ancient and vulnerable IT systems, it was about job creation, economic development, and introducing a new way of governing through a public-private partnership.

When then-Gov. Mark Warner announced the awarding of the 10-year, $2 billion contract in November 2005, state agency IT departments were already being put under one roof known as VITA. The next step of this transformation was to find a private partner to modernize the state's woefully inadequate computer systems. Highlights of the inept system included state employees using 12 separate e-mail services, some agencies using Windows Office 97, and millions of dollars' worth of illegal copies of software floating around.

The modernization concept (and how to pay for it) was this: Turn IT into a service similar to a utility, not much unlike the telephone or electricity. So instead of individual agencies buying their own computers and software, they instead would now buy "seats" that in turn got them not only the latest equipment, but also enhanced security and technical know-how.

In finding a partner, the state was looking for the company to make a significant investment in Virginia by building two new data centers (including VITA's new headquarters) in addition to paying for all of the computers, wires, software, and widgets needed to revitalize the state's IT infrastructure.

The General Assembly also insisted that the contract be equal to the same amount the state would have been paying for its IT services -- not a dime more. To make this happen while also satisfying the need to make a profit, Northrop Grumman would take the financial risk, but it would be allowed to leverage the state's IT network and sell services to local governments, higher education institutions, and the private sector.

The true genius of this was to find a partner that could help expand economic opportunity throughout the state. In other words, this wasn't just a contract -- it was a job creator. Not just the 400 Northrop Grumman jobs the company expects to ultimately create, but the ancillary employment and economic development opportunities that would result.

It worked: In Lebanon, for instance, CGI built its facility next to Northrop Grumman's IT facility, creating an additional 600 jobs in the rural part of the state. That's 1,000 new jobs in Russell County directly attributable to this project. The state also got the added benefit of having 600 VITA employees become Northrop Grumman employees, thus coming off the state's pension and health insurance plans and eventually saving taxpayers millions of dollars.

Clearly, there are difficulties facing this marriage. This deal has not lived up to expectations and both sides are to blame. But with a $400 million break-up fee hanging over its head, the commonwealth can't afford to walk away. Nor can Northrop Grumman, as its reputation and prestige are on the line.

With the upcoming legislative session certain to bring proposals to reform the contract and VITA itself, it's time to take a step back and see what's worked and what hasn't. And those working to salvage this deal need to remember that this partnership isn't about them. Rather, it's about the people who now have jobs in Russell County, the chance to save taxpayers money, and creating a partnership that will be a model for other states to follow while moving Virginia forward.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Privatization News Roundup, Oct. 23, 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 23 Oct 2009 15:16:00 EDT

Some privatization news highlights from the last week that haven't been covered elsewhere on the blog:

FEDERAL

"GAO: Army shouldn't privatize West Point jobs," The Associated Press
"Panel Recommends Privatization of Fannie Mae And Freddie Mac," Talk Radio News Service
"Justice kicks off planning phase of $1.5B contract," Washington Technology

STATE & LOCAL:

"Puerto Rico to Use Private-Partnership Proceeds to Repay Bonds," Bloomberg
"Arresting Developments," Barron's
"Miami Tunnel Reaches Closure," The Bond Buyer
"Despite speed bumps, Port of Miami tunnels continued attracting lender interest," Miami Today
"Lawmakers eye using budget as a tool against Northrop Grumman in IT deal," Richmond Times Dispatch
"Montana Airport to Privatize Security Screening," Security Management
"Airport to privatize security," Daily Inter Lake
"Colorado prison cuts possible elsewhere," Denver Post
"Fire department should keep going to medical emergencies, committee says," Record-Searchlight
"Village gets bid by company to construct sewer system," The Reporter

INTERNATIONAL:

"Scottish Think-tank Propose PFI Replacement," PPPFocus.com
"Private firms model for projects," BBC News
"UK's Royal Mint Workers Protest Against Privatization Plans," Bloomberg
"Japan Post Goes in New Direction," Wall Street Journal
"Makeover of postal privatization," The Japan Times
"France: Voters Reject Postal Privatization," Toward Freedom blog
"Russia may privatize certain state corporations - Medvedev," RIA Novosti
"Poland Banks on Privatizations to Plug Budget," BusinessWeek
"Zambia Shortlists Eight In Privatization Of Zamtel," Wall Street Journal
"Public-private partnerships contribute to country's development," AngolaPress
"Zimbabwe: Privatization Opens Massive Infrastructure Opportunities," AllAfrica.com
"Government announces new wave of privatization," Daily Georgian Times
"More private finance initiatives to reduce budget deficit," Malaysia Star
"6 power plants to be privatized next year," Manila Bulletin

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Policy Stinker of the Day: Arizona Mulls Hiking Vehicle Fees to Fund State Parks

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 23 Oct 2009 13:28:00 EDT

As an Arizona taxpayer, an outdoor recreationist, and transportation wonk, I'm frankly offended by the latest bad idea to craftily pick our pockets in the midst of the state's cascading budget deficits:

State parks officials are turning to the idea of introducing a car-registration surcharge to save the financially crippled parks system from deterioration or even possible shutdown.

The plan, which could face significant opposition in the Legislature, would add $10 to $15 to the cost of registering a non-commercial vehicle in Arizona. In return, Arizona motorists - who likely would be allowed to opt out of the surcharge - could enter any state park without paying admission. The proposal is modeled after programs in Montana and Washington, and backers say it would generate $32 million a year.

"Instead of paying an entry fee of $6 or $10, or buying an annual pass that costs up to $200, every citizen of Arizona with a license for a non-commercial vehicle could enter state parks for $10 to $15 a year," said Bill Scalzo, a member of a task force on state parks appointed by Gov. Jan Brewer. "That is the greatest deal I've ever seen for state parks." [...]

Already, officials have closed three parks and reduced hours at 17 others. Administrators also laid off 40 percent of the parks staff, which oversees 27 parks with 2.5 million annual visitors. "We're moving toward the total collapse of the parks system," said Bill Meek, head of the Arizona State Parks Foundation, a non-profit advocacy organization.

Some lawmakers say they would consider supporting a registration surcharge, so long as motorists could opt out. "I think that would be an excellent way to go," said Rep. Nancy Young Wright, D-Tucson, whose district is home to Catalina State Park. "We need to protect opportunities to connect with nature."

From where I stand in Arizona, over 75% of the state is owned by the federal, state or local government and held in the public trust. Are we really lacking opportunities to "connect with nature?" I do a ton of hiking, biking and camping myself, and you could live here a lifetime and still not explore all of the current public land in the state. Lack of access to nature is really not much of an issue in Arizona.

House Appropriations Chair John Kavanagh nailed it:

[Kavanagh] said requiring motorists to opt out would result in too many people inadvertently donating funds because they had not read the fine print.

"It might generate great revenue, but it's not ethical," said Kavanagh, R-Fountain Hills. "Nice try, but come back with something with a little less scam in it."

Indeed this idea is a scam, and it's terrible public policy.

What's the nexus between vehicle registration and state parks? Right, there isn't one. If policymakers intend to spend the political capital to hike vehicle registration fees, you'd think they'd do so for the purpose of addressing the state's transportation funding crisis, not the state's park funding crisis. Arizona is facing over $100 billion in unfunded transportation infrastructure needs over the next several decades, one primary factor driving the passage of a law to facilitate private sector investment in state transportation earlier this year. With a transportation funding gap that dwarfs the state parks gap, can policymakers really mingle parks and vehicle registration fees with a straight face? (For the record, I don't think vehicle registration fees should be raised for either purpose; mine is more a comment on the "ready-fire-aim," tone-deaf nature of the proposal.)

This is nothing more than a sneaky tax, a way to smear costs across park users and non-users alike. Rep. Kavanagh's right. Many people will just sign the paperwork, write their registration check and never know that they could have opted out of the parks tax. And our state legislature has shown a propensity for fund sweeps and other gimmicks to close the state's ever-mounting budget deficits. So what's most likely to happen is that the new funds get swept out of parks and used somewhere else to close the deficit.

Meanwhile, you've just incentivized more people to use the state parks at the same time that you've left those parks in an operating deficit and are unable to maintain them. So you don't solve the parks deficit at all, and in fact, you accelerate the parks' decline.

Both the transportation and parks long-term funding crises share a similar root—weak user fee structures, bad price signals, and too much socialization and subsidy. As my colleague Adam Summers recently commented on California's state park funding crisis:

User fees provide a fairer funding source since they ensure that those who actually use government services are primarily responsible for paying for those services, reducing tax dollars and giving people more choices.

User fees also offer practical benefits such as increased park management flexibility—allowing park managers to adjust to economic conditions or changes in park visitors' recreational preferences—and greater financial accountability. States such as Vermont, New Hampshire and Texas have realized significant park services cost savings through user fees.

Opening up park management and maintenance services to a competitive bidding process, and turning these operations over to private-sector or non-profit groups, could further reduce costs and help to make the parks self-sufficient while addressing maintenance backlogs.

Read the whole thing for more on why user fees and competition should be the focus of parks funding discussions, not a hidden money grab under the guise of a "voluntary" tax. It seems a lot less voluntary when the tax is already on your bill when you get it and you bear the burden of having to remove it.

For an in-depth exploration, see Adam's 2005 study on improving services and accountability in the National Park System through user fees, as well as this 2003 Reason Foundation testimony before the U.S. Senate Energy and Natural Resources Committee on competitive sourcing in parks.

If this silly idea somehow moves forward, then count me in as an opt-out. And I'll continue to pay their underpriced park entry fees, knowing that I'd actually be very willing to pay twice that if it was a true user fee and was relied upon to turn that park into a self-sustaining operation.

UDPATE: Washington State recently adopted this policy, and Jason Mercier at the Washington Policy Center offered a similar critique on their blog yesterday. Reading his piece, it's now become very clear that Arizona proponents are trying to justify their idea at least partially on the basis of another state that has had exactly one month of a track record.

If Washington State jumps off a bridge, should Arizona follow too?

UPDATE 2: Thanks to Tom Jenney at Americans for Prosperity Arizona for the link. Tom's post further explores the idea of private concessions at state parks (an idea also discussed in California recently) and is well worth a read. If concessionaires can operate the lodges, restaurants, stores, tours and activities in the crown jewels of the national parks—Yellowstone, Death Valley, Grand Canyon, Bryce Canyon, Zion, Crater Lake, Petrified Forest and Rocky Mountain, to name a few—then why can't Arizona look to innovative public-private partnerships for its state parks? After all, if it's good enough for the Grand Canyon...

Unfortunately, as Tom notes, privatization and public-private partnerships were not even considered by the university consultants. Yet another instance of taxation as first resort.

Noteworthy PPPs in 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 22 Oct 2009 16:16:00 EDT

A reporter recently asked me about noteworthy public-private partnership (PPP) infrastructure projects that have advanced in 2009. Since this is a question that there's probably a lot of interest in, I thought I'd share my response. There are certainly several to choose from across a variety of sectors (water, prisons, courthouses, etc.), but I focused my response on transportation since there are a few noteworthy megaprojects that really jump out (and should be emulated by cash-strapped states and cities):

I-635 managed lanes project (Metroplex area, Texas): This blockbuster, $4 billion, 52 year concession project will deliver a technically complex mix of new "free" (untolled) lanes and managed express toll lanes. The state is contributing $445 million in public funds, while the concessionaire will bring the remainder of the financing to the table. The project reached commercial close earlier this year, and financial close is anticipated before summer 2010. Interestingly, the Dallas Police & Fire Pension System is on the investor team, making them the first public pension fund to be direct equity investors in toll road projects in the U.S.

North Tarrant Express (Metroplex area, Texas): This $2 billion, 52-year concession project, also in the Metroplex area, involves a combination of dynamically priced managed lanes & untolled lanes. The state is contributing $570 million in public funds; the concessionaire will bring the remainder of the financing. Interestingly, the Dallas Police & Fire Pension System is one of the investors, making them the first pension fund to be direct equity investors in toll road projects in the U.S. The project reached commercial close earlier this year, and financial close is anticipated by early 2010. Like the I-635 managed lanes project, the Dallas Police & Fire Pension System is one of the equity investors.

I-595 Express Lanes project (Fort Lauderdale area, Florida): This $1.6 billion project to add express toll lanes to I-595 reached both commercial and financial close in 2009. This is an example of an "availability payment" concession in which the the concessionaire will finance, design, build, operate and maintain the lanes and will be repaid over 35 years through "availability payments" (or payments from the state based on delivering the lanes and keeping them "available" for users). In contrast to the Texas projects, in the I-595 case the state—not the concessionaire—will actually collect the tolls in this project, which effectively means that the state takes on the revenue risk of the project. Counterbalancing that is that these types of arrangements require less upfront equity invested, so they may be easier to finance in today's market, relative to full concessions.

Also of note, the two Dallas-area projects will ultimately total about $6 billion in infrastructure investment to eliminate some of the most congested bottlenecks in the region (and state), and the state will only be contributing roughly $1 billion of that. So the state essentially pays for a can and gets a six-pack. Adding in the state's other toll concession—State Highway 130 segments 5 & 6, where the private sector is delivering all of the financing for the $1.3 billion project—the state is paying about $1 billion to get over $7 billion in investment. By contrast, Texas received less than half of that (about $2.5 billion) for highway improvements from the so-called "stimulus."

Along similar lines to something I've written before, if you really want to see a stimulus, unleash the billions in private capital sitting out there looking for projects like these to invest in.

» Reason Foundation's Transportation Research and Commentary

Privatization and State Laboratories of Democracy

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 21 Oct 2009 16:46:00 EDT

Following up on my post last week on the cancellation of Indiana's welfare modernization contract with IBM, there have been a mixed bag of opinions floating around in the state newspapers, some of which unfortunately paint the situation as a "failure of privatization," (which I argued earlier was a false interpretation). However, I found this sensible editorial in The News-Sentinel (Fort Wayne) to be spot on:

The failure of the plan should not be taken as proof that the effort never should have been tried in the first place. If we still believe in our republic's promise that states will be laboratories of democracy, we must accept experimentation. And some experiments fail.

The point is to learn from the failures. It could be argued that Indiana could have learned better from Texas, where a similar effort to privatize welfare failed spectacularly. And it should be argued that Texas and Indiana together provide a cautionary tale for other states planning such efforts.

But the focus should be on improving privatization efforts rather than eliminating them. Government can and must both serve its constituents and become more efficient.

Oklahoma Corrections Study Merits Scrutiny

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 21 Oct 2009 03:02:00 EDT

Barbara Hoberock at the Tulsa World reports today that the Oklahoma Department of Corrections has done an internal study which they claim shows that the state has similar or lower costs per prison bed than private prisons. Unfortunately, having scanned the ODOC's website, they haven't made a copy of the report available so that we can review their methodology, so at this point I think it's best to take the study with a grain of salt, because the reported findings raise more questions than answers. First, some context from Hoberock's article:

The findings were released to the state Board of Corrections last week. [Department of Corrections Director Justin] Jones said the department is required to report rates to the board each year. "We are either less than the private per diems or extremely competitive," he said.

The cost to house an inmate in a public, medium-security bed is $44.35 a day, compared with $49 for a bed in a Corrections Corporation of America lockup and $44.83 for a bed in a GEO prison, Corrections Department figures show.

Jones said the public rates were calculated before the agency's most recent budget cuts, so they do not include recent cuts in contracts with private prisons.

The daily cost to house an inmate in a maximum-security state prison is $63.70, compared with $64.50 in a CCA prison, the department says.

Some red flags here:

These numbers don't jive with the ODOC's own data reported in its March 2009 Facts and Figures publication. There it clearly shows a medium security per-diem rate of $56.10, and a maximum security per-diem rate of $70.04. Both are clearly higher than either the public or private per-diems cited in the article. It may be that these are old figures, it may be that they're an average of all facilities (public & private), or it may be that the ODOC's new report ignores important costs—it's hard to tell without more information. Regardless, the discrepancies warrant further review of the new study's methodology.

It may even be that budget cuts and other system changes have actually reduced medium-security per diems by 20 percent in 6 months (from $56 to $44). I seriously doubt it, but for the sake of argument let's say it's accurate. In that case, I'd say that the outcome would then validate the findings of the Vanderbilt University study discussed in Reason Foundation's Annual Privatization Report 2009, which found that states can better keep their corrections budgets in check by partnering with the private sector to deliver correctional and detention services. In essence, the study demonstrated that the injection of competition with private prisons worked to drive cost efficiency in the public prisons. But again, this interpretation is dependent upon the idea that the state managed to bring costs down by 20 percent this year, which just doesn't happen very often in government.
Does the new study factor in the capital costs of the prisons (several hundred million for roughly 5,000 new beds) the state would need to build to house the thousands of inmates currently incarcerated in private prisons? A true apples-to-apples cost comparison would need to factor that in. It's easy to make the public sector look very cost competitive when you start ignoring significant costs like these. Throw in tens of millions in annual debt service for a public bond issue to build new prisons, and the public sector per-diem rates will starts to look a lot different. If the goal is to compare the value for money for public prisons vs. private—which should be the underlying question, right?—then you can't just wish away major costs, nor the societal trade-offs for pursuing public debt for prisons, as opposed to funding other priorities (or just not adding to the debt burden in the first place).
Similarly, did the ODOC factor in those costs borne by the state outside of the corrections budget? What about legal expenses? How about risk management and insurance coverage (states are usually self-insured for these sorts of things, which is probably not in the corrections budget? What about facility maintenance, HVAC systems and the like—are those costs captured in the corrections budget or handled by another agency? What about overhead and utility costs? The list goes on, which is why (a) it's tricky to do good public-private cost comparisons (especially when they're done by the contracting agency itself, who may have an incentive to game the numbers out of self-preservation), and (b) the reported findings of the ODOC report should be taken with a major grain of salt. As they stand today, the numbers are not transparent.

In fact, this is what makes this statement so ironic:

However, Jones said the evaluation is deceiving because the state system also supports an agricultural operation and has different inmate health care costs than private prisons do. The public system does not transfer inmates with severe health problems to the private prisons, he said. "We still have costs they don't have," he said.

And the private prisons have costs the state doesn't have, like taxes for one. Again, a key reason why a true value for money analysis would look at all of these factors, shared costs and unique costs alike, to try to get to an accurate public-private cost comparison.

I'm not the only one who's skeptical at this point:

Sen. Anthony Sykes, R-Moore, the chairman of the Senate Appropriations Subcommittee on Public Safety and Judiciary, said the analysis was based on assumptions and did not appear to take into account factors that cannot be ignored. He said the state has a long history of maintaining a balance between public and private prisons.

"It appears that DOC has used this analysis to justify having private prisons and halfway houses bear the entirety of the 5 percent cut ordered by the Office of State Finance and that no cuts are being imposed on public facilities," Sykes said. "At the very least, this action by DOC places the state in potential breach of contract."

I don't want to speculate on motivation, but knowing that the study is being released at the same time as the state is requiring the private prisons to bear the entire burden of agency budget cuts demands serious scrutiny of the ODOC analysis. The implication is that Oklahoma has achieved something no other state (or nation) has—maximum efficiency in their public prisons, to the point that they should be spared any cuts at the same time that many other state services are.

Let's get real—most states are in a fiscal crisis. No one should be off limits when it comes time to spread the cuts around state government. Whenever some agency claims that it should be given special treatment, it should generally be interpreted as a self-interested attempt to protect its budget. Ask most state agencies and they'll tell you they too have one thing or another that deserves protection from spending cuts. If policymakers listened to all of them, significant spending reductions in state government would be few and far between.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary