Reason Foundation - Authors > Geoffrey Segal

Comparing the Performance of Private and Public Prisons

info@reason.org (Geoffrey Segal) — Fri, 04 Apr 2008 00:00:00 EDT

The Arizona Department of Corrections (ADC) recently released its latest cost comparison study between the ADC operated facilities and private facilities operated for the state. State law requires these occasional reviews to be conducted and the previous two studies found that the private facilities operated with significantly fewer tax dollars than their government-run counterparts, achieving cost savings of 17, 13.6 and 10.8 percent in 1997, 1998, and 1999 respectively. Despite this history and a clear track record of success throughout the country, the latest ADC review suggests a curious shift - that private prison costs were 8.5 and 13.5 percent higher than state costs.

Even a cursory review of the study finds a logical explanation for the quick turnaround: If you change the rules, you can change the results.

After several years of study and a widely accepted methodology that consistently produced results that demonstrated the success of private prisons, the ADC chose to change the rules rather than compete. Put simply the new cost analysis ultimately removes or deducts costs traditionally attributed to the ADC from their bottom line, while adding additional costs to the private facilities. This type of accounting can only be described as "Enron-like"—where the accounting rules are determined by the desired outcomes.

To be fair, not all of the changes are necessarily wrong or unfair. For example, contract administration and oversight costs are added to the average daily cost of private facilities—adding $2 to the daily bottom line cost. This is a widely common and acceptable practice. Indeed, it was undertaken in the previous two reviews as well.

However, this raises a question. Who is more accountable—public or private facilities?

In this review, no additional oversight costs are charged to ADC facilities. It seems as if public and private facilities are held to different standards—and the private facilities achieve a higher level of oversight given the extra cost to administrate and monitor those facilities. Given that actual contract administration represents a tiny fraction of the cost added to private facilities, ADC facilities must not have the same level of oversight or else they would have been applied the same costs. Thus, the extra cost is an extra benefit for private prisons.

In another example of Enron accounting, the review also eliminates some costs for the ADC facilities. It pretends that money was not spent by the state. For example, it removes $1.09 from the daily cost of ADC beds for the work incentive plan because this cost is "entirely borne by the state." Well of course it is; it's a state program isn't it? For comparisons' sake you can't just ignore some costs. If the ADC were operating the private facilities this program would remain in place—and those costs would continue to be borne by the state. Thus, they should be included in any consideration and review of the true costs of operated an ADC facility.

The study authors suggest that these changes should be made because "historical" data can only tell you so much. And that ADC may develop a better design and generate savings in future projects. While this may be true, historical data is terribly important. It provides a baseline and an expectation. For example, since the first introduction of private prisons in Arizona the real cost has declined from $47.27 a day in 1995 to $44.77 in 2004. During the same time, public facilities have seen a double digit percentage increase ($43.79 to $53.63).

If the data was allowed to speak for itself, before adjustments (additions and subtractions) the private facilities would continue to fair very well. Consider this, the average cost of ADC facilities in 2003 - $46.90, and 2004 - $47.30, are both higher than the average private cost ($43 and $46.57). That's even after adding additional oversight to the bottom line.

Another key consideration is that private facilities can only control their costs. They have no impact over state administrative or oversight costs. The data suggests that they have superior ability to control their costs and prevent escalation. The average daily rates over the course of the three studies is evidence enough—where they've had direct control over their costs, they've gone down. ADC's went up in every category.

Beyond this, the new study format also fails to consider the relative quality between public and private prisons, a true disservice. While costs are important, quality and performance are just as if not more important factors that should be included in any consideration.

That's where a more detailed analysis identifies some fundamental flaws in the analysis.

First the formula used to generate the average daily cost is inconsistent and the authors fail to give a justification. The state's own Per Capita Cost Documentation reports that private prisons managed 1,678 inmates in 2003 and 1,685 in 2004—this includes temporary and emergency beds that the private facilities operated inside existing facilities. However, the analysis uses only 1,250 as the bed count for private facilities. This inflates the true per bed/inmate cost by over several dollars a day!

Second, the analysis leaves out any construction and start up costs. Private facilities factor these costs into their contract price upfront and recover those costs over the life of the contract. However, the state separates capital and operational expenditures and does not account for these costs in their per bed/per day cost. These costs, conservatively add between $3 and $5 per bed. This cost should be added to the in-house cost.

Third, while the analysis attempts to capture only those costs borne by both facilities it fails to subtract out special treatment costs that each private facility provides under contract, not provided by the state. While there is no way to account for these costs given the available data, it certainly does skew the results. Private facilities price would drop by at least a $1 if these services were removed from the evaluation.

At the end of the day, citizens don't care who is providing a service as long as it is being provided effectively. Results and performance are what ultimately matter to taxpayers, not whether a private or public employee does the work. In order to generate real discussions about improving performance in our correctional systems, we need to get away from ideology and partisanship. Policy debates need to focus on results, performance and achieving the best outcome with the limited resources available. Failing programs, whether public or private, should be halted in favor or better-performing programs. The debate should move away from public vs. private and toward performing vs. non-performing. It shouldn't matter what type of organization produces the best outcomes, so long as outcomes are achieved.

Just as in the cost category the private prisons faired exceptionally well in the previous years' studies. In fact the 1997 review determined that the private facility (there was only one in the state at the time) was superior in public safety issues, protecting staff and inmates, and compliance with professional standards.

While not as one sided, the 2000 findings were significant. Government and private prisons were compared on 10 individual dimensions including security, food service, facility safety and sanitation, and inmate health services. In the first year, the private prisons outperformed ADC prisons in seven of 10 dimensions; in the second year, private facilities and ADC split the dimensions five to five.

Perhaps the Maximus analysis did not set out to review the relative quality because they couldn't "justify" changing those rules?

Streamlining San Diego

Sat, 01 Sep 2007 18:00:00 EDT

...

Officials Should Embrace Private Infrastructure Investment

leonard.gilroy@reason.org (Leonard Gilroy) info@reason.org (Geoffrey Segal) — Thu, 09 Aug 2007 10:59:00 EDT

The I-35 tragedy in Minneapolis is shining the public spotlight squarely on America's decaying infrastructure. A recent Federal Highway Administration report estimated that the $70 billion annual capital investment in our highways is roughly $9 billion less than what's needed just to maintain our highways and bridges; an additional $60 billion per year would be needed to improve and expand the highway network to keep up with the increasing demand for road space.

The challenges and needs of our infrastructure network are no secret to federal and state officials. The unfortunate reality is that most states lack the resources to adequately maintain their current roads and bridges, let alone build the new projects needed to reduce the traffic jams that are increasingly stifling the efficient movement of people and goods. Congressional earmarks and pork projects have steered limited resources away from priority projects.

It is time to rethink how we fund, build and maintain our infrastructure.

For some, the remedy is easy—a massive federal spending program funded by a hike in the federal gas tax. This would be a short-sighted response that would inevitably pass the problems along to future leaders. Gas taxes are an unsustainable and highly inequitable funding source because inflation and the increasing fuel-efficiency of our vehicles eats away at the money generated. As for a new federal spending program, a strong federal role, which emphasizes politics over pragmatism, is precisely what got us into this mess. Congressional earmarks—spending on pork projects—have been diverting limited resources away from priority projects for too long.

This business as usual approach is not going to fix an increasingly broken system. Unfortunately we'll be left with worsening gridlock, aging infrastructure, and a transportation system incapable of meeting the needs of a growing economy and population. Fortunately, a new paradigm has emerged—private capital and public-private partnerships—to deliver a 21st century infrastructure network.

Reason Foundation's recently published 21st Annual Privatization Report includes a lengthy section demonstrating how the private sector can play a significant role in financing and developing all sectors of infrastructure. This has been happening in Europe, Australia, and other parts of the world for decades, but is just starting to happen here. In the last few years, private companies have raised at least $100 billion of capital for investment in U.S. infrastructure.

This is part of a larger, bipartisan trend in which the doors to private capital and expertise are increasingly being opened by innovative, forward-thinking policymakers.

Chicago Mayor Richard Daley, a Democrat, started the trend by leasing a toll road, the Chicago Skyway, for $1.83 billion. Daley has continually asked questions like, why is the city of Chicago running parking garages? Daley has privatized over two dozen activities and has taken the first steps towards possibly leasing the Midway Airport.

Its no surprise that Indiana is the only state in the nation with a fully funded transportation investment plan after Republican Governor Mitch Daniels initiated a lease of the state's underperforming toll road for $3.85 billion. New construction spending will quadruple in the next eight years, including more lane widening and additions than can possibly listed. US-31, I-65 and I-69 will all be the beneficiaries of new investments, to name a few.

Texas Governor Rick Perry (R) launched a bold and ambitious transportation program in which private companies are playing a significant role in financing, constructing, and operating the road capacity needed to reduce congestion, improve air quality, and goods movement. Even Pennsylvania Governor Ed Rendell, a Democrat, said his state could "have generated another half-billion dollars for bridges, roads, and highways had we leased the Turnpike to a private operator."

Roads and bridges are in the spotlight today, but our infrastructure challenges don't just stop with our roads. Many of our nation's water systems have been in service longer than originally designed and the cost to upgrade them is truly staggering. Indeed, the Government Accountability Office pegs the cost between $485 billion and $1.2 trillion. Ports and waterways, airports and electricity generation needs bring the infrastructure price tag to a staggering amount.

Fortunately, there is a track record for private sector participation in these areas. Over 2,400 publicly-owned water and wastewater systems contract with private firms to provide system operations and maintenance services, and thousands of private, regulated water and wastewater utilities serve approximately 15 percent of the U.S. population. Consumers routinely purchase phone, internet, and electricity services from highly-regulated private companies subject to strict government oversight.

The solution to our infrastructure is more private participation, not less.

Americans, culturally infused with a healthy skepticism of big government and reliant on private-sector know-how in all other facets of their daily lives, somehow suspend their disbelief where infrastructure is concerned. They should find it unacceptable that countries like France—which has fully privatized its equivalent of our interstate highway system—are embracing private infrastructure investment, yet we're stuck with a transportation system held hostage by politics and government inefficiency.

The choice is clear. In this case, business as usual will result in higher taxes and marginal improvements at best. Embracing public-private partnerships puts us on a new path with new sources of capital that don't further burden the taxpayers.

There is little doubt that our infrastructure needs significant investment and improvement, and the money just isn't there to do everything. Its time to modernize our infrastructure policy. Public-private partnerships are vital to the overall success and development of our infrastructure. Private capital markets are standing at the door willing to help. It's time for lawmakers to welcome them in.

Developing Transparent, Accountable and High Performing Competition and Privatization Programs

info@reason.org (Geoffrey Segal) — Tue, 31 Jul 2007 14:03:00 EDT

Mr. Chairman, and members of the committee, my name is Geoffrey Segal. I am the director of government reform policy at the Reason Foundation, a public policy research and education institute based in Los Angeles. Reason first began researching privatization in the late 1970s and is the publisher of the world's two longest running periodicals on privatization—the monthly Privatization Watch and our Annual Privatization Report which just published its 21st edition. Our experts have advised numerous presidents and state and local governments on how reform efforts can improve services and reduce costs.

Over the past decade, more and more governments have been inviting private firms to compete for contracts to provide services once restricted to public sources. This practice, known as privatization, contracting-out, and most recently competitive sourcing, has been widely embraced as an effective policy tool for driving change in organizations, improving performance and restraining costs. The key, of course, is ensuring that it is done correctly in a transparent, performance-based manner.

This trend is not confined to any particular region, or to governments dominated by either major political party. The reason for the widespread appeal of competitive sourcing is simple: it works.

According to a vast array of studies by the federal government, academic researchers and others, competitive sourcing historically has resulted in cost savings in the range of 5 to 50 percent.[1] Recently the federal government has experienced savings averaging 28 percent. Perhaps more impressive is that for every $1 the federal government has invested in competitive sourcing—preparing the competitions, managing them, and long-term oversight—it saves $31.

But cost savings aren't the only benefit. A review of state practices around the country found that a need for greater flexibility, access to skills not available in-house, and private sector innovation are all important factors in a state government's decision to outsource or institute competitive sourcing of services.[2] Indeed, initiatives that are considered best practices for government procurement and service contracting utilize 'best value" techniques, where, rather than purchase on low cost alone, governments choose the best mix of quality, cost, and other factors.

At its most basic level, competitive sourcing involves looking at everything government agencies do and determining whether private firms could do the same things more efficiently and effectively. I'm often asked what can government compete. Perhaps, its easier to identify what it cannot open up to competition, since virtually every service, function and activity has successfully been subjected to competition by a government somewhere at sometime. When former Florida Governor Jeb Bush was asked what he wouldn't privatize, he said, "…police functions, in general, would be the first thing to be careful about outsourcing or privatizing. This office. Offices of elected officials ... and major decision-making jobs that set policy would never be privatized." Its worth noting that Florida used competitive sourcing more than 100 times under Bush's watch and saved more than $741 million in actual dollars and prevented an estimated $1.4 billion in additional costs.

Former Indianapolis Mayor and now Harvard professor Stephen Goldsmith, used a different but widely accepted approach known as the yellow pages test; essentially saying that if a service can be found in the yellow pages, government ought to buy it rather than produce it. This mirrors a former New York Governor Mario Cuomo quote, "It is not a government's obligation to provide services, but to see that they are provided."

Another approach utilized by the state of Virginia and the federal government is to conduct a formal inventory of government activities to identify opportunities where competition could improve services and save taxpayer money.

Regardless, competition is about finding new ways of doing business and buying something different from what you already have. A sound process is essential to ensure a transparent, accountable, ethical, performance-based and competitive environment. A standard procedure ought to be developed with a dedicated team or 'unit' tasked with managing the process to ensure that the benefits of sharing lessons learned and best practices among agencies is not lost.

To date only the federal government and a handful of states (e.g., Florida and Virginia) have created commissions or administrative centers to address competitive sourcing. In each case, there is an establishment of an independent decision making body. Each organization created a uniform cost accounting model and recognized the importance of a standardized process for identifying and implementing competitive sourcing.

The key to success, in many ways, are the rules themselves. A successful process will ensure transparency, accountability, and the delivery of high performance services. By utilizing best practices and lessons learned from existing state and federal experience the likelihood of achieving those results is greatly enhanced.

I will close by making several recommendations that are based on more than 30 years of best practice.

Seek stakeholder input and establish clear, standard lines of communication with the public to avoid a lack of lack of transparency

Establish a core group of procurement officials to assist in procurement planning and decisions

Develop performance metrics and goals; include them into contracts and other oversight plans

Develop strong oversight, monitoring and assessment protocols before entering into a contract to guarantee compliance and performance

Develop a centralized 'unit' designed to manage initiatives and to establish best practices, utilize lessons learned and present a standard performance-based process

Focus on changing antiquated business processes

Conduct an annual or biannual inventory of all functions and activities performed by state government

These are some broad strokes to provide you with some guidance as you move forward with the development of your policies. While you can emulate others and their programs your policy must be designed to meet your unique needs and goals. Furthermore, while flexibility is important it must be stated that you cannot be flexible with the core principles of transparent, accountable and results or outcome based management.

As the think tank that has done the most research on privatization, competition and outsourcing, the Reason Foundation welcomes the opportunity to be of further assistance to this committee and body as a whole, as you learn more about these new approaches. Please feel free to call upon us.

Thank you again for this opportunity to be here today. I look forward to working with you and answering any questions you may have.

Geoffrey F. Segal is the director of government reform at Reason Foundation. An archive of Segal's work is available here and Reason's transportation research and commentary is here.

Endnotes

[1] Over 100 studies of cost savings from competitive sourcing are reviewed in John Hilke, Cost Savings from Privatization: A Compilation of Study Findings, Reason Foundation How-to Guide No.6, (Los Angeles: Reason Foundation, 1993), http://www.reason.org/htg06.pdf. For an overview of research on cost savings in federal competitive sourcing, see General Accounting Office, DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates, Washington, D.C.: GAO/NSIAD-00-107, Aug. 8, 2000; General Accounting Office DOD Competitive Sourcing: Some Progress but Continuing Challenges Remain in Meeting Program Goals, Washington, D.C.: GAO/NSIAD-00-106, Aug. 8, 2000; and Center for Naval Analysis, "Long-run Costs and Performance Effects of Competitive Sourcing," Washington, D.C., 2001 http://www.cna.org/research/studies/comsourc.html. For a classical text on this subject see E. S. Savas, Privatization and Public-Private Partnerships (Washington, DC: CQ Press, 2000).

[2] Keon Chi and Cindy Jasper, Private Practices: A Review of Privatization in State Government (Lexington, KY: Council of State Governments, 1998 and 2003).

Borrowing Won't Fix Pennsylvania's Road Problems

info@reason.org (Geoffrey Segal) — Wed, 25 Jul 2007 12:08:00 EDT

TollRoadsNews.com recently broke the news that New Jersey had received a $30 billion offer to lease the New Jersey Turnpike. After seeing the latest state transportation funding plan – and how it fails to reduce congestion, Pennsylvania taxpayers are going to wish Gov. Ed Rendell hadn't shelved his own plans to lease the Pennsylvania Turnpike for billions that could have been spent improving transportation across the state.

The state budget and transportation spending compromise recently reached by the governor and legislature will do little to relieve congestion. The compromise will not lead to a well financed or functioning system because it relies on borrowing billions. Borrowing is bad news for commuters because bonds end up costing taxpayers nearly $2 for every $1 borrowed. Wouldn't spending $2 on new roads beat $1 for new roads and then sending the other dollar to the credit card company?

An annual Reason Foundation study just ranked Pennsylvania's state highway system 36th in the country, finding 43 percent of the state's highways already congested. By 2030, Pennsylvania will need 4,450 new lane-miles at a total cost of $26 billion, in today's dollars, to prevent even more severe, economy-crippling congestion.

Failing to bring reforms to aging transit systems and the Pennsylvania Turnpike Commission (PTC) will have long lasting negative impacts on Pennsylvania. Morgan Stanley recently concluded that a turnpike lease could net as much as $18 billion for the state's roads. Keep in mind that experience with toll roads in Indiana, Chicago, and Texas shows that private sector proposals are often twice that of the estimated value, so some experts wouldn't have been surprised if Pennsylvania had fetched over $30 billion in a turnpike lease. But rather than tap the private sector, Pennsylvania will be giving more power and authority to the PTC, hamstringing future generations of Pennsylvanians to high cost, poor quality transportation options.

Just over a year ago, Indiana leased its toll road for 75 years and now they're the only state in the nation that has a fully funded transportation investment plan. In fact, thanks to its toll road lease, Indiana is earning $6 of interest every second. That interest money will continually be spent on critical road projects that wouldn't have been funded otherwise. Indiana has plans to spend $12 billion on road projects by 2015.

Meanwhile in Pennsylvania, the transportation plan calls for borrowing, raising tolls on the turnpike 25 percent in 2009, and placing tolls on Interstate 80, a route that is currently free. The plan to toll I-80 and take the proceeds to fund improvements around the state is probably illegal under federal law.

The federal government has placed strict rules on placing tolls on existing taxpayer financed highways. It's not likely that Pennsylvania's plan meets those guidelines potentially leaving commuters stuck in traffic.

Rendell took the turnpike lease off the table in order to reach this compromise deal full of borrowing and fee increases that don't promise better commutes. The global trend towards public-private partnerships is a better answer for the state's future. Indeed, Rendell recently said, "in the palace of truth and justice, we would lease that baby," referring to the turnpike.

Rendell is right on this one—sadly he didn't keep up the fight. His fellow Democrats should ask Chicago Mayor Richard Daley, also a Democrat, how leasing one of the city's major roads to a private company turned out.

"I'm happy to state that our expectations have been met, and possibly exceeded," Daley said on the one year anniversary of the $1.83 billion lease.

Do you think Pennsylvania's taxpayers will say the same positive things one year from now about the borrowing? With billions in new debt, higher fees, possibly having to pay tolls on roads that are free today, and consistently worse commutes, I'm guessing the answer will be a resounding "no."

The Indiana Toll Road: One Year Later

info@reason.org (Geoffrey Segal) — Wed, 25 Jul 2007 11:52:00 EDT

A little over a year after the Indiana Toll Road lease, taxpayers and politicians should look back to see if the predictions about the deal came true. To be fair, one year into a 75-year agreement we can't begin to measure the full impact that the deal will have on Indiana but evaluating the lease thus far is a useful exercise nonetheless.

First, how are operations on the Indiana Toll Road?

Despite doom-and-gloom forecasts, the sky did not fall. The foreign companies operating the road didn't scoop up the pavement and move the toll road to Australia or Spain. When it snowed, the road was plowed. A major construction program has been initiated, electronic tolling was just rolled out and a new third lane to relieve congestion on the road's western end will be developed soon.

Have the private companies raised toll rates through the roof?

Before the lease, tolls hadn't been increased in 20 years, so we knew a toll increase was needed. With tolls of just 15 cents at some booths and the government estimating it was costing about 34 cents just to collect those 15 cents, Gov. Daniels half-joked that the toll road should be shifted to the honor system. Today, tolls for cars are only $4.65 for the entire 157-mile trip; still significantly less than what neighbors in Ohio and Illinois pay.

Additionally, tolls are now being collected electronically for the first time. Toll booths on the first 23 miles of the road have already been equipped for electronic collection. The remaining collection spots will be retrofitted by year's end.

What about the proceeds the state got from the deal?

Indiana is the only state in the entire country that has a fully funded transportation investment program. In fact, Hoosiers are earning upwards of $6 of interest, a second—more than $500,000 a day—while other states struggle to adequately invest in their infrastructure. The state is expected to spend $11.9 billion on road construction by 2015. US-31, I-65 and I-69 are just a few of the beneficiaries of new investments.

In comparison, Ohio has been scaling back new transportation projects; deferring projects until funding can be secured. Things will only get worse for other states too because the Federal Highway Trust Fund is now estimated to run out of money in the next two years.

According to Texas Transportation Institute research, Indiana's traffic congestion has increased 20 percent since 1982, costing travelers in Indianapolis alone more than $360 million per year in wasted fuel and lost time. And a 2006 Reason Foundation study found that to significantly reduce the state's severe congestion and prepare for growth expected by 2030, Indiana needs almost 2,270 new lane-miles at a total cost of $3.1 billion, in today's dollars. The toll road deal makes many of those needed projects possible.

What about politics?

Prior to the 2006 elections, Indiana House Republicans held 11 seats in toll road counties—afterward, they held 10 seats. The only loss was Rep. Steve Heim in the 17th District, which consists of two non-toll road counties and a small portion of LaPorte County away from the Toll Road.

The ultimate political question remains to be answered—can the governor win re-election? Opponents are lining up in hopes that the toll road deal is Daniels' albatross. Yet, Daniels campaigned on shaking things up and changing the way government does business. He can point to the toll road as just one more example of how he kept his word and brought innovation and change to Indiana.

While other states are struggling to fund vital infrastructure improvements Indiana is equipped to build the roads it needs, producing more mobility and reduced congestion for taxpayers and businesses. The bottom line is that one year later Indiana is better off having leased the Indiana Toll Road.

National Parks Need Competitive Sourcing

info@reason.org (Geoffrey Segal) — Tue, 24 Jul 2007 16:22:00 EDT

To date everyone has been talking about theory, I want to provide a little perspective to what this means. The 30 percent figure is thrown around as potential cost savings from competition – let’s assume that this figure is off by a margin of 50 percent and that savings are truly only 15 percent. The National Parks Service, which has 16,000 employees has identified approximately 2,200 positions that are commercial in nature – competing only 20 percent of those would result in savings of $6.6 million in the first year alone (assuming that NPS spends $100,000 on the average position – which is total NPS spending on a per FTE basis). The savings seem small, however, this only represents NPS competitive sourcing efforts – the savings are much, much higher if you incorporate the entire Department of Interior competitive sourcing plan. With that said though, these savings translate into the treatment of over 40,000 additional acres of public lands deemed in danger of catastrophic wildfire; or $6.6 million dollars of additional maintenance, reducing the backlog plaguing our national parks; or allowing for more funds to be transferred into cleaning additional acres of wetlands or degraded lands in our nations parks; or best yet, allow for free admission to popular national parks like Yellowstone, Yosemite, Glacier, the Everglades, or the Statue of Liberty.

If this committee wants to assume that direct federal provision is the most efficient, they must fully understand what the tradeoff is, and the costs associated with it. In this case, it is the opportunity for NPS to better achieve its agency’s mission and goals:

1. Enhance and ensure environmental protection (wetland and degraded land cleanup);

2. Public enjoyment of recreational facilities (maintenance of facilities); and

3. Public safety (wildland fire program)

Again, even if we’re wrong about the 30 percent and savings are only 15 percent, this is better for the American taxpayer.

Recently the management of the National Parks Service (NPS) has been under a microscope. A series of financial lapses and a multi-billion dollar backlog of maintenance and other work signal weak standards and general mismanagement. For example, “in 1997, the NPS inspector general reported that officials at Yosemite used taxpayer money to build 19 staff homes for $584,000 each—and in 2001, the General Accounting Office (GAO) acknowledged recent NPS efforts to overcome this troubled legacy but concluded that efforts had fallen short in several significant areas.”

Additionally, park users themselves have noticed the poor condition of many of our national parks. In a recent Q&A with Interior Secretary Gale Norton two separate questions were posed regarding the condition national parks or the facilities that service the parks were in.

Washington, D.C.: The last time I visited several well-known national parks in the west, the roads were in very poor shape with potholes, no shoulders for bicyclists, hard to read signs and inadequate places to pull over to see park features. Is fixing the roads in the parks part of the backlog your report talks about?

New York, N.Y.: Our national parks are in a bad state, with backlogs and dilapidated facilities.

These reports and observations cannot go unnoticed. Our national parks are the hallmark of what makes America a great nation. For too long, however, they have suffered from mismanagement as maintenance and much-needed upgrades and additions have gone unfinished. The President’s Management Agenda (PMA) is a set of initiatives designed to improve the management of federal agencies by adopting performance-based criteria for decision-making and action. Competition or competitive sourcing is a major component of the PMA, which simply means a systematic effort to have commercial activities in the federal government periodically go through a process of competition.

The competitive sourcing initiative forces agencies to put their fingers on their own pulse. It provides a framework by which agencies examine whether they have the right skill sets, technologies and organization structure to provide Americans the best possible service—service that is effective and efficient. Through the initiative, agencies review certain tasks and activities, evaluating whether they can re-engineer the work to improve service quality. Contrasting the status quo and the re-engineered option with what a private firm, or, potentially, even what a state or local government might charge to perform the same work. The bottom line is that these evaluations are used to determine and provide the best value to citizens.

Competitive sourcing has two oft-overlooked related benefits. First, it allows agencies to refocus on core functions and mission-critical activities. Secondly, it helps them address their human capital management. Essentially, it enables federal managers to rethink the structure of their workforce.

The federal government human capital management challenges have been well documented—while not as severe as originally thought, the problem continues to persist. Competitive sourcing provides a unique opportunity to agencies in managing the structure of the workforce. Put simply, incorporating competitive sourcing into the broader context of human capital challenges creates linkages and improves flexibility. Agencies could move existing staff between agencies or within the agency to activities considered core or mission-critical as needed. Competitive sourcing is a means of tapping new sources of human capital to meet current service needs. Indeed, competitive sourcing is fundamentally about accessing new pools of talent.

Essentially competitive sourcing is a tool that redeploys human capital. A common misconception about competitive sourcing is that it leads to layoffs and to loss of pay and benefits for workers. But a long line of research shows that in fact the majority of employees are hired by contractors or shift to other jobs in government while only 5-7 percent are laid off. In fact, competition leads one portion of existing human capital to join with the new human capital the contractor brings to the table, and either or both may be utilized in new ways to meet the goals of the government agency. Private contractors are more able to crosstrain and develop workers to meet human capital needs. At the same time, the government agency can redeploy many workers who did not switch employment to the private contractor and can retrain and reposition them to meet other human capital challenges. Agencies already do have tools that have assisted them with human capital issues in the past, and these remain promising tools for the future—especially with moving resources and personnel around. The Office of Personnel Management mandates that agencies prepare both a Career Transition Assistance Plan (CTAP) and Interagency Career Transition Assistance Plan (ICTAP) when a reduction in force (RIF) is expected or when an activity is being competitively sourced. These programs give managers an additional tool to fill needs and strategically focus on service delivery.

Competitive sourcing creates three opportunities for meeting human capital challenges: a) it is a means of bringing in private sector human capital to meet government service needs, b) if competitive sourcing displaces some government workers, they can be redeployed and retrained to meet yet other human capital challenges, and c) it changes the way existing human capital is utilized.

With this said, competitive sourcing is not new to NPS. In fact, in 1998 NPS was ordered to contract with private architectural-engineering firms for 90 percent of its design work and required that all construction oversight be handled by private firms. Additionally, House report 105-163 directed the NPS “to continue to increase its contracting of commercial activities, with a goal of divesting itself of such activities by the end of fiscal year 1999.” Furthermore, the report stated that “when services or products of equal quality and cost are available from the private sector, the [NPS] should use the private sector.”

Additionally, the NPS parent department has used competitive sourcing very systematically and effectively. NPS can learn and use this approach. For example, from the start, Interior worked with the unions and has kept costs down. Furthermore, transition strategies were identified for affected employees. And while more than 1,800 positions have been competed, not a single employee was left without a job. In fact, the employee bid has won more times than the private bidder. Additionally, in an effort to mitigate impact in one area, competitions have been balanced; competitions have been targeted in different locations and different pay grades.

So what does all this mean? How can NPS benefit from implementing a competitive sourcing plan? There is overwhelming evidence that competitive sourcing saves significant money. While studies show that the average savings are 30 percent—assuming that this is off by a margin of 50 percent and that savings are truly only 15 percent—of 16,000 NPS employees only 2,200 positions have been identified as commercial in nature. Competing only 20 percent of those would result in savings of $6.6 million in the first year alone (assuming that NPS spends $100,000 on the average position, which is total NPS spending on a per FTE basis). These savings may seem small, but this represents only NPS competitive sourcing efforts. The savings are much, much higher if you incorporate the entire Department of Interior competitive sourcing plan.

With that said though, these savings translate into the treatment of over 40,000 additional acres of public lands deemed in danger of catastrophic wildfire; or $6.6 million dollars of additional maintenance, reducing the backlog plaguing our national parks; or allowing for more funds to be transferred into cleaning additional acres of wetlands or degraded lands in our nation’s parks; or best yet, allowing for free admission to popular national parks like Yellowstone, Yosemite, Glacier, the Everglades, or the Statue of Liberty.

If this committee wants to assume that direct federal provision is the most efficient, it must fully understand what the tradeoff is, and the costs associated with it. In this case, competitive sourcing provides the opportunity for NPS to better achieve its agency’s mission and goals:

1. Enhance and ensure environmental protection (wetland and degraded land cleanup);

2. Public enjoyment of recreational facilities (maintenance of facilities); and

3. Public safety (wildland fire program)

Again, even if we’re wrong about the 30 percent and savings are only 15 percent, this is better for the American taxpayer.

Some opponents of competitive sourcing insist that our national parks are special, and that they should be shielded from competition. However, several states and provinces in Canada have long used competitive sourcing and the private sector to provide services in their respective park systems. In fact, according to the Council of State Governments, parks departments that were surveyed “were more likely than other [executive] agencies to expand [competitive sourcing] in the past five years.” Reasons for seeking competitive sourcing were reduced costs, additional personnel and greater expertise. Respondents also expect the trend to continue for the next five years, with almost three quarters of the respondents stating that they expect to use competitive sourcing “more frequently in the coming years, and most others will maintain current levels.”

Of those agencies that had competed services, “a large portion of parks agencies are saving more than 15 percent of their budgets through competitive sourcing.” This evidence further justifies the claims of at least 15 percent savings from competitive sourcing. Many services that would be competed by NPS were also competed by the states. Those services include: construction, maintenance and janitorial services, operation of individual parks, custodial services, security services, vehicle maintenance, recreational programs and services.

While several states and many cities in the United States have successfully used competitive sourcing and privatization at state and local parks, some of the most interesting examples are efforts of Canadian provincial park systems. Note that Canada’s park systems have faced budget pressures even more severe than those plaguing park systems in the United States.

Alaska

Beginning in the 1990s Alaska State Parks began contracting out the operation of a small number of campgrounds. Currently the department contracts out seven small and isolated parks. Because of their isolation, the parks were costly (relative to revenues) for the department to maintain. Contract lengths are short, running from one to five years. In return for meeting maintenance standards, operators keep the camping fees and have their commercial use permit fee waived. Indicative of the department’s satisfaction with contracting out, Alaska Parks is currently proceeding with a plan to contract out the operation of a “top-flight” park, Eagle River.

Newfoundland

The experience of Newfoundland is significant because of the magnitude of its competitive sourcing efforts. In 1997, faced with a $1.8 million cut in its small budget of $3.2 million, Newfoundland’s Parks and Natural Areas Division competitively sourced 21 of its 34 provincial parks. The 21 parks were rural, primitive parks, with low usage. All parks remain public land (Crown Land); some agreements are leases of duration of up to 50 years, while others are short-term “licenses to occupy.” Significantly, during their first season, 13 operators at the privatized parks made capital improvements, thus using profit incentives instead of tax dollars to mobilize resources to upgrade park facilities. Under private management, the parks no longer need public financing. In fact, the parks are modest revenue producers despite the capital improvements. Bottom line is that they now better serve the public, at no cost to taxpayers.

British Columbia In 1988, B.C. Parks began using private sector contractors to operate its parks; by 1992, the department contracted out 100 percent of park maintenance and operations. In FY 1998, visitor satisfaction was high: 81 percent of visitors rated park facilities and services as excellent or above average. The department has also realized substantial savings, estimated at 20 percent on average.

Alberta

In 1997, Alberta decided to expand its already extensive use of private sector operators of its park and recreational facilities. During earlier budget reductions, the agency used competitive sourcing to withstand cuts, while at the same time actually increasing the size of its recreation and protected areas network. Utilizing a new management strategy that is eerily similar to the NPS core goals (preservation, heritage appreciation, outdoor recreation and tourism), despite seeing its budget reduced by $11 million over a four year period and another $6 million two years later, the department added 34 undeveloped sites to the network over a 25-month period beginning in March 1995. This was primarily achieved through the use of competitive sourcing.

The department enlisted private operators in those program areas where they are firmly established. Doing so helps free department resources from routine operational and maintenance duties, allowing them to focus more on planning and managing protected landscapes and resources inventory, delivering heritage appreciation and environmental education, managing contracts and partnerships, and coordinating volunteer efforts.

Despite the benefits of competitive sourcing there remains skepticism and objections to the initiatives. Some of the more common objections include:

NPS is inherently governmental, and should be shielded from competition.

Ultimately NPS will determine what activities within the agency are commercial in nature, what could be competed, and what actually will be competed. It will determine this based upon the FAIR act and an analysis of its workforce without compromising the core mission of agency. Prohibiting NPS from studying its workforce and determining where efficiencies can be achieved will only hamstring the agency from achieving its goals.

Competitive sourcing also enables the agency to better focus on its mission. The agency can and should focus resources on mission-critical activities and utilize contractors where possible, especially in services like lifeguarding, janitorial, maintenance, computer technicians, and ticket takers.

NPS diversity will suffer.

For starters, competitions can be targeted at locations that don’t have diversity issues. Two other issues come to mind too; first, contractors that win competitions will rely on local labor markets to fill positions. Thus, diversity goals will likely be met regardless of who is providing the service. Secondly, NPS can use competitive sourcing to further its diversity goals by identifying competitions and contractors that will advance its policy. Additionally, diversity concerns assume that the contractors will violate civil rights laws or that minority workers cannot compete with whites and must be sheltered by an undemanding civil service code.

No cost savings will be achieved.

The Department of Defense (DOD) has the greatest amount of experience in competitive sourcing of all U.S. agencies. Between 1978 and 1994 over 3,500 competitions were initiated by DOD involving 145,000 personnel. The competitions resulted in an estimated annual savings of $1.46 billion (FY 1996 dollars). Had the DOD competed the entire inventory of competeable positions, over 13,000 functions employing over 380,000 personnel, competitions would have generated $7.58 billion in annual savings.

The data show an average savings of 31 percent of the baseline cost, and that a majority of competitions remained in-house. However, it also shows that DOD strategically used resources in the most effective and productive manner by subjecting positions to competition. DOD was able to focus more on core functions after resources were freed up from outsourcing. Even if forecasts of savings are wrong by a margin of 50 percent (i.e., savings only equal 15 percent) those are still significant savings. As taxpayers, we should not automatically assume that federal employees are as efficient as they could be. Without even the threat of competition, agencies can grow stale and inefficient, as evidenced just last year.

In 2002 OMB decided to use competition in response to poor performance by the Government Printing Office and offered the job of printing the fiscal 2004 federal budget to competitive bidding. Simply indicating that the agency would be required to compete, i.e., OMB no longer assumed that they were as efficient as they could be, the GPO turned in a bid that was almost 24 percent lower than its price from the previous year. That was $100,000 a year that GPO could have saved taxpayers any time it chose, but it never chose to do so until it was forced to compete.

There will be negative impact on rural communities.

There are real concerns that competitions will lead to work being taken out of local communities, especially rural ones. However, the projects NPS will be competing are mostly small competitions where the work cannot be transferred away from the locations. Put simply, maintenance activities cannot be removed from the locations. Additionally, large companies like Bechtel will not be competing for these jobs. If the in-house team does not win the competition, the winners are actually likely to come from the local communities serving the location. Thus, economic activity will increase, not decrease. Additionally, private companies pay taxes while government doesn’t, creating additional economic activity for local rural communities.

The American taxpayer and park visitors deserve the best services possible. Competitive sourcing gives NPS an opportunity to improve its efficiency, tackle its massive maintenance backlog, and focus its resources and energy on its core functions. Ultimately, competitive sourcing can improve the quality and efficiency of our national park system—in many regards the crown jewel of America. While there are associated upfront costs, the demonstrated savings are significant and competitions pay for themselves many times over.

Competitive sourcing gives NPS a valuable opportunity to focus on the agency’s mission and goals of enhancing environmental protection, ensuring the availability and enjoyment of recreational facilities, and providing for public safety. Again, the goal should be about improving the service that is provided to the American taxpayer, both in terms of quality of service, but also in terms of cost. Can we assume that federal employees are the most efficient and effective given the backlog of maintenance work and past mismanagement issues? We must fully understand what the tradeoff and resulting costs are in stifling the NPS competitive sourcing initiative. In this case, it is mandating inefficient management and lesser quality parks for the American taxpayer.

Unconstitutional Power Grab

info@reason.org (Geoffrey Segal) — Tue, 19 Jun 2007 15:12:00 EDT

Bacon's Rebellion

The Tenth Amendment reads that "the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved for the States respectively, or to the people." In short, the amendment explicitly states that the federal government is limited to the powers given it in the Constitution and that all other powers are reserved to the states. Those powers include setting public policy on how infrastructure is built, maintained and operated and covers various operational models that individual states can select depending on their unique needs, challenges and goals. However, two U.S. Congressmen clearly need a refresher course in the Constitution and the 10th Amendment.

Representative James Oberstar, the Chairman of the House Transportation and Infrastructure Committee, and Representative Peter DeFazio, the Chairman of the Highways Subcommittee, recently sent a letter to governors, legislators and public officials "strongly discourage[ing]" states from using public-private partnerships for transportation and arguing that these partnerships "are not in the long term public interest."

They followed this missive with a more recent threat to withhold federal highway funds if public-private partnerships fail to meet their — I mean, federal — standards. Indeed, Rep. DeFazio has gone so far as to say that he "will put an end to this [public-private partnership]."

Despite clearly violating the Tenth Amendment, this tactic is not new. Both the 55 mile-per-hour speed limit and 21-year drinking age were imposed under the threat of withholding funding. Furthermore, the Commerce Clause has been used by Congress and the federal government over the years to interject federal power on policy issues. But the Tenth Amendment makes it clear that, unless explicitly stated otherwise, state officials should have the ultimate power and authority to make decisions about their respective states. Our state elected officials can make their own judgments about how our roads are built and operated.

Fortunately, Virginia leaders are fighting this latest incursion on states' rights. Said House Speaker William J. Howell: "For more than 10 years the Commonwealth has used public-private partnerships to develop and operate our transportation network; it’s unfortunate that Congressmen Oberstar and DeFazio can assume positions of leadership without understanding how vital public-private partnerships are to states’ transportation policy and that they’d try to stop it on purely ideological grounds."

Furthermore, Transportation Secretary Pierce Homer disagreed with the Congressmen’s recent letter. In a recent speech, he noted that public-private partnerships have been "a major force in helping Virginia deliver more projects on budget, in shorter time frame, and with results that please the customer — those who use Virginia’s roads."

Elected officials from other states are fighting back too. Pennsylvania Governor Ed Rendell, who is considering leasing the state’s turnpike, has said that the congressional concerns are overblown. He further predicted that more public-private partnerships will take place because of the fiscal realities states face.

Even the American Legislative Exchange Council got into the fray. In a press release issued on June 14th, ALEC opposed the Congressmen’s efforts on Tenth Amendment grounds. They added that, "Congress should not dictate to [state governments] how they fund the construction of roads," and argued that "many states use public-private partnerships and believe they are the best way to relieve traffic congestion and save taxpayers money."

The fight is important for obvious reasons — most importantly, the federal highway trust fund is becoming increasingly inadequate to meet our nations’ infrastructure needs. A recent report by the Government Accountability Office suggests that it will be unable to fund the present limited program of federal grants to the states by 2009 — and a gas tax increase high enough to make a difference is unlikely.

Given this reality, it makes no sense to hamstring state efforts to supplement and leverage existing funds with public-private partnerships. Indeed, rather than meddling in state affairs and attempting to undo efforts to solve congestion and improve mobility Congressmen Oberstar and DeFazio should be looking at ways to help states address their transportation challenges — not standing in their way.

Leasing the Pennsylvania Turnpike: A Response to Critics of Gov. Rendell's Plan

info@reason.org (Peter Samuel) info@reason.org (Geoffrey Segal) — Fri, 01 Jun 2007 16:28:00 EDT

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Divesting the Pennsylvania Liquor Control Board

info@reason.org (Geoffrey Segal) info@reason.org (Geoffrey Underwood) — Wed, 18 Apr 2007 14:21:00 EDT

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HOT to Trot

info@reason.org (Geoffrey Segal) — Wed, 21 Mar 2007 10:36:00 EDT

Bacon's Rebellion

Recently Prince William Board of County Supervisors Corey Stewart called High Occupancy Toll (HOT) lanes "a sham." Seems Stewart and his colleagues on the Prince William Board of Supervisors would rather see commuters stuck in traffic than give them an option to spend more time with friends and families at home.

HOT lanes have successfully relieved congestion everywhere they've been implemented. They've been so successful that they're supported from the political left and right alike, from environmental groups like the Environmental Defense Fund to local business associations.

If you're unfamiliar with HOT lanes, they use variable pricing to mitigate congestion and ensure a free flow of traffic. As demand goes up so does the toll; likewise, the price goes down with a drop in demand.

The ability to adjust prices enables the operator to manage the flow of traffic dynamically and keep the lanes relatively free of congestion, even at the height of rush hour.

Southern California, home to the country's worst gridlock, has had great success with HOT lanes. On Orange County's 91 Express Lanes, drivers pay a variable toll that goes up during rush hours, in exchange for access to a lane that is guaranteed to be moving at 65 miles per hour. If the average speed is less, commuters see their toll refunded.

HOT lanes operating in Houston, Minneapolis, Salt Lake City, Denver and San Diego show that variable pricing works. By using a price to discourage some people from traveling in peak hours, HOT lanes actually provide more mobility. A free-flowing highway lane has much greater throughput per hour than a congested lane — about 50 percent more. Orange County's HOT Lanes account for just one-third of the highway's lanes but carry half of all rush-hour traffic.

Buses and carpools of three or more people would continue to ride free, while others could choose to pay a toll upwards of $1 a mile to use congestion free lanes. At that price, a 21-mile, rush-hour trip from the Pentagon to Prince William Parkway would cost as much as $22.28 — one of the most expensive commutes in the country.

While too expensive for many, HOT lanes will find users. With a peak rate of $9.25 for a 10-mile ride California's SR-91 had more than 12 million users.

HOT lanes give every motorist "congestion insurance," an alternative to gridlocked freeways for those times when they really need it — if you're willing to pay a premium.

Opponents, including Chairman Stewart argue "that only the very affluent will be in those lanes." The reality based on experience and data proves him wrong. People of all incomes levels use HOT lanes, but very few people use them every day.

Over a decade of data available from the 91 Express Lanes in Orange County and the HOT lanes on I-15 in San Diego indicate that the vast majority of drivers — high and low income — use the HOT lanes only occasionally, not daily.

While studies of the 91 Express Lanes indicate that use increases slightly with income group, 20 percent of the users are from the lowest income group, and another 23 percent are from the second-lowest income group.

In 2005 there were more than 12 million trips on the 91 Express Lanes, with most people using the lanes as congestion insurance. When people have to pick up their kids at day care, they know the toll is less than the late fees. When they have to make a flight or get to a child's soccer game, they know they have a traffic-free alternative.

The lowest income users are least able to afford these costs of congestion, and studies show they welcome the choice.

In addition, Stewart's line of argument ignores how HOT lanes benefit all commuters. For every car that chooses to use HOT lanes, one less car is using the "free" lanes, improving traffic flow on those lanes as well.

Planners also see HOT lanes as a way to boost transit service by providing open roads for buses. Indeed, the HOT lanes being added to the Katy Freeway in Houston guarantee transit 25 percent of the capacity. Tolls from solo users help pay for the transit operations (as well as local road improvements).

Bottom line, HOT lanes work. They improve mobility, give commuters an opportunity to escape congestion, and improve transit operations. Our freeways don't have to resemble parking lots. HOT lanes will be a vital piece in our war against congestion.

Building New Roads Through Public-Private Partnerships: Frequently Asked Questions

Thu, 01 Mar 2007 13:44:00 EST

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The Emerging Paradigm: Financing and Managing Pennsylvania's Transportation Infrastructure and Mass Transit

Thu, 01 Mar 2007 00:00:00 EST

In November 2006, Governor Ed Rendell’s Pennsylvania Transportation Funding and Reform Commission identified a $1.7 billion annual shortfall in funding for the Commonwealth’s transportation infrastructure and mass transit services. The Commission suggested an additional $900 million for state highways and bridges, $65 million for local highways and bridges, and $700 million for mass transit is needed on an annual basis to sufficiently meet Pennsylvania’s transportation funding needs.

In order to fill this funding gap, the Commission recommended multiple tax increases, including increases in the gas (Oil Company Franchise) tax, higher license and vehicle fees, and an increase of the Realty Transfer Tax. The Commission also proposed increases in local taxes for mass transit funding, including a higher local sales tax, a higher local Earned Income Tax, or a higher local realty transfer tax.

In addition, the Commission identified $180 million in savings by improving efficiencies ($120 million in highways, $60 million in transit) and recommended the utilization of Public- Private Partnerships (P3s) in both road and transit services. P3s are a means of leveraging private capital and expertise to provide a public service.

Governor Ed Rendell delivered his fiscal year 2007-08 budget proposal to the General Assembly in February 2007 in which he proposed a new 6.17% Oil Company Gross Profits Tax (to generate $760 million in new revenue) to fund mass transit in Pennsylvania, and a possible lease of the Pennsylvania Turnpike to a private contractor to generate $965 million per annum for roads and bridges.

The decision to explore the potential lease of the Pennsylvania Turnpike represents the emergence of a new funding paradigm in transportation. Instead of relying solely on traditional revenue sources—gas and vehicle taxes—state and local transportation agencies are increasingly looking to supplement those sources with private investment through Public-Private Partnerships (P3s). P3s can build new infrastructure, maintain existing infrastructure, and operate existing services, particularly mass transit.

The Emerging Paradigm explores these options for funding and managing Pennsylvania’s transportation infrastructure and mass transit services by considering the P3 experiences of other states and cities. For example, in 2005, leases of two toll roads—the 99-year lease of the 7.8-mile Chicago Skyway and the 75-year lease of the 157-mile Indiana Toll Road—garnered the City of

Chicago nearly $2 billion and the State of Indiana more than $3.8 billion. The upfront payment to Indiana is generating more than $500,000 in interest per day to fund its transportation needs without raising taxes or fees.

Pennsylvania could also utilize P3s in mass transit through “competitive contracting.” Pennsylvania’s two major public transit agencies—the Philadelphia-based Southeastern Pennsylvania Transportation Authority (SEPTA) and the Pittsburgh-based Port Authority Transit (PAT)—are facing a financial crisis. However, the crises at SEPTA and PAT are cost, not revenue-driven. Despite the fact that only 1% of all travel in Pennsylvania is done via mass transit, it receives 25% of all transportation subsidies.

American cities like San Diego, Denver, Los Angeles, San Francisco and Boston, as well as foreign cities such as London, Copenhagen, Stockholm, Melbourne and Tokyo, have successfully embraced “competitive contracting” of transit services whereby private contractors take over the operation of transit services through a contract with the government entity. The City of London has reduced bus costs by approximately 50% since 1985, and Stockholm has reduced bus, subway, and commuter rail costs approximately 20% since the early 1990s.

The experience of the City of San Diego—which has contracted out its bus system—compared to PAT is revealing. If SEPTA would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 57.8% lower ($432.5 million less). And if PAT would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 62% lower ($167.9 million less).

The Emerging Paradigm also explores additional opportunities for P3 utilization in transportation. The report concludes with a discussion about the benefits of P3s and addresses the common concerns about Public-Private Partnerships.

Several States Consider Privatizing Their Lotteries

info@reason.org (Geoffrey Segal) — Fri, 23 Feb 2007 10:31:00 EST

Extracting value from assets has moved beyond the emerging category and into a staple of public finance. Many states are seeking alternatives to new taxes and higher fees to pay for transportation infrastructure—an effort that has caught fire in the last few years.

The trend began when Chicago entered into a 99-year lease for the operation of the city's 7.8 mile Skyway—a terribly underperforming toll road—that netted the city $1.8 billion. Shortly thereafter deals were struck in Indiana and Virginia that have delivered transportation improvements and billions into state coffers.

The state or local governments still own the assets and private companies now operate them. The companies must perform maintenance and invest in improvements for a specified period of time, under a long-term lease arrangement called a "concession." Once the lease is up, just like when you lease a car, the asset goes back to the original owner. Generally speaking the private company pays an upfront fee for the right to collect fees over the life of the operating agreement.

Following the successful deals in Indiana, Virginia and Chicago, several states are pursuing their own deals. High value toll roads in New Jersey and Pennsylvania are up for bid this year, with several others likely to soon follow.

More traditional asset privatization has long been used by governments; however, they've usually stuck to selling surplus property and underutilized property. Indeed, Indiana has raised millions in surplus sales in recent years and Ohio Treasurer Richard Cordray recently released a list of 446 state properties that should be divested.

Recently asset privatization has evolved into a new field—lotteries. Several states including Illinois, Indiana and Texas have floated plans to privatize their state lotteries. The deals themselves are not unlike toll road concessions. A long-term concession would be signed which will establish the guidelines and expectations of both parties, as well as what the state's regulatory role will become.

The concessionaire will likely pay an upfront fee in the billions of dollars for the right to operate the lottery on behalf of the state. Some states may ask for lower upfront payments in return for an annual royalty and/or revenue sharing plan.

There is no doubt that lotteries are valuable assets. They have a fairly stable revenue stream and one that certainly can be maximized under private management. Private operators will likely introduce new, more popular games. Marketing will also be professionalized using the latest technology to target games to markets. Under this arrangement, lotteries may, for the first time, truly operate as a for-profit business function with the goal of generating more sales.

Traditionally, proceeds from toll road concessions have rightfully been dedicated to relieving debt and investing new transportation infrastructure. However, some of the proposals currently being debated in state capitals call for lottery privatization proceeds to be spent on a host of new government programs. Perhaps the most egregious is Texas Gov. Rick Perry's plan to fund a new state health insurance program, cancer research and education with the lottery proceeds.

While privatization is a valuable exercise, and certainly an effort that every government should use for all non-essential or non-core functions, including lottery operations, privatization cannot be used as a mechanism to fund government expansion.

There are several acceptable uses of proceeds from privatization. First, proceeds should be used to pay off existing debt. States pay billions in interest each year, paying this debt off early reduces the tax burden and creates a better fiscal picture. Second, states should invest into additional hard infrastructure—e.g., roads and highways—to relieve congestion and improve the long term economic competitiveness. Third, proceeds could be used to fund a shift in the state pension system from defined benefit to defined contribution. Finally, proceeds could also be used to fund permanent tax decreases for taxpayers and businesses. Each of these options has one thing in common—a reduction in the tax burden.

Creating new programs or establishing new benefits does exactly the opposite. Rather than shrink government and lower the tax liability, it increases it.

This of course says nothing about the state granting monopoly rights for lottery operations in the state, which isn't a good thing. The state ought to consider allowing competition, perhaps through multiple franchises. This of course will likely diminish the value of a deal—which may not be a bad thing considering how some states are proposing to spend the proceeds.

Lottery privatization can be a good thing, if done correctly. Each proposal should be judged independently to ensure that proceeds are spent wisely and serve as a benefit to taxpayers. Without a doubt using proceeds to create new government programs or expand existing ones is unacceptable.

Geoffrey Segal is director of government reform at Reason Foundation. An archive of his work is here and Reason's privatization research and commentary is here.

Innovative Tools to Relieve Congestion and Improve Mobility

info@reason.org (Geoffrey Segal) — Tue, 13 Feb 2007 14:42:00 EST

Mr. Chairman and members of the committee, my name is Geoffrey Segal. I am the director of government reform policy at the Reason Foundation, a public policy research and education institute based in Los Angeles.

Reason first began researching privatization and public-private partnerships (PPPs) in the late 1970s, and transportation PPPs since the late 1980s. Our experts have advised numerous governments, including many departments of transportation on how innovative road operations and financing can help relieve congestion and improve mobility.

The average rush-hour commuter in Phoenix wastes 49 hours a year sitting in traffic. And with the area's population projected to swell by another 2 million people over the next two decades, traffic congestion will get much worse.

Today a rush-hour trip in Phoenix takes 35 percent longer than it would in clear traffic conditions. By 2030, Phoenix's delays will nearly double. What is supposed to be a 30-minute commute will take more than 49 minutes - 65 percent longer than it should. That's worse than traffic experienced today in congested cities like San Francisco and Chicago.

Congestion costs Arizonians a "hidden congestion tax." According to the Texas Transportation Institute (TTI), Phoenix area drivers spend about 26 hours per year in congested traffic at a per person cost of about $431, while drivers in the Tucson area spend about 19 hours in congested traffic at a cost of $324. Sadly, these figures grossly understate the true costs of congestion. True costs—when you add the costs of goods movement, unreliability, safety, and environment—are about 2.25 times the TTI estimate.

When you consider the impacts on local businesses and goods movement, you can imagine a "shrinking pie," with congestion reducing the job choices, worker choices and customer choices for a business or person.

Despite significant investments in transit and High Occupancy Vehicle (HOV) lanes, congestion continues to get worse. Congestion is not inevitable—we can beat it with a variety of transportation solutions. It will require a comprehensive strategy that incorporates new road capacity, converting underutilized HOV lanes to high-occupancy toll (HOT) lanes, and more-efficient transit solutions.

New Paradigm Equals New Opportunities

The global environment of transportation is entering a new paradigm. Like many states, Arizona finds itself at the convergence of two intersecting trends that demand fiscal attention: First, growing transportation needs are outstripping available capacity, and second, the need for maintenance and renovation of existing systems is eating up available resources. A failure to address these twin challenges will lead to even greater congestion in various forms and lowered relative reliability of service in the future. By any measure, these realities impact Arizona's economic competitiveness and its citizens' quality of life.

We can beat congestion. The challenge isn't as difficult as some perceive, but some fundamental reforms and innovative thinking will be necessary to help Arizona achieve its desired ends. How? If we take a global perspective, the answer becomes more clear—we must seek greater private sector participation and investment in providing for our transportation needs. Government cannot do it alone.

While the vast majority of transportation projects around the country continue to be funded from traditional sources—gas and vehicle taxes—a new funding paradigm is rapidly emerging. State and local transportation agencies are increasingly looking to supplement these sources with private investment. While public-private partnerships (P3s) are just one "tool in the tool box," they remain a promising and valuable tool available to policymakers that has been relatively untapped in Arizona. P3s come in many forms; the most relevant to this discussion is the operation of HOT lanes and express toll lanes.

Advantages of PPPs

Toll financing can help Arizona close the financing gap for new infrastructure. In addition, the PPP model has several advantages over the traditional model of transportation financing.

1. Access to large new sources of capital
The concession model is attractive to many different types of investors, including equity investors and lenders. More important, it opens the door to institutional investors such as pension funds. Infrastructure has become a fashionable asset class for a host of investors that don't invest in toll-agency bonds. Billions of dollars of private investment is available, as we've seen recently with the concession agreements for the Chicago Skyway and Indiana Toll Road.

2. Ability to raise larger sums for toll projects
New highway capacity is far more costly these days than it was when the Interstates were built. Hence, rebuilding and modernizing our freeways and Interstates will be far more costly than most people realize. There is growing evidence that the long-term concession model can raise significantly more funding for a given toll project than the traditional toll agency financing model. For a new toll road in Texas, for example, a toll traffic and revenue study estimated the ability to finance $600 million, but the project's cost was $1.3 billion. Texas DOT turned to a long-term concession approach, in which the private sector will finance the entire $1.3 billion project, in exchange for a 50-year concession. Three factors seem to drive such results. First, the concession agreement adds certainty to future toll increases that we've never seen with toll agencies. Second, the private sector seems more aggressive in both attracting traffic and holding down costs. And third, the private sector can take depreciation as a tax write-off, like any other business, but toll agencies can't, since they pay no income taxes.

3. Shifting risk from taxpayers to investors
Public-private partnerships involve parceling out duties and risks to the party best able to handle them. For example, the state is the party best able to handle right-of-way acquisition and environmental permitting, so those tasks and risks are assigned to the state. The private sector in these deals nearly always takes the risks of construction cost overruns and possible traffic and revenue shortfalls. Given the poor track record of the public sector in transportation mega-projects, being able to shift construction and traffic/revenue risk to investors is a major advantage.

4. More businesslike approach
The typical U.S. toll agency and the typical European or Australian toll road company are miles apart in their approach to everyday business. Private toll road companies are less constrained by political pressure and are more customer service oriented. They are quick to adopt cost-saving and customer-friendly technology and specialized products and services to meet customer needs.

5. Major innovations
One of the most important advantages of investor-owned toll road companies is their motivation to innovate, in order to solve difficult problems or improve their service to customers. Today, we know that variable pricing (also known as value pricing) works very well to eliminate traffic congestion during peak periods, actually maximizing throughput while maintaining high speeds. Electronic toll collection makes value pricing possible—but it was a private toll company in California that took the initiative to introduce and perfect value pricing; no state toll agency was willing to take the risk of doing so. Toll road companies are also good a value engineering—thinking outside the box to dramatically reduce the costs of new capacity. A case in point is the forthcoming HOT lanes project on the Beltway in northern Virginia. Virginia's DOT plans to add two HOV lanes in each direction on that section of the Beltway would have cost $3 billion—money that VDOT did not have. The private sector team's unsolicited proposal called for adding two HOT lanes in each direction, the same amount of physical capacity. That project will cost under $1 billion; thanks to value engineering that reduced or eliminated many "bells and whistles" that added large costs but very little real benefit. In France, an unsolicited proposal from a private toll firm resolved a 30-year impasse over completing the missing link—through Versailles—of the A86 Paris ring road. The company is completing the link as a deep-bore tunnel underneath Versailles, and is financing the $2 billion project with value-priced tolls.

Tolls as a Demand Management Tool

High Occupancy Vehicle (carpool) lanes were heralded as a solution to congestion. They were an early form of demand management, yet there is excess capacity on those lanes. Many are beginning to transition those lanes into High Occupancy Toll or HOT lanes to maximize the available capacity.

HOT lanes are freeway lanes priced (like other scarce commodities) so that demand will equal the supply of uncongested road space. Having some freeway lanes always operating under "free-flow" conditions is of great benefit to (1) emergency vehicles, (2) buses, (3) carpools and (4) everyone who really needs to get to his or her destination on time and is willing to pay a price to do so.

How do they work? Using variable pricing, congestion can be mitigated to ensure a free flow of traffic. As demand goes up so does the toll; equally, the price goes down with a drop in demand. This enables the operator to manage the flow of traffic dynamically and keep the lanes relatively free of congestion even at the height of rush hour.

Southern California—home to the country's worst gridlock—has had great success with HOT lanes. On Orange County's 91 Express Lanes, drivers pay a variable toll that goes up during rush hours, in exchange for access to a lane that is guaranteed to be moving at 65 miles per hour. If the average speed is less, commuters see their toll refunded.

In addition to Orange County, HOT lanes are currently operating in Houston, Minneapolis, Salt Lake City, Denver and San Diego. What they show is that variable pricing works. It maximizes throughput while remaining free-flow even at rush hour. Despite only having 33 percent of the capacity, the 91 Express Lanes handle 49 percent of freeway's traffic at rush hour.

And the region's entire transportation system is benefiting from the lanes. The 10-mile toll road generated nearly $40 million in revenues in 2005, money that will soon be enough to pay for upgrades to other freeways.

Success has resulted in a proliferation of proposals for more congestion-relief lanes in congested urban areas. Denver recently completed an HOV-to-HOT lane conversion with private-sector management. The Virginia DOT has received private-sector proposals to add two HOT lanes in each direction to the southwest quadrant of the Washington Beltway (I-495) and to add HOT lanes to I-95 approaching the Beltway and the Shirley Highway (I-395) within the Beltway.

As mentioned earlier, the toll lanes currently being negotiated on I-495 rescued a traditional road widening project collapsing under a barrage of local opposition. The concessionaire came up with a proposal that nearly eliminated the need to acquire extra right of way for the road, saving hundreds of homes from eminent domain condemnations, and reduced the project cost from about $3 billion to $700 million.

In a subsequent effort on I-395 and I-95, two private teams proposed expanding the HOV lanes and open them to single-occupant vehicles willing to pay a toll. The proposals involve adding a third-lane of about 28 miles on the existing facility, plus 20-mile extensions southward and new entry and access points and ramps. Further, substantial improvements to park-and-ride and bus facilities will also be completed. Currently the Virginia DOT is working out the details of a $999 million long-term concession.

In Maryland, the State Highway Authority has requested the private sector to advise it on the feasibility of private projects to add Express Toll Lanes to the Maryland portion of the Capital Beltway (I-495), the Baltimore Beltway (I-695), and several other major highways in the area.

Converting current carpool lanes won't be enough, though. The private sector could help finance a network of HOT lanes connecting all of the area's existing freeways. A HOT Network is an interconnected network of HOT lanes on the freeway system of an urban area, allowing congestion-free travel throughout the region. There are currently no HOT networks in operation, but a number of metro areas (including the San Francisco Bay Area) include them in their long-range transportation plans.

While Arizona doesn't have the money to finance such a project, private companies are willing and able. Arizonan and U.S. Secretary of Transportation Mary Peters recently said there are "billions of dollars that the private sector and lenders have amassed to invest in transportation."

The private sector has committed nearly $2 billion to add high-occupancy toll lanes near Washington, D.C., and $7.2 billion to build toll roads from Dallas to San Antonio. There are more than $25 billion in public-private partnership highway projects planned or already approved across the United States.

This model can benefit transit riders as well. Indeed, there can be real synergy between HOT or express toll lanes and bus rapid transit (BRT). The BRT concept has attracted much recent attention as a way of achieving service quality akin to that of rail transit, but at much lower capital cost thanks to the ability of buses to use already existing infrastructure. However, for the long-haul portions of express bus service, BRT proponents much prefer exclusive busways in order to guarantee reliable high-speed service (giving BRT a speed advantage over driving). But except in very rare cases (where one or two buses per minute can be justified), an exclusive busway is an enormous waste of the costly, exclusive right of way. Some time-saving can be achieved by operating express buses in HOV lanes (as in Houston and on the El Monte Busway in Los Angeles), but since successful HOV lanes fill up with traffic, the speed and reliability gains for buses are not sustainable long-term.

A much better solution is to operate BRT service on HOT lanes, as proposed in Reason's 2003 report. Electronic market pricing can ensure that the number of vehicles per lane per hour is limited to an amount compatible with free-flow conditions (typically no more than 1,700 vehicles/lane/hour). Hence, the HOT lane becomes a "virtual exclusive busway." From the transit operator's perspective, it obtains the service quality of an exclusive busway, but does not have to pay for it, thanks to the premium tolls paid by the automobiles that share the use of these lanes.

The first "virtual exclusive busway" is currently under construction on the Katy Freeway (I-10) in Houston. A number of other metro areas are currently studying the possible creation of a network of such managed lanes, serving as both congestion-relievers for drivers and as BRT infrastructure. They include Dallas, Miami, Minneapolis-St. Paul, and the greater Washington, DC area.

Concerns About Toll Roads

There are some common concerns about toll roads. I will address those concerns individually.

1. Double Taxation
Some are concerned that toll roads constitute double taxation. However, it's important to note that no one will pay a toll to use any lane that they are now using for free. It cannot be said more plainly: drivers in regular freeway lanes will still use those lanes at no charge. Furthermore, carpoolers in what are now HOV lanes will still use them at no charge when they become HOT lanes. The only difference is with solo drivers. They will have a choice of staying in the regular lanes, at no charge, or they can choose to use the HOT lanes if they're willing to pay a toll.

Where brand-new HOT lanes or express toll lanes are added to a freeway, or new toll roads are built, the only ones who will pay tolls are those who choose to use them.

It's also worth noting that the gas tax typically does not even cover the costs of ongoing maintenance of roads, let alone raise enough money for needed expansions and new roads. As a result, a substantial percentage of the costs of building and maintaining roads comes from sources such as property and sales taxes, where payments are completely unrelated to how much one actually drives. Money raised by congestion tolls could be used to replace these non-transportation taxes.

2. Induced Demand
If you build it, will they come? The idea of induced demand is really a way of measuring our failure to adequately invest in roads to begin with. Most research shows that induced demand, if it even exists, is really minor. Building more road capacity reduces congestion much faster than new cars come on the road. The problem is when we stop building new capacity and let congestion overtake us again.

Evidence shows that our demand for travel is maxing out—just about everyone has a car and is driving, so our ability to keep up with travel demand through new investments makes more sense than ever.

Furthermore, we've built our way out of congestion before. The interstate highway system added huge amounts of road capacity that kept congestion in check for 50 years. In fact, congestion really didn't begin to increase significantly until after 1980—about a decade after we stopped seriously investing in new capacity.

Cities like Houston that have increased road capacity to match rising travel demand have been able to make serious headway on congestion. Sadly, most cities always end up playing catch up, and with significant population growth investment and capacity expansion is the only way to go.

3. Enforcement
Enforcement is done by a combination of technology and visual checks for occupancy (as with HOV lanes). All electronic toll systems include video enforcement equipment, in which the license plates of a vehicle without a valid transponder and account are imaged so that follow-up action can be taken due to non-payment. Police can also use a handheld reader to ensure that the transponder on the vehicle is operating. Milwaukee has found a reduction in violations from the traditional HOV lanes, because frustrated solo drivers tempted to cheat and use the faster lane now are able to pay to do so, and the toll is cheaper than risking a ticket.

Transponders with embedded money work essentially as cash; the toll is deducted from the transponder itself and no record is kept of the transaction. Another option uses license plate recognition to identify users, and bills are paid through credit cards or other means.

4. Lexus Lanes
Opponents used to call the 91 Express Lanes "Lexus Lanes," implying only the rich would use them. But they've been proven wrong. The reality based on experience with California projects is that people of all income levels use these lanes, but very few people use them every day. Over a decade of data are available from the 91 Express Lanes in Orange County and the HOT lanes on I-15 in San Diego indicate that the vast majority of drivers—high and low income—use the HOT lanes only on occasion, instead of every day.

A 2001 telephone survey of San Diego I-15 Express Lane users revealed that 80 percent of the lowest income motorists in the corridor agreed that "People who drive alone should be able to use the I-15 Express Lanes for a fee." In fact, they were more likely to agree with that statement than the highest income users.

In 2005 there were more than 12 million trips on the 91 Express Lanes, with most people using the lanes as "congestion insurance." When people have to pick up their kids at day care, they know the toll is less than the late fees. When they have to make a flight or get to a child's soccer game, they know they have a traffic-free alternative. The lowest income users are least able to afford these costs of congestion, and studies show they welcome the choice.

Bottom line: It's not 10 percent of the people using the lanes all the time; rather, 90 percent of people using them 10 percent of the time.

5. Eminent domain
There is understandable concern that toll road privatization might lead to private companies acquiring the power to condemn land for right of way. To the best of my knowledge, none of the nearly two dozen state PPP enabling acts has delegated any such power to private partner companies. The eminent domain power is always reserved by the state, in its traditional role of acquiring rights of way for public-use infrastructure.

6. Uncontrolled tolls
The main purpose of value-priced tolling is to manage traffic flow. In those cases, pre-defined limits on toll rates defeat the purpose. Those rates must be allowed to vary, as needed, to keep traffic flowing freely at the performance level specified—such as Level of Service C. When such value-priced lanes are operated under a concession agreement, instead of limiting the toll rates, the agreement should limit the rate of return the company is allowed to make, with any surplus revenues going into a state highway or transportation fund. That is how California's original pilot program for long-term concessions dealt with the issue.

7. Losing control
The widely expressed fear that states will lose control of vital highways reflects a misunderstanding of a concession agreement. These documents typically run to several hundred pages, and may incorporate other documents (e.g., detailed performance standards) by reference. These agreements establish guidelines for who pays for future expansions and rebuilding, how decisions on the scope and timing of those projects will be reached, what performance will be required of the toll road, how to deal with failures to comply with the agreement, provisions for early termination of the agreement, what protections (if any) will be provided to the company from state-funded competing routes, what limits on toll rates or rate of return will be, etc.

8. Non-compete clauses
Clauses designed to protect toll road operators from the construction of new, parallel "free" roads have evolved over the years. The approach has changed from an outright ban on competing facilities to a wider definition of what the state may build—generally, everything in its current long-range transportation plan—without compensating the toll road developer/operator. And for new roadways the state builds that are not in its existing plan and which do fall within a narrowly-defined competition zone, the current approach is to spell out a compensation formula. The idea is to achieve a balance between, on one hand, limiting the risk to toll road finance providers (of potentially unlimited competition from taxpayer-provided "free" roads) and, on the other hand, the public interest.

Two recent long-term lease transactions provide a useful illustration. For the Chicago Skyway, there were no protections for the private-sector lessee. For the Indiana Toll Road, the agreement set up a narrow competition zone alongside the toll road. The state may add short, limited-access parallel roads (e.g., local freeways), but if it builds a long-distance road within the competition zone, there's a formula for compensating the private sector for lost toll revenue.

Conclusion

The success of existing private sector participation in transportation services highlights the potential benefits for the vast majority of transportation projects needed in Arizona. Public-private partnerships offer some major advantages, none more important than relieving congestion and improving mobility.

Business as usual won't work any longer. Arizona's policy makers need to embrace a new paradigm for highway funding and operation.

Variable pricing has become widely accepted as sustainable congestion relief technology, and is supported by the political left and the right, from environmental groups like Environmental Defense, to local business associations.

Implementing variable pricing is a top priority of the US Department of Transportation's National Congestion Initiative, and has been highlighted by the President in his annual budget blueprint revealed February 5 of this year. The US DOT will be offering financial support to urban areas who implement new pricing project.

As the think tank that has done the most research on public-private partnerships and their applicability to transportation infrastructure, the Reason Foundation welcomes the opportunity to be of further assistance this committee and body as a whole, as you learn more about these new approaches. Please feel free to call upon us.

His Way or No Highway

info@reason.org (Geoffrey Segal) — Mon, 05 Feb 2007 15:06:00 EST

Bacon's Rebellion

It appears as if Senate Finance Chairman John Chichester's favorite movie is Groundhog Day. In it, Bill Murray plays a TV reporter who wakes up each day to find it's the same day he just lived. In Chichester's case each day represents a new legislative session, yet his "answer" is always the same. More taxes.

This time the Senator and his groupies demand that the sales tax be applied to gas — an increase of five cents on every dollar, not gallon, spent on gas. If he doesn't get his way, he will take his marbles (his vote and that of others) and go home. While most agree that the Commonwealth needs to dedicate more resources to transportation, Chichester's latest move killed a compromise plan that was generated in the House with bi-partisan support. While not perfect, the House compromise plan would have gotten much needed dollars flowing into new projects and would have taken the Commonwealth one step closer to solving its transportation challenges.

While Chichester argues that the Commonwealth is in dire need of more money for roads, he balks at any plan that isn't his and has openly criticized members of the General Assembly for standing in the way of progress. It's either his way, or no new highways for the Commonwealth. Who is standing in the way of progress now?

Sadly, Chichester's plans always fall back to more taxes despite state surpluses worth several billion dollars over the past few years. Chichester argues that General Fund surplus dollars should not be spent on transportation. He has argued that these funds need to be protected for education, public safety and other social services.

This line of argument is disingenuous. It suggests that these programs have not been fully funded or have even faced cuts. The reality is the General Fund budget has been growing at staggering rates — they've been fully funded each and every year. Indeed, Senator Chichester made sure of that just a few years ago when he crammed the state's largest tax increase down our throats. Ever since, the Commonwealth has enjoyed significant surpluses.

As these vital programs have been fully funded, the General Assembly has been left with two choices — either refund the taxpayers the difference or transfer the revenues into other priority program areas. Given the Senators' penchant for spending, we can throw out the refund option, so you'd think it would be OK to shift surplus dollars into transportation efforts. Sadly, this option isn't acceptable to Sen. Chichester, and we're left with either new taxes or no new funds for transportation.

Essentially, the Senator is saying is that every dollar currently spent by the Commonwealth is already appropriated to its best use. His actions also suggest that protecting, and securing additional funding, for those programs is a higher priority than new transportation funding. Unless of course, the plan is “to look in other people's pockets,” and increase taxes to confront the transportation crisis.

New roads won't be built overnight. Despite all the political positioning there likely won't be too many ribbon-cutting ceremonies this year or even next. This is especially true if vital VDOT reforms to streamline and expedite the planning, engineering and environmental analysis are not completed. VDOT reform is a central piece of the House plan – the compromise plan signed off on by many of Senator Chichester's own Republican "moderates."

Furthermore, while the vast majority of transportation projects around the country continue to be funded from traditional sources, a new funding and operational paradigm has emerged. Increasingly, state and local transportation agencies are looking to supplement their own resources with private investment and operations.

Indeed, the private sector has demonstrated its ability to get new infrastructure built faster and cheaper when its own capital is at risk — or when there are sufficient incentives for speedy delivery. Again, private sector investment and operation is a critical component of the House plan.

Perhaps Chichester should study how Texas has been able to embark on an ambitious and aggressive transportation building frenzy without raising taxes. Indeed, that state has made it an explicit policy to embrace the changing funding paradigm and invite the private sector to build and operate new roads.

This has enabled Texas to ensure that roads are built quickly and efficiently, and stretch its own limited resources without reaching back into the public's pockets.

Chichester's reliance on new taxes flies in the face of how transportation is increasingly financed in the U.S. After three years of debate and discussion a reasonable compromise was hammered out. Now "King John" has killed it because he didn't get his way. His willingness to halt progress threatens the long-term fiscal health and economic competitiveness of the Commonwealth.

Geoffrey F. Segal is the director of government reform at Reason Foundation. This column was originally written for Bacon's Rebellion. An archive of Segal's work is available here and Reason's transportation research and commentary is here.

Innovators in Action 2007

info@reason.org (Geoffrey Segal) — Sun, 21 Jan 2007 10:57:00 EST

Former New York City Mayor Rudy Giuliani, former Florida Gov. Jeb Bush, former Colorado Gov. Bill Owens and several other local and state officials demonstrate how governments can tackle bureaucracy, streamline operations and become more accountable to taxpayers in a new Reason Foundation publication, Innovators in Action.

"Ask taxpayers and they'll tell you they pay too much in taxes and government wastes way too much money. Business as usual won't cut it anymore," said Geoffrey Segal, director of government reform at Reason Foundation and editor of Innovators in Action. "Change is never easy, but government agencies at every level can learn valuable lessons from these trailblazers who have shown there is a better, more effective and efficient way."

In addition to Giuliani, Bush and Owens, the Reason Foundation publication features essays by Anaheim Mayor Curt Pringle, Virginia Delegate Chris Saxman, Hamilton County (OH) Commissioner R. Patrick DeWine, Secretary of Indiana Family and Social Services Administration E. Mitchell Robb, Jr., the City of Charlotte's Business Process Improvement Manager David Elmore, and Reason Foundation's Robert Poole and Lisa Snell.

In their own words, these leaders reveal how they are reducing government spending; how they are collaborating with the private sector to deliver cost-savings and better services to taxpayers; how they are using public-private partnerships to build roads their governments couldn't afford on their own; how they are working with high-tech firms to improve technology and increase Internet usage; and how they reforming Medicaid, health and social services.

Pennsylvania Must Join Private Sector, Boost Infrastructure

info@reason.org (Geoffrey Segal) — Wed, 17 Jan 2007 00:00:00 EST

The Patriot News

The way Pennsylvania and its cities finance roads must change.

The traditional means of funding our roads, bridges and mass transit systems through myriad federal and state taxes have proven unable to meet the challenges and needs of commuters, and continually lack the funds for much-needed capacity additions.

But where will we get the money and expertise to fund a 21st century transportation system?

The Pennsylvania Transportation Funding and Reform Commission says the state's transportation network is suffering a $1.7 billion annual shortfall. The proposed remedy: higher taxes and new or higher fees. For commuters, more taxes and higher fees only compound the nightmare of daily gridlock.

There's a better way to raise private capital and improve the quality of public transportation infrastructure and services.

Public-Private Partnerships (P3s) leverage the capital and expertise of the private sector with the management and oversight of the government to provide public services. While new to Pennsylvania transportation policy, P3s have been used effectively in other areas of government to reduce costs and improve quality.

P3s are an effective way of financing, managing and operating roads while minimizing taxpayer costs and risks. In their most basic form, the state or local government owns the asset — the highway — but a private company operates it and invests in improvements for a specified period of time, under a long-term lease arrangement called a "concession."

Once the lease is up, just like when you lease a car, the asset goes back to the owner. If the private company doesn't meet upkeep standards or other quality controls, the state revokes the contract and keeps the cash it got up front.

Nearly two dozen states have approved P3 legislation. More than $25 billion in private capital is already pouring into states such as Texas, Virginia, Georgia and Florida. And the U.S. Department of Transportation just released model legislation aimed at helping other states get a piece of the private sector's transportation money.

Pennsylvania should thoroughly examine the tremendous opportunity to lease the turnpike. Chicago and Indiana recently leased their toll roads, netting billions of dollars to reinvest in their transportation systems. If Pennsylvania followed these examples, the commonwealth could erase its transportation-funding deficit in one swoop and pay for countless road and transportation projects that have long been ignored because of budget constraints.

The turnpike lease is only the beginning. P3s could finally get the Mon-Fayette Expressway built in Pittsburgh. Philadelphia residents could see dramatic efforts to ease their commute, perhaps including a second deck to the Schuylkill Expressway.

We're in the midst of a national shift toward innovative, private financing that can deliver the roads Pennsylvanians need faster, cheaper and without new taxes.

Leasing assets such as the turnpike can revitalize the entire transportation system if the proceeds go to transportation infrastructure. Indiana, thanks to its lease of the Indiana Toll Road, has $3.85 billion for new transportation projects.

State Rep. Rick Geist, R-Blair, has called for a constitutional amendment to protect any proceeds and guarantee that they go only toward Pennsylvania's transportation network — and not the pet projects of a governor or legislator.

P3 legislation would also enable PennDOT to cut costs and improve its customer service. Consider Florida, where 85 percent of all maintenance functions are performed by the private sector. The shift has resulted in dramatically improved road conditions and saves the state more than $120 million annually.

Pennsylvania's transportation system needs a similar infusion of cash, repairs and improvement. U.S. Secretary of Transportation Mary E. Peters says there are "billions of dollars that the private sector and lenders have amassed to invest in transportation."

Why wouldn't Pennsylvania want a piece of the pie? Passing P3 legislation would be the first step in addressing the current $1.7 billion shortfall and moving toward a 21st century transportation network that provides individuals with mobility, allows goods to flow and the economy to thrive.

Pennsylvania's transportation policy is due for modernization, and the governor and Legislature will have to be partners in getting the job done. If they choose the proven, effective policy tool of public-private partnerships, billions in private money -- with no taxpayer risk -- will flow in, creating jobs and improving the state's transportation network for generations.

Geoffrey F. Segal is the director of government reform at the Reason Foundation and an adjunct scholar at the Commonwealth Foundation in Harrisburg, PA. An archive of Segal's work is here, and Reason's transportation research and commentary is here.

Turn the Turnpike Into a Solution

info@reason.org (Geoffrey Segal) — Sun, 14 Jan 2007 00:00:00 EST

Pittsburgh Post-Gazette

Pennsylvania is facing a $1.7 billion annual shortfall in funding for roads, bridges and mass transit. The only thing worse than the deficit is the proposed "solution" to this shortfall: higher gas taxes, higher income taxes, higher sales taxes, higher realty taxes and higher vehicle fees. We're told if taxes are not raised, Pennsylvania's roads will only get more congested, less safe and mobility will continue to suffer.

But are higher taxes and fees really the only solution to Pennsylvania's transportation funding crisis?

The best solution is the global trend of public-private partnerships, or P3s, which have gotten a lot of publicity recently because of the possible lease of the Pennsylvania Turnpike.

But these partnerships aren't new. Some two dozen states have passed legislation enabling P3s, whereby governments partner with private-sector companies to provide public goods and services. States like Indiana, Georgia and Texas have largely centered their transportation policy on the utilization of these partnerships. And the U.S. Department of Transportation just released model legislation showing states how to properly write their public-private partnership laws.

"The growing stranglehold that congestion is placing on America's transportation network calls for new ways of financing and maintaining our critical transportation infrastructure," said U.S. Transportation Secretary Mary E. Peters. "This model legislation will help to ensure that states are in a position to tap into the billions of dollars that the private sector and lenders have amassed to invest in transportation."

The discussion over a possible turnpike lease is part of a larger trend beginning to sweep across the nation, as global capital markets discover the potential of investing in highways and governments discover a new revenue source that can finance neglected transportation needs.

In 2005, two high-profile deals caught the attention of policy makers around the country: the city of Chicago leased the 8-mile Chicago Skyway for almost $2 billion and the state of Indiana leased the 157-mile Indiana Toll Road for $3.85 billion.

In both cases, the company is responsible for maintaining and operating the road and facilities. Ownership, however, remains with the government, and a very detailed concession agreement, or contract, protects the public interest. Indeed, the contract even sets toll rates and possible increases.

Furthermore, the contracts establish well-defined performance levels that the private companies are required to meet. If they fail to do so, the companies face penalties, fines and the potential voiding of the contract. These agreements also dictate everything from future maintenance and road condition expectations to the time it takes to remove road kill. In many cases, these standards far exceed the standards of government-run roads.

From the risk perspective, perhaps the most important aspect, is the state's ability to terminate the contract at any time. The agreement between the public and private partners establishes concise conditions under which the government can revoke the lease and resume operations of the road should the contractor fail to fulfill the contract obligations. In that event the state keeps the upfront concession payment -- billions of dollars in the case of the Chicago Skyway and the Indiana Toll Road and all risk is borne by the private contractor, not the taxpayers.

Additionally, the contractor in both Chicago and Indiana reimburse the taxpayers for law enforcement activities on the highways. Since the state no longer has to pay for policing these roads, the deal equals millions in direct cost savings to the budget over time.

In Chicago, private management has reduced traffic congestion and improved customer service. Customer satisfaction levels have risen, and the contractor, Cintra-Macquarie, has added reversible lanes to accommodate peak demand during rush hours. Electronic toll collection was rolled out in record time -- saving commuters time and relieving them of the hassle of searching for change.

While the Indiana lease agreement was only recently closed in early 2006, state officials are ecstatic about earning $6 of interest per second. Those funds are dedicated to funding future transportation projects in the Hoosier State. In addition, the contractor has pledged to spend approximately $4.4 billion in toll road improvements over the term of the contract, with more than $200 million spent in the first three years of the deal.

Perhaps one of the most important benefits will be the creation of at least 130,000 new jobs from the deal. The agreement mandates the contractor hire Hoosiers first and "Buy Indiana" for 90 percent of its purchases. Indiana officials are so happy with the deal that they are currently seeking two new P3s in the state.

Given the budget deficits and Pennsylvania Turnpike's size and potential value, the state should certainly examine the lease possibilities. There are other possibilities that deserve exploring as well. For Pittsburgh, a P3 could complete the stalled Mon-Fayette Expressway with private capital and in a shorter time frame. Philadelphia residents could see innovations to help ease congestion brought to the Schuylkill Expressway, perhaps a double-deck approach similar to that of the expressway in Tampa, Fla.

The choice is clear. In this case, business as usual will result in higher taxes and less mobility. Embracing P3s puts the commonwealth on a new path with new sources of capital that don't further burden the taxpayers of Pennsylvania. P3s, when done right, can adequately fund the commonwealth's transportation needs without raising taxes or fees.

There is little doubt that Pennsylvania's transportation system needs significant investment and improvement and the state doesn't have the money to adequately address them. Public-private partnerships are vital to the overall success and development of the state's much-needed transportation infrastructure and transit systems.

Private capital markets are standing at Pennsylvania's borders willing to help the state solve its transportation funding problems. It's time for lawmakers to welcome them in.

Scary Truth Amid Government Accountability

info@reason.org (Benita M. Dodd) info@reason.org (Geoffrey Segal) — Fri, 12 Jan 2007 00:00:00 EST

Georgia Public Policy Foundation

If ever there was a moment of unvarnished political pass-the-buck, it came during Atlanta Mayor Shirley Franklin's annual State of the City address to the Atlanta City Council.

Franklin told the audience the city's annual budget needs to grow by $250 million, or about 40 percent, to improve city services and cover retiree health-care costs. Then she said, "One of the best ways to find funds is to look in other people's pockets." She said she'd look to state and federal government and the private sector for funding.

Look for versions of Franklin's speech across the state as local governments report their indebtedness. Their newfound honesty comes by virtue of a federal Government Accounting Standards Board requirement. "GASB 45" forces disclosure of the funding commitment (beyond pensions) that our cities, counties and state have made for the next 30 years to workers "post-employment" — after they leave or retire.

Governor Sonny Perdue told Georgians in his State of the State address that in the fiscal '08 budget, "We are also planning to set aside $100 million to meet our future obligations for state employee benefits. It may not be a shiny new program, but it is the right thing to do for our state's long-term fiscal health and for our state's retirees."

Bain and Co., pro bono consultants to the city of Atlanta, found an $82 million funding gap when Franklin took office in 2002. In her fourth week in office, Franklin promised that she would "stop making commitments the City cannot fund" and would cut costs and waste. In 2003, Bain reported the city had improved from a position of having 37 percent more employees per capita than comparable cities to about 5 percent more. The city then had 1,348 personnel per 100,000 residents, versus 983 for the average of Bain's benchmark sample.

But this week, the mayor noted the city has more than 8,000 employees and a half-million residents — a whopping 1,600 workers per 100,000 residents. Where have all the employer savings gone, and what will this mean to future taxpayers who must fund these "post-employment" benefits?

Individuals have to work within their budgets or eventually declare bankruptcy. Government, on the other hand, simply digs deeper into taxpayers' pockets when it comes up short, with the usual either-or warning: either higher taxes or fewer/worse government services.

Local governments challenged by rising retiree costs and the transparency of GASB requirements - which will also threaten their credit ratings — need to be pre-emptive. Looking to privatization of services, outsourcing and vendor contracts would be another long-term opportunity to shrink government and, consequently, taxpayer commitments to government employees as they leave and retire. Plus, as Ronald Reagan noted, "the truth is that outside of its legitimate function, government does nothing as well or economically as the private sector of the economy."

The new city of Sandy Springs, for example, successfully outsources care of streets, water and sewage systems, property development regulation, traffic engineering, permitting, revenue collections and other basic services — and residents saw service improvements. (By law, Georgia public safety cannot be outsourced.)

Why keep digging when you find yourself in a hole? Atlanta looking to find additional funding for MARTA, for museums and greenspace projects is one example. Continuing budget-crippling compensation for public sector employees is another example. The city — and state — could learn from Cobb County's forward-thinking, firm, taxpayer-friendly approach to the federal requirement. It is vesting employees, raising premiums and setting aside surplus funds.

In 2006, Cobb decided to offer retirees continued medical coverage after 20 years of employment. Only the retiree and one family member will be covered, and retirees must pay the full premium for additional family members. Beginning this year, premiums for current employees were raised 30 percent to offset costs. Beginning his year, employees with less than seven years of employment must have 15 years of service to retire with benefits; employees with more than seven years can retire with health benefits after 10 years of service.

It is true that GASB requirements don't leave much room for government creativity. While GASB's inflexibility in reporting future commitment may not reflect the innovative financing opportunities governments have for meeting the debt, it serves as a warning regarding the growing force of former government employees whose increasing longevity makes them government's commitment long after they've left the job. It also serves as an eye-opener to Georgians, for the scary truth is that we have seen the "other people" who must fund this. Whether it's federal or state funding, as Pogo would say, the "other people" is us.

Benita M. Dodd is vice president of the Georgia Public Policy Foundation. Geoffrey Segal is the director of government reform policy at Reason Foundation and an adjunct scholar with the Georgia Public Policy Foundation. An archive of Segal's work is here, and Reason's government reform research and commentary is here.

Privatizing University Housing

Mon, 01 Jan 2007 15:41:00 EST

Introduction

The idea of going away to college has become inextricably linked to the idea of “dorm life,” or, to keep up with the language of today, “residence hall life.” Reminiscing about college, it is easy to romanticize the camaraderie and late nights of communal residence hall life while forgetting the cramped 11 by 14 foot rooms, the crowded bathrooms, and the week’s leftovers being served in the dining hall for the fourth meal in a row.

While fond memories of college often filter out the unpleasant aspects of residence hall living, university housing administrators cannot turn a blind eye to substandard living conditions of oncampus students. While administrators would like to direct attention to the improvement of living conditions, they must also attend to the realities of unprecedented enrollment, less government funding, aging buildings, greater technological needs, and expanding regulation. To manage these demands, some schools have privatized aspects of their residence halls, taking advantage of increasingly common campus management companies to fulfill their needs. In these cases, privatization has provided a number of benefits to universities and to the students who live in their residence halls, including lower costs, faster construction, and higher quality housing.

Skeptics might question the appropriateness of the broad application of privatization tactics that have, so far, only been used by a fraction of all universities. How can student housing administrators be sure that privatization will have the desired effects?

Despite the newness of residence hall privatization, there is plenty of evidence that it is more effective than the traditional model. Ten years ago, the U.S. military faced many of the same housing challenges. Aging buildings, housing shortages, and high-cost maintenance were frustrating administrators and undermining service member morale. Realizing that housing construction and management is not a core government competency, the U.S. military has since turned to the private sector for remedies. Military housing privatization has proven to be a great success, delivering higher-quality housing to satisfied service members at lower costs to the government and, ultimately, taxpayers. These lessons translate easily to the university setting: residence hall privatization is an excellent approach to addressing university housing woes.

It's Too Early to Derail Daniels' Tollway plan

info@reason.org (Geoffrey Segal) sam.staley@reason.org (Samuel Staley) — Sat, 02 Dec 2006 00:00:00 EST

Indianapolis Star

Gov. Mitch Daniels promised to move Indiana forward when he was elected, and he's pushed the envelope hard seeking innovative solutions to some of the state's most pressing issues, from welfare reform to energy to health care.

But none of these initiatives has received more criticism than his forward-thinking approach to transportation policy. Indeed, many believe his eminently sensible, yet controversial, proposal to lease the financial albatross that is the Indiana Toll Road contributed to Republican losses throughout the state in November's elections.

Today, Indiana is on the cutting edge of transportation policy and several other states are following Indiana's lead, leasing toll roads and asking the private sector to build new ones. If Indiana retreats from its aggressive and strategic approach the state's economic competitiveness will suffer.

Daniels recently proposed the Indiana Commerce Connector (ICC), which would form an outer-belt tollway connecting six interstates and linking areas like Franklin, Greenfield, Martinsville, Pendleton and Shelbyville. For some, the ICC has created a new level of angst and they are trying to kill the idea right now. That would be a big mistake.

Indiana's traffic congestion costs travelers in Indianapolis alone more than $360 million per year in wasted fuel and lost time. Today, a rush-hour trip in Indianapolis takes 24 percent longer than it should. By 2030, that same rush-hour commute will take 42 percent longer than it should, according to a new study by Professor David Hartgen of the University of North Carolina-Charlotte.

How bad is that Indy traffic going to be? Much larger cities like Houston and Miami experience delays similar to those looming for Indianapolis.

The only real solution to traffic congestion, particularly in a state where 99 percent of all motorized travel is by car, is adding more road capacity. Thus the ICC could be a prudent and realistic attempt to stave off traffic congestion before it cripples Indiana's economy.

At this stage, the governor is merely gauging the level of interest that private companies might have in building and developing the series of toll roads. A study has recently emerged suggesting there would be little traffic impact from an outer beltway. Studies casting doubt on private-sector solutions to problems have been wrong in the past though. For example, the state estimated the Indiana Toll Road's value at $2 billion -- falling some 80 percent short of the value the private sector placed on the same asset.

Given this, Daniels should have earned some latitude to work with the private sector to determine if there is some interest in further partnering with the state.

One of the benefits of the proposed arrangement is that the ICC project would move forward only if the private sector is willing to pay to build the roads. These potential builders will get involved only if they estimate that enough drivers will use the roads and pay the tolls to make it financially viable for them. If there isn't demand for the road, it won't be built. Further, the construction and financing risks would belong to the private sector, not taxpayers. Hoosiers would be totally protected from cost or time overruns -- since it would be private money at stake.

If the private sector is interested, Gov. Daniels will have accomplished several things. First, the ICC will provide for increased mobility and long-term congestion relief. Second, the deal will bring funding for other road and transportation projects throughout the state -- most notably a toll-free I-69 extension. And third, these vital projects would be completed years or decades sooner because of the private sector's funds and involvement.

The ICC is yet another example of Daniels following through on what he promised to do -- ask questions and seek cost-effective solutions to Indiana's challenges. It's too early to know if the private sector will even be interested in developing the ICC, so there certainly isn't a compelling reason to derail the project at this early stage.

Segal is director of government reform and Staley is director of urban and land use policy at the Reason Foundation. An archive of Segal's work is here and Staley's work is here. Reason's transportation research and commentary is here.

Time for a "Citizens Initiative"

info@reason.org (Geoffrey Segal) — Mon, 06 Nov 2006 00:00:00 EST

Bacon's Rebellion

As citizens go to the polls this week, their votes will largely determine the direction governments at all levels will take. There are many public policy questions at play — especially in state and local elections.

For many the size and growth of government spending and programs will be a dominant issue. Under the Bush administration the federal budget has grown at staggering rates. In recent years the Commonwealth's budget has been on a dramatic uphill climb too, reaching $70 billion for the first time. Just over a decade ago Virginia's budget was below $35 billion. While the shocking size of our spending increase may be unusual, the overall trend is not.

Something special may happen this year. Fed up with ballooning government, taxpayers may say, "Enough," and, "Vote the bums out." Voters in three states will have a unique opportunity to take back control of their respective governments from spendthrift politicians.

Taxpayers in Maine, Nebraska, and Oregon will vote on whether reasonable limits should be placed on how fast and by how much government should be able to grow. And if not for what the Wall Street Journal's Stephen Moore calls "dubious legal technicalities," similar measures would also have made it to the ballot in at least six other states. In future elections, we're sure to see more efforts to place initiatives on the ballot. This trend signals a growing belief among taxpayers that government growth is not inevitable.

While discussing a similar effort to curb the growth of government in his home state, South Carolina Gov. Mark Sanford said that "government shouldn't grow faster than the people's pocketbooks and wallets — and what we've found is people, when they compare their wallets with the growth of government, nearly always agree!"

Seems easy enough — has your family's budget doubled in the last 10 years? Have you seen double digit percentage increases in your paycheck?

Without reasonable limits, governments largely function on auto-pilot. They find new and creative ways to spend each new dollar that comes in.

Maybe it's time for the Commonwealth to get on the bandwagon. Each April, many Virginians suffer from a form of sticker shock once they discover how much their state and local taxes cost. Our booming economy and a robust real estate market has given state and local officials a windfall of added revenue, and many seem determined to spend it instead of lowering the tax rate so taxpayers may keep more of their hard-earned money. The rapid growth of our budget is testament to that.

The problem is that, once established, programs rarely go away. As Ronald Reagan once said, "The nearest thing to eternal life we will ever see on this earth is a government program."

That's because officials typically fail to ask fundamental questions about government's proper role and scope. Contrast that to the private sector, where business leaders often ask themselves the question suggested by management guru Peter Drucker: "If we weren't doing this yesterday, would we do it today?" While government operates differently from business, this test still applies and ought to be used. Unfortunately, it isn't. And when governments constantly roll out new programs, while continuing their existing ones, that spells growth.

There are three ways Virginia could establish reasonable spending restraints.

First, the General Assembly can allow citizens to vote on a constitutional amendment that would place limits on how much government budgets can increase annually. The constitutional route is by far the strongest; however, it would take several years to take effect. Thus, it doesn't offer taxpayers any immediate relief.

Second, the General Assembly can place a statutory restriction on itself. While not as strong, this could protect taxpayers while the constitutional amendment is going through its process. Indeed, Maine taxpayers have chosen this route. Rather than amend the constitution, voters are deciding on a "Citizens' Initiative" which has the effect of statutory law.

Third, our lawmakers can pledge that they'll simply hold themselves to reasonable limits. If history is any lesson, however, they'll be unable to truly hold the line on spending.

Keeping Virginia's cost of government low is essential to keeping our economy vibrant. Low cost of government enables lower taxes, encouraging investment and job creation from the private sector.

While we have much to be proud of, and our governments do many things reasonably well — especially when compared to other states — we must continue to scrutinize all spending and continuously ask if there's a better way. A tax-and-spending limitation measure will once and for all force policy-makers to get serious about spending reform.

Geoffrey F. Segal is the director of government reform at Reason Foundation. Reason's research on government reform is here and an archive of Segal's work is here.

The Sky Won't Fall If Maine's TABOR Passes

info@reason.org (Geoffrey Segal) — Mon, 30 Oct 2006 00:00:00 EST

Bangor Daily News

Opponents of the Taxpayer Bill of Rights must have thought Halloween came early this year. They've begun rolling out the scare tactics — some truly frightening pictures of what "would" happen should Maine taxpayers place reasonable controls to government spending on Nov. 7.

While they stopped short of saying that people will die, bridges will collapse and schools will close, they have suggested that public safety and popular programs are the first to go.

In Washington, this publicity stunt is commonly known as the Washington Monument Syndrome where when faced with cuts the National Parks Service talks about closing the Washington Monument. These choices are a classic "straw man" tactic: vote to give up more of your hard-earned money to the government or vital services will be slashed and burned! But it is a false choice, and voters should not be fooled.

While fear-mongering may be a brilliant communications and public relations strategy, it is not an accurate depiction of the situation. For starters, if TABOR passes, no cuts will be needed. Government spending, at every level, will continue to increase, although perhaps not at the level that government has become accustomed to.

What's worse is that by suggesting that important services would be the first to go suggests that these programs are less important than everything else government does. Further, this rhetoric presupposes that every dollar spent by Maine's governments is both spent well and effectively.

While many government services in Maine may be performed efficiently, there is always room for improvement. In addition, over the years governments have taken on new responsibilities and started new programs. Rarely do old programs get phased out or eliminated. Could there be some functions government can stop providing to make room for new programs?

It is important to point out that the opposition to TABOR is coming from the big government status quo. These groups like the Maine State Employees Union, Maine Municipal Association and the State Chamber of Commerce do not want to see government spending reform because they personally benefit from government continually increasing taxes on Mainers. The deception that they are employing against TABOR should be appalling to every Maine citizen.

This status quo group has a track record of promising to control government spending and lower taxes, but never delivering. Last legislative session, this big government coalition promised historic tax relief with the passage of LD 1. That bill never delivered the spending restraint and promised tax relief. Now the same group is a citizen initiative that will accomplish what they failed to deliver.

TABOR will force policy-makers to get serious about spending reform. In turn, Mainers will finally see real tax relief.

There are plenty of examples of effective spending reform efforts that target government waste so that those resources can be better spent by on priority programs. Texas utilizes performance-based budgeting to identify the most effective and efficient programs and budget its appropriations accordingly. In addition, they regularly evaluate state agencies for purpose and effectiveness often eliminating or merging programs — resulting in billions in savings over time. The effort fully funds effective public services and helps ensure a higher quality of life.

Washington state and South Carolina use a "priorities of government" model to rank all government services by activity — rather than rigid agency structure — and "purchases" all activities from the top of the list down until available revenues are depleted. The least important or least effective programs are considered lower priorities — much the same as the way families spend their scarce dollars on the most important things and put off buying luxuries they can't afford until a later date.

Each of these approaches places an emphasis on performance and results, rewarding governmental services that best meet citizens' needs and weeding out ineffective and low-priority programs. Note that this improves the quality of public services while eliminating government waste.

Maine needs a fundamental change in its budgeting process and a serious evaluation of its priorities. A process that emphasizes program performance and providing higher-priority services would improve Mainers' quality of life while continuing to protect their pocketbooks. It is time for government to focus on better delivering government services, instead of preying on people's fears.

Despite what public officials are claiming, the sky will not fall and Maine will not disintegrate if TABOR passes. Children will still be well educated, fires will be put out and police will still protect Maine communities.

Geoffrey F. Segal is the director of government reform at Reason Foundation. Reason's research on TABOR laws and government reform is here and an archive of Segal's work is here.

A Bad Idea Gone Too Far

info@reason.org (Geoffrey Segal) skaidra@reason.org (Skaidra Smith-Heisters) — Sun, 01 Oct 2006 00:00:00 EDT

Executive Summary

Proposition 86 seeks to expand California’s health care services and medical research funds by approximately $2 billion annually, initially through an excessive 300 percent increase in the state’s tax on tobacco products.

The largest single spending items in Proposition 86 would pay for uninsured hospital and emergency trauma care costs ($756 million annually) and children’s health coverage ($367 million), including expanding health coverage to children from families with incomes between 250 and 300 percent of the federal poverty line, or from $50,000 to $60,000 for a family of four. The proposal would make cigarette smokers pay part of the medical bills for obesity and people with diseases like diabetes, while less than 1 percent of the revenues generated by the new tax would actually go toward helping smokers quit. Less than 10 percent of the proposed tax funds would be spent on anti-smoking advertising and tobacco control and enforcement programs in total.

Fewer than 15 percent of California adults are smokers—the second lowest rate in the nation—but tobacco consumers constitute a relatively captive tax base, from which politicians can draw funds for a variety of programs, regardless of merit, without fear of meaningful political backlash. The tax itself and programs funded by these measures often have far-reaching consequences—such as increased tax fraud, smuggling, and diversion and waste of state funds—that are not fully appreciated by voters at the ballot box.

The proposed tobacco tax increase of $2.60 per pack of cigarettes would make California’s the highest tobacco tax ($3.47) in the country by more than $1.00—3.5 times the national average— and create an unprecedented incentive for legal and illegal tax avoidance. Neighboring states have far lower cigarette and sales tax rates, and there will be greater incentives to purchase cigarettes through the Internet, by mail order, and other sales avenues. As illustrated by the nation's experience with alcohol prohibition, these types of regulations also provide unique opportunities for organized crime, which is why numerous law enforcement associations have come out against Proposition 86, including the Association of Los Angeles Deputy Sheriffs, Deputy Sheriffs Association of San Diego County, San Francisco Police Officers Association, Peace Officers Research Association of California, and the Los Angeles Police Protective League.

Tobacco tax revenues will initially cover the costs of new programs and expansion of health care benefits, but as tobacco sales continue to decline, programs founded on California’s tobacco consumers will be left stranded with budgetary needs far above the dedicated revenue stream.

Meanwhile, many health care programs outlined in Proposition 86 are already funded by the state budget. Rapid growth in the state’s general fund allowed for $1.2 billion increased spending for Health and Human Services in 2006-07, bringing the total to $73.1 billion. Last year California earned the highest grade in the nation for the State of Emergency Medicine according to the American College of Emergency Physicians. California already has one of the most generous health benefit systems for children. While there is still room for health care reforms that would lower costs and improve quality of care in California, Proposition 86 doesn’t address those concerns—it only adds 38 pages of mandates, new programs, and activities that over time will develop their own bureaucracies and become long-term liabilities for the state.