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Out of Control Policy Blog Archives: 4.22.12–4.28.12

Being Taken for a Ride on High-Speed Rail in California

In my latest commentary, I once again tackle the boondoggle that is the California high-speed rail project, specifically, the most recent version of what passes for a business plan from the California High-Speed Rail Authority (CHSRA).

When the High-Speed Rail Authority recently released yet another version of its purported business plan, it was just another day in the world of the ever-changing high-speed rail plans and assumptions made by the Authority and its backers. The fourth incarnation of the plan relies upon sharing tracks with commuter trains in both Los Angeles and the Bay Area in order to trim estimated costs from $98.5 billion to "only" $68.4 billion—still more than 50% more expensive than the plan voters thought they were approving in November 2008. But, as the non-partisan Legislative Analyst's Office (LAO) observed, this plan makes no more sense than any of the previous ones.

The LAO analysis concludes,

We find that HSRA has not provided sufficient detail and justification to the Legislature regarding its plan to build a high-speed train system. Specifically, funding for the project remains highly speculative and important details have not been sorted out. We recommend the Legislature not approve the Governor’s various budget proposals to provide additional funding for the project.

The vast majority of the expected funding continues to be wishful thinking. As I relate in my article,

As with every other attempt at a plan, the latest effort from the CHSRA lacks any basis in reality. Once again, most of the funding is to come from unidentified federal and private-sector sources that almost certainly will not materialize. In fact, 83.2 percent of the project’s proposed funding is unaccounted for, including $38.6 billion the CHSRA hopes to receive in federal funds (in addition to the approximately $3.5 billion in federal stimulus and transportation funds that has already been allocated), $13.1 billion expected from private investors, and $5.2 billion to come from other sources such as local governments.

In response to such criticisms, CHSRA Chairman Dan Richards argued that it is simply common practice for transportation projects to go forward without knowing from where the money will come. “I spent 12 years on the [Bay Area Rapid Transit] board in the transit world; we never knew where all of the money was coming from,” Richards said. “Our colleagues in Southern California just adopted a $540 billion regional transportation plan for the Southland, for the next 20 years, same time period we’re talking about here. They don’t know where all of the money is coming from.” Added Richards, “It is just part and parcel of the transportation world that people don’t know these things now.”

If ever there was a window into the mindset of a government central planner, this is it. So the excuse for such irresponsibility and carelessness with scarce taxpayer dollars is the notion that “Everyone else (in government) is doing it!” Besides, who needs to know minor details like how something is going to be paid for when your state faces yearly multi-billion-dollar deficits?

Yet CHSRA board member Mike Rossi calls the new business plan “credible, reasonable, and transparent.” Many of the high-speed rail planners are clever people, so it is hard to believe that they could be so divorced from reality. There are many special interests involved in a project of this scope, however (which is yet another reason why such things should be left to the voluntary decisions of people in a free market, rather than forced down people's throats through the political process), so perhaps it is simply an attempt to intentionally delude taxpayers whom they hope will be too apathetic or uncritical to notice otherwise.

One of the things that continually amazes me is how basic assumptions such as the cost of the project and the estimated ridership—which affects everything from how much revenue the system will generate to how much it will affect traffic congestion and greenhouse gas emissions—can change so dramatically, so quickly, and yet the supporters of high-speed rail cling to the project with religious fervor and never question how these seemingly arbitrarily-determined numbers affect the viability of such a large project. As I argued in my column,

The CHSRA and many advocates of high-speed rail have demonstrated that they are beyond reason, despite all the facts that contradict their hopes and assumptions. High-speed rail advocacy has become more of a religious crusade than a policy position. Avoiding the facts stacking against this project is how cost estimates can triple, then be reduced by one-third. It’s how ridership estimates can magically plummet to one-third of their original estimates (see this CalWatchdog article for a good summary on the project’s changing assumptions). It’s how major decisions such as changing from dedicated high-speed rail tracks to tracks shared with slower commuter trains on both ends of the system can be made. And yet with all these arbitrary changes, high-speed rail acolytes have not batted an eye or even questioned how the plan can still be considered feasible, much less profitable.

Moreover, the bond measure (Prop. 1A) that voters narrowly passed back in 2008 requires that a trip between Los Angeles and San Francisco on the high-speed train system take no more than 2 hours, 40 minutes. That probably would not have happened even under the older plans, but seems to be pure fantasy now that the high-speed trains will have to share tracks with slower commuter trains at both ends of the system. As Quentin Kopp, former California state senator and CSHRA chairman who was a leading figure in pushing for the passage of Prop. 1A and the creation of the CHSRA, admitted of the new plan, “This isn’t high-speed rail.” Added Kopp, “High-speed trains have separated tracks. That’s how they could achieve speeds and travel times promised to voters in the 2008 ballot measure.”

The high-speed rail project is such a disaster on so many fronts—economically, politically, even environmentally—that one can only hope that the plug will be pulled before California wastes more billions of dollars it does not have. At the very least, voters should have the chance to re-vote on such a project that is so different from the one put before them in 2008. Barring that, it will be up to the voters to use the initiative process to kill the high-speed rail system in order save themselves from more financial waste and abuse.

See my full article here.

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Considering Causes of Recessions vs. Rates of Recessions

High school economics wunderkind Evan Soltas put an interesting chart (see below) on his blog yesterday that The Atlantic's Matt O'Brien pointed out to me, asking for a libertarian response. I lightly and respectfully undertake an attempt below.

Evan writes that he pulled the chart together from FRED and NERB data showing that recessions have slowed down considerably since the 1850s. This is not incredibly new information—it is widely understood that since the 1930s that volatility is much more subdued than in the 19th century—though I had not seen the information presented like this before, to Evan's credit. 

(The chart was an embedded interactive file so I had to take a screengrab to show it here, but check out the original on Evan's blog here.)

By itself this chart doesn't tell you much until you start putting pieces of information on it to extrapolate as to the cause. For instance, Evan argues: 

In libertarian circles, the late 19th-century is seen as the pinnacle of growth and of laissez-faire and treated with according reverence. That story is not really true. Statistics which show unprecedented growth during the Gilded Age, I worry, are either imprecise, inaccurate, or worse, gamed according to their start- and end-points... It would be very possible that [GDP] grew quickly in between the frequent recessions, but the data do not support such a case: from 1800 to 1840, real GDP per capita grew at 0.4 percent annually; from 1840 to 1880, 1.44; from 1880 to 1920, 1.78; from 1920 to 1960, 1.68; from 1960 to 1978, 2.47.

I don't want to put words in Evan's mouth, but it appears the underlying assumption is that it was the creation of the Federal Reserve, victory of new Keynesian economic policy, Glass-Steagall, deposit insurance, and a less laissez-faire system that enabled the faster growth in the 20th century. Furthermore, I take an assumption that our present state of fewer recessions and GDP average growth of 2 percent over a multi-decade period is preferable. (I'm happy to be corrected if I am in error on these judgments.)

While I have not dug into this specific data myself for any extended period of time (and it appears there was a detailed attempt here anyway), there are a few things to consider in performing such economic analysis. To start, recessions are not ubiquitous events. They are not created equal. Their causes matter more than their numbers. For example, we might prefer five recessions that are six-to-eight months long scattered between 2002 and 2012, all caused by over investment in tech firms like we saw in the wake of the dot-com bubble's burst, to the boom from 2002 to 2007, followed by the 19 month recession, and then three-plus years of tepid economic growth. 

In the former scenario we are less likely to see recessions substantially impact household debt or long-term consumption trends. Spending would tighten up for a few months, balance sheets would be cleansed a bit, but the level of toxicity would not be so dramatic as to cause the losses we've experienced in the wake of our most recent bubble's bursting.

In the later scenario we have only 19 months of recession to deal with as opposed to as many as 40 months of recession to wrestle with. And we achieve much higher living standards for at least half of the time period. However, there is no inherent, objective measure that suggests this is better than the alternative scenario that I set up.

Nor is my alternative objectively better either. If the causes of those frequent recessions were bank runs that caused liquidity tightening and wide-spread bankruptcies as businesses failed to get access to credit to finance their payrolls, then we might not see quick bounce backs and the effects of those regular recessions could bleed into each other creating the environment Evan's data suggests for the middle part of the 19th century (which did include a devastating Civil War, by the way). 

All of this merely points out that the frequency of recessions is a relatively unimportant data point. It is the sources of such recessions. 

So to the second assumption, on the causes of the decreased volatility. This is a complex question. I pointed out the declining savings rate of the 1980s, 1990s, and 2000s earlier today on this blog and how this contributed to the economic boom years following the end of Stagflation and the Reagan recession. Perhaps if there were no technical advances to give us credit cards or if we were a less trusting society we would have had slower economic growth. Would this change have then discredited Reaganomics or influenced the way we view tax rate impact on GDP growth? Probably. 

The point here is to merely suggest that GDP growth rates as higher in the 20th century on average relative to the 19th century don't suggest much about the realities of the Gilded Age. What would the 20th century have been without the technical evolutions that gave us cars, planes, global telecommunication, and computing power? Back in 2008, this country would have given up a lot to get a 1.5 percent GDP growth rate. 

Evan concludes that his chart and argument shows "a very different picture of America, when you think about it. Frequent recessions, slow growth, little improvement in living standards, profound inequality -- all of this against what we have (had?) in the postwar era: fewer recessions, faster growth, faster improvement of living standards, less inequality."

On its face this is an efficiency argument for the central bank era vs. a supposed lassiez-faire era. The problem is that this assumes the desirability of a recession rate, speed of economic growth, and level of equality all divorced from their causes. That's not a leap of logic we should lightly undertake. 

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GDP Falling Back to 2.2% is Not Surprising

 

The BEA released first quarter of 2012 GDP data this morning, with the headline figure coming in at 2.2 percent growth. This was to be expected.

GDP growth for the last quarter of 2011 was primarily built on businesses spending money to add products to their inventories. It was further manipulated by a low adjustment for inflation. Even with BEA today reaffirming its 3.0 percent growth rate for 4Q2011, there is still a measure of cognitive dissonance and gaming of the figure to look stronger than growth on Main Street really was. 

Now we get a 2.2 percent for 1Q2012 figure. 

One positive is that personal consumption accounted for 2.04 of the 2.2 growth, compared to 1.47 of 3.0 at the end of 2011. In contrast inventory building was just 0.59 percentage points of the 2.2 percent growth figure, relative to 1.81 percentage points added to 4Q2012.

The major negative shift in bringing down GDP growth, however, was a combination of reduced inventory building and decline in non-residential fixed investments, like buildings, equipment, and software.

So at the end of 2011 businesses were spending a lot, likely to take advantage of depreciation rules that allowed many fixed investments to be written off of taxes at 100 percent, and consumers were a bit tepid in the holiday season. For the first three months of 2012, consumers are spending a bit more, and saving a bit less.

The reduced savings rate, from $466.0 billion in the first quarter compared with $530.8 billion in the fourth (or 3.9 percent in the first quarter compared with 4.5 percent in the fourth), means more contribution to GDP in this measurement period, but it also means less stability for the long term. One of the problems of the economic boom from the 1980s through the 2000s was that it was build in part on a declining savings rate. 

In the chart below you can see that personal savings as a percentage of GDP fell steadily from 1982 (the end of the Reagan recession) to 2006 (the height of the housing bubble). During the recession there was a sharp bounce back in savings, but since the recession ended in mid-2009, the savings rate has begun to decline again. 

Personal savings as a percent of GOD

Another way to look at savings is in fixed dollars. Here, data from the BEA shows that savings maintained a relatively stable line until the 2008-09 recession (spiking a bit in relative relation to its levels during the 2001 recession, but not much change measured against the 30 years measured here). But now the savings rate is falling. That could be interpreted as a positive thing for GDP growth in the coming quarters, or as signalling a return to imprudent spending behaviors by the American public and some new, unstable bubble. 

Personal savings in fixed dollars

Other, somewhat neutral news was that consumption of automobiles and parts declined 27 percent from the last quarter of 2011 until now, though it was nearly double the rate from the first quarter of 2011. 

We've now had six straight quarters of negative change in consumption of gasoline and other energy goods. And transportation services remained at a less than 2 percent change from quarter to quarter for the sixth straight month as well. 

 

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The Year 2011 in Surface Transportation and Aviation Privatization

The rollout of Reason Foundation’s Annual Privatization Report 2011 continues today with the release of the Surface Transportation Privtization and Aviation Privatization sections authored by Reason’s Bob Poole. The Surface Transportation section provides a comprehensive overview of the latest on toll roads, HOT lanes and other news on privatization and public-private partnerships in surface transportation. The Aviation section provides a comprehensive overview on the latest news on domestic and international airport privatization and privatization of airport security. Topics include:

 Surface Transportation

  • In 2011, infrastructure finance continued to recover from the credit market crunch of 2009. The amount of capital available in infrastructure equity investment funds reached a new all-time high.
  • Over the past five years, the 30 largest global infrastructure investment funds have raised a total of $183.1 billion dedicated to financing infrastructure projects, with the bulk coming from U.S., Australian and Canadian inventors. 
  • Eight major privately financed transportation projects were under construction in the U.S. in 2011 totaling over $13 billion investment, including megaprojects in Virginia, Texas and Florida. 
  • In 2010 CalPERS, the largest U.S. public employee pension fund, purchased a 12.7% equity stake in London Gatwick Airport, and public pension funds in Arizona, Louisiana, Oregon, Texas and San Diego are seeking similar investments. 
  • Puerto Rico’s Public-Private Partnership Authority announced a $1.5 billion lease of the PR-22 and PR-5 toll roads, their as its first large-scale project.  Ohio officials are considering a similar lease of the Ohio Turnpike.
  • Other topics include the federal role in private infrastructure finance, an update on high-occupancy toll and express lane projects in the U.S., and a review of toll road developments in the states and across the world.

Aviation 

  • In the aftermath of the credit markets crunch of 2008–2009, the airport market continued its recovery in 2011, with efforts including Puerto Rico's current plan to privatize San Juan’s Luis Munoz Marin International Airport and Chicago's continued interest in a potential Midway Airport lease. 
  • A total of 48% of European air passengers were handled by partly or fully privatized airports in 2011, with that share likely to grow with impending privatization initiatives in Spain and Greece. 
  • Amid public outrage over TSA’s introduction of body scanners and aggressive pat-downs, the administration and Congress continued to battle over proposals to allow airports to opt-out of TSA security and hire private screeners. However, some progress was made in Washington D.C. over reviving the trusted traveler program, advancing a more risk-based approach to security.
  • Since 1990, 51 governments have commercialized their air traffic control systems, separating the air traffic control functions from regulatory bodies, removing them from civil service, and making them self-supporting from fees charged to aircraft operators. However, there was no significant progress in 2011 toward commercializing air traffic control in the United States. 
  • Other news on domestic and international airport privatization and air traffic control commercialization 
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Las Vegas City Neighborhoods Fare Worse Than Suburbs

Much of the hype from the Great Recession has focused on how exurbs are losing population while closer in neighborhoods are gaining population. In reality the opposite is often true. At last week’s American Planning Association conference in Los Angeles, Alan Mallach of the Brookings Institution highlighted that in Las Vegas the suburbs and exurbs have survived the recession while the older parts of the city have not fared as well.

Mr. Mallach who researches urban revitalization and real estate divided sun-belt towns into four categories: bust high-cost, bust low-cost, small-decline and stable. Mallach found that although some cities particularly in California, Florida, and Nevada have high unemployment rates and depressed housing prices, any notion that the sunbelt is declining is a myth. Some sunbelt cities are outperforming the rest of the country. Texas metro areas have been some of the least affected places in the country by the recession. Mallach found that over the past fifty years, the only significant variable in predicting migration and growth is the average January temperature. This research supports the idea that the Sunbelt will begin growing again when the recession ends.

Typically the ghost towns in boom/bust cities such as Las Vegas are not distant suburbs but closer in neighborhoods. Home prices in the newer planned suburban communities decreased less than home prices in the older urban neighborhoods. The “less walkable” suburban developments saw smaller price depreciation than the “more walkable” urban developments. The vacancy rate in the new planned communities actually decreased during the recession. And during the recession, most home buyers continued to purchase a dream-house in a planned community with a 15-30 minute drive from their workplace. These homeowners do not consider a 15-30 minute one-way drive time an inconvenience. Other boom/bust cities across the country have housing characteristics similar to Las Vegas.

Mr. Mallach does not expect a radical change in the economy of demographic patterns. The most popular places in boom/bust cities like Las Vegas will most likely remain the suburbs. 

There are two takeaways from this research. First, while many have been quick to promote the death of the suburbs and the rebirth of central cities, in many metro areas this is not the reality. While revitalized cities have many positives, policymakers need to use facts not desires to create new policy. 

Second, many people still prefer to live in suburban areas. Yes many people, particularly the young prefer cities for their variety and excitement. Historically, younger people prefer cities. As these younger people age, have families, look for better schools and more affordable housing, they often move to the suburbs. People should be free to choose between the cities and the suburbs; both have advantages and disadvantages. The U.S. is a large country; promoting the same solution for every metro area is not the way to improve the neighborhood or the economy.

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Romney's Transportation and Land Use Policies may be Little Different than Obama's

Many people know that “Obamacare” was modeled on former governor Mitt Romney’s Massachusetts health-care law. However, few know that one of President Obama’s landmark “smart growth” initiatives known as the Partnership for Sustainable Communities was also based on a Romney program. 

When Romney was governor of Massachusetts he fought sprawl and encouraged density. According to The Grist, in 2002 he said, “Sprawl is the most important quality of life issue facing Massachusetts.” After winning Romney changed the state’s land-use laws in several ways. First, he created the Office for Commonwealth Development and appointed environmentalist Douglas Foy to lead it. According to Commonwealth Magazine, the business community was furious. The state office ensured that transportation, housing, energy, and environmental offices all worked together to promote smart growth. The Partnership for Sustainable Communities has accomplished the same goals on the federal level with the department of transportation, department of housing and urban development and the environmental protection agency.

Romney’s administration worked to concentrate development in town centers, construct housing near transit stations, and improve existing roads instead of expanding them. 

Further according to The Grist:

Romney was a vocal advocate for the cause. “I very much believe in the concept known as smart growth or sustainable development, which is the phrase I used in the campaign,” Romney told Commonwealth Magazine in 2003. “You do not want to deplete your green space and air and water [in order] to grow, and the only way that’s possible is if your growth is done in a thoughtful, coherent, strategic way.

As Romney put it in 2005, “By targeting development to areas where there is already infrastructure in place, not only can we revitalize our older communities, but we can also curb sprawl as well.” His administration actively pursued a “sustainable development agency” and promoted “transit-oriented development,” “multi-modal transportation,” “village-style zoning" “green building,” “mixed use” development, “mixed-income housing,” and other approaches that would delight any green-leaning city planner — and rile up any red-blooded Tea Partier.

Environmental activists still found plenty to criticize in Romney’s approach to land use and development, but many greens and smart-growth advocates were pleasantly surprised, at least in the first half of Romney’s term. In 2006, the U.S. EPA gave Massachusetts’ Office for Commonwealth Development its National Award for Smart Growth Achievement.

There are several parallels between Romney’s state program and the current federal program:

Just as Romney’s Office for Commonwealth Development incentivized local communities to embrace smart growth by offering grants, so does the Partnership for Sustainable Communities. Since its launch, the partnership has helped to allocate about $3.5 billion in grants and other assistance to more than 700 communities that want to better coordinate housing, transportation, and economic-development projects and make neighborhoods more walkable, transit-accessible, and sustainable.

In fact Romney’s policies were smart growth oriented until his last year as Governor when he decided to quit the Regional Greenhouse Gas Initiative (RGGI):

 [I]n mid-December (2005) Romney abruptly pulled the state out (of the RGGI)— despite the fact that several staffers in his administration had spent two and a half years and more than half a million dollars negotiating and shaping the deal.

Romney had until (December of 2005) been an advocate and architect of RGGI, which includes a market-based trading system that will let big fossil-fuel power plants buy and sell the right to emit carbon dioxide. As recently as November (2005), he was publicly talking up the agreement: “I’m convinced it is good business,” he told a clean-energy conference in Boston. “We can effectively create incentives to help stimulate a sector of the economy and at the same time not kill jobs.”

So why did then Governor Romney pull out? It was about this time he considered running for the Republican 2008 nomination for President. 

So where does Romney stand now? He recently told several donors that he might eliminate HUD, the department his father headed during the Nixon administration. He has said the EPA under President Obama is “out of control.” Would he approach smart growth in a similar manner to health-care and argue that promoting smart growth at the state level makes sense while promoting it at the federal level is unconstitutional? Since the President’s smart growth policies mostly apply at the local level, applying the health care reasoning to the smart growth arena is not the same. 

Still people who worked with Romney are not sure of his real views. I will try to hazard a guess. Romney is a moderate Republican; in a few states he might qualify as a Democrat. He believes in smart growth, providing universal healthcare, reforming immigration, and is pro-choice. However, to become President his views have “evolved” to become more in line with the base of the Republican party. While he is not the first politician to switch his views to become more electable, he is pressing the limits of believability. 

The question is what happens after he is elected. Will his true opinions on smart growth shine through or will he take a politically popular path. And what happens if he is elected to a second term?

Much of the current opposition to smart growth has arisen as a result of a United Nations document titled Agenda 21. The non-binding agenda that came out of the 1992 Rio Earth Summit contains many policies that could be harmful to the United States. However similar to most other bad United Nations policies it has been ignored by most of the world and will likely continue to be ignored. Some in the tea party are making a mountain out of this molehill of a document. Neither Obama’s nor Romney’s policies are based on Agenda 21. In reality, they are based on smart growth dogma that is emotionally charged and largely factually unsubstantiated. Programs such as the Partnership for Sustainable Communities, applied indiscriminately with no regard for the differences between different places, are potentially more damaging to the United States in the long-term than any United Nations document. 

From a land use and transportation viewpoint, Romney’s policies may be little different than Obama’s policies. In some ways Obama is more believable because he actually believes in what he preaches. Romney preaches just to be elected. In transportation matters, President Obama has been one of the least effective Presidents in the last fifty years. The fact that Governor Romney may be little different is a depressing thought indeed.

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Denver's RTD Abandons Tax Hike for FasTracks

Monte Whaley of The Denver Post reports:

A FasTracks proposal to link commuters in the northwest Denver metro area to downtown is stalled after the Regional Transportation District (RTD) board of directors decided Tuesday night not to pursue a tax increase in November that would fund the idea.

All 12 members of the RTD board said the timing is wrong for any kind of tax hike—which would have gone for to all unfunded and partially funded corridors—and there still remains too many questions about the plan.

This vote shelves an ongoing conversation about solving surface transportation needs in the Denver metropolitan area. In this piece I highlight two motivating factors behind their decision, and offer three takeaways for what to expect moving forward.

First, for those unfamiliar, I outlined the context of this vote in a reason.org commentary last month:

In 2004 voters in Denver’s Northwest Corridor approved raising a regional 0.4 percent sales tax, generating $894.6 million to build a Commuter Rail Transit (CRT) line known as the Northwest Rail Line by 2017. The proposed 41-mile diesel, 7-station diesel-powered (non-electric light rail) CRT would start at Denver’s Union Station and would have stations in Westminster, Walnut Creek, Broomfield, Louisville, Boulder, Gunbarrel and Longmont. The Northwest Rail Line is one piece of a larger regional transit program known as FasTracks...

Overall FasTracks is a multi-billion dollar transit expansion program that aims to ultimately comprise of 122 miles of CRT and light rail, 18 miles of bus rapid transit (BRT) and 21,000 new complementary parking spaces across eight counties. When voters approved FasTracks it was projected to cost $4.7 billion - these estimates have proven to be totally inaccurate.

Fast forward to spring 2012: FasTracks costs ballooned from $4.7 up to $7.4 billion and the system is not expected to be complete until 2042. Last year alone FasTracks' system-wide capital costs increased by $968.3 million and eighty five percent of that increase came from the Northwest Rail Line. The RTD Board of Directors weighed four options for the Northwest Rail Line that all hinged on ballot placement, and voter approval, doubling the initial FasTracks regional sales tax from 0.4 percent up to 0.8 percent. They pursued—and ultimately abandoned—a hybrid option prepared by the RTD staff that would have provided supplemental BRT from Westminster to Longmont until CRT was complete.

The RTD Board of Directors essentially punted on making a decision by abandoning the tax hike for the hybrid option, and they were primarily motivated by two factors.

  1. It's uncertain whether or not voters would approve a tax increase this fall. For example, last fall voters rejected Proposition 103, which would have collected an estimated $3 billion in tax revenue for education, by nearly 40 points. Gov. John Hickenlooper famously described the state of the electorate last fall saying, "There's no appetite for taxes anywhere, all over the state." In addition to their analysis and public outreach, RTD reportedly conducted telephone polling to gauge voter willingness to support a tax increase and they likely weren't encouraged by the results.
  2. Several board members expressed concern over the ambiguity of the proposed hybrid option. Board member John Tayer was quoted in The Denver Post saying, "I will not support going forward... until we have a specific plan and a specific time frame."

This vote is only a temporary setback, as the Board explains in a press release:

RTD will continue to work aggressively to seek alternative funding sources for the program including grants, public-private partnerships and unsolicited proposals. The Board will continue to explore pursuing a sales and use tax election in the future when the time is right for the region.

There are three takeaways from this vote by the RTD Board of Directors.

  1. It's only a matter of time before another revenue raising ballot measure is discussed for the Northwest Rail Line. Stakeholders along the corridor have expressed continued dismay over the fact that full service won't be provided until 2042 at the earliest.
  2. This may open the door for more innovative alternatives. Initial cost and completion projections have been totally inaccurate throughout FasTracks with the exception of one aspect: the Eagle P3 Project. The Eagle P3 project is a 34-year design-build-finance-operate-maintain (DBFOM) public-private partnership signed with Denver Transit Partners in July 2010. As mentioned above, RTD has signaled willingness to pursue similar public-private partnerships in their efforts to complete the line. RTD currently evaluating an unsolicited proposal for rail along I-225. 
  3. Finally, with more time, it's likely that officials will be convinced of the merits of BRT. A recently launched global database on BRT systems demonstrates their efficacy in 134 cities around the world carrying over 22.4 million passengers daily. U.S. BRT leaders include New York City, Pittsburgh and Boston. The Board considered BRT prior to choosing the hybrid option. Compared to the CRT option, the BRT option would have offered: an earlier competion date, more frequent on-peak and off-peak service and more frequent stops; while offering comparable travel times, costing half as much in the short run and requiring lower annual operation and maintenance costs in the long run.

This project is one to watch in the coming months and years ahead because RTD has signaled interest in the types of innovative alternatives that would meaningfully address the Denver metropolitan area's surface transportation needs—before 2042 and beyond.

For more on the Northwest Rail Line and FasTracks, see my previous posts here and here.

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Philadelphia Schools to Follow New Orleans Market Education Lead Without a Hurricane?

Philadelphia plans to revolutionize its school system by closing schools, moving to an all-charter or autonomous school district, ditching the central office, and privatizing school services with outside vendors.

As the Philadelphia Inquirer reports:

So, at the SRC's direction, Chief Recovery Officer Thomas Knudsen on Tuesday announced a plan that would essentially blow up the district and start with a new structure.

The plan - subject to public comment and SRC approval - would close 40 schools next year and 64 by 2017, move thousands more students to charters, and dismantle the central office in favor of "achievement networks" that would compete to run groups of 25 schools and would sign performance-based contracts. . . .

Forget the command-and-control district structure. It's archaic and it doesn't work, officials said.

Instead of orders coming from a large central office that runs 249 schools, much of the power would be concentrated in the new achievement networks.

Those would represent "a breaking-apart of the district," Knudsen said. They would be "a group of people who choose to do business with the SRC and the central office to run" from 20 to 25 schools organized either by geography or by some other theme.

Successful principals or district staff could apply to run an achievement network. So could charter organizations, or universities, or a combination of those groups.

Principals would answer to the achievement networks, although they would remain district employees. The achievement networks would have contracts with the SRC, and would have to meet performance goals or risk being replaced.

The achievement network structure "creates an entrepreneurial approach, a flexibility, a nimbleness, a willingness to experiment," Knudsen said.

The current academic divisions - formerly called regions, clusters, and districts - will be gone as of this summer. Pilot achievement networks will be in place this fall, with a formal rollout in 2014.

Schools would have much more autonomy, with the ability to choose their own curriculums.

Though there is some precedent for this kind of work - officials pointed to the decentralization in New York City public schools - Ramos noted that what Philadelphia is proposing "is different from what many other places are doing."

The central office, already half the size it was a year ago, will shrink further, from over 1,000 employees a few years ago to about 200 in the new model. 

This model has been working well in New Orleans where more than 80 percent of students are in charter schools without a central office and in several other districts that have decentralized control to the parents and the schools. Philadelphia is moving toward the sea change in school governance and school funding that is happening across the United States.  More than 30 "school funding portability" funding systems are funding students through a student-based budgeting mechanism in cities like New York, Baltimore, Denver, Hartford and Cincinnati. In 2011, Rochester, Newark and Boston have moved to full weighted student formula systems where the money follows the child. Los Angeles Unified is moving from 100 pilot schools being funded based on per-pupil basis to all 800 schools funded based on where the student enrolls. In Louisiana, 7 school districts are piloting a student-based budgeting system, including the largest school district in the state, Jefferson Parish, with 50,000 students. New Jersey, Rhode Island, and Indiana have all recently changed their statewide school funding systems to a state formula where the money is attached to the child. These kind of systems support a level playing field for charters and district schools and do not give schools a residential advantage. 

There are many interesting details of the plan at the Philadelphia Inquirer so read all about it here.

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Privatization and Public-Private Partnership Trends in Local Government in 2011

The rollout of Reason Foundation's Annual Privatization Report 2011 continues today with the local government section, which provides an overview of the latest on privatization and public-private partnerships at the local level. Highlights include:

  • 57 percent of city finance officers report their cities were less able to meet their financial needs in 2011 than in 2010 while general city revenues declined for the fifth straight year, according to the National League of Cities. This “new normal” fiscal condition is hitting local governments across the U.S. that continue to feel the squeeze of the prolonged economic downturn.
  • Chicago Mayor Rahm Emanuel, and former White House Chief of Staff to President Obama, hit the ground running during his first year in office. He implemented managed competition for the city’s Blue Cart recycling program allowing private companies to compete with the public sector, the move is projected to provide Chicagoans cost-savings exceeding 50 percent. The city began outsourcing the water bill call center in summer 2011 and is considering outsourcing the collection of city ambulance fees to improve collection rates.
  • Parking assets remain the hot item in local government privatization. Chicago and Indianapolis are realizing substantial gains from their reforms and were joined in 2011 by a host of cities (such as New York, Pittsburgh, Sacramento, Memphis and Harrisburg) that are considering similar efforts.
  • San Diego, California is finally implementing the managed competition mandate approved by voters in 2006. City employees won bids for the Publishing Services Department and Fleet Services Division, with new contracts expected to save y 30 percent ($5.2 million) and 13 percent ($22 million) respectively over the separate five-year contracts. Officials are also exploring street sweeping services, utilities call centers, street and sidewalk maintenance and landfill operations.
  • Toronto Mayor Rob Ford championed efforts to privatize trash collection in District 2 could save residents anywhere from $35-$92 million over the course of the seven-year contract. Half the city’s trash collection is now provided by the private sector, allowing for cost and service comparison before further privatization.
  • New mayors in Tulsa and Jacksonville have quickly moved to apply competitive forces to public service delivery. In Tulsa, Mayor Dewey Bartlett is implementing 1,134 strategic opportunities compiled by KPMG to realize cost savings, enhance revenue collection and improve efficiency. In Jacksonville, Mayor Alvin Brown appointed a new public-private partnership commissioner who will oversee a wide range of streamlining initiatives.
  • Contract cities in Georgia continue evolve, with the latest improvement coming in the form split service contracts that saved taxpayers almost 30 percent, or over $7 million, in Sandy Springs for example.
  • A 2011 survey conducted by American University found that 93 percent of city officials support government contracting with the private sector, and 63 believe that most public agencies do a good job at contract management.
  • Jefferson County, Alabama filed the largest government bankruptcy in American history. The county held approximately $4.23 billion in debt owed to more than 5,000 creditors that traced back to a 1996 federal judge ruling that obligated the county to rebuild its sewer system.

» Annual Privatization Report 2011: Local Government [pdf, 1.7 MB]

» Complete Annual Privatization Report 2011 homepage

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The Year 2011 in State Government Privatization and Public-Private Partnerships

The rollout of Reason Foundation's Annual Privatization Report 2011 begins today with the release of the State Government Privatization section, which I co-authored with Reason's Lisa Snell. This section of APR 2011 provides an overview of the latest on privatization and public-private partnerships in state government. Topics include:

  • In New Jersey, the Christie administration continued to expand its portfolio of privatization initiatives in 2011, which included highway maintenance, manual toll collection, state-run horse racing facilities, vehicle fleet operation, the NJ Network TV station and more.
  • Two ratings agencies upgraded Louisiana's credit rating in 2011, citing the state's strong fiscal management, strong employment levels and sustainable levels of public debt. Privatization remained a central feature of the Jindal administration's fiscal management in 2011, with progress on some of its major healthcare privatization initiatives in Medicaid delivery, public employee health care and behavioral health services.
  • New Ohio Gov. John Kasich has already taken significant steps to advance privatization as a key component of his governing agenda, including privatizing the state's economic development agency, selling a state prison to a private operator, and hiring advisors to analyze the potential privatization of the Ohio Turnpike and Ohio Lottery.
  • In late 2011, Washington State became the first state since the end of Prohibition in 1932 to fully privatize the sale and distribution of liquor, and several other states, including Pennsylvania and Virginia, considered similar moves. Today, 33 states have completely private wholesale and retail trade in liquor, while 17 states still retain a state-run wholesale and/or retail liquor monopoly.
  • Puerto Rico continued to emerge as a leader in attracting private investment in public infrastructure, with public-private partnerships undertaken or underway in 2011 that include a modernization of 100 K-12 schools, a $1.5 billion toll road lease and an ongoing procurement for a long-term lease of San Juan's international airport.
  • In 2011, both Texas and Connecticut enacted broad-ranging laws to authorize private sector financing for infrastructure assets.
  • As state park systems continued to face significant fiscal pressures in 2011, policymakers in states like Arizona, Utah and California took steps to expand the use of private for-profit and nonprofit operators to take over state parks threatened with closure.
  • Illinois' groundbreaking lottery privatization program got underway in 2011, an initiative designed to generate an additional $1 billion in revenues to the state over the next five years. Policymakers in California, New Jersey, and Ohio are considering similar moves.
  • After years of implementation challenges that prompted a dramatic overhaul, Indiana's privatized welfare eligibility modernization program significantly improved its performance in 2011, prompting federal officials to authorize its expansion throughout the state and award the state $1.6 million in recognition of its progress at reducing its error rates for food stamp processing.
  • Other topics include public-private partnerships in higher education, an update on state child welfare privatization systems and more.

» Annual Privatization Report 2011: State Government
» Complete Annual Privatization Report 2011 homepage

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New at Reason: Review of Federal Privatization Issues in 2011 and Today

The rollout of Reason Foundation's Annual Privatization Report 2011 begins today with the release of the Federal Government Privatization section, authored by Reason's Adam Summers and Anthony Randazzo. This section of Reason Foundation's Annual Privatization Report 2011 provides an overview of the latest federal insourcing, housing finance, private spaceflight and other news on privatization and public-private partnerships in the federal government. Topics include:

  • The ongoing dispute over what constitutes “inherently governmental” functions continued in 2011, and new Obama administration regulations could undermine federal outsourcing policy standards dating back to 1955.
  • Regulators implementing the Dodd-Frank Act are creating significant risk for both mortgage investors and securitizers and appear likely to undercut the private mortgage industry while benefitting government mortgage providers. 
  • In 2011, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) combined to purchase or guarantee 95 percent of all new mortgages in America with some mortgages worth as much as $729,750. Every one of these mortgages is backed by taxpayer money.
  • Federal agencies, under the encouragement of President Obama, are expected to generate nearly $13 billion in cost savings from asset divestiture, $9.8 billion of which comes form the Department of Defense’s Base Realignment and Closure (BRAC) efforts.
  • The federal government owns approximately 1.2 million properties that cost $20 billion a year to maintain. Recent Congressional efforts to pass a Civil Property Realignment Act could save as much as $15 billion, according to the Office of Management and Budget.

» Annual Privatization Report 2011: Federal Government Privatization [pdf, 1.9 MB]

» Complete Annual Privatization Report 2011

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New at Reason: Annual Privatization Report 2011

We are pleased to announce that today marks the launch of Reason Foundation's Annual Privatization Report 2011. Now in its 25th year of publication, the Annual Privatization Report is the world's longest running and most comprehensive report on privatization news, developments and trends.

Readers will notice that APR 2011 features the same format as last years report, published in as a series of reports arranged by topic, rather than one consolidated report as in previous years. We expect that this will make it easier to use as a resource and find the information you're looking for. The individual sections of APR 2011—which will be released over the next two weeks—include:

  • Federal Government Privatization
  • State Government Privatization
  • Local Government Privatization
  • Air Transportation
  • Surface Transportation
  • Education
  • Telecommunications
  • Corrections and Public Safety

We started the rollout today with the APR 2011 Federal Government Privatization section. It provides an overview of the latest federal insourcing, housing finance, private spaceflight and other news on privatization and public-private partnerships in the federal government.

» Annual Privatization Report 2011: Federal Government Privatization [pdf, 1.9 MB]

» Complete Annual Privatization Report 2011

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The Fed As Source of Income Inequality

We've noted before that income inequality is not inherently a bad thing—what matters is the source of the inequality. In last week's WSJ, hedge fund founder Mark Spitznagel points out one bad source creating artificial income disparagement... the Fed:

 

The Fed doesn't expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.

The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.

At some point, of course, the honey flow stops—but not before much malinvestment. Such malinvestment is precisely what we saw in the historic 1990s equity and subsequent real-estate bubbles (and what we're likely seeing again today in overheated credit and equity markets), culminating in painful liquidation.

The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president's presumption of tax unfairness (if there is anything unfair about approximately half of a population paying zero income taxes) or deregulation.

 

See the full article here.

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[Op-Ed] (Colorado SB 124) is a Misguided Attempt to Create Jobs

Colorado recently lawmakers Senate Bill 124, which seeks to cut the strings on tax incentive programs for tourism projects. As I explain in my recent op-ed in The Colorado Springs Gazette entitled "Tax incentive program is a misguided attempt to create jobs": 

Nearly 8 percent of Coloradans are unemployed and seeking a job, and with numbers like that it’s normal for policymakers to focus on job creation. However a misguided attempt to create jobs through tourism projects might be made worse by the recently passed SB 124. The projects were originally approved with strings attached to limit taxpayer risk and lawmakers seeking to cut those strings aren’t considering the consequences.

The bill would modify the Regional Tourism Act passed in 2009, which approved tax increment financing for six total tourism projects. The Regional Tourism Act stipulated that only two projects could be chosen over the next three years and SB 124 would remove that stipulation until officials reach the six project cap. Despite passage through the legislature:

... (T)he bill faces bipartisan opposition in the Legislature and from the Governor’s office. Officials at the Colorado Office of Economic Development and International Trade have also questioned SB 124, citing uncertainty over whether the program will work. Gov. Hickenlooper’s critique centers around the need for oversight provisions and accountability measures that demonstrate projects will attract out-of-state visitors.

The piece later details how the Pew Center on the States determined Colorado belongs among the bottom half of states "trailing behind" in accountability for tax incentive programs. The piece concludes:

As long as the state is in the business of doling out special treatment through the tax code, taxpayers might as well know what they’re getting for their money. SB 124 is an excellent opportunity for Gov. Hickenlooper to flex his famed pragmatism and send a message that now is not the time to cut the strings and set loose Colorado’s flawed tax incentive programs, it’s time to rein them in.

Read the full piece available online here. For more, see my previous blog post on the aforementioned Pew study here

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Durbin Swipe Fee Watch V: Gas Retailers

It is time for another edition of the Durbin Swipe Fee Watch. 

Recall that the Durbin Amendment was a last minute measure added to the Dodd-Frank Act. The provision, which directed regulators to cap bank interchange fees-the fees banks charge retailers in order for the retailers to use the banks debit card-was naturally lobbied for hard by retailers. Regulators later set the limit at 21 cents per transaction, less than half of the average 44 cents per transaction prior to the rule.

At the time, Senator Durbin hoped that the lowered fees would reduce prices and amount to savings for consumers. That hasn't been how the movie has played out though. 

The most recent evidence comes from new research showing that while the automobile gas retail industry has achieved $1 billion in annual savings from the lowered swipe fees, these are not savings being passed on to consumers. Of the 134 billion gallons of gasoline sold in 2011 approximately 48 billion gallons were purchased using debit cards, and with the average savings for gas retailers of about 3 cents/gallon on debit card purchases courtesy of the Durbin Amendment, you get the $1 billion figure. The reduced swipe fees mean less cost for the retailers, but what about the consumers?

With debit as the overwhelmingly most popular payment choice at the pump (comprising of 36 percent of all transactions), the reduced swipe fees have essentially given the gas retailers a subsidy windfall rather than any savings for consumers. 

It is well documented that gas price averages were 26 percent higher in 2011 compared to 2010. Much of this could be blamed on the Arab Spring or Federal Reserve's QE programs driving up commodities prices. The data shows that consumers should be seeing a 4-5 cent discount for an average 16 gallon pump when they pay with debit. But with prices ever climbing the ill conceived Durbin Amendment has just put that money into the pockets of the gas stations.

While it is not necessarily a bad thing that small businesses (gas retailers) have reduced costs, it is a problem that this has come at the expense of other businesses (banks), all because Washington decided to pick favorites. Disguising their rule as somehow for the betterment of consumers has simply become a joke.

We predicted this back in 2010. Since Durbin Amendment's directed regulation has started its film reel many banks have ended debit card reward programs and flirted with monthly debit card fees. Retailers such as Redbox have even had to increase prices as a direct result of the Durbin Amendment. All of this has caused measurable harm to consumers, with little evidence of an aggregate benefit for them, and all this while big box retailers stand to make millions and more. The notion that businesses would voluntarily pass along these savings to consumers and that the banks would not find other ways to make up for lost revenues is baffling, and very short-sighted by the U.S. Congress.

Now in its fifth edition, the Durbin Amendment Swipe Fee Watch has reached the level of both the Rocky and Planet of the Apes movie franchises in that, like both Rocky V and Battle for the Planet of the Apes, you are now wishing the Durbin Amendment never happened. We all fear the release of the next edition.

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