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Out of Control Policy Blog Archives: 6.23.13–6.29.13

FasTracks to Nowhere: Denver's Decade-Old Boondoggle

Denver’s Regional Transportation District (RTD) has been forced to reschedule a telephone town hall meeting that was intended to discuss the future of its Northwest light rail line with local residents; RTD had given out an incorrect phone number to participants. This latest blunder is, unfortunately, all too representative of how the FasTracks project has proceeded thus far. 

Mismanagement, unwarranted optimism and a consistent failure to plan for foreseeable contingencies have led FasTracks down the road towards insolvency and incompletion, leaving stakeholder communities with a choice between losing access to the system they paid for or ponying up even more in new taxes. This is not the transit system Denver had bargained for. 

When approved by voters in 2004, RTD was expected to build 122 miles of light rail over the course of 12 years for $4.7 billion. To date, only 40 percent of the system, and only one complete line, has actually been constructed, about 75 percent of the way through the initial timeline. Its budget has ballooned 57% to $7.4 billion and because of massive cost overruns and revenue shortfalls, RTD does not expect the project to be completed until at least 2044, if ever. 

In fact, it might never be finished, unless RTD gets new funding from… somewhere. It certainly won’t be from Denver taxpayers—they’ve steadfastly rejected proposals to double the sales tax increase they approved in 2004 to close the $2+ billion funding gap. 

The project is a case study in how expensive transit mega-projects can go sideways. Many of FasTracks’ problems can be traced back to flaws in its original proposal: RTD didn’t secure rights of way for its corridors or obtain realistic cost estimates of acquiring them before submitting the budget to voters. When it pitched the plan the agency assumed that sales tax revenue would increase 6 percent annually, from 2004 to 2025—an unrealistic forecast that never materialized. 

Before ground had even been broken in 2007, RTD announced that FasTracks was already a billion dollars over its original budget. Cost overruns would continue to grow to over $2.3 billion during the next few years Modifications to the plan approved by voters, including changes in project scope, new safety requirements and higher land costs, and from increases in the cost of construction materials led to these overruns. By 2009, the North Area Transportation Alliance had concluded that, “[FasTracks is] floundering with a financial plan that lacks credibility and a series of incremental decisions that are producing disjointed transit segments.” 

The 41-mile Northwest Rail Line in particular (the subject of last week’s abortive town hall meeting) has been subject to skyrocketing costs, nearly doubling from an estimated total cost of $894 million to over $1.7 billion. Three of the northern counties that would be served by the line have already contributed $243 million in taxes to FasTracks, but they won’t see even a 6-mile segment of their line completed until 2016. At the moment the full track isn’t expected to be completed for another three decades

Currently, FasTracks also includes funding for 17 miles of Bus Rapid Transit on two HOT lanes on U.S. 36 between Table Mesa Drive and the I-25 Express Lanes. One proposed solution to the continuing problems of the Northwest corridor is to replace most of that route, with BRT. This would dramatically reduce the cost of the line without forcing the community to give up its access to transit. The U.S. 36 BRT/HOT lanes project will cost only about $10.5 million per mile, while being subsidized by toll revenue from other vehicles using the lanes. By contrast, the Northwest Rail Line will cost over $40 million per mile and never recoup its capital costs. 

As communities along the corridor debate making changes to the project, they should consider that proven, affordable rapid transit is available in the form of BRT for a fraction of the cost of light rail. Best of all, because its capital costs can be partially offset by automobile user fees, it could actually be built now, without raising taxes or waiting decades for funding to appear. 

A public-private partnership to build and operate the line would be an effective way to shield justifiably skeptical taxpayers from the risks inherent in these kinds of transit projects. It would also reduce automobile congestion on the route with HOT lanes and maintain RTD’s commitment to provide fast, reliable transit service to the northern Denver metro region.

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California's Not-Actually-Balanced Budget Ignores Unfunded Liabilities

Reading some of the mainstream news coverage of the recent $96.3 billion California General Fund budget deal, one would think that fiscal restraint has come back and that all is well in the Golden State. In a press conference last week, Governor Jerry Brown announced that "California is focusing, in this budget, on improving the healthcare of the people of our state and improving educational opportunity — that's the big take-away — while we're living within balance.”

The 2013-2014-budget plan, which includes salary increases for 95,000 state employees at an estimated additional cost of $735 million over three years, is balanced enough to cover expenditures for the year. But there’s a problem: the “balance” is achieved by ignoring unfunded liabilities and a reliance on temporary revenue increases.

This reality prompted a colorful take on the budget by Assemblyman Jeff Gorell (R-Camarillo): “It’s the mullet budget. It’s conservative up front, but it’s liberal in the back.”

The California Department of Finance notes that the budget does not set aside "significant money" to address the $38.5 billion unfunded liability for state employee pensions (CalPERS), nor the $63.8 billion in unfunded liabilities for retired state employee health care. To make matters worse, "that liability increases by billions of dollars each year” and beginning in 2015, hundreds of millions of dollars in additional spending will be needed to cover pension obligations. Then there is the additional $71 billion in unfunded liabilities for the California State Teachers Retirement System (CSTRS), which according to the Legislative Analyst’s Office (LAO) requires $4.5 billion in additional annual spending in order to maintain solvency.

And those are the rosy numbers. If Moody’s new actuarial method is to be believed, then California’s unfunded pension liabilities for state and local governments could actually be over $329 billion. Two years ago, the Stanford Institute for Economic Policy Research calculated California’s unfunded pension liabilities to be nearly half a trillion dollars.

The current budget does nothing to address these problems.

Further, the extent to which this system is “balanced” is even sketchier when attention is turned to revenue estimates. General fund revenues for 2013-2014 are down by nearly $1 billion from last year, due in large part to a $3.1 billion reduction in revenue from personal income taxes, while general fund spending is up half a billion from last year. The “balance” is established due to the (hopefully) temporary increases in Special Fund revenue resulting from Proposition 30, which raised the state sales tax from 7.25% to 7.5% and income taxes on individuals making more than $250,000. These tax increases, which are set to expire in four and seven years, respectively, are thought to contribute approximately $6 billion in revenue annually. What will happen as this added revenue dries up is up in the air.

In recognition of their  “fantastic job,” California lawmakers are getting a 5% pay increase from the California Citizens Compensation Commission.

With the current budget built around ignoring unfunded liabilities larger than the annual General Fund and a temporarily increased revenue stream, California legislators are simply patting themselves on the back for kicking the can down the road at the expense of taxpayers. Again.

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SCOTUS Secures Jury Trial Rights for Criminal Defendants

While everyone was waiting for the U.S. Supreme Court rulings on the same-sex marriage cases, the Court handed down two significant rulings last week regarding criminal sentencing.

The first was a decision handed down on Monday for the case of Alleyne v. United States. In this case, Allen Ryan Alleyne was charged with using or carrying a firearm in relation to a crime of violence (in his case, armed robbery), which carries a five-year mandatory minimum sentence, but is increased to a seven-year mandatory minimum sentence “if the firearm is brandished.” When Alleyne was convicted, the jury indicated that he had “[u]sed or carried a firearm during and in relation to a crime of violence,” but did not indicate that he had brandished the weapon. However, the trial judge recommended a seven-year sentence for Alleyne. Writing for a 5-4 majority, Justice Clarence Thomas held that Alleyne’s Sixth Amendment right to a trial by jury was violated when the judge recommended the seven-year mandatory minimum sentence based on a finding that had not been reached by the jury. In his opinion, Thomas wrote:

Because mandatory minimum sentences increase the penalty for a crime, any fact that increases the mandatory minimum is an ‘element’ of the crime that must be submitted to the jury.

This decision has implications for criminal sentencing for crimes that carry mandatory minimum punishments around the country. Oftentimes with mandatory minimum drug sentences, the difference between a conviction for drug possession and a conviction for possession with intent to sell (which carries a heavier prison term) is determined solely by the weight of the drugs the person possessed at the time of his or her arrest. Now, this evidence must be presented to a jury and found to be true beyond a reasonable doubt before a judge may recommend a sentence enhancement. This ensures that offenders are given their right to a fair trial instead of facing back-door sentence enhancements after their conviction.

The court’s ruling is a victory for the Sixth Amendment, as well as for advocates in favor of fairer sentences for those who face mandatory minimum terms of imprisonment.

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Innovators in Action: Public Works Contracting 2.0 in Centennial, Colorado

The latest interview in Reason Foundation's Innovators in Action 2013 series focuses on the contract city of Centennial, Colorado and its comprehensive public-private partnership to deliver a full-range of public works services.

In recent years, Centennial—a Denver-area suburb of over 100,000 residents that incorporated in 2001—has gained increasing recognition in public administration circles as a leader in innovative government efficiency and privatization initiatives. Since incorporation, the city has pursued a "contract city" policy of contracting with outside providers for all public services, unless there is a demonstrable, quantifiable advantage to providing services in-house.

In 2008, Centennial launched what has become its most recognized signature achievement: a large-scale contract with national engineering firm CH2M HILL to provide all of the city's public works services. Centennial's public works contract has gained national attention for its scope and innovation and garnered the city a series of awards, including the 2010 National Council for Public-Private Partnerships Service Award, the 2010 American Public Works Association Innovative Customer Service Call Center Award, and the 2012 Institute of Transportation Engineers Transportation Achievement Award for Operations.

In June 2013, Reason's Leonard Gilroy interviewed Centennial Mayor Cathy Noon and the City Manager John Danielson on the groundbreaking public works PPP, how the city drives performance and accountability from contractors, citizen satisfaction, lessons learned in contracting and more. Here's an excerpt:

Gilroy: How flexible is the contract in terms of making adjustments in priorities along the way, for example, in the event that city revenues come in less than expected at the beginning of the fiscal year or if priorities change over time?

Danielson: One of the things we did in the last contract negotiation was actually reduce the amount of money we're paying on the contract, and we created something called a "flexible spending account," which gives us a lot of ability to expand or contract as circumstances demand. Plus, all of our service providers understand that this is a partnership, and if we were to get into a fiscal situation where we no longer deemed something affordable or no longer a priority of the city council, then we could pretty easily modify the contract if need be.

Noon: A few years ago before the most recent renegotiation of the contracts with all of our contractors, there were some revenue downturns that we weren't expecting during the recession. We worked with our private partners and were able to do a reduction in services. For instance, in the public works contract, instead of doing six street sweepings, we would do four for that year. We cut back on the amount of mowing we did. The contract was written so that we are able to expand and contract in order to match the revenues we have. Consequently, we can pay extra for something because we know what the costs would be. For example, if we decide we need another street sweeping, the cost is spelled out in the contract so that we know what it would cost to add another sweep. And we also have an "exchange" written into the contract, so to speak, such that one street sweeping equals two mowings, for example. So if we decide that we don't see a need for a particular service in a given year—perhaps it's a dry year and we don’t need as much mowing—we can exchange that for another service. [...]

Gilroy: In all forms of privatization, a key concern is that the government will "lose control" of public services. How do you hold the private sector accountable for living up to their end of the contract?

Danielson: I’ve heard that for a lot of years, and one of the things that I find interesting is that we in government tend to not hold ourselves to the same standards as we hold our contractors to. How many government agencies say that we'll give ourselves X number of hours or days to respond to a particular request and hold ourselves to it or penalize ourselves if we don't do it? But we do that consistently with all of our contract relationships. So I'm a little bit skeptical about the fear of losing control. If it gets away and there is a downturn in service, and your contract doesn't provide specific stipulations about what the remedy is for that, then you don't have a very good contract. We do have that written into our contracts, we do have responsiveness, and we do have penalties. I think that we're actually more responsive as a contract city than the cities that are completely staffed by in-house personnel.

Noon: That's very true. I think that because we have to look at the contract, it keeps us more in control. It's much easier if it's just your city staff, and everyone is just going on and doing what they’ve always done. But we have to make sure that someone else outside of our city payroll is really providing what we're supposed to get. I really think that makes us more engaged, because it's usually easier to hold someone else accountable than it is to hold yourself accountable.

If you hire your brother-in-law to redo your kitchen and things aren't going right, do you want to complain to your brother-in-law? That can create a lot of problems. But if you hire someone off of a preferred contractor list, and he signs on to do something a certain way, it's easier to tell him what he's doing is right or wrong. [...]

Danielson: And the contractors are financially incentivized such that they hope that we do ask them to bring somebody else in, because the more employees they have working, the more it benefits their bottom line. So they're delighted to bring people in. And I should also note that since we pay for work done—and not for someone's time—then it does the contractor no good to have someone sitting here with no work coming in.

So it's actually an ideal business relationship. We have shared risk in that sense. The contractors are hoping for a good year when they can bring people in, but it's a liability for them to have folks sitting around that they can't pay, so they'll instead move them around to other locations where they're needed.

Gilroy: How does that translate to ensuring the performance of contractors?

Danielson: On performance, we get almost instantaneous feedback. I know exactly what project is on time, and I know exactly what the outcome is. Believe me, we get spontaneous feedback on what works and what doesn't work. I don't know how many cities do this, but we've got a citizen response center where a real human being answers calls 24 hours a day, seven days a week on anything and everything that may be going on, from law enforcement to potholes to street sweeping. We get continuous feedback in terms of our turnaround time on building plans, building inspections and the like, and we respond to many of those the same day.

So we monitor our contractors much more closely—and it's much easier to monitor them—than I think it would be if we had an entirely in-house staff because the complaints come back more circuitously in that environment.

Noon: I think that's one of the things that helped lead the council toward implementing key performance measures both in-house and externally. We started performance measures with a lot of the contracted services like code compliance and building services, but now we're looking at how we put that in place for other areas. [...]

So we're focused on looking at how we can guarantee good customer service not only by our contractors, but also by our in-house staff. We're setting performance targets for our own internal operations, and we're looking to do even more of that.

Danielson: That's a key point. We're not just monitoring our external contract operations; we monitor our own in-house operations just as closely, even though they're much smaller. We really are interested in our efficiencies, both inside and out.

Check out the full interview here for details on Centennial's approach to maintaining a lean government through smart contracting and using public-private partnerships to help drive performance across the entire city government. Centennial's innovative thinking on when, where and how to tap the private sector in the delivery of public services is impressive and cutting-edge, and they can serve as a model for other municipal governments in how to approach competitive contracting.

For those public administrators elsewhere that assume that they "know contracting" merely because they already manage some contracts, I'd wager that Centennial could give them a master clinic on how to step up their game to get far better results. Just because someone plays with paint doesn't make them an artist. When it comes to municipal contracting, I think it's safe to say that Centennial is meticulously brushing oil on canvas to make true art, while many others are merely fingerpainting.

Centennial has such an interesting story that it wouldn't fit in one interview, so next month's Innovators interview will feature the city's chief innovation officer on the role for innovation change agents in government and future directions for public-private partnerships in Centennial.

Other articles featured in the Innovators in Action 2013 series are available here.

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