Annual Privatization Report

Kasich Administration Advanced Privatization in Ohio in 2011

Initiatives advanced in economic development, asset realignment and more

A year into his new administration—and as promised during his gubernatorial campaign—Ohio Gov. John Kasich has taken significant steps to advance privatization as a key component of his governing agenda.

JobsOhio: In an early move, Kasich enacted a bill making good on one of his key campaign planks: privatizing the state's economic development functions. In February 2011, Kasich signed House Bill 1, creating JobsOhio, a new semi-private, nonprofit economic development organization created by privatizing functions of the Ohio Department of Development related to the state’s corporate recruitment and expansion, marketing and job retention efforts. To fund the new entity, Kasich advanced a plan to lease revenues from the state’s liquor monopoly to JobsOhio, which was later approved in the state’s 2012–2013 budget.

Under the plan, JobsOhio will gain control of the liquor system’s annual net revenues for 25 years in return for a $1.2 billion upfront payment funded through the sale of revenue bonds backed by liquor system profits. Approximately $700 million of the proceeds would be used to defease existing liquor revenue-backed debt, while roughly $500 million would be deposited in the state’s general fund for short-to-near term uses. In return, the new nonprofit would collect liquor revenues over the 25-year term to fund its economic development activities—e.g., loans, grants, tax credits, etc. to attract businesses to locate or expand in Ohio—and debt service.

According to proponents, JobsOhio’s status as a private nonprofit will make it easier to conduct the state’s economic development work without the bureaucratic delays and regulatory burdens seen in the public sector, making a more nimble vehicle to attract and retain businesses in Ohio. Some critics have responded that the state should have no role in picking winners and losers in the economy, while others have raised legal objections. For example, soon after passage the advocacy group Progress Ohio joined two Democratic state legislators in a lawsuit challenging the constitutionality of JobsOhio, a case that was ultimately dismissed by a Franklin County judge in December 2011.

Corrections: In September 2011, the Ohio Department of Rehabilitation and Corrections announced the results of a large-scale procurement that will see the state raise $72 million from the sale of one state prison to a private operator—the first sale of its kind in the nation—and two others turned over to private management, for an estimated $13 million in annualized cost savings.

Under the deal, the state will sell the Lake Erie Correctional Institution to the Corrections Corporation of America, while contracting with the new owner to continue housing state inmates there. Management and Training Corp. (MTC) will take over operations of the North Central Correctional Institution and the currently vacant Marion Juvenile Correctional Facility; both facilities will remain state-owned. One additional facility currently operated by MTC—the North Coast Correctional Treatment Facility—will be consolidated and merged with the state-run Grafton Correctional Institution, which will remain under state operation. The state’s biennial budget signed in June 2011 authorized the Department to sell up to five prisons to help close the state’s budget deficit and reduce corrections costs, though the Department ultimately opted to pursue a mix of asset sales, outsourced facility operations and facility consolidation/insourcing.

Like the JobsOhio initiative, Progress Ohio has filed a lawsuit against the state challenging the prison deal on constitutional grounds. At press time, no court decision had been issued.

Ohio Turnpike: In November 2011, the Ohio Department of Transportation (ODOT) took a significant step toward advancing a major Kasich administration priority—a potential long-term lease of the 241-mile Ohio Turnpike—by announcing that it had selected the firm KPMG to serve as the state’s financial advisor on the proposed lease. KPMG will analyze various options and make recommendations on how to proceed, which could range from leaving the Turnpike in its current form, leasing it to a private operator, transferring it to ODOT or other options not yet identified. KPMG will issue its recommendations to the state by July 1, 2012.

The 2012–2013 state budget enacted earlier in the year authorized the proposed lease, allowing a lease term of up to 75 years and requiring solicitations and proposed business terms to be submitted to the legislature for approval before they are issued. During and after his gubernatorial campaign, Kasich signaled his interest in receiving at least $3 billion in an upfront payment in a Turnpike lease. “We would lease it with the hopes of bringing in literally billions of dollars in payments,” Kasich told The Plain Dealer in August. “For Ohio to sit on an unused asset makes as much sense as a company sitting on an unused asset. And when companies do that, companies get taken over.”[1]

Ohio Lottery: In late August 2011, the Cleveland Plain Dealer reported that the Kasich administration planned to issue a request for proposals from consultants to analyze whether or not the state should pursue privatization of the management of the Ohio Lottery, and if so, how to best maximize its value.[2] A provision in the 2012–2013 budget that would have authorized the privatization of lottery management was pulled in late negotiations amid legislator concerns over its constitutionality.

In other Ohio privatization news:

  • The 2012–2013 budget signed into law by Gov. Kasich in June included a number of provisions granting new privatization authority to various units of state and local government. For example, the budget authorized state higher education institutions to privatize dormitories and other facilities, while authorizing K-12 schools to privatize their transportation services. Similarly, the budget also authorized local governments and other units of government to enter into long-term leases up to 30 years in length to privatize the operations and management of their garages, meters and other municipal parking assets. Ohio State University may be the first to take advantage of the new authority, as university trustees have authorized a procurement for a potential 50-year lease of their parking system to generate $375 million in upfront revenues, as well as avoid operational costs over the term of the agreement. (For more details on this initiative, see the “Local Government Update” section of Reason Foundation’s Annual Privatization Report 2011).
  • Gov. Kasich signed into law House Bill 114, authorizing the Ohio Department of Transportation to enter into public-private partnerships to finance, design, build, operate and/or maintain highways, bridges and other transportation infrastructure statewide.
  • Gov. Kasich is reportedly considering subleasing the operation of the Ohio Academic Resources Network—a nearly 2,000-mile fiber optic system connecting universities, schools, medical centers and research facilities—to private businesses, according to local press reports.

Given the robust activity on privatization seen in Ohio in 2011, it is likely that the Kasich administration and legislature will return to the subject in 2012. In a news conference announcing his budget, Gov. Kasich suggested “[t]here are more privatizations to come [...] [w]e don’t want to leave any money on the table,” according to a March 2011 article in The Plain Dealer.[3]

Leonard Gilroy is director of government reform at Reason Foundation. A modified version of this article was published in Reason Foundation's Annual Privatization Report 2011: State Government report.


Notes

[1] Reginald Fields, “Gov. John Kasich moves ahead with turnpike leasing proposal,” August 12, 2011, The Plain Dealer.

[2] Mark Naymik, “Gov. John Kasich's administration moves closer to privatizing lottery,” August 28, 2011, The Plain Dealer.

[3] Joe Guillen, “Gov. Kasich plans to sell prisons, privatize state liquor profits for now, Turnpike lease could be in near future,” March 15, 2011, The Plain Dealer.

Leonard Gilroy is Director of Government Reform





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