Annual Privatization Report 2013

State Privatization News and Notes

Subsection of Annual Privatization Report 2013: State Government Privatization

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Arkansas

An independent assessment of the Arkansas Secretary of State's office recommended that the agency consider privatizing the State Capitol Police force, among other changes designed to improve efficiency. According to the report, the police force is "top-heavy,” primarily composed of higher ranking officers, and it concentrates on work that “appears to be security-oriented rather than law enforcement and can possibly be performed with less cost than is currently being incurred.”1 The report, prepared at the request of Secretary of State Mark Martin, also recommended the potential privatization of custodial services in state buildings, as well as potentially eliminating or outsourcing management of the Capitol gift shop.

California

In California, a union-sponsored bill that would have strengthened state employee job protections and raised barriers to privatization died in the 2012 legislative session. Assembly Bill 1655 ("Public Employees Bill of Rights")—introduced by Assemblyman Roger Dickinson and sponsored by the Union of American Physicians and Dentists—would have given state civil service employees priority over contractors in filling permanent, overtime and on-call positions; reduced the time period to complete disciplinary actions from three years to one year, and prohibited employees from being compelled to perform extra work due to vacancies, furloughs or layoffs. AB 1655 passed the Assembly Committee on Public Employees, Retirement and Social Security in March 2012, but it was later held in the Assembly Appropriations Committee, effectively killing the bill.

Despite the defeat of AB 1655 in the legislature, the state budget adopted in June included several provisions aimed at "insourcing" (i.e., bring back to in-house delivery) work currently contracted out to private firms and restricting the University of California system from privatizing certain services. In his May 2012 budget revision, Gov. Jerry Brown called for agencies to reduce the use of outside information technology consultants and requested the state's Department of General Services to review all personal services contracts for work like janitorial and security services, with an eye toward ending contracts for which the work could be performed by state employees.2 Gov. Brown and public employee unions contend that limiting the use of private contractors would lower costs.

In other news, in May 2012 the Los Angeles Memorial Coliseum Commission (a multi-jurisdictional body with state and local representation) approved a long-term lease of the aging L.A. stadium to the University of Southern California, a private institution. The plan would put the stadium and its revenues under the University's control for 42 years and would require it to invest $70 million in stadium renovations and pay a $1 million annual rent payment to the state. Under Commission operation, the facility has seen a growing backlog of capital maintenance projects and needed renovations, as well as a corruption scandal that has seen eight former employees charged with theft and various other crimes. The lease deal will require a separate agreement between the University and state, expected to be completed in 2013. According to a May 2012 article in the Los Angeles Times, the University is seeking additional concessions from the state that include an extension of the lease term to 99 years, assurances in the event the Coliseum Commission is dissolved, and the inclusion of six adjacent state-owned parking lots in the management agreement. 3

Colorado

Colorado Governor John Hickenlooper’s long-running quest to privatize Pinnacol Assurance—the state-owned insurer that provides over half of the workers compensation insurance policies in the state—failed to progress in 2012 after a task force he appointed to review the plans to restructure Pinnacol into a private mutual insurance company gave a chilly reception to the proposal in February 2012. Primary concerns included uncertainty over what would happen to workers compensation insurance rates under privatization, how to handle employee pension liabilities, and frustration among policymakers over Pinnacol’s spending of over $3 million for public relations and lobbying work in support of the proposal.

Under the proposal, the state’s insurer of last resort would convert itself into a privately held mutual assurance company, granting the state a $350 million, 40 percent ownership stake that would generate $13.6 million in annual dividends potentially split between education and economic development. The company would remain headquartered in Colorado but would be able to expand its business into other states, as have other recently privatized state workers compensation insurers elsewhere. A 2009 legislative proposal to raid over $500 million from Pinnacol to keep the state budget afloat prompted the company's management to offer legislators an alternate solution in 2010—rejected at the time—that formed the basis of the current proposal: a multi-million payment to the state by Pinnacol in return for turning it into a private mutual insurance company.

Connecticut

In August 2012, the state of Connecticut announced the launch of an energy savings performance contracting program to allow state agencies and municipalities to enter into performance contracts with pre-qualified private firms to perform energy efficiency upgrades on public buildings with no upfront costs. Instead, retrofitting projects are paid over time through guaranteed savings on future energy bills. The program provides a number of support mechanisms to state agencies and municipalities to help reduce startup costs and standardize best practices in performance contracting for energy efficiency, including pre-qualified contractors, standardized performance contract templates, and on-call program and financial advisory services.

“Use of performance contracting is also another example of how we can leverage private capital to advance our energy agenda,” Governor Dannel Malloy noted in an August press release. “Through these contracts state and local governments will immediately realize tremendous savings from energy efficiency projects without having to spend scarce dollars and then wait for the payback period.”

The impetus for the development of the performance contracting program was a 2011 law (Public Act 11-80) requiring the state’s Department of Energy and Environmental Protection to create a standardized energy savings performance contracting program eligible for use by state agencies and local government entities.

Florida

There were several noteworthy developments on privatization in Florida in 2012, including:

  • Legal challenges killed or slowed Florida’s plans to privatize the operation of 29 South Florida state prisons and privatize the statewide delivery of correctional healthcare, though the Florida Department of Corrections did announce new plans in 2012 to privatize the operation of 20 state-run work release centers. For more details on these initiatives, see the “Criminal Justice and Corrections” section of Reason Foundation’s Annual Privatization Report 2012–13.
  • Despite new state laws in 2011 authorizing Florida to expand its current five-county privatized Medicaid managed care program statewide (see discussion in Reason Foundation’s Annual Privatization Report 2011), the state has not received final approval from the federal Centers for Medicare and Medicaid Services, which must approve the waivers of applicable federal laws necessary to allow implementation of the expanded Medicaid managed care program to proceed. In February 2012, the federal agency rejected specific components of Florida’s privatization plan—namely, proposals to charge Medicaid recipients a $10 monthly premium and a $100 co-payment for non-emergency visits to the emergency room—sending federal and state officials back to the negotiating table.
  • In October 2012, the Florida Department of Juvenile Justice (FDJJ) announced that it was seeking private bids to take over the operation of the five remaining state-run juvenile residential facilities (halfway houses) by October 2013. Residential commitments have declined by 44 percent over the last five years, and 95 percent of the state’s residential beds are already privately operated. The 213 existing public employees at the five affected facilities would be offered the right of first refusal for continued employment with the selected provider. The following month, FDJJ announced a series of reforms intended to strengthen the agency’s procurement process, contract monitoring and accountability for results, including the deployment of standardized procurement practices and tools, improvements to the contract management quality-control process, implementation of contract management staff training, and the expansion of the agency’s automated contract management and monitoring system.
  • After facing a vocal opposition campaign led by county tax collectors, Florida’s Department of Highway Safety and Motor Vehicles scrapped plans in late 2012 to privatize the manufacture and distribution of the state’s license plates. In order to lower costs, the agency had issued an invitation to negotiate in November 2012 to prospective bidders on a two-year, $31 million contract to make license plates and distribute those ordered online and by mail. The move prompted a protest and threat of legal action by elected county tax collectors—who currently distribute license plates—and PRIDE, the current nonprofit license plate manufacturer that relies on prison inmate labor. The agency may revisit the potential privatization of plate manufacturing (not distribution) in 2013, according to the Miami Herald.4 New, flat license plates are being sought that are easier to read by toll road video cameras and red light cameras.
  • In December 2012, Florida Governor Rick Scott announced plans to solicit private sector bids in early 2013 for the development of a new budget transparency website to facilitate monitoring of spending on state programs, contracts and other expenses.5

Georgia

In May 2012, Georgia Governor Nathan Deal signed into law a bill dismantling much of the Georgia Aviation Authority (GAA), a move that has paved the way for the privatization of the state’s aviation services. Senate Bill 339 transferred the GAA aircraft previously owned and operated by the state’s Department of Natural Resources and the Georgia Forestry Commission back to those agencies and expanded their statutory authority to divest aviation assets. A similar bill passed in 2011 returned ownership of other state aircraft to the Department of Public Safety. The GAA was originally created in 2009 to centralize state aviation operations and lower costs, but concern over unrealized cost savings prompted state policymakers to start the process of dismantling GAA in 2011.

Along with the restructuring, the Deal administration has grounded state airplanes, moved to begin selling some state-owned aircraft—it has already sold or placed under contract three planes totaling $3.8 million in value—and contracted with three different private charter companies to provide flight services. In total, the moves are expected to save over $2 million annually.6

Separately, the Georgia Assembly passed House Bill 456 (“Georgia Government Accountability Act”) in March 2012, which would create a new Legislative Sunset Advisory Committee to review and evaluate state agencies' productivity, efficiency and responsiveness to determine whether or not they should continue in existence. The sunset committee would evaluate potential privatization opportunities as part of its regular agency review processes. Different versions of the bill passed both chambers of the state legislature in 2011, requiring a conference committee to reconcile them. However, Gov. Deal vetoed HB 456 in May, noting that the Assembly failed to appropriate any funding for the sunset committee and that a separate bill passed to require zero-based budgeting will already provide sufficient means to review agency performance and spending.

Hawaii

Hawaii Governor Neil Abercrombie signed into law House Bill 1398 in June 2012, authorizing the state to pursue public-private partnerships for the development of new public housing. Under the new law, the state could partner with private entities to undertake all or a portion of the study, planning, design, development, financing, acquisition, installation, construction, improvement, operation and/or maintenance of public housing facilities.

Illinois

In August 2012, Illinois Governor Pat Quinn signed into law a bill to privatize the administration of the state’s workers compensation insurance program. Proposed initially by House Speaker Michael Madigan, Senate Bill 2958 requires the state to contract with one or more third-party, private vendors to administer the program that provides payments for workers compensation liability for the majority of state employees. Madigan originally drafted the proposal in response to research by his staff finding a significantly higher rate of claims by state employees relative to private sector workers, as well as a highly critical state Auditor General audit of the program that found rampant payments for unsubstantiated worker claims, overpayments to claimants, and other problems with the program.

Indiana

In July 2012, Indiana Governor Mitch Daniels announced that his administration planned to appeal a Marion County Superior Court ruling that would force the state to pay $52 million to technology giant IBM over the early cancellation of a contract to modernize the state’s welfare eligibility system. As discussed in recent editions of Reason Foundation's Annual Privatization Report, Indiana launched a 10-year, $1.34 billion contract with IBM in 2006 to automate eligibility determinations for food stamps, Medicaid and other welfare benefits and significantly reduce face-to-face meeting requirements via more computerized processes. However, the system was quickly beset with problems, prompting Daniels to ultimately cancel the IBM contract in 2009 and pursue a revamped “hybrid” approach that relies more on face-to-face contact while enhancing some of the previous technological improvements made by IBM. To implement the hybrid approach, the state contracted for the services of Xerox subsidiary Affiliated Computer Services (ACS)—IBM’s primary subcontractor on the original privatization—in an eight-year, $638 million service contract.

The ruling found that IBM’s poor performance in service delivery did not constitute a breach of contract, as much of the hybrid program that followed was derived from IBM’s original work on the modernization. IBM had been seeking a higher total ($113 million) in its lawsuit than the $52 million it was ultimately rewarded, and the state lost its countersuit to recover $170 million from IBM.

The improved performance of the hybrid system—which prompted federal officials to authorize its expansion throughout the state in 2011—continued in 2012. In an August 2012 article, Gov. Daniels noted that after the first six months of full, statewide implementation of the hybrid system, food stamp error rates have dropped from 6.6 percent to 3.3 percent, timeliness of decisions has improved from 75 percent to 93 percent, and costs have dropped by over $60 million per year (relative to the pre-privatization welfare system).7

Kansas

In December 2012, the federal Centers for Medicare and Medicaid Services granted final approval of Governor Sam Brownback’s sweeping plan to privatize the state’s Medicaid program—known as KanCare—allowing the reform initiative to proceed to full implementation in January 2013. Under the KanCare plan, the state will transform its Medicaid program into a managed-care system delivered by three companies: Amerigroup Kansas, Inc., Sunflower State Health Plan, and United Healthcare of the Midwest, Inc. The goals of the initiative are to reduce state Medicaid spending by over $1 billion over the next five years, while expanding the benefits available to the nearly 380,000 Kansas Medicaid beneficiaries that will be assigned to one of the three providers.

Various legislative proposals to create a legislative oversight committee to monitor KanCare, to delay implementation of the privatization effort and to require annual KanCare audits all failed to advance in 2012. Nonetheless, under the privatization contracts each contractor is required to maintain a Health Information System to provide regular reporting to state and federal officials that includes data on service utilization, enrollment and disenrollment trends, and grievances. Gubernatorial and legislative officials also appointed a new KanCare Advisory Council in March 2012 to help guide implementation and program operation. Further, each of the three KanCare contractors is required to create member advisory boards to receive regular feedback from health plan enrollees.

In separate news, while Kansas policymakers adopted laws in 2010 and 2011 requiring the state to begin developing a comprehensive real property inventory, a November 2012 performance audit prepared by the Legislative Division of Post Audit found that the inventory developed by the state’s Department of Administration thus far is incomplete and inaccurate, noting that “it is important for the state to have a complete list of all real property it owns.”8 Further, the audit found that the department has not fulfilled its statutory directives to help agencies identify and sell surplus property and to conduct periodic reviews to identify surplus real property. In fact, the audit found that despite a legal requirement to periodically update and verify inventory records, the Department of Administration had no one on staff responsible for performing that work. Hence, significant additional work remains to be done in order for the state to develop a robust real property inventory that would facilitate the divestiture of surplus, underutilized or nonessential state assets.

Kentucky

Kentucky’s newly privatized Medicaid management program experienced a significant setback in its first year of implementation. In October 2012, Kentucky Spirit Health Care, one of the state’s Medicaid contractors, filed a lawsuit against the state seeking to end its contract a year early after incurring losses of $120 million, which the firm attributes to inaccurate information provided to bidders by the administration of Gov. Steve Beshear during its 2011 procurement.

According to Kentucky Spirit’s suit, bidders relied on incorrect Medicaid cost data provided by the state in preparing their bids, including misrepresentations of the levels of neonatal intensive care unit admissions and emergency room use, among others, according to the Lexington Herald-Leader.9 Through the lawsuit, the firm seeks to avoid having to pay damages to the state for terminating its contract early. The state intends to transition Medicaid beneficiaries currently served by Kentucky Spirit over to one of its two other managed care providers, Coventry Health Care and WellCare.

As discussed in Reason Foundation’s Annual Privatization Report 2011, Gov. Beshear's administration launched this Medicaid privatization initiative last year in an effort to save $375 million in general fund spending and $1.3 billion across all funds over the course of the three-year Medicaid managed care provider contracts, allowing the state to fully balance its Medicaid budget in FY 2012.

Louisiana

In its second term, the administration of Louisiana Gov. Bobby Jindal continues to be a leader on privatization. The initiatives pursued by the Jindal administration in 2012 include:

  • In November 2012, the Jindal administration received legislative approval of one of its major privatization initiatives: contracting out the administration of the preferred provider organization (PPO) health plan for state employees to Blue Cross/Blue Shield of Louisiana. The state’s Office of Group Benefits oversees several health plans for state employees and retirees, all of which had been previously contracted out to private administrators except for the PPO. The privatization will eliminate 177 state positions, with cost savings estimated at $11–20 million annually at the state level and additional savings expected to accrue to local school boards and other public entities.10 Under private administration, Blue Cross/Blue Shield will earn $37.8 million per year to operate the program, and benefits and premiums for the over 60,000 policyholders will not change.
  • In December 2012, the Louisiana Department of Health and Hospitals and Louisiana State University (LSU) announced new public-private partnerships with nonprofit healthcare providers to take over operation of three LSU hospitals—which provide care for the uninsured and serve as medical training facilities—in return for making annual lease payments back to the state. The moves came in response to a reduction in federal Medicaid reimbursement dollars paid to the state that ultimately forced a reduction of the LSU health system’s budget of over $329 million. Though approved by the LSU Board of Supervisors in December, the cooperative endeavor agreements that will form the basis of the partnerships will also need approval from the Joint Legislative Committee on the Budget, among other entities, in order to proceed. Officials hope to have the agreements finalized by summer 2013.
  • In December 2012, the Louisiana Department of Health and Hospitals announced an agreement with Florida-based Meridian Behavioral Health Services to take over inpatient psychiatric beds and outpatient services at the Southeast Louisiana Hospital, along with an agreement transferring control of the property to St. Tammany Parish (county). The transfer from state to private operation is set to occur in early 2013. The move will lead to the layoffs of 350 hospital staff, though Meridian has pledged to offer hiring preference to former state hospital workers. Like the lease of LSU Hospitals, the Southeast Louisiana Hospital privatization initiative was prompted by the reduction in federal Medicaid reimbursement dollars. According to the state, the privatization will save $1.6 million in the first year and $3.5 million annually on an ongoing basis.11
  • In August 2012, LSU withdrew a request for proposals seeking a hospital to provide in-patient and emergency medical services for state prison inmates after it received no bids from interested providers. The move came as LSU—which provides healthcare services for state and local inmates under Louisiana state law—prepares to shutter its current hospital serving inmates in Baton Rouge as part of larger facility relocation efforts.12
  • State officials gave final approval in August to Jindal’s plans to privatize two state-run homes for the developmentally disabled in a move expected to save the state $6.9 million and eliminate 980 positions from the state payroll. Under the initiative, operations of the North Lakes Supports and Services Center in Hammond will be taken over by Evergreen Presbyterian Ministries, and operations of the Northwest Supports and Services Center in Bossier City will be taken over by the Association for Retarded Citizens of Louisiana. Former state employees at the facilities will be given preferential status in hiring.13
  • In June 2012, the Louisiana Civil Service Commission approved four new state agency privatization contracts:
    • First, the Louisiana Office of Student Financial Assistance is partnering with Sallie Mae in a five-year contract to collect delinquent federal student loans that is expected to generate between $1.3 million and $3.3 million in operational savings each year.
    • Second, the Louisiana Department of Health and Hospitals is partnering with Health Care Services Group to provide food services at four mental health and developmental disabilities centers in a contract expected to save $1.4 million annually.
    • Next, the LSU Health Sciences Center in Shreveport is partnering with Sodexo Operations to provide environmental services at the facility in a contract estimated to save $1.6 million per year.
    • Last, the Secretary of State received approval of his plans to contract out security operations at the Old State Capitol and the State Archives, which is expected to save $270,000 annually.14
  • The Louisiana Department of Transportation and Development sought bids in 2012 to privatize the operations of three Mississippi River ferries in the New Orleans area, but the agency announced in November that no interested bidders responded to the solicitation. The ferries had previously been funded by tolls on the Crescent City Connection bridge linking downtown New Orleans with the West Bank of Jefferson Parish, but a voter referendum extending the bridge tolls two additional decades removed the ability for those tolls to be used to subsidize ferry operation. The lack of responses surprised transportation officials given the interest shown by vendors early in the solicitation, and the agency plans to survey those vendors to determine if there were unpalatable terms and conditions in the request for proposals that prompted them to abstain from bidding.15
  • In November 2012, the Jindal administration announced a new contract with CGI Technologies and Solutions to help the state improve its collection of delinquent debt owed to state agencies, which officials estimate exceeds $1.4 billion.

Maine

A bill (LD 1887) sponsored by Maine Governor Paul LePage that would have restructured the state’s Department of Health and Human Services—including contracting out the positions of over 20 intensive case managers who work with mentally ill inmates in state prisons and local jails—died in the state Senate at the end of the 2012 legislative session after a narrow passage in the House in April. The LePage administration sought to partially privatize intensive care management not to cut costs, but rather in an effort to improve patient care.

Maryland

Maryland Governor Martin O’Malley signed legislation (Senate Bill 745) in May 2012 to privatize the state’s Injured Workers’ Insurance Fund (IWIF)—the state-chartered workers compensation insurer—by restructuring it into a private, nonprofit corporation by October 2013. IWIF officials began seeking privatization in recent years in part as a means of protecting its over $330 million surplus from a raid by the legislature to help balance budgets; the privatization plans would see a one-time $50 million payment to the state in exchange for the nonprofit conversion. The new company—to be named the Chesapeake Employers' Insurance Company—will continue to serve as the workers compensation insurer of last resort in Maryland and will continue to have its board members appointed by the governor, both of which prompted opposition to the plan from the American Insurance Association over concerns that the new entity would not truly be privatized under its new structure and would have competitive advantages not enjoyed by other private insurers in the Maryland market today.

In other news, the Maryland Board of Public Works approved a contract in early 2012 to replace the Chesapeake House and Maryland House, two aging travel plazas on Interstate 95. Under the deal, Areas USA will spend $56 million to rebuild the travel plazas and will operate and maintain them for 35 years, during which it will also cover all maintenance costs and make additional capital investments. The deal also includes annual revenue-sharing provisions that stand to net the state an estimated $400 million over the life of the contract. Progress on the project was slowed by legal action against the state from unsuccessful bidders complaining of a state bias toward the selected vendor in the procurement process, but the legal challenge was dismissed by a Maryland circuit court in November 2012.

Michigan

Despite having sponsored it, Michigan Governor Rick Snyder vetoed a bill in 2012 that would have privatized the quasi-public Blue Cross/Blue Shield Michigan health insurer after the legislature amended it to include a sweeping ban preventing firms from offering elective abortion coverage in employee health plans. The bill would have ended Blue Cross’s tax-exempt status—and its corresponding role as an insurer of last resort to serve anyone regardless of pre-existing health conditions—and streamlined the regulatory process for the insurer to see rate and product changes approved, among other provisions. Both Gov. Snyder and Blue Cross have indicated they plan another attempt at the legislation in 2013—without the abortion coverage provisions—and if approved, the insurer would shed its status as an insurer of last resort, would be responsible for paying an estimated $100 million annually in taxes to the state, and would spin off a $1.5 billion charitable foundation that would continue to advance Blue Cross’ current social mission, according to the Associated Press.16

In other news, in August 2012 a Michigan state appeals court dismissed a lawsuit filed by a resident of the Grand Rapids Home for Veterans to stop the state from privatizing 170 nurse aide positions at the facility over fears that the quality of care might suffer. As reported in Reason Foundation’s Annual Privatization Report 2011, a circuit court judge issued an injunction in October 2011 to stop the privatization initiative, which the Snyder administration estimates would lower costs by $4.2 million. The appeals court disagreed with the lower court ruling, noting that it was based on speculative fears.17

Missouri

Three separate bills were introduced in the Missouri General Assembly in the 2012 legislative session to privatize the Missouri Employers Mutual Insurance Company (MEMIC), the state-chartered workers compensation insurer that controls a 16 percent majority share of the Missouri market. None of the bills ultimately passed, though the state Senate passed a separate bill in April (Senate Bill 856) to establish an interim legislative study committee to assess MEMIC’s value and determine whether it should be sold, privatized or reorganized. Though SB 856 passed two House committees, it failed to receive a floor vote before the session adjourned.

MEMIC was originally created in the 1990s in response to rising workers compensation insurance rates—a situation that no longer exists. The momentum to privatize MEMIC has gained strength due to several factors, including criminal indictments of former MEMIC board members and executives. Moreover, a critical state auditor report released in 2012 showed that MEMIC had accumulated a $163 million surplus, aided by its tax-exempt status, a benefit not extended to its competitors.18 The report found that MEMIC “essentially operates as a private entity, compensates officers and employees at rates that are in excess of public sector entities, incurs expenses that are not considered acceptable in the public sector, and does so without complying with state open records laws.”19 The audit recommended that the General Assembly determine if the insurer “continues to fulfill a necessary public mission” and whether it should maintain its tax exempt status. 20

New Jersey

In October 2012, the New Jersey Senate Labor Committee approved a bill that, if ultimately enacted, would add significant complexity and drive up the costs of state privatization pursuits. Senate Committee Substitute Bill 1494 would prevent privatization efforts that lower costs through workforce changes (including pay and staffing policies), service level changes or higher user charges, making only those initiatives that lower costs through management efficiency or technological improvements viable. Among its provisions, the bill would also require cost analyses prior to privatization demonstrating the sources of potential cost savings, would allow public employees to submit alternative bids to continue providing services subject to competition, and would give the state comptroller veto power over contracts negotiated by state agencies, as well as requiring the state auditor to undertake a series of contract audits to document savings. Business organizations like the New Jersey Chamber of Commerce and the New Jersey Business & Industry Association opposed the bill since it would effectively preclude a significant amount of potential privatization, given that contractors would not be able to alter staffing or pay levels relative to public sector operation.

Separately, in January 2012, Governor Chris Christie directed the state treasurer to launch a review of the state’s purchasing and contract procurement process after two newspapers published articles finding that approximately 20 percent of state contracts between $2 million and $10 million in value had errors or included provisions that violate state law.21

In other Garden State news:

  • Though delayed by bid protests and other factors, the Christie administration successfully finalized the privatization of the state-owned Meadowlands Racetrack and Monmouth Park horse-racing facilities. In late December 2011, the administration signed a 30-year lease with New York developer and racetrack operator Jeff Gural to take over operations of the Meadowlands Racetrack. And after a similar deal with a New Jersey casino owner to operate Monmouth Park fell through that same month, the state sought new bidders and reached a five-year agreement in March 2012 with the New Jersey Thoroughbred Horsemen’s Association to operate that facility, along with the operations of the off-track wagering facility in Woodbridge (with rights to develop additional off-track wagering sites). The New Jersey Sports & Exposition Authority had previously operated the two facilities—which had been losing an estimated $6–10 million per year each under state operation—and the privatization moves were intended to eliminate taxpayer subsidies to the horse-racing industry and put it on viable financial footing.
  • The New Jersey Department of Transportation announced a public-private partnership (PPP) with State Farm in April 2012 to sponsor the state’s Safety Service Patrol (SSP) program, which offers assistance to motorists of disabled vehicles (due to accidents, mechanical failure, etc.) to enhance highway safety and reduce congestion. Under the PPP, State Farm will provide the agency $1.8 million annually for three years (with two annual renewal options) to support the SSP program, and in return State Farm logos will be placed on SSP trucks and on highway signs indicating patrol areas. State Farm sponsors similar motorist-assist patrols in seven other states including New York, Pennsylvania, Maryland, Georgia, Florida, Indiana and Kansas. The partnership allows the agency to reallocate program dollars toward other non-SSP safety projects. The SSP initiative was originally proposed in a 2010 report issued by the New Jersey Privatization Task Force.

New York State

In August 2012, New York Governor Andrew Cuomo vetoed a union-supported bill (S7782) that would have required state agencies to conduct a public-private cost comparison before pursuing consultant services contracts valued at over $500,000 annually in order to determine whether state employees could do the work at a lower cost. In his veto message, Gov. Cuomo noted that agencies are already required to document the need for contracted services and that the bill is incompatible with current state law requiring services to be procured using a “best value” approach—which evaluates costs, service quality and a range of other factors together—as opposed to a “low bid” approach focusing solely on costs.

In other news, a special commission appointed to review electric utilities’ emergency preparedness and their response to Hurricane Sandy issued a recommendation in January 2013 that the state privatize the Long Island Power Authority (LIPA), given longstanding governance issues and its poor performance in the aftermath of the storm. Instead of LIPA setting its own rates, the proposed privatization would place rates under the oversight of the state’s public utilities commission. Nearly half of the 2.1 million electricity customers that lost power after Sandy are served by LIPA, which took up to three weeks to restore power to affected homes, in some cases.22 "LIPA was flawed from inception, there's nothing you can do with the existing structure," said Gov. Cuomo in response to the recommendation, according to The Wall Street Journal.23 However, credit rating agency Fitch released a statement noting that the recommended privatization of LIPA could be prohibitively expensive and fail to yield the promised benefits to ratepayers, primarily due to the utility’s existing $7 billion in outstanding debt, which would have to be addressed in any privatization plan.

Last, in September 2012, the New York Post reported that Gov. Cuomo plans to seek a private manager to operate the Aqueduct Racetrack, Belmont Park and Saratoga Race Course horse-racing facilities, replacing the scandal-plagued New York Racing Association (NYRA), the current nonprofit operator.24 Cuomo signed legislation in 2012 to restructure the NYRA and give the state direct control over its operations, and his administration plans to solicit bids from for-profit managers by mid-2013, according to the report.

North Carolina

Despite growing support among policymakers and the endorsement of a state House committee, a bill that would privatize the operation of the state-run North Carolina Zoo (House Bill 958) failed to reach a floor vote before the end of the brief 2012 legislative session, primarily because transition funds were not included in the state budget. Under the plan, which is expected to be reintroduced in the longer 2013 legislative session and is supported by zoo officials, the state would turn over operations and management of the zoo (though the state would still own the underlying land and facilities) to the nonprofit North Carolina Zoological Society as a means of increasing private fundraising and capital investment in the zoo, facilitate the development of new exhibit areas, and draw down the state’s current subsidies to the facility to a lower, more predictable level. Under state operation, the zoo has accumulated a backlog of $30 million in deferred maintenance needs, a point likely to be addressed in any privatization plan moving forward in 2013. According to current zoo director Dr. David Jones, the plan has significant legislative support and the zoo needs to be “run as a business to get the income we need. We can’t run it under the current government bureaucracy.” 25

Ohio

Though Ohio Governor John Kasich ultimately announced in December 2012 that his administration did not plan to pursue a privatization of the Ohio Turnpike, the Ohio Department of Transportation announced the creation of a new, internal Division of Innovative Delivery in 2012 tasked with identifying potential public-private partnership opportunities for new road and bridge construction, non-Interstate rest area development, and corporate sponsorship of transportation assets. One early project involves exploring the commercial development of five of the state’s 59 non-Interstate rest areas to generate revenue for the state and enhance the amenities available for travelers. Another is the Sponsorship, Maintenance, Advertising and Revenue Targeted (SMART) program to create advertising and corporate sponsorship opportunities at interstate rest areas and welcome centers throughout the state in order to generate additional revenues for road and bridge construction.

Oklahoma

Oklahoma began taking important steps toward better real property management in 2011 with the passage of House Bill 1438 ("Oklahoma State Government Asset Reduction and Cost Savings Program"). The law requires the state's Director of Central Services to publish a report detailing state-owned properties—including a list of the 5 percent most underutilized properties, the value of those properties and the potential for purchase if sold. State policymakers continued to reform the state’s real property management in 2012, enacting separate legislation (House Bill 2262) to establish a Maintenance of State Buildings Revolving Fund to which proceeds from any sales of state assets will be deposited for expenditure on the maintenance and repair of the state's aging buildings and properties. Both bills were sponsored by incoming House Speaker T.W. Shannon.

Pennsylvania

In March 2012, Pennsylvania Governor Tom Corbett issued an executive order creating a new Governor’s Innovation Office to advance initiatives to lower costs, improve services and eliminate waste in government. “The Governor’s Innovation Office will serve as a clearinghouse for [ideas to make state government work better], evaluate and prioritize them, and work collaboratively with state agencies to make them happen,” Governor Corbett said in a press release. The new innovation office, housed within the Office of Administration, will review recommendations by the Governor’s Advisory Council on Privatization and Innovation, proposals by state agencies, and suggestions submitted by the public through an online survey. As of December 2012, the Innovation Office reported that it had already completed 25 projects and initiatives, with another 164 underway across 38 different state agencies.26

In other news, Pennsylvania’s Office of Information Technology issued a request for proposals in November 2012 seeking bids for a private manager to operate the state’s data centers. The private manager would be responsible for operating two data centers—one currently run under a private management contract that expires in 2014, and the other currently managed by state employees.27 The move is part of a larger initiative underway in recent years that has seen the state consolidate six data centers into two. Bidder proposals are due in March 2013.

South Carolina

South Carolina Governor Nikki Haley’s proposal to privatize the state’s school bus operations failed to advance for a second year in a row, with the result that the state remains the only one in the nation to own and operate its own K-12 school bus fleet. A bill (House Bill 4610) that would have required local school districts to take over their own school bus operations—either in-house or through third-party contracts—was gutted during the 2012 legislative session so as to simply establish a legislative study committee on the issue. However, the amended bill failed to advance in the Senate after passing the House in May. During discussions on the bill, a number of local school districts raised concerns over potential new costs from taking on their own busing responsibilities, despite the state’s promised commitment to provide additional funds to school districts to help cover the costs of bus operations. The policy debate is likely to continue in 2013, as Gov. Haley has already announced plans to continue to pursue school bus privatization.

Texas

Based on significant cost savings in a Houston-area pilot project, the Texas Department of Transportation (TxDOT) announced plans in August 2012 to expand its highway maintenance privatization efforts to other regions of the state. A private contractor bid a $26 million price for a contract to conduct comprehensive highway maintenance on Interstate 45 in the Houston area, a rate 28 percent lower than the state’s own estimated in-house cost of $36 million. Based on these results, TxDOT announced that it planned to extend the concept to parts of Interstates 35 and 45 between Dallas and Houston and Dallas and San Antonio, as well as other highways in the Dallas and Houston areas. TxDOT estimates the maintenance contracting plan could save the state $120 million over five years, which could free up funds for other state transportation projects.

In other Lone Star State news:

  • In October 2012, the Texas Department of State Health Services rejected a bid from the mental health services provider GEO Care to take over operation of the state-run psychiatric hospital in Kerrville, Texas and reduce operating costs by 10 percent. Officials cited fears over the impact of proposed staffing cuts to justify their decision. The bid was the only one received by the state in a procurement mandated by the state legislature to solicit private bids for the potential operation of one or more state-run psychiatric hospitals.
  • After a massive $863 million data center consolidation contract with IBM went bust in 2010, the Texas Department of Information Resources announced a revamped approach in 2012 in which it awarded an eight-year, $1.1 billion contract to Xerox to operate data centers, servers networks and other IT infrastructure. It awarded another six-year, $120 million contract to Capgemini to serve as a master services integrator to coordinate service-level management, desk support, security and other functions.28 The revamped system will provide data center services to 28 state agencies.

Utah

The Utah House Political Subdivisions Committee approved a bill (House Bill 94) in February 2012 that would have created a process for state and local government entities and other political subdivisions to follow before undertaking new commercial (e.g., not inherently governmental) activities, though it failed to ultimately receive a full House vote. HB 94 would have required most political subdivisions of the state to conduct a study and contact private enterprise before engaging in new commercial activities, required the state’s Privatization Policy Board to hold a public meeting and issue an advisory opinion about the proposed commercial activity, and granted private firms a legal right of action to compel an injunction to prevent the government entity from undertaking a commercial activity if the entity fails to comply with the bill’s requirements.

Vermont

In January 2013, state officials in Vermont approved a public-private partnership with a developer to build a new, privately owned and operated rest area and visitor center off Interstate 89 in the town of Randolph, in order to replace a state-run rest area that was shuttered in 2009, as well as another nearby rest area facing potential closure. Under the 30-year agreement, the developer will cover the costs of buiilding the new visitors center and operate it at least 14 hours per day. The facility will offer rest rooms, complimentary coffee, information on Vermont tourism, and a showcase of Vermont-made products. It will be integrated into a larger development that includes residential housing, office space and light manufacturing. The agreement precludes the state from building another rest area between White River Junction and Burlington, and the state would post signs notifying drivers of the privately operated rest area, according to Vermont Public Radio.29 Both Governor Peter Shumlin’s administration and the legislature's Joint Transportation Oversight Committee strongly endorsed the project.

Virginia

The Virginia Ports Authority (VPA) is expected to vote in the spring on two competing proposals for a 30–48 year lease of five state-owned port terminals to a private operator, though some Virginia state legislators have filed bills in the 2013 session that would require prior legislative approval for any privatization.30 In December 2012, state transportation officials released two bids for the proposed operation of VPA terminals: a $3.8 billion bid from APM Terminals (a subsidiary of Danish shipping giant A.P. Moller-Maersk Group) and a $3.1 billion bid from a joint venture pairing financier JPMorgan with terminal operator Maher Terminals LLC. The bids would involve upfront concession fees of $395 million and $400 million, respectively, and would include significant capital investment into the facilities over the life of the lease. The VPA terminals are currently operated by the state-chartered nonprofit Virginia International Terminals, Inc., which has submitted a counterproposal to continue operating the terminals.

Separately, the Virginia Department of Transportation issued a request for proposals in July 2012 seeking a private firm to operate and integrate the state's five transportation operations centers, which monitor traffic conditions, provide traveler information on road conditions and coordinate congestion management and incident response in different regions of the state. Key to the plan is investing in and transforming the centers to operate under a single active traffic management system platform to improve operational efficiency and interoperability. Robust competition is anticipated, as 32 different firms submitted responses to the state’s earlier request for information from interested potential bidders in January 2012. At press time, proposals were under evaluation, with a contract award expected by the spring of 2013.

Last, a bill that would require competitions for all commercial services procured by the Commonwealth of Virginia failed to advance in the House of Delegates. House Bill 611 (“Competitive Government Act”) would have directed the governor to require any commercial activity performed by state agencies to be bid out to the private sector, except in cases where an agency director determines in writing that the proposed competition would not lower costs or provide measurable benefits to taxpayers.

Washington State

The administration of Governor Chris Gregoire made several noteworthy moves on privatization in its last year in office in 2012. In March, Gregoire signed legislation to centralize the state’s procurement and purchasing authority under the newly created Department of Enterprise Services (DES), the state’s revamped general administrative services agency, in an effort to simplify and drive standardization in state contracting. Under House Bill 2452, DES is given responsibility for overseeing the procurement of goods and services by all state agencies, adopting uniform policies and procedures for state agency procurement and contract management, maintaining an annual list of all current state agency contracts, and establishing a mandatory training program for best practices in procurement. Other provisions of the law tighten contractor oversight, encourage agencies to maximize the use of performance-based contracts, authorize the electronic submission of bid documents, and authorize “best value” contracting that allows agencies to evaluate bids across a wider range of factors (e.g., service quality, experience, etc.) than cost alone.

The Gregoire administration also launched bidding processes for several administrative support functions in 2012, though the procurement processes are taking longer than expected and will likely fall to the next administration to complete. As reported in Reason Foundation’s Annual Privatization Report 2011, a law enacted in 2011 requires the state's Office of Financial Management to select six activities under the scope of DES every two years to subject to private sector competition. The administration sought bids in 2012 to privatize state mail delivery and various information technology services that include website development and handling online transactions; the state received five private sector bids for the technology services contract, as well as two bids for the mail services contract.31 At press time, the Gregoire administration was reviewing the bids received and had not made a final decision.

The administration also launched a procurement in December 2012 to create a pool of vendors to take over a range of bulk printing functions currently provided by DES on behalf of state agencies, local governments and other organizations. Service categories include stationery and business cards, brochures, maps, labels and decals, multi-part forms and video media. The state anticipates selecting bidders and negotiating contracts by the spring of 2013.

Wisconsin

The Wisconsin Department of Children and Families solicited outside bids to take over operation of the state’s W-2 “welfare to work” program amid a major restructuring being undertaken by Walker’s administration to lower costs and tie payment to performance. The state solicited bids and selected providers for each of 10 regions of the state—consolidated down from the 36 counties and regions that formerly ran the program—and spending on the program in 2013 is authorized at a level of $51 million, down from $62 million in 2011. State payments to providers—which have historically lacked significant controls, limiting accountability of the counties and other program administrators across the state—will be based on performance under the restructuring to ensure that providers are incentivized to focus on results and cost control. A coalition led by the Wisconsin Counties Association and the Wisconsin Council on Children and Families formed to oppose implementation of the restructuring, citing fears over the potential negative local impacts of reduced welfare-to-work program funding.

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Endnotes

1 Rob Moritz, "Study recommends changes in secretary of state’s office," Arkansas News Bureau, June 12, 2012.

2 Jon Ortiz, "California government unions move to squeeze out private contractors," Sacramento Bee, June 4, 2012.

3 Rong-Gong Lin II, "Coliseum Commission approves controversial new lease with USC," Los Angeles Times, May 14, 2012.

4 Brittany Alana Davis, “State scraps plan to have private vendors make license tags,” Miami Herald, December 9, 2012.

5 Mary Ellen Klas, “Gov. Rick Scott calls for bids to build budget transparency website,” Tampa Bay Times, December 15, 2012.

6 Aaron Gould Sheinin, “State uses private flights to slash air travel costs,” Atlanta Journal-Constitution, December 18, 2012.

7 Mitch Daniels, “Welfare privatization critics need to modernize talking points,” The Times of Northwest Indiana, August 28, 2012.

8 State of Kansas, Legislative Division of Post Audit, Performance Audit Report—State Asset Management: Evaluating the Possibility of Cost Savings and Revenue Enhancements through Property Sales, Report R-12-010, November 2012.

9 John Cheves, “Kentucky Spirit files lawsuit alleging state provided faulty Medicaid data,” Lexington Herald-Leader, October 23, 2012.

10 Michelle Millhollon, “OGB privatization plan approved,” The Advocate, November 10, 2012.

11 Jeff Adelson, “Southeast Louisiana Hospital privatization OK'd by state Civil Service Commission,” The Times-Picayune, December 13, 2012.

12 Marsha Shuler, “No proposals for prisoner health care,” The Advocate, August 06, 2012.

13 Ed Anderson, “Privatizing disability centers will save $6.9 million, officials say,” The Times-Picayune, August 2, 2012.

14 Marsha Shuler, “State contracts out services,” The Advocate, June 07, 2012.

15 Allen Powell, “No takers for ferry operations. State’s efforts to privatize hit snag,” The Advocate, November 16, 2012.

16 Associated Press, “Blue Cross Blue Shield begins new year by lobbying state lawmakers,” AnnArbor.com, January 6, 2013.

17 Paul Egan, “Lawsuit over Grand Rapids nursing privatization overturned,” Detroit Free Press, August 3, 2012.

18 Thomas A. Schweich, Missouri Employers Mutual Insurance Company, Office of the Missouri State Auditor, Report No. 2012-11, February 2012, p 11.

19 Ibid.

20 Ibid, p 11.

21 Juliet Fletcher, “Gov. Christie orders complete review of N.J. purchasing laws, public contracting processes,” The Star-Ledger, January 15, 2012.

22 Laura Nahmias, “State Panel Wants LIPA Privatized,” The Wall Street Journal, January 7, 2013.

23 Ibid.

24 Fredric Dicker, “Gov’s ‘bettor’ way. Plan to kill NYRA and privatize horse racing,” New York Post, September 24, 2012.

25 Kathi Keys , “Lack of funding stalls N.C. Zoo public-private partnership,” The Courier-Tribune, July 7, 2012.

26 Pennsylvania Office of Administration, Governor’s Innovation Office, “Innovation Initiatives,” http://goo.gl/aeV6u (accessed January 5, 2013).

27 Noelle Knell , “Pennsylvania to Outsource Data Centers,” Government Technology, November 30, 2012, http://goo.gl/9hDzf (accessed January 5, 2013)

28Steve Towns, “Texas Awards New Data Center Contracts,” Government Technology, March 15, 2012, http://goo.gl/m8rDF (accessed January 6, 2012).

29John Dillon, “Vt. Lawmakers Study Plan For Private Rest Area,” Vermont Public Radio, August 21, 2012

30Michael Welles Shapiro, “Bill would give Legislature say on ports privatization deals,” The Daily Press, January 3, 2013.

31 Jordan Schrader, “Contract out more state services? Decisions overdue,” The Seattle Times, November 24, 2012.

Leonard Gilroy is Director of Government Reform





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