Privatization & Government Reform Newsletter #4

February 2014 edition: Detroit bankruptcy, per-mile tolling, pension reform, social impact bonds, and more

In this issue:


MUNICIPAL BANKRUPTCY: Analyzing Detroit’s Plan of Adjustment

Detroit's ongoing bankruptcy saga has now taken another turn with the long-awaited release of Emergency Receiver Kevyn Orr's plan of adjustment last week. While considerable attention is understandably being paid to the treatment of creditors and pensioners in the overall plan, it's also important to review how the plan addresses future city government operations—specifically with regard to the privatization of services and assets—as well as proposed reforms to the city’s pension system. In two new articles, Reason Foundation analysts explore these issues.

In my latest article, I write that the more services and assets privatized, the more manageable the emergence from bankruptcy and the smoother the path to long-term fiscal and financial sustainability—which translate into improved quality of life for Detroit's citizens and businesses. However, on both fronts—outsourcing and asset privatization—the proposed plan of adjustment is a mixed bag.

In a separate article, my Reason Foundation colleague Anthony Randazzo writes that the history of Detroit's bad actuarial assumptions and its poor operating practices more than make the case for pension reform. The city's plan to "adjust" its $18 billion in debt by slashing as much as half of it before exiting bankruptcy includes cuts to already accrued pension benefits, as well as changes to how future public pension benefits are earned. The proposal also has less innovative, but important elements of good pension reform including forcing the city to use "market values" in accounting for its liabilities, using slightly more realistic investment return assumptions, and adjusting its defined-benefit system. However, while the Detroit plan of adjustment makes some steps towards the needed reform, there is more to do.
» FULL ARTICLE: Detroit Plan of Adjustment Leaves Much to be Desired on Privatization (Gilroy)
» FULL ARTICLE: Detroit Bankruptcy Pension Reform Not Good Enough (Randazzo)
» RANDAZZO & GILROY OP-ED IN THE DETROIT NEWS: How Detroit Can Build From Bankruptcy

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TRANSPORTATION: Replacing Fuel Taxes With Per-Mile Tolling

A new Reason Foundation policy brief focuses on the challenge of developing a viable, user-friendly, per-mile charging system to replace fuel taxes for the nation's major highways and outlines 10 reasons why per-mile tolling is a better highway user fee than fuel taxes. As the brief explains, fuel taxes should be replaced with a direct charge for highway services that is sustainable, fair, efficient and—for major highways and bridges—tailored to the capital and operating cost of individual facilities. Further, the system should not create privacy concerns by enabling governments to track where and when people travel, and it should give motorists choices in how to pay for their miles traveled. » FULL POLICY BRIEF

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PENSIONS: Why the “California Rule” is Counterproductive

The so-called "California rule" on pensions basically holds that California government employees acquire a right to their promised pension benefits on day one of employment, and those benefits are assumed to be protected for their entire career in government. In other words, they are seen as permanent contractual rights that cannot be changed—unless the terms are modified to bestow enhanced benefits. Policymakers are thus precluded from later deciding to enact reforms to rein in those benefits in the interest of the financial sustainability of the pension system—such as reducing cost of living adjustments or increasing contribution rates—even if on a purely prospective basis, where previously accrued benefits would be left untouched. In a recent Reason.org article, Emory Law School associate professor of law Alexander Volokh explains why the “California rule” is counterproductive and explores several potential workarounds, including shifting to defined contribution plans, providing benefits via short-term contracts, amending the state constitution, and privatization. » FULL ARTICLE

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INNOVATORS IN ACTION: Pioneering State-Level Pension Reform in Michigan

The latest installment of Reason Foundation's Innovators in Action monthly interview series—which profiles innovative policymakers in their own words, highlighting good government efforts delivering real results and value for taxpayers—examines Michigan’s groundbreaking reforms to its state employee pension system in 1996, which closed the defined-benefit system to new hires and created a parallel defined-contribution system. Michigan’s pioneering reforms have served as a model for similar actions taken later in Alaska, Utah and other states. I recently interviewed former state treasurer Douglas B. Roberts, Ph.D., on the factors that prompted Michigan’s historic pension reforms, how proponents made the case for reform, lessons learned, and much more. » FULL INTERVIEW

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SOCIAL FINANCE: Massachusetts Announces $27 Million Social Impact Bond Program

A month after New York launched the nation’s first social impact bond initiative—where the private sector finances and implements new social service delivery models on behalf of governments under a pay-for-success contract model—Massachusetts Gov. Deval Patrick announced the launch of the Massachusetts Juvenile Justice Pay for Success Initiative, a seven-year, $27 million program that represents the largest social finance investment in the U.S. thus far. » FULL ARTICLE

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PRIVATIZATION: Missouri Think Tank Examines State, Local Privatization Opportunities

In February, the Missouri-based Show-Me Institute released a report examining ways that Missouri’s state and local governments can and do partner with the private sector to provide an array of public services, as well as challenges that some jurisdictions have faced in contracting out services and best practices in implementation. I recently interviewed Show-Me Institute Director of Local Government Policy David Stokes, the report’s author, on its findings. » FULL INTERVIEW

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NEWS & NOTES

New Reason Foundation Pension Reform Case Study on San Jose: Starting in 2010, San Jose embarked on a series of pension reforms that are profiled in a new Reason Foundation case study. These reforms culminated with the passage of Measure B, under which retirement benefits were reduced for new employees, while current employees had to choose between switching to a plan with reduced benefits or contributing more of their salaries in order to maintain their existing benefits. In addition, the measure eliminated the “13th checks” that had been issued in the past when the pension investment fund had earned a return higher than a certain threshold, reduced the automatic annual cost-of-living adjustment from 3 percent to 1.5 percent, and required voters to approve any future benefit increases. With many other cities and states facing large unfunded liabilities for post-employment benefits, San Jose offers one possible model for reform.

Detroit Council Gives Final Approval to Solid Waste Outsourcing: Last week, Detroit’s city council gave final approval to two contracts with private waste haulers for residential trash and recycling pickup services that are expected to save taxpayers $6 million annually, according to the Detroit News. The firms will offer positions to current city solid waste workers at a higher pay rate, and the city will avoid an estimated $35 million in costs for new vehicles to replace its aging fleet. “We let the facts drive our decision and […] concluded that the residents of Detroit are better served by turning over trash collection to private contractors better equipped to provide improved and expanded service,” according to the city’s Chief Operating Officer Gary Brown.

Dallas Exploring Privatized Road Maintenance: Dallas, Texas city manager A.C. Gonzalez is reportedly exploring privatizing the city’s street maintenance, according to the Dallas Morning News. Gonzalez recently informed the city council that it was in preliminary discussions with a private infrastructure firm on privatization concepts—including a fixed-cost contract covering all street maintenance services—to stem the city’s annually rising costs in maintenance expenditures. “If they could just keep it the same as what we’re spending, it’s a big win,” according to Gonzalez.

Washington State Opens Bulk Printing to Competition: After a lengthy, year-long review, Washington State Gov. Jay Inslee’s administration recently announced plans to open up bulk state printing services to private sector competition. State agencies seeking products like business cards, letterhead, brochures, maps, and voter guides will now be able to solicit bids directly from the state’s print shop as well as over 350 private printing firms, according to The News-Tribune. The administration also announced plans to review four more state activities for potential outsourcing, including remaining print and imaging functions, website functions, real estate leasing services and vehicle liability claims.

Texas Approves Bundled Maintenance Contract for Houston-Area Highways: Earlier this month, the Texas Transportation Commission approved a two-year, $23 million contract with a private vendor to perform all routine highway maintenance on 350 miles of state-controlled highways—including Interstates, U.S. highways, state highways and farm-to-market roads—within the Beltway 8 loop around Houston. Under the contract, Texas Tree and Landscape, Ltd. will take over a full-scope of routine maintenance functions—encompassing pavements, guardrails, signage, mowing, striping, litter removal and more—at a cost nearly 15 percent lower than the state’s, according to Engineering News-Record. The state expects to roll out a number of similar bundled highway maintenance contracts across the state, with anticipated aggregate savings of approximately $96 million over the next five years.

Goldwater Institute Challenges Tucson’s Bid Preference Program: Earlier this month, the Arizona-based Goldwater Institute filed a lawsuit challenging a 2012 City of Tucson ordinance that enacted a discriminatory preference for local and state vendors in city contracts for goods and services. Filed on behalf of two Tucson taxpayers and a local business owner, Goldwater is seeking a court order to invalidate the bid preference ordinance as being illegal under state statute and unconstitutional under both the federal and state constitutions. More details on the case and the legal rationale are available here.

University of Kentucky to Pursue Privatized Dining Services: Earlier this month, officials at the University of Kentucky directed its purchasing division to begin negotiations with potential vendors to take over campus dining services in an effort to expand the capacity of dining facilities, as well as lower the cost and improve the quality of dining services offered. Conditions sought by the university include the retention of current dining employees and student workers, the continuation of a current local food purchasing program, and the addition of healthier food choices. The university is also asking bidders to make a capital investment of between $25 million to $50 million to improve and expand dining facilities on the campus in order to avoid taking on new debt, according to the Lexington Herald-Leader. The university received several private proposals in November 2013 after issuing a request for proposals in September.

Maine Announces New Liquor Wholesale Lease: Though categorized as a “control state,” Maine has leased the operation of its state-owned liquor wholesale enterprise since 2004. In the summer of 2013, Maine launched a procurement to rebid its wholesale liquor warehousing and delivery operation, and early last month announced that it had selected Pine State Trading Company for a 10-year lease designed to significantly increase revenues to the state relative to the previous 10-year lease agreement. Under the previous wholesale system lease with Maine Beverage Company, the state received an estimated $190 million in revenues over the 10-year contract period, which included a $125 million upfront payment and a share of annual revenues; the new lease agreement is expected to generate up to $450 million in revenue over the next decade, primarily due to shifting from a percentage-based revenue share model to one that pays the contractor a set fee, according to the Bangor Daily News. The administration of Gov. Paul LePage sought the increased revenues to help cover nearly a half million dollars in past Medicaid debts owed to the state’s hospitals.

Early Results from the Justice Reinvestment Initiative: A new Urban Institute report developed on behalf of the U.S. Department of Justice’s Bureau of Justice Assistance (BJA) offers some early insights into the implementation of the BJA’s Justice Reinvestment Initiative (JRI) across 17 states since 2010. The initiative relies on using evidence-based strategies to identify the drivers of prison populations and correctional costs and develop corresponding policies to better manage them while enhancing public safety. Part of the initiative involves reinvesting the cost savings from successful evidence-based programs into more effective public safety measures. According to the report, eight states have already experienced reductions in their prison populations since launching JRI, and it projects cost savings—both from reduced prison populations and avoided capital costs of new prisons—of up to $4.6 billion. The full report—Justice Reinvestment Initiative State Assessment Report—is available here.

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QUOTABLE QUOTE

“Even under the most conservative measures, public pension liabilities are currently over $1 trillion larger than plan assets. Using discount rates that actually reflect the promise reveals shortfalls of $2.5 trillion for accumulated benefits only and over $3 trillion for broader measures. This shortfall has to be borne by some party: taxpayers or public employees, be they past, current, or future.”
—Robert Novy-Marx and Joshua D. Rauh, "Policy options for state pension systems and their impact on plan liabilities," Journal of Pension Economics and Finance, April 2011.

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Additional Resources:


Leonard Gilroy is Director of Government Reform





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