Privatization & Government Reform Newsletter #5

March 2014 edition: Detroit water, value-added tolling, Pontiac's shift to a contract city, e-cigarette taxes, and more

In this issue:


MUNICIPAL BANKRUPTCY: Detroit Seeking Private Partner for Water/Wastewater System

This month, Detroit Emergency Manager Kevyn Orr issued a request for information on a potential public-private partnership for the operation and maintenance of the city’s water and wastewater system. While the request for information envisions an operations and maintenance (O&M) contract—with a cap on any rate increases of 4% annually for the first 10 years of a contract—it also notes that Orr will consider “alternative transaction structures, such as a long-term lease and concession agreement or sale.” The request comes as city’s original plans to lease the water and wastewater system to a regional public authority have stalled amid resistance from surrounding suburban governments. » FULL ARTICLE

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PUBLIC HEALTH: States Consider Counterproductive E-Cigarette Taxes

While Washington State’s legislature recently scrapped a proposed “sin tax” on e-cigarette products, policymakers in New Jersey and several other states are currently considering proposals to impose excise taxes on e-cigarettes, as Minnesota began doing in 2012. In a recent article, I wrote that these proposed taxes would discourage smokers from switching to a safer product, thereby ensuring that many more people continue to smoke cigarettes, which are far more harmful. » FULL ARTICLE

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INNOVATORS IN ACTION: From Traditional to Contract City—Navigating Financial Distress in Pontiac

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 Pontiac, Michigan’s recent transformation into a contract city while under emergency manager control between 2009 and 2013. That period saw the contracting out of dozens of services through privatization and intergovernmental agreements, the sale of major city assets, the restructuring of the city’s retiree healthcare plan, the elimination of the city’s fire department through merger with an adjacent municipality, and much more. As a result, the city’s workforce fell from over 500 non-court employees down to just 20; city debt fell from $115 million to $28 million; and general fund expenditures were halved.

The Mackinac Center’s Michael LaFaive and I recently interviewed former Pontiac Emergency Manager Louis Schimmel on his experience serving as the city's emergency manager from 2011-2013, the role for privatization and asset sales, the city’s financial restructuring moves, lessons learned, and more. » FULL INTERVIEW

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INFRASTRUCTURE: Recent Developments in the Privatization of Surface, Air Transportation

Last week, Reason Foundation began releasing the transportation-related sections of its Annual Privatization Report 2014, the 27th edition of this yearly compilation of the latest news on privatization and government reform initiatives at all levels of government. These sections provide a comprehensive overview of the latest on a range of transportation topics, including toll roads, managed lanes, public-private partnerships in surface transportation, airport privatization, airport security, air traffic control, infrastructure finance, and much more.
» FULL REPORT: Surface Transportation 2014
» FULL REPORT: Air Transportation 2014
» FULL REPORT: Transportation Finance 2014
» Annual Privatization Report 2014 homepage

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TRANSPORTATION: Value-Added Tolling—A Better Deal for America’s Highway Users

After nearly a century of use, the fuel tax is running out of gas as a highway funding source, primarily due to the increasing fuel-efficiency of vehicles and the projected growth in vehicles powered by sources other than gasoline and diesel fuels. Meanwhile, the costs of building and maintaining highway and bridge infrastructure continue to climb. Many transportation economists have advocated replacing fuel taxes with per-mile tolling as the primary highway funding source, but some highway users currently are not convinced that this would be in their interest. A new Reason Foundation policy brief by Robert Poole explores the concerns of highway users and frames a set of policy approaches—called “value-added tolling”—that would be genuinely in the interest of those users. » FULL POLICY BRIEF

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ASSETS: Privatized Parking a Win-Win in Indianapolis

Critics of the privatization of municipal parking assets often point to Chicago’s pioneering—and unpopular—implementation of it’s 75-year, $1.1 billion parking meter system lease as a warning that such deals will result in cities giving up parking-related revenues over the duration of the deal, effectively trading a long-term revenue stream for upfront cash. However, Indianapolis’s experience with parking privatization tells a far different story, one that illustrates that these are not cookie-cutter transactions, but rather customizable contracts that can—and should—be tailored to each community’s context and policy goals. » FULL ARTICLE

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CONTRACTING: Washington State Legislature Rejects Anti-Privatization Bill

The Washington taxpayers just dodged a bullet in the legislature on state government contracting issues, though policymakers should be wary in case the issue resurfaces again in future legislative sessions. The so-called “Taxpayer Protection Act” would have made several subtle, but important, amendments to statutes enacted in 2011 and 2012 that were designed to facilitate more competitive contracting for state services. The bill contained several problematic elements that would have been a barrier to competitive contracting, would have run counter to the state’s sensible 2011 and 2012 procurement reforms, and were ultimately designed to elevate the economic interests of government employee unions over the public interests of taxpayers. » FULL ARTICLE

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NEWS & NOTES

Philadelphia Mayor Announces Sale of City Gas Utility to Shore up Underfunded Pensions: Philadelphia Mayor Michael Nutter announced in early March that UIL Holdings Corp., a Connecticut-based energy company, has agreed to buy the city-owned Philadelphia Gas Works for $1.86 billion. The Nutter administration sought the sale as a means to generate between $424 million and $631 million to shore up the city’s pension fund, which is less than 50% funded, according to the Philadelphia Business Journal. “The state of our pension fund and the crippling effect its obligations have on the city is a major concern of mine and City Council and it is one of the most pressing financial issues facing the City,” Mayor Nutter said in a statement. “This contribution will go a long way in our efforts to restore the health of the pension fund.” To proceed, the deal will require approval of the city council—which is currently reviewing the proposal and considering alternatives to divestiture—and the state’s Public Utility Commission. The Nutter administration has launched a website on the utility sale—www.exploringasale.com—to answer frequently asked questions and provide reports, fact sheets and other related information.

New Reason Foundation Pension Reform Case Study on Michigan: In 1996, Michigan became the first state to enact major pension reforms, freezing the state employees’ defined-benefit pension fund for new members and creating a defined-contribution pension system for future hires. The state employees’ defined-benefit pension fund had a relatively healthy funding ratio at the time, making this a seemingly unusual move, but one that turned out to be prescient. Because Michigan policymakers opted not to reform the public school employees’ defined-benefit pension fund, they inadvertently created a natural experiment to determine which system would be more sustainable in the long run. A new Reason Foundation case study finds that over the past 15 years, the public school employees’ plan accrued unfunded liabilities that would have likely been mirrored by the state employees’ fund in the absence of reforms. The report finds that this would have increased fiscal pressure on current state leaders and made Michigan worse off on the whole.

Georgia Child Welfare Privatization Bill Stalls: Despite the passing both legislative chambers in different forms, a bill that would have created a three-year pilot program for privatized child welfare services—including adoption, foster care and other services—stalled on the last day of the legislative session in March. A more sweeping version of the bill (Senate Bill 350) approved by the Senate in February that would have fully privatized these functions by 2017 was later amended in the House to limit its application to a two-year pilot program. On the last day of the legislative session, the Senate subsequently passed an amended version of the language (House Bill 914) to expand it to a three-year pilot program, followed by full privatization in 2018. However, this version of the bill failed to receive a final vote in the House before the close of the legislative session later that day.

Tennessee Seeking Info on State Park Privatization: Late last month, The Tennessean reported that Tennessee’s Department of Environment and Conservation has issued a request for information seeking feedback from private firms regarding potential lease and management contract options for services in 11 state parks. “We have a responsibility to manage state parks and operations in a way that provides the best service for the best value to Tennessee taxpayers and visitors,” department spokeswoman Kelly Brockman told The Tennessean. “We are in the beginning process of this. This is just a research phase. It’s just seeing what’s out there.”

Dispute Over Impacts of Washington State Liquor Privatization: As the debate over the potential privatization of Oregon’s state liquor monopoly heats up, last month The Oregonian reported the findings of research suggesting that implementation of Washington State’s 2012 liquor privatization measure “has had a bad effect on young people, from looser attitudes about drinking to more alcohol-related emergency room visits.” However, a March Forbes article penned by George Mason University’s Statistical Assessment Service executive director Donald Rieck called the findings into question, suggesting that they were “less a study […] than a PowerPoint presentation of preliminary data by long-term opponents of privatization.” Rieck notes that “the preponderance of data on the effects of privatization on Washington State suggests the exact opposite” of the negative effects cited in the research.

Indianapolis Announces Qualified Bidders for Potential Criminal Justice Complex PPP: The Indianapolis Business Journal reported this month that Indianapolis has shortlisted three consortia for a potential public-private partnership to develop a new Marion County criminal justice complex that would consolidate criminal courts, county jail facilities and criminal justice offices into one facility with an estimated price tag of at least $200 million. Five developer teams responded to the city’s original request for qualifications, and the city expects to issue a request for proposals to the three qualified teams later this spring. If ultimately completed, this would not be the first privately financed criminal justice facility in the U.S. The $490 million Gov. George Deukmejian Courthouse in Long Beach, California—financed and developed under a 35-year public-private partnership—opened last fall.

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Additional Resources:


Leonard Gilroy is Director of Government Reform





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