Taking on Infrastructure, Pension Challenges in Georgia

In May 2015, Georgia Gov. Nathan Deal signed into law Senate Bill 59-the Partnership for Public Facilities and Infrastructure Act-which enables the state and local governments to use public-private partnerships (PPPs) for the private financing and development of “social infrastructure,” such as higher education facilities, schools, public health facilities and other public buildings. The passage of SB 59-the culmination of over two years of work to advance the concept by the bill’s sponsor, State Senator Hunter Hill-places Georgia among the early leaders in providing a statewide legal framework for social infrastructure PPPs, alongside pioneers like Virginia, Texas and Florida.

At the same time, Sen. Hill sponsored legislation to transition the state teachers’ pension system from a traditional defined-benefit pension plan to a hybrid defined-benefit/defined-contribution plan that would have lowered financial risks to the state and provided a more equitable retirement system for teachers of all experience levels. Like many pension plans covering public school teachers, the current system punishes younger teachers by backloading retirement benefits, pushing the bulk of benefit accumulation toward the years close to retirement.

Reason Foundation Director of Government Reform Leonard Gilroy recently interviewed Sen. Hill on his social infrastructure PPP legislation, the need to reform the state teachers’ pension system, and more.

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Leonard Gilroy, Reason Foundation: During the last two legislative sessions you proposed enabling legislation to allow for public-private partnerships (PPPs) in the development of “social infrastructure,” meaning a broad array of government buildings. That legislation was ultimately enacted this year. What prompted your interest in social infrastructure PPPs?

Georgia State Senator Hunter Hill: The issue came to my attention once I got into government as I learned about how constrained our budgets are at the state level and the local level for providing facilities that the public needs. As costs have increased in health care and other human services, infrastructure dollars have really taken a downturn in terms of their prevalence within the budget. It just seemed to me that we should leverage the capital, innovation and expertise of the private sector in delivering government facilities. PPPs help the taxpayer get a better value, and they help the public side get a better understanding of how to deliver projects to meet a public need.

Gilroy: Are there particular needs on the social infrastructure front in Georgia that helped drive this legislation forward?

Hill: No, it wasn’t any one specific need. Rather, it was something I think we need to address now for the future. I think the law gives the appropriate flexibility for state and local governments to be able to address the needs that they may have now or face in the future, but it’s also constrained enough that it keeps us fiscally responsible and protects the public from any downsides or bad ideas.

Gilroy: At the same time your legislation was being debated in 2014, the legislature granted the University System of Georgia the ability to embark on a massive student housing PPP initiative across nine campuses, something that is now underway. Did this effort play into the discussion on your broader social infrastructure PPP legislation?

Hill: Not really. The Board of Regents has always been doing public-private partnerships, and they have a system in place that they’re happy with. My bill was not connected to that at all; it actually didn’t affect the Board of Regents. My bill addressed other state agencies and local governments.

Gilroy: Are there experiences in other states that you find particularly compelling on social infrastructure PPPs?

Hill: We learned from the models in Virginia, Texas and Florida, and we had a similar initial bill that we tailored specifically to meet Georgia’s needs. For example, we tightened the window for when state agencies could accept unsolicited bids or proposals. Unsolicited bids have always been legal, but there’s never been a structured framework to deal with them. Because of that, in cases where they could have been beneficial, they weren’t used, and in fact, they could have been done behind closed doors in a less vetted environment, which is not good for free markets and not good for taxpayers.

So by constraining when government will accept them, they’ll know exactly when they’re coming and will be prepared for unsolicited bids. And on the flip side, there will be more competition brought to bear when the public is telling everyone that there’s a window in which they will accept unsolicited bids.

During the study committee looking at this issue back in 2013, we actually got Virginia officials on the phone with us to talk about their experiences. It was a state agency using their PPP legislation to develop a new prison facility. We tried to learn as much as we could during the process, and it was definitely beneficial.

Gilroy: Given that the legislation creates this PPP tool for local governments too, were municipalities and school districts generally supportive? How did they react?

Hill: They were very supportive. The Georgia Municipal Association and the Association County Commissioners of Georgia were integral to getting us where we wanted to be on the legislation. Some counties will use what we’ve given them and some won’t. And some will use a modified structure, which we gave them the flexibility to do. But the main thing we were trying to accomplish in the bill for local governments was to provide them with a new opportunity for procurement for these facilities. Instead of government running the procurement process from start to finish, by opening it up to the private sector earlier in the process, you can leverage their innovation and expertise-and sometimes even their financing.

Gilroy: Even though Georgia has some experience with PPPs in transportation and higher education, social infrastructure PPPs can be a complicated issue. Was there a learning curve in terms of how to communicate the value of these PPPs?

Hill: It’s definitely a newer concept, and I think for us it was really just about repetition. That’s why it took a couple of years to get the bill done. I don’t think I necessarily got better at selling the idea over that time, it’s just that if people keep hearing the same argument for years in a row it begins to sink in.

And in terms of really understanding the value, I don’t think we’re there yet. We did pass the bill, but it’s going to take some time for this tool to be used. We passed transportation PPP legislation seven years ago, and we’re just now beginning to see the first project underway with our managed lane project on Interstate 75.

It just takes time. I’m just glad that we’re now in the queue, if you will, by having passed this legislation. I wouldn’t imagine that there would be any projects that result from it for another couple of years. We’ll learn more along the way, and if there’s a need to tweak anything, we can. But for now, we’ll just be watching it unfold and will see what the learning process looks like moving forward.

Gilroy: Social infrastructure PPPs are, at a general level, one way of harnessing the private sector to achieve public sector goals. What’s your general philosophy on how governments and private enterprise can team up to advance the public interest?

Hill: If I were to oversimplify it, I like the old-fashioned “Yellow Pages test” method. If there are three companies in the Yellow Pages that can provide the service that the government needs, then it ought to be privatized. So I’m always looking for ways to leverage the expertise and innovation of the private sector to deliver projects or services that the public sector needs. We do that pretty well in Georgia, but we can always improve.

Gilroy: Shifting gears, you also proposed legislation to overhaul the teachers’ pension system in Georgia, an effort that was ultimately unsuccessful. You had proposed legislation that would have placed new hires in a hybrid defined-benefit/defined-contribution retirement plan. What prompted your interest in reforming the teachers’ pension system?

Hill: I introduced a bill that would move our future teachers to a 401(k)-style retirement plan. Ultimately, I want to see us incentivize and reward teachers for the great value that they’re providing to our students today, instead of this very large deferred compensation that we have through our current defined benefit pension plan, where they’re not getting fully rewarded for the value brought to our students until they’re much later in their career and even into retirement. To me, that’s not a good system-one where you’re paying people a large portion of their compensation when they’re not currently adding value.

We cannot change the commitment we’ve made to current teachers and retirees, but I want to incentivize newly hired teachers in the future in their first ten years of work. Right now, we’re basically letting them work for very small dollars for 10-15 years, and then right about the time when they’re thinking they might be fed up and ready to move on, we dangle this carrot in front of them with this huge, lucrative pension to entice them to stay. It’s just how the system works, with a backloaded benefit that works against the younger teachers. We should probably pay teachers more on the front end and give them a retirement plan that provides them with a benefit the whole time they’re providing their value to our students.

We’re behind the curve on this in Georgia, but I couldn’t even get a second in the committee on my proposal. That’s because there was just a lot of misinformation amongst teachers’ organizations suggesting that I was just trying to take their retirement away. I’ll accept responsibility for the poor communication on my proposal this time around, but I’m going to continue to work on this issue because I believe it is important not only for the retention and recruitment of future teachers-we need to be more competitive on that in Georgia-but also for the long-term fiscal trajectory of the state.

Gilroy: What do you think stood in the way of your colleagues in terms of support for taking a look at the current system and proposed changes from a mathematical standpoint? It seems like doing an actuarial analysis was a very low-risk activity that would have had a lot of benefit in terms of building knowledge about the health of the system.

Hill: The way Georgia works, it’s very difficult to change a retirement system, which is a good thing overall. It isn’t something that should be easily changed. But on the flip side, to do it, you have to submit a full reform proposal to then be able to go to an actuarial study. So you have to develop a proposal to be studied, and then it gets studied, and then there’s a financial analysis attached to that bill. Then it becomes very difficult to change that, because any changes would require it to go back for another actuarial study.

So the system works in favor of not changing the retirement system. And in Georgia, we have a strong executive branch in terms of how our constitution is written, so it makes it very difficult to make these changes led out of the legislature. They probably need to be led from the governor’s office. Governor Deal has done a good job in this regard, and he’s just set up a compensation reform committee in education, so there are now people that are going to be studying the very issue that I was trying to address.

I’m not on the commission, but I’m hoping that my philosophy will find its way on to the commission. I think we need to pay teachers more for the work they’re providing today in lieu of the long-term guarantee that we’re currently offering them. My proposal was portrayed as anti-teacher, but I believe that it’s actually pro-teacher. I think it’s a good thing for teachers to pay them more for the value that they’re adding today. The teachers’ groups were opposed to it, but I think that’s because they didn’t fully understand it.

Gilroy: Beyond the policy arguments regarding fairness and recruitment of future teachers, were there other issues-like unfunded liabilities-that also played into your proposal?

Hill: While we have some long-term fiscal challenges in our pension system like every system does, the Teachers Retirement System of Georgia is actually one of the strongest. But all of them have a long-term challenge. We’re putting current and future taxpayers on the hook for past commitments. The fiscal sustainability and trajectory is always an issue, and while the system I proposed would be beneficial for improving the future sustainability of the system, that’s not why I developed my proposal.

I did it because I think we have a cultural problem in our education system that incentivizes the wrong things through our compensation system. It incentivizes length of service instead of excellence in the classroom. It’s more of the compensation philosophy that I think is problematic in terms of recruiting. That’s not to say that we don’t have great teachers-we do have great teachers, but we have them in spite of our compensation system, not because of it. We need to change this.

Even though my proposal this session wasn’t successful, I think we’ve at least started a conversation, and now we need to turn that into action.

Gilroy: Are there other legislative initiatives on the financial or regulatory front that you have pushed or plan to push for?

Hill: We worked on putting a bill forward on education savings accounts this past session, the idea being that if someone’s public school is not working for them, then they should be able to use the money that was allocated to them on the state formula side for other educational benefits, whether it be a private school tuition, tutoring, or even remedial training work out of this education savings account. It didn’t get very far in the Senate this year, but it did move very quickly in the House before stalling in the Rules Committee. But it’s still alive for next year.

I think it’s a good idea to allow people that don’t have the means to pursue a private education or other educational alternatives to be able to. We promise our children a solid education in the state of Georgia, and when their public school is not providing a solid, excellent public education, then they should have options to go elsewhere. That’s the thought process behind the education savings account bill.

On the craft brewery front, there’s a three-tier system that governs all alcohol-you’ve got the manufacturer or brewer, the wholesaler/distributor, and then you’ve got the retailer, which is the restaurant, bar or store. But any one entity can only do one of these things, and not the other two in this state. But it seemed to me that these small brewers, who are having to sell 100% of their craft to a distributor, are going to have a hard time getting their product to market, and while they’re a small business that is capital-intensive, they might not have the revenues or margins and the operating costs to sustain selling their craft at such low margins. My thought was that I wouldn’t want to take the distributors completely out of the operation, but I thought that the brewers should be able to sell a limited amount of their craft directly to the consumer so that they could enjoy higher margins, reinvest in their business, and grow their brands.

So that’s what we worked on and were able to move the ball down the field and get a bill done, which was a big win. It wasn’t exactly what we had asked for, and the distributors and retailers weighed in on that to make it a more modified approach from what we put forth. But overall I still think it’s a win for the brewers, and now we’ll get to see whether this construct will do what I wanted it to do, which was to create their revenues and allow them to increase their brand awareness in the market.

Gilroy: Social infrastructure PPPs and pension reform are two very different issues, but share two key similarities: (1) they’re complex issues, and (2) both involve paradigm shifts and a big change from the status quo. Are there any lessons you’ve learned thus far in how to communicate the value of these types of major reforms to your colleagues in the legislature, as well as constituents?

Hill: I saw my legislative session this year as being reform-minded and sometimes taking on status quo thought. And it is a challenge to effect change in any organization, but especially in government and politics because there’s a tendency among politicians to be cautious. And I think that’s a good thing. We have a fiduciary responsibility to the state, and caution is a good thing at times. But I also think that when there are proven reforms that have taken place in other states, then we should learn from that. And that’s what I tried to do with Virginia, Florida and Texas on public-private partnerships, and Arizona on education savings accounts.

We need to be innovative, we need to learn from other states, and we need to be willing to take on those large silos of support that stand in opposition to reform. Legislators usually get through the session with not a lot of contention, and so when there is an issue where you are taking on those large silos of support, legislators are going to proceed with caution. So communicating around and through the opposition is valuable.

It’s really just about letting people know what you’re trying to accomplish and who it’s going to benefit. That means challenging assumptions and challenging the arguments from people who say that a reform is going to hurt them when it will actually help them. With my craft brewery bill, in no case does it hurt distributors and retailers. I think it lifts all boats and is going to increase the energy around the craft beer industry, which helps distributors and retailers. On modifying the teachers’ retirement system, I can see why one might be afraid of these proposals but they’re going to help the education profession and teaching in general.

It’s often a matter of telling a story about how reforms are going to help everyone involved, not picking winners and losers.

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State Senator Hunter Hill was elected to the State Senate for Georgia’s 6th District in 2012. Sen. Hill represents portions of Cobb and Fulton counties. In 2014, he was elected Majority Caucus Vice-Chairman by his colleagues.

Sen. Hill is the Chairman of the Senate Veterans, Military and Homeland Security Committee and Vice-Chairman of the Finance Committee. He is a member of Appropriations (Vice-Chairman of the Public Safety Subcommittee), Judiciary Non-Civil, and Reapportionment and Redistricting committees. Sen. Hill is also an Ex-Officio of the Retirement and Rules committees.

After graduating from the United States Military Academy at West Point with a Bachelor of Science degree in General Management and Civil Engineering, Sen. Hill became a 2nd Lieutenant in the United States Army. He went on to graduate from the Airborne, the Air Assault, and the U.S. Army Ranger Schools. In June 2001, Hill took command of a rifle platoon with the 101st Airborne Division, which he led into battle in Afghanistan in 2002. Sen. Hill subsequently led another platoon into battle in Iraq in 2003, and he commanded three different teams on other deployments in Iraq and Afghanistan. In addition to his combat roles, he also served as a general’s aide in Iraq, and earned two Bronze Stars, the Meritorious Service Medal and two Army Commendation Medals.

Sen. Hill is currently the President of Tommy Newberry Coaching, where he leverages his military, real estate development and security industry experience to lead and grow his business.

Other articles in Reason Foundation’s Innovators in Action 2015 series are available online here.