Privatization & Government Reform Newsletter #26 (August 2016 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #26 (August 2016 edition)

August 2016 edition: pay-for-success contracting, transportation & education trends, e-cigarettes, and more

In this issue:

SOCIAL FINANCE: Pay for Success Contracting—The Emerging Paradigm

A new Reason Foundation policy brief examines Pay for Success (PFS) contracts, which provide a way for governments to test human service programs through the private sector and only pay if the program delivers on its promised results. At its core, a PFS contract is a type of public-private partnership that combines private financing and performance-based contracting in the delivery of social services. Although they have been in existence for just five years, PFS contracts have generated a great deal of interest around the world in that short time. The policy brief—intended as a primer for policymakers on PFS contracting—is authored by Joe Coletti, co-founder and CEO of the Better Yes Network and former leader of the North Carolina Government Efficiency and Reform (NC GEAR) initiative.

» return to top

TRANSPORTATION: The Latest in Airports, Highways, Transportation Finance

Over the last decade, infrastructure investment funds have raised approximately $350 billion, which could support global infrastructure projects worth $1.4 trillion, according to Reason’s Annual Privatization Report 2016, which suggests that substantial private capital resources are available for U.S. surface and air transportation projects. The report also examines the latest developments in international airport privatization, air traffic control corporatization, outsourced airport screening, major public-private toll road and bridge projects, federal and state policy developments related to highway public-private partnerships, and the continued growth of pension fund investment in infrastructure.
» FULL REPORT: Transportation Finance 2016
» FULL REPORT: Air Transportation 2016
» FULL REPORT: Surface Transportation 2016
» Annual Privatization Report 2016 homepage

» return to top

EDUCATION: Reviewing Recent Trends in School Choice, Funding Portability

Legislative victories in 2015 and 2016 heralded six additional new school choice programs, raising the total to 59 programs across 28 U.S. states and the District of Columbia, according to the newly released Education section of Reason Foundation’s Annual Privatization Report 2016. The report reviews developments over the past year in education, with topics that include the expansion of school choice programs, the expanding charter school market share, education savings accounts, student-based budgeting and school funding portability in the states.
» FULL REPORT: Education 2016
» Annual Privatization Report 2016 homepage

» return to top

PRIVATIZATION: How Does Privatization Affect Government Liability?

The law treats the public and private sectors differently in all sorts of contexts, including legal liability. The precise contours of government vs. private immunity depend on the context and depend on what laws are involved. The relative treatment of the public and private sectors will obviously affect the costs and benefits of privatization, the government’s incentives to privatize, and injured parties’ prospects for monetary recovery. This is nicely illustrated by two cases from the U.S. Supreme Court’s recent term, as Emory Law School associate professor Alexander “Sasha” Volokh explains in a recent Reason Foundation article.

» return to top

PENSION REFORM: Michigan Pension Reform Case Study

In 1996, the Michigan state legislature passed a first-of-its-kind bill that closed the state employees’ defined benefit pension fund to new members and created a defined contribution retirement plan for future hires. A new report by Reason’s Anthony Randazzo finds that the legacy retirement system is more solvent today than if the legislature had not closed the defined benefit plan for new hires, with a full system funded ratio of 88% as of 2015, compared to an estimated 68% funded ratio without reform. But while closing the defined benefit plan has prevented the state from taking on even more unfunded liabilities than without a change, the report finds that the positive effects of pension reform have been muted by the failure of policymakers to properly manage the defined benefit plan well as it is being closed over time.

» return to top

E-CIGARETTES: The Vapor Revolution: How Bottom-Up Innovation Is Saving Lives

The public health impact of the vapor revolution has already been profound: millions of smokers have switched entirely to vaping, and millions more are using vaping to reduce the amount they smoke. The best estimate so far produced puts the risk posed by vaping at approximately 5% that posed by smoking. In a new working paper, Reason’s Julian Morris and Amir Ullah Khan write that, given time and further innovation, vaping has the potential to continue dramatically to reduce both the number of people who smoke and the number of cigarettes smoked by those who choose to continue to smoke. The authors estimate that over the course of the next two to three decades, vaping might gradually replace smoking altogether, thereby saving most of the billion lives—and perhaps 8 of the 10 billion life-years—that otherwise would be lost to smoking over the coming century. Yet, the authors warn that if innovation is to continue to deliver better, safer, less expensive products—and thereby attract more smokers to switch—it is essential that producers, retailers and consumers be free of excessive regulatory intervention.

» return to top


DOJ Announces Private Prison Phase-Out, DHS to Evaluate: Earlier this month, the U.S. Department of Justice’s Office of the Inspector General (OIG) released a report claiming that “contract prisons incurred more safety and security incidents per capita than comparable [Bureau of Prisons (BOP)] institutions and that the BOP needs to improve how it monitors contract prisons.” Shortly after the release of the OIG report, Deputy Attorney General Sally Yates issued a memo stating an intention for “reducing—and ultimately ending” DOJ’s use of private prisons and directing that as each BOP private prison contract comes up for renewal in the coming years, the agency should either “decline to renew that contact or substantially reduce its scope.”

Correctional management firms quickly countered that the OIG report was flawed and failed to take into account the very different demographics of the population of private prisons in the BOP system (compared to BOP-run facilities), along with a number of other underlying factors ignored by the OIG. Emory Law School associate professor and Reason contributor Sasha Volokh offered a detailed critique of the report in a recent Washington Post blog post.

In the wake of the OIG report and new DOJ policy, another federal agency has announced a review of its private prison use. Earlier this week, Department of Homeland Security (DHS) Secretary Jeh Johnson announced that he had directed the agency’s advisory council to undertake a study on whether Immigration and Customs Enforcement should continue its use of private prisons for immigration detention. Recommendations pursuant to the study are due from the advisory council by November 30.

MBTA Privatizations Advance: The Massachusetts Bay Transportation Authority (MBTA) has taken major steps toward privatizing much of its operations over the last two months. The transit authority issued a Request for Proposals in late June for a private firm to take over the operations of its warehouse, a move to which warehouse workers responded by immediately seeking arbitration, the Boston Globe reported.

MBTA also looks to privatize its police and emergency dispatch, as well as its cash operations. The Globe reported this month that MBTA looks to contract with IXP Corporation for police and emergency dispatch. The two-year, $6.1 million deal for police dispatch would free 15 officers from dispatch duties and allow them to work patrol, a major relief to MBTA Transit Police Superintendent Richard Sullivan, who said of the move, “This is going to help us tremendously.”

The transit agency may also privatize its cash counting operations, after a consultant report found many problems with its current in-house arrangement, including poor training and recordkeeping, security lapses (including vault doors secured with duct tape), and employee shirking, as well as outdated and inefficient technology and equipment. Officials believe that privatization could generate $4.6 million in savings. The 78 workers that the agency currently employs for its in-house cash counting make a combined $10.1 million, or a little more than $128,000 per worker. MBTA will likely submit requests for qualifications/proposals within the coming weeks. More details are available here.

Denver International Airport Announces Winning Terminal PPP Bidder: At the end of June, Denver International Airport chose a Ferrovial Airports-led consortium to make improvements to its Jeppensen Terminal through a public-private partnership (PPP), the airport noted in a press release. Parties are currently negotiating final terms for the pre-development period, which, pending an agreement, will result in a full city council vote on a contract in August. The PPP aims to upgrade the terminal by consolidating the airline ticket counters, consolidating and relocating the TSA screening areas, modifying the baggage handling system in and under the terminal, and redesigning the shopping, dining and overall passenger experiences available within the terminal.

China Pledges $1.6 Trillion for PPP Development: A Chinese official announced this month that the county plans to provide funding of $1.6 trillion to over 9,000 PPP projects in the coming years. Problems with local, public financing of projects played a major role to the increased commitment from China to the public-private model, with municipalities now being allowed to rely on private funding to make up for shortfalls from bond issues. China’s finance ministry will soon publish lists of demonstration projects valued at $121 billion, of which nearly half (48%) have reached implementation. More information is available here.

Fargo-Moorhead Flood Control RFQ Released: Earlier this month, the Flood Diversion Board of Authority issued a request for qualifications for the public-private partnership portion of the $1.8 billion Fargo-Moorhead Area Diversion Project, a joint effort between the Army Corps of Engineers and the states of North Dakota and Minnesota to control flooding on the Red River. The project has two main components: the Corps will build a dam using federal funds, while a private developer will finance and construct a 36-mile-long, 1,500-foot-wide diversion channel with 32,500 acres of upstream staging, to be repaid over time through state sources. Earlier this month, the mayors of Fargo (ND) and Moorhead (MN), the Flood Diversion Board of Authority, and the Corps signed a project partnership agreement to advance the project. A full request for proposals for the PPP portion of the project is anticipated by the end of 2016. More information is available here.

Mackinac Center Releases Annual School Service Privatization Survey: Michigan’s Mackinac Center released its School Privatization Survey 2016 earlier this month, noting continued growth of school districts choosing to privatize food, custodial, or transportation services (now 379 of the state’s 541 districts, or 70%). Half of Michigan school districts rely on privatized custodial services alone, up from 7% in 2003, while food services, now at 43%, grew less sharply over that period at 64%. Transportation services remains the least common (just 25% of districts), though its prevalence grew over 600% over the past decade, now relied upon in 137 Michigan school districts. Satisfaction amongst school officials remains high, too—90% of officials reported being satisfied with the privatized services upon which their district relies, while only 3% reported dissatisfaction. The full report is available here.

Alaska Taps Consultants for Health Care Privatization Studies: Medicaid reform legislation signed in June requires Alaska to hire consultants to study the possibility of privatizing parts of the state’s health services system, with a sharp focus on juvenile facilities, pharmacy services, and the state’s sole psychiatric hospital. By mid-July, the state selected winning bids from two firms—Carter Goble Associates (CGA), who will examine privatization in state’s short-term detention facilities, LLC and Public Consulting Group, Inc (PCG), who will look at privatizing some services at the Alaska Psychiatric Institute. A third bid for examining pharmacy services was rejected. More information is available here.

Baltimore City Circuit Court Facility PPP Proposed: The Baltimore City Circuit Court asked the Maryland Stadium Authority to help it seek bids for private developers to repair or replace its existing facilities, potentially through a PPP structure, the Baltimore Sun reported. In 2011, an attempt renovate the buildings was rejected because of an estimated $600 million cost, while a report the same year described conditions at the facilities as “dire,” in terms of safety and operations, as did previous studies.

Cleveland State University Seeking Parking PPP: In June, Cleveland State University issued a request for qualifications seeking firms interested in a potential long-term concession to operate and upgrade the university’s parking system. The university is seeking to maximize the value of its parking assets while addressing a shortage of parking spaces amid rapid growth in enrollment. Qualifications were due in mid-July; at press time the university had not released a list of responses.

Mercatus Case Study Examines New D.C. Taxi and Ride-Share Agency: Researchers at the George Mason University-affiliated Mercatus Center released a study recommending that policymakers rethink the entire structure of taxi regulations, which limit competition, inflate prices, lower quality, and employ antiquated technologies and practices. The authors argue that taking further steps to level the regulatory playing field between taxis and ride-sharing companies by way of deregulation will serve consumers better. Previous concerns about customers’ inability to assess the quality of street-hailed taxis led to current regulations, the study maintains. But new technological advances such as greater monitoring of drivers, instant customer feedback via smartphone apps, and secure electronic payment systems have virtually erased those problems. Keeping such regulations intact in the face of such added security, the authors argue, ends up harming consumers by way of stifling competition.

Iowa Private Medicaid Management Update: Since privatizing Medicaid to three companies in a managed care agreement this April, a first quarter report found the state saving $22 million, though some details of measurement remain unclear. The private providers did fail to meet performance standards in April and May, and were fined $4,400 for incorrect claim information.

Gov. Terry Branstad continued to stress savings from fraud prevention, citing figures from a previous smaller scale privatization. A study released by the U.S. Department of Health and Human Services (HHS) assessing performance of the public and private sector with respect to avoiding improper Medicaid payouts in Iowa found private sector workers to be vastly more successful in FY2014. While public sector workers improperly paid out 10% of funds in its fee-for-service program, private workers, which at the time covered about 10% of the total state Medicaid program, achieved an improper payment rate of less than 1%. More information is available here.

CT Gov. Malloy Releases Group Home Privatization Plan: Earlier this month, Gov. Daniel P. Malloy’s administration released a plan to save $70 million annually by privatizing 40 state-run homes, as well as services for residents with developmental and intellectual disabilities, currently provided in-house by the state’s Department of Developmental Services (DDS). “The plan follows national trends and best practices for reducing publicly run residential and larger institutional facilities and continuing on a path of providing cost effective, community-based options for individuals supported by DDS,” according to DDS Commissioner Morna A. Murray. “Community-based care provided by experienced non-profit organizations will ultimately allow Connecticut to afford to provide supports to the thousands of families currently waiting for services.”

Redding/Shasta County (CA) Renews Library Contract: Earlier this month, Library Systems & Services signed a contract extension to continue providing operations, technical, and strategic support for Redding’s and Shasta County’s libraries until 2021. The relationship has been very beneficial to the city and county in terms of traffic and finances; while the average California county spends nearly $50 per capita on its libraries, Shasta and Redding spend a little over $12, and the county and city receive 12 visits per capita to their libraries, which is double the California average. “Results speak for themselves: the Redding branch operates at 60+ hours a week, while the city could only run it at 40 hours and for more budget,” Peggy O’Lea, executive director of the Shasta Library Foundation, said in a press release.

Oklahoma Corrections Department Leases Private Prison: This month, the Oklahoma Department of Corrections began moving its inmates from its State Reformatory in Granite into a much newer private facility located in North Fork. The state will lease the privately owned facility from Corrections Corporation of America in a six-year, $37.5M deal that will have state employees operating the facility, KGOU Public Radio reported. While most of the state’s prison facilities previously served some other purpose—such as Boy’s Homes, hospitals, or munitions plants—and were retrofitted to serve as prisons, CCA’s North Fork facility was specifically constructed be a prison only 18 years ago. Compared to the 107-year old Granite facility, North Fork has modern IT infrastructure—including two educational buildings with computer labs for inmates for job training purposes—and the facility itself can be reconfigured to become the equivalent of four separate prisons, allowing for separation of different types of inmates.

» return to top

“The question is whether the past twenty or thirty years is a useful yardstick for predicting the next twenty or thirty years. The United States has benefited from a 35-year bond market boom, over which time interest rates have trended consistently lower to the near-zero rate that it has held steady for the past seven years […] All other things being equal, lower interest rates push stock and bond prices higher. Consequently, U.S. pension funds have enjoyed 35 years of rising prices for stocks and bonds (with short interludes of falling prices) in their portfolios. But as interest rates approach zero, it is impossible under conventional economic theory for them to drop any lower. Perhaps, as we are seeing in some places around the world, it is possible for central banks to engineer below-zero interest rates, but we have no historical experience by which to judge how economies, bond markets and stock markets will perform under such circumstances. […]

It is almost inconceivable that the future 35 years of investment returns will match that of the previous 35 years, one of the great bull market eras of U.S. financial history. Therefore, [the Virginia Retirement System (VRS)] (and other all pension funds) are reckless to assume that recent history will be any guide at all to future performance. Stretch out the frame of analysis for 50 years, 100 years, or longer, and the case for equities and bonds may be as favorable as ever. But the VRS cannot look out 100 years. Baby Boomers in the state workforce are retiring in large numbers now: One quarter of the state workforce will be eligible to retire within five years. Virginia will need the money in the next 20 to 30 years.”

—James Bacon, “The Seven Percent Assumption,” Bacon’s Rebellion (blog), July 12, 2016.
“Both [private prison] facilities in Ohio perform in a manner that is safe and secure, as demonstrated by their contractually required accreditation status by the American Correctional Association and compliance with Ohio internal management audit standards. Ohio’s two privately operated facilities are considered full partners within our prison system.”

—JoEllen Smith, spokeswoman for the Ohio Department of Rehabilitation and Correction, quoted in Alan Johnson, “Ohio won’t follow federal lead in ending private prison contracts,” The Columbus Dispatch, August 19, 2016.
“Data-driven approaches are beginning to produce benefits not only in the area of pretrial detention but throughout the criminal justice process. Dashboards now in use in a handful of jurisdictions allow not only administrators but also the public to see court waiting times by offender type and to identify and address processing bottlenecks. Fast-tracking minor cases allowed Tarrant County, Texas, for example, to reduce its jail population by 40 percent; mental-health diversion resulted in $10 million in savings per year in Bexar County, Texas; and New Orleans reduced crime while witnessing a two-thirds decrease in its in jail population by using risk-based pretrial decision-making and turning to summonses rather than detention for low-level offenses such as disturbing the peace and marijuana possession.”

—Stephen Goldsmith and Jane Wiseman, “The Billions We’re Wasting in Our Jails,”, June 22, 2016.

» return to top

Additional Resources: