Privatization & Government Reform Newsletter #12

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #12

October 2014 edition: city fiscal conditions, school services contracting, contract cities, and more

In this issue:

LOCAL BUDGETS: Report Finds Slow Recovery, Fiscal Headwinds for Cities

Earlier this month, the National League of Cities issued the 2014 edition of its annual City Fiscal Conditions report, which found that cities remain early in their post-recession economic recovery, though they still face significant fiscal headwinds moving forward.

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PENSIONS: Pension Funding and the “Transition Costs” Myth

With state and local governments facing over $1 trillion in unfunded pension liabilities, one proposed solution is to shift government employees from defined-benefit pension systems-in which retired government employees receive a set annual payment for life-to 401(k)-style defined-contribution systems like those typically found in the private sector. However, critics often argue that this reform will result in transition costs that outweigh the benefits of the change. A new Reason Foundation policy brief examines that claim and finds it to be false: the transition costs argument is based on a fundamental misunderstanding of how public employee pensions are funded and should not discourage governments from exploring a shift away from defined-benefit pensions to defined-contribution retirement plans.

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PRIVATIZATION: School Services Contracting Continues Rise in Michigan

The privatization of non-educational school support services-primarily food, custodial and transportation services-is a common occurrence in school districts nationwide but has been infrequently studied, with the notable exception of Michigan, where the Mackinac Center for Public Policy has conducted an annual survey of local school districts dating back to 2003. The 2014 edition of this report was released earlier this month and found record levels of school service outsourcing in Michigan, which has generally been on an upward trend for over a decade.

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INNOVATORS IN ACTION: Evolving the Public-Private Partnership Model in Johns Creek, Georgia

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 Johns Creek, Georgia, which incorporated in 2006 not as a traditional city, but one that relied on a large-scale public-private partnership that saw most municipal services outside of public safety delivered by private contractors, as opposed to municipal employees. I recently interviewed Johns Creek Mayor Mike Bodker on the city’s startup, its evolving use of public-private partnerships, what’s next for the city, and more.

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ENVIRONMENT: FAQ on Endangered Species Act Reform

Proponents of the Endangered Species Act claim it is a success because it has saved many species from extinction. Others question its record, noting that there is increasing evidence the Act is causing widespread harm to the species it is supposed to protect. A recent Reason Foundation study proposed a new approach-known as the Endangered Species Reserve Program-which would eliminate counterproductive penalties that encourage landowners to make their land inhospitable to endangered species, and replace them with an entirely voluntary system in which landowners are compensated for investing in habitat and species conservation. A new article answers the frequently asked questions about endangered species protection, the failures of the Endangered Species Act, and the potential benefits of a new approach.

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GAO Finds Decline in Federal Agency Use of Performance Information: A new report from the U.S. Government Accountability Office (GAO) evaluating the implementation of the Government Performance and Results Act (GPRA) Modernization Act of 2010 found an overall decline in federal agencies’ use of performance information in decision making between 2007 and 2013. Of the 24 agencies surveyed, only two (Office of Personnel Management and Department of Labor) showed a statistically significant increase in use of performance information, while four agencies (Department of Veterans Affairs, NASA, Department of Energy, and Nuclear Regulatory Commission) showed a statistically significant decline. The full GAO report is available here.

NCHRP Releases Leading Practices Guide on Privatized Transportation Maintenance: A new report released as part of the U.S. Domestic Scan Program of the National Cooperative Highway Research Program (NCHRP) examines practices, challenges and opportunities for the large-scale outsourcing of maintenance functions at state departments of transportation. Among the issues explored are the factors influencing the decision to outsource maintenance, contractual considerations and approaches, outsourcing success factors and concerns, and more. The full report is available here.

New Report Recommends Infrastructure Life-Cycle Cost Analysis: A new report from the American Society of Civil Engineers and the Eno Center for Transportation explores the benefits of life-cycle cost analysis in transportation projects and ways to eliminate barriers to its implementation in public infrastructure decision-making. The report finds that life-cycle cost analysis-accounting for the total costs of an infrastructure project over its expected life, as opposed to policymakers’ current emphasis on upfront costs, with little attention to future costs-“can ensure the sustainability of future budgets and better management of our vital infrastructure.” The report also finds that life-cycle costing is more widespread in the private sector than the public sector and recommends the use of public-private partnerships to help accelerate the use of this tool by government agencies. The full report is available here.

Toll Concession Project Opens in North Texas: The first two segments of the North Tarrant Express toll concession project opened to the public on October 4th, marking the state’s second public-private partnership highway to launch this year. The $2.1 billion project-a 13-mile upgrade of the Interstate 820 and SH 121/SH 183 corridor in Northeast Tarrant County to nearly double the capacity of the congested corridor-included a reconstruction of the general purpose lanes with expanded capacity through four new managed (dynamically tolled) lanes and additional frontage lanes. The project used a combination of state funding and private financing under a 52-year concession model, notable for having the Dallas Police and Fire Pension System included in the private developer consortium as one of the direct equity investors in the project. More information is available at the project’s website here.

Philadelphia City Council Rejects Sale of City Gas Utility to Shore up Underfunded Pensions: The Wall Street Journal reported this week that the Philadelphia City Council has issued a statement rejecting Mayor Michael Nutter’s proposed sale of the city-owned Philadelphia Gas Works over concerns regarding the financial terms of the deal and potential risks to customers. The Nutter administration announced in early March that UIL Holdings Corp., a Connecticut-based energy company, had agreed to buy the utility for $1.86 billion, which was expected to generate between $424 million and $631 million to shore up the city’s pension fund, which is facing an $8.3 billion unfunded liability. In rejecting the utility sale, the council noted that it would seek new ways to improve the operations of the Gas Works, though it did not discuss any plans to address the unfunded pension liability. “Unfortunately, the only other option to generate that kind of money [to shore up pensions] would be to either take it from the general fund or increase citizens’ taxes,” Mayor Nutter told reporters in response to the rejection, according to the Philadelphia Inquirer.

Pennsylvania DOT Selects Team for Bridge Replacement Public-Private Partnership: Last week, the Pennsylvania Department of Transportation (PennDOT) selected a winning bidder for the state’s Rapid Bridge Replacement Project, a public-private partnership to reconstruct 558 structurally deficient bridges statewide. Plenary Walsh Keystone Partners-a consortium that includes the Plenary Group, The Walsh Group, Granite Construction Company, and HDR Engineering (along with 11 Pennsylvania-based subcontractors)-will finance the $899 million project in an availability-payment concession and will manage the bridges’ design, construction and maintenance under one comprehensive to streamline project delivery. All 558 bridges will be replaced within three years of the 2015 project start date, and the consortium will maintain each bridge for 25 years after completion. PennDOT estimates the average per-bridge cost under this project to be $1.6 million, compared to an average of more than $2 million under a traditional delivery approach. More information is available here, and my recent interview with Bryan Kendro, who directs PennDOT’s Office of Policy & Public Private Partnerships, is available here.

Phoenix Leases Struggling City Golf Course to Private University: The Arizona Republic reported last week that the City of Phoenix has approved a 30-year lease with the private Grand Canyon University to take over the management of the city-owned Maryvale Municipal Golf Course, which ran a $250,000 deficit under city management during the last fiscal year. Under the deal, the university will take on all operating costs and invest $8 million into course repairs and an upgraded clubhouse, and it will make payments to the city at a level of 10 percent of net revenues after it recoups its upfront investment. Phoenix officials have been seeking alternative management solutions for city-owned golf courses to reduce taxpayer subsidies after the courses racked up millions in operating deficits over the past decade.

Georgia County Selects Finalist for Multi-Departmental Services Contract: Earlier this month, officials in Barrow County, Georgia selected CH2M HILL as the preferred contractor to submit a bid to potentially take over the operations of nearly a dozen county departments, including public works, general administration, transportation, human resources, community development, parks and engineering. According to the Barrow County News, the firm is currently preparing a bid, and the county’s board of commissioners is expected to vote on a resulting contract in November. While several municipalities have incorporated in Georgia over the past decade using a contract city model (see my interview with Johns Creek Mayor Mike Bodker above), Barrow County could become the first in Georgia-and possibly the nation-to convert from traditional service delivery to a largely contract-based model.

Osceola County, Florida Officials Approve Jail Healthcare Contract: The Osceola News-Gazette reports that county commissioners have approved a five-year, $21.8 million contract with Armor Correctional Health Services to provide healthcare services at the Osceola County Jail, a move officials expect will save taxpayers $677,000. All current county employees will be offered interviews, and the county can terminate the contract at will with 120-day advance notice.

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“[T]he days of public employees-or anyone, for that matter-paying nothing toward their health-insurance costs are numbered, and rightly so. State and local taxpayers shouldn’t be asked to subsidize a public-employee perk that they themselves can only dream of.”

-Charles Chieppo, “When Public Employees Won’t Budge on Their Benefits,”, October 24, 2014.

“Private sector partners know their number one job is to focus on service to earn a paycheck […] We foster a teamwork environment and our private sector partners play an essential role and are partners in delivery services to the public.”

-Sandy Springs, GA Mayor Rusty Paul, on his city’s widely publicized use of private contractors to provide nearly all municipal services (outside of police and fire). Quoted in Patricia-Anne Tom, “Striking the Right Note: Despite some discord, properly managed public-private partnerships can find harmony,” American City and County, September 24, 2014.

“Getting managers to use performance information isn’t just a procedural or technical exercise. It is a fundamental change in how they do their day-to-day jobs and how they approach problem-solving. Bob Behn of Harvard’s Kennedy School of Government, says that using performance information is a leadership strategy, not a set of processes and procedures. In fact, GAO found that training managers on how to technically develop performance measures actually led to a decrease in their use by managers. GAO found that training managers on how to analyze and use performance information was far more conducive.”

-John Kamensky, IBM Center for the Business of Government, “Why Isn’t Performance Information Being Used?,” Government Executive, October 14, 2014.

“[The Indiana Toll Road concession] got into trouble because its traffic projections were overoptimistic. The 2007-09 recession cut into truck traffic at the same time overall driving miles fell. Revenue from tolls came up far short of forecasts, and with much of the deal financed by debt, ITR fell into arrears. It missed a debt payment in June and declared bankruptcy this month. The toll road, however, continues to function normally, with no disruptions expected because the lease requiring routine maintenance of the road remains in effect. The lease is now an asset that will go to the highest bidder – who will be obligated to abide by its terms – as ITR works through bankruptcy. The biggest losers will be ITR’s debt and equity holders.”

-Rick Newman, “How taxpayers fleeced well-heeled investors, for once,” Yahoo Finance, September 26, 2014.

“California’s effort to provide medical services in the state prison system has been an abysmal failure. For more than a decade, the state has provided what one federal judge called a system of “at times outright depravity,” with a standard of health service delivery that has failed to pass constitutional muster. […] There are alternatives. In 2012, California’s Legislative Analyst’s Office suggested that the state look at contracting out health care services. Dozens of states contract out a variety of correctional health services. Texas contracted with its state university system to provide inmate medical care. Kansas contracts all medical services with a private company. The LAO notes that of all models, contracting out through a competitive bidding process, with a clearly defined contract and sets of expectations, yields the best results in terms of service delivery and controlling costs for state governments.”

Orange County Register editorial board, “Editorial: California prison health care is seriously ill,” October 1, 2014.

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