Privatization & Government Reform Newsletter #15 (February 2015 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #15 (February 2015 edition)

February 2015 edition: public opinion on pension reform, liquor privatization, transportation recommendations for Congress, and more

In this issue:

PENSIONS: Does the Public Support Pension Reform?

Conventional wisdom suggests that while pension problems are likely to be a serious discussion in fiscal and budget committees in city halls and statehouses, substantive pension reform efforts will be given short-shrift, in part due to a lack of interest among the public on such a complex issue, as well as misinformation about the effects and political repercussions of reform. But what if the conventional wisdom is wrong? New polling suggests that it may indeed be. Not only does the public understand the importance of the issue, but there is also widespread support for reforms.

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TRANSPORTATION: Reauthorization Recommendations for Congress

Approximately every six years, Congress reauthorizes U.S. surface transportation legislation, providing an opportunity to make changes and updates that affect millions of Americans. Reason Foundation has identified six programs or policies that need to be changed in the next reauthorization.
» Eliminate TIGER Grants
» Require Metropolitan Transportation Plans to Consider Congestion Reduction
» Add Taxpayer Protections to the Railroad Loan Program
» Eliminate Surface Transportation Funding for Non-federal Modes
» Simplify Conformity Regulations for Regional Transportation Plans
» Simplify DOT Regulations Regarding Metropolitan Transportation Planning

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PRIVATIZATION: Pennsylvania House Passes Liquor Privatization Bill

For the second time since 2013, legislation that would privatize the sale and distribution of wine and distilled spirits in Pennsylvania has passed the House, which voted yesterday to approve House Bill 466 by a 114-87 margin. HB 466-sponsored by Speaker Mike Turzai-would privatize Pennsylvania’s state wholesale wine and spirits monopoly, gradually close the hundreds of state-owned liquor stores, and create 1,200 private retail and distribution licenses for wine and spirits.

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ENVIRONMENT: Repealing Plastic Bag Bans Good for Shoppers, Environment

A statewide plastic bag ban signed into law by California Gov. Jerry Brown won’t come into force until after the voters have a say in November 2016. While Californians can be proud of their commitment to environmental protection, it has sometimes led to perverse results, and local efforts to ban lightweight plastic bags in is a case in point. As Reason Foundation vice president of research Julian Morris recently wrote in the Orange County Register, such bans have been sold on their supposed environmental merits, but almost certainly cause more emissions to the environment, increase the use of natural resources-including oil and water-and do little to reduce litter or marine pollution.

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INNOVATORS IN ACTION: Reforming Public Safety Pensions in Tequesta, Florida

The latest installment of Reason Foundation’s Innovators in Action interview series-which profiles innovative policymakers in their own words, highlighting good government efforts delivering real results and value for taxpayers-focuses on the Village of Tequesta, Florida’s 2010 reforms to its public safety defined-benefit retirement plans. Village officials negotiated significant reforms to police and firefighter pensions in the collective bargaining process-including a full transition to a defined-contribution, 401(k)-style system for new police officers and a realignment of benefits for new firefighters entering their defined-benefit pension system-putting the plans on a path toward sustainability. I recently interviewed Tequesta Village Manager Michael Couzzo on the reforms enacted, the resulting benefits and more.

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INFRASTRUCTURE: The Private Cure for Crumbling Waterway Infrastructure

The locks and dams on our nation’s rivers are decaying and require billions in investment, but given our current fiscal condition, it is unlikely that the current or next administration will find the political will and support to fund the cost of rebuilding these assets. According to former Conrail executive William Newman, it doesn’t have to be this way. In a new Reason Foundation article, Newman writes that given their economic value and potential attractiveness as commercial investments, the locks are a classic federal asset ripe for either: 1) privatization; 2) a long-term concession (lease) to private investor/operators; or 3) a public-private partnership, with preference in that order.

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New Research on Public Pension Underfunding: The failure of many states to properly fund their pension systems has been a well documented reality over the past few years, and unfunded liabilities are estimated to be as high as $4 trillion. A little examined question is why policymakers have been so particularly bad at fulfilling their duty of making full annual required contributions to pension systems. Reason Foundation colleague Anthony Randazzo recently teamed up with USC political scientist Michael Thom to examine this question and found that there are various fiscal, political, and institutional factors at work, and no one-size-fits-all answer. Their results were recently released by the journal State and Local Government Review; the article is available here.

GAO Releases Latest Biennial High Risk List: Earlier this month, the Government Accountability Office (GAO) released the latest edition of its biennial High Risk List, identifying 32 federal activities with a high risk for waste, fraud, abuse or mismanagement, or are in need of reform. GAO added two new areas in this edition, covering information technology acquisitions and operations and veterans affairs health care, and it also introduced new star-shaped graphics to indicate degrees of progress in meeting five criteria for removing an area from the High Risk List, which include leadership commitment, agency capacity, an action plan, monitoring efforts, and demonstrated progress. Details on the list, a full report, and podcast are available on the GAO’s High Risk List homepage.

A Fix for New Jersey Pension Mess? New Jersey’s severely underfunded government employee pensions made national news this week in the wake of a Superior Court judge’s ruling that Gov. Chris Christie’s administration violated a 2011 pension reform law by cutting over $1.5 billion from the state’s legally required pension contribution in this year’s budget; the administration plans an appeal. The ruling came a day before Christie’s annual budget address, in which he endorsed a “roadmap to reform” developed by the New Jersey Pension and Health Benefits Study Commission he appointed last year to develop comprehensive solutions for the state’s looming pension and retiree healthcare crises.

Among other reforms, the Commission recommends freezing the state’s current defined-benefit pension plans to any new accruals or employee contributions and shifting all current and future employees to a cash balance plan, which blends some aspects of defined-benefit pensions with features of a 401(k)-style defined-contribution plan. The Commission’s full report and recommendations are available here.

Pennsylvania Gov. Wolf Creates Innovation Unit: On February 5th, new Pennsylvania Governor Tom Wolf signed Executive Order 2015-04 establishing a new Governor’s Office of Transformation, Innovation, Management and Efficiency. The order calls for agency heads to solicit employee input and identify key staff to form innovation teams, enhances interagency coordination, and emphasizes public-private partnerships in order to find an immediate $150 million in cost savings to help close the Commonwealth’s current $2.3 billion budget deficit. In addition to seeking internal cost savings ideas from employees, the new office will explore new opportunities to partner with the private sector and better leverage the state’s collective buying and purchasing power. The executive order is available here.

Nearly Half of PA Municipalities Have Distressed Pension Plans: Earlier this month, the Pennsylvania Department of the Auditor General released a report finding that of the 1,223 municipal governments that administer pension plans, 562 of them (46%) administer plans that are “distressed” and underfunded by at least $7.7 billion. The aggregate unfunded liability is up $1 billion since the previous edition of the report was issued two years ago. Philadelphia topped the list of distressed municipalities with its $5.3 billion unfunded liability, followed by Pittsburgh at $484.6 million. The full report is available here.

New Report on Water PPPs: A new report from the Horinko Group provides a useful primer for local public officials on how different types of public-private partnerships (PPPs)-including management consulting contracts, operations and maintenance contracts, concessions/leases, and design-build-operate agreements-can be used to meet a local government’s unique water and wastewater infrastructure needs. It includes discussions regarding ways to assess water/wastewater needs, selecting the best PPP model, and best practices in PPP implementation. The full report is available here.

Texas Pols Seek to Improve State Contracting: Shortly after taking office last month, new Texas Gov. Greg Abbott issued a memorandum endorsing contracting reform legislation-Senate Bill 353, sponsored by Sen. Jane Nelson-aimed at improving transparency and accountability in the contracting process. Among its provisions, the bill would require public disclosure of all no-bid contracts (and a public justification for using them); require agency employees involved in contracting to disclose any possible conflicts of interest; prohibit contracts with firms in which agency leaders or staff have a financial interest; and require the agency’s board chair or director to sign any contract valued over $1 million. The legislation comes in the wake of a January 2015 report from the Texas State Auditor’s Office reviewing 14 contract audits conducted since 2012 that found that while state agencies generally complied with contract planning and contract formation requirements, they “did not consistently comply with contract procurement and contract monitoring requirements.”

Georgia Social Infrastructure PPP Legislation Reintroduced: After coming close to passage in 2014, the Georgia General Assembly will again consider social infrastructure PPP enabling legislation in the 2015 session. The “Partnership for Public Facilities and Infrastructure Act” (Senate Bill 59), sponsored by Sen. Hunter Hill, would authorize state agencies, local governments, school boards and other governmental units to use PPPs to develop any infrastructure project on government-owned or leased land that serves a public purpose and would also create a Partnership for Public Facilities and Infrastructure Act Guidelines Committee to prepare model guidelines for governmental authorities to use in developing PPP projects. A very similar bill passed the Senate and the House Committee on Governmental Affairs in 2014 but failed to receive a vote in the full House. Hill has modified the 2014 legislation to address concerns raised over provisions related to unsolicited PPP proposals that private sector firms would be allowed to submit to state agencies, according to the Atlanta Business Chronicle.

Indiana to Contract Out License Plate Production: The Courier-Journal reported late last month that the state’s Bureau of Motor Vehicles plans to end its contract with a company that employed maximum-security state prisoners to produce license plates, instead opting to shift production to a new vendor, Intellectual Technology Inc., in a contract estimated to save the state $14 million over five years.

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“Many economists disagree with GASB and argue that it is more appropriate to measure funding status of public pensions using a lower riskless rate of return analogous to the corporate bond rates used to discount private sector pensions, such as a long-term Treasury rate, instead of a higher expected long-run investment return on assets. They reason that there is an implicit public guarantee that assures public pensions will be paid regardless of investment returns, which makes it hazardous to determine funded status and make benefit promises based on anticipated investment returns that may not come to pass. In lay terms, they say using expected investment returns amounts to counting the chickens before they hatch.”

-Christopher M. Klein, Chief Judge of the United States Bankruptcy Court, Eastern District of California, “Opinion Regarding Confirmation and Status of CalPERS,” February 4, 2015, p.21.

“A funded ratio of 80% should not be used as a criterion for identifying a plan as being either in good financial health or poor financial health. No single level of funding should be identified as a defining line between a ‘healthy’ and an ‘unhealthy’ pension plan. All plans should have the objective of accumulating assets equal to 100% of a relevant pension obligation, unless reasons for a different target have been clearly identified and the consequences of that target are well understood.”

-American Academy of Actuaries, “The 80% Pension Funding Standard Myth,” Issue Brief, July 2012.

“Illinois’ pension debt is so large that it would take three years of a complete government shutdown, during which the entire general fund went toward pensions, just to break even. That means no funding for schools, no money for public safety and nothing for health care and human services. […] This $111 billion pension shortfall means the state has only 39 cents of every dollar it should have in the bank today to pay for future benefits. In the private sector, these funds would be deemed bankrupt.”

-Benjamin VanMetre, “State of the State: 10 Pension Facts Every Illinoisan Should Known,” Illinois Policy Institute, February 3, 2015.

“If you cover current obligations by borrowing money, you’re on an unstable course.”

-Former New York lieutenant governor Richard Ravitch on pension obligation bonds, cited in Aaron Kuriloff, “Pension Bonds: State and Local Official Should Proceed with Caution,” The Wall Street Journal, February 6, 2015.

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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.

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