Privatization & Government Reform Newsletter #17 (April 2015 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #17 (April 2015 edition)

April 2015 edition: federal fiscal outlook, ridesharing, tolling, e-cigarettes, and more

In this issue:

FEDERAL: GAO Warns on Federal Fiscal Outlook

Earlier this month, GAO released its annual Federal Fiscal Outlook, finding a fundamental, long-term imbalance between revenue and spending, which if unaddressed will lead to an unsustainable scenario of ever-increasing debt as a share of GDP. The growing fiscal imbalance at the federal level is largely a result of an aging population and the associated spending on entitlement programs. Further, the report suggests that the growing debt and cost of interest will limit the federal government’s ability to respond to future challenges (e.g., financial or natural disasters) and emerging fiscal issues.

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REGULATION: Legalize Ridesharing and Remove Onerous Taxi Restrictions

Uber, Lyft and other ridesharing services exemplify the efficiency of free and unregulated markets, injecting competition that should lead to an improvement in the overall quality of ride services and pressure to innovate outdated taxi services. However, angry taxi company owners and ideological politicians have stepped in to push for the extension of the traditional regulations to the ridesharing services. In a recent Reason Foundation article, Carol Park and Baruch Feigenbaum explain why this approach is problematic. The solution is not to ban ridesharing, they argue, but rather loosen laws to end the taxi industry’s monopolistic practices.

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PUBLIC HEALTH: Misleading on E-Cigarette “Gateway” Theory

Anti-smoking activists and public health officials opposed to electronic cigarettes argue that vaping is a “gateway” to conventional cigarette smoking, especially among youth. To the contrary, new data released-and sensationalized-by the U.S. Centers for Disease Control show that vaping and smoking rates among teenagers are moving in opposite directions-vaping is up, smoking is down. In a recent article, Reason Senior Editor Jacob Sullum writes that rather than admit they were wrong about the e-cigarette gateway theory, vaping opponents continue to imply, in defiance of all scientific evidence, that there is no important difference between the two kinds of nicotine delivery devices.

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HIGHWAYS: Top Priorities for Interstate Tolling

Two major problems in surface transportation are: (1) the aging and increasingly inadequate Interstate highway system, and (2) chronic urban freeway congestion, with direct costs to highway users exceeding $120 billion per year. Tolling excels at both generating revenue to finance the creation of new highway capacity and, when implemented on a variable basis, providing the best available means of reducing freeway congestion on a long-term, sustainable basis. In a recent Public Works Financing column, Reason Foundation’s Robert Poole explores where tolling might offer America’s highway users the greatest bang for the buck.

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PENSIONS: Governance & Decision-Making in the Underfunding of Public Sector Pension Plans

Cities and states are struggling to meet the financial demands of skyrocketing public employee pension contributions, and the immense size of unfunded pension liabilities is forcing agencies to amortize these debts over decades, transferring the financial burden to future generations of taxpayers. In a recent article, Reason Foundation senior fellow and former San Jose (CA) city councilman Pete Constant writes that as policymakers pursue meaningful reform of pension systems, they will be merely trimming at the edges unless there is a clear focus on structural issues and decision-making processes to address failed governance. This means there must be a concerted effort to address the systemic failures, ensure risk is managed and shared, and prevent intergenerational transfers of debt.

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CRIMINAL JUSTICE: Reforms to Reduce the High Cost of Incarceration in Florida

Over the past few decades, Florida has passed a number of laws that have dramatically increased criminal sentences, and enacted others that have limited the amount of gain-time credits-or credits for good behavior or participation in rehabilitative programming-inmates may earn toward a reduction of their sentences. Taken together, these laws have contributed to Florida’s burgeoning prison population and increased costs for taxpayers. In order to limit the unintended consequences and negative impacts of these laws, a new Reason Foundation report suggests numerous reforms legislators could pursue that would help reduce the state’s prison population and corrections expenditures without compromising public safety. Proposed reforms include eliminating mandatory minimum sentences, enacting broad safety valve legislation to increase judicial discretion, limiting the scope of Florida’s habitual offender laws, and allowing nonviolent and low-level offenders to earn additional incentive gain-time credits toward a reduction in their sentences.

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PARKS: Massive Maintenance Backlog Threatens National Parks

With the centennial of the National Parks System fast approaching, there will be much focus on the parks’ history and legacy in the coming months. What’s hopefully not lost in the discussion is that our parks are deteriorating faster than we can fix them, threatening their long-term viability. A new National Park Service report finds that the system is facing nearly $11.5 billion in deferred maintenance; national parks in California alone account for $1.72 billion of the backlog. In a recent Orange County Register article, I write that the operating model for national parks is going to have to change significantly if they’re going to survive another century.

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GAO Issues Latest Edition of Fragmentation, Overlap, and Duplication Report: The U.S. Government Accountability Office (GAO) recently released its 2015 annual report on fragmentation, overlap and duplication that identifies 66 new actions that federal agencies and Congress could take to improve the efficiency and effectiveness of government in 24 areas. The report finds that the executive branch and Congress have made some progress in addressing the approximately 440 actions that GAO has identified in its past annual reports. A total of 37% of these actions were addressed, 39% were partially addressed, and 20% were not addressed. Actions taken over the past four years have resulted in over $20 billion in financial benefits, with an additional $80 billion in financial benefits anticipated in future years. The report is available here.

GFOA Issues Warning on Pension Obligation Bonds: Earlier this year, the Government Finance Officers Association (GFOA) issued an advisory warning state and local governments against the use of pension obligation bonds-taxable bonds issued to pay down unfunded pension liabilities-given the significant investment risks. “Failing to achieve the targeted rate of return burdens the issuer with both the debt service requirements of the taxable bonds and the unfunded pension liabilities that remain unmet because the investment portfolio did not perform as anticipated,” according to the GFOA advisory, which is available here.

New Report on the Pension “Crowd-Out” Effect in California: Earlier this month, the Manhattan Institute released a new report by Stephen Eide finding that between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services such as police and fire, as well as quality of life services such as parks and libraries. Further, the report suggests that if municipalities were to devote what they currently spend on pension debt service to basic maintenance, some could reduce all or most of their infrastructure backlog within a few years. The full report is available here.

Prescott, Arizona Council Refers Unfunded Pension Liability Sales Tax Proposal to Ballot: Speaking of the pension “crowd-out” effect, in what may be an unprecedented move nationally, earlier this week the Prescott (AZ) city council voted to refer a proposed 0.55% sales tax to the ballot this August that would be dedicated to paying down the city’s unfunded public safety pension liabilities over the next 16-20 years. The city’s current unfunded safety pension liability stands at $70 million and would grow to an estimated $165 million over the next two decades if left unaddressed, according to city officials. City Manager Craig McConnell told the council that under the status quo, the city would need to cut roughly $2 million from its budget next year-equivalent to the entire public library budget-and that over the long term, if “we do not deal with this liability, it will be devastating” to city operations, according to The Daily Courier.

Senators Reintroduce Social Impact Financing Legislation: Last month this newsletter reported that Congressmen Todd Young (R-IN) and John Delaney (D-MD) re-introduced their bipartisan social impact financing legislation-the Social Impact Partnership Act (H.R. 1336)-to allow state and local governments to compete for a share of a federal funding allocation dedicated to pay-for-success projects addressing recidivism, long-term unemployment, reduced welfare dependence, and other social challenges currently targeted by federal programs. Earlier this week, Senators Orrin Hatch (R-UT) and Michael Bennet (D-CO) introduced a companion bill (S. 1089) in the Senate. “These public-private partnerships represent a shift to a model of government where results matter and where we pay for competence,” Senator Bennet said in a press release. Reason’s interview with Congressman Young on the subject last August is available here, and more information about the current legislation is available here.

Indianapolis Airport Authority Seeks Private Partner for Water/Wastewater Project: Late last month, the Indianapolis Airport Authority issued a request for qualifications seeking to partner with a private firm to reduce the total costs and improve the efficiency of the airport’s wastewater and stormwater systems. The authority is considering a lease structure that would include the disposal of chemicals related to deicing operations, solving capital investment needs resulting from growth, and mitigating proposed or anticipated utility rate increases. In seeking a partner to operate and maintain the systems, the authority “wishes to focus its attention on its core business of owning and operating a world-class facility for private, commercial and business aviation,” according to the request. Responses are due on May 11th.

Miami-Dade County Officials to Seek Advisors for Criminal Justice Complex PPP: reported last week that officials in Miami-Dade County, Florida intend to launch a procurement for legal and financial consultants to advise them on a potential public-private partnership to develop a $390 million criminal justice complex to house courts and jail facilities and replace the county’s aging courthouse. The move follows the defeat of a bond issue for the proposed facility by voters last November and the subsequent passage of a county resolution to explore a potential partnership with a private team to design, build, finance, operate and maintain the proposed facility.

New Jersey Communities Exploring Water Privatization: In the wake of a newly adopted state law allowing municipalities to sell or lease their water or wastewater systems without a public referendum if an emergent condition exists, policymakers in three New Jersey communities are exploring privatization. Last month, Woodbury’s city council passed a resolution authorizing a procurement to hire a consultant to evaluate the value of the city’s water and wastewater system, a precursor to a potential sale of a system facing a need for significant upgrades, according to the South Jersey Times. That same month, officials in Bridgeton created a special committee to evaluate the potential privatization of the city’s aging water system as a way to lower costs, according to the The Press of Atlantic City. And earlier this month, city leaders in Millville scrapped a resolution that would have established a privatization study committee, but instead passed a motion to solicit private bids for the development of a capital improvement plan for the two departments that would identify the costs of keeping the systems under city ownership, according to The Daily Journal.

Xerox Wins New York State Medicaid Technology Contract: Last week, New York State’s Department of Health selected Xerox as its partner in a five-year, $564.9 million project to roll out a next-generation management information system to overhaul the technology supporting its expanding Medicaid program and shift to a managed care model. “Xerox is giving New York the flexibility to customize our Medicaid program so we can best serve both the people who rely on this system and the healthcare providers who are on the front lines of caring for them every day,” state Medicaid Director Jason Helgerson said in a press release.

Mississippi Seeking New Prison Healthcare Contract: Earlier this week, the Associated Press reported that the Mississippi Department of Corrections is recommending the selection of a new prison healthcare provider to save $2 million relative to its current contracts with multiple vendors. The department is seeking to award a $149.2 million, three-year contract to Centurion of Mississippi LLC-a joint venture between Centene and MHM Services-starting in July. “When we decided to do the request for proposals, we believed by having one vendor to provide health care services we would be able to obtain a better price,” Mississippi Corrections Commissioner Marshall Fisher told the Associated Press.

Texas Cancels Procurement for Private Manager for State Psychiatric Hospital: Last month, the Texas Health and Human Services Commission (HHSC) cancelled a procurement for a private operator of the state-run Terrell State Hospital after the Texas State Auditor’s Office issued a report finding that the HHSC and the Department of State Health Services did not fully comply with the HHSC’s contract planning and procurement processes. Last October, the department announced that it had selected Correct Care Solutions as the winning bidder for a contract to take over operation of the hospital, but implementation was delayed by a legislative request to have the state auditor review whether HHSC properly followed the procurement process and whether the privatization is authorized under state law.

Alabama State Auditor Proposes Privatizing State Agency Auditing: Last week, Alabama State Auditor Jim Zeigler issued a press release proposing to privatize the auditing of state agencies to save an estimated $13 million per year through the elimination of the Examiners of Public Accounts agency budget. Zeigler cites a lack of timeliness in the current auditing process and recent moves by some agencies to hire outside CPA firms using funds from their own budgets, which he suggests “speaks loudly about a problem in our auditing system.” Zeigler proposes using the savings to help close an $11 million deficit in the state parks system and avoid park closures.

O’Fallon, Illinois Voters Defeat Water Privatization Referenda: City officials in O’Fallon received responses from three potential bidders for a 40-year lease of the city’s water and wastewater systems to generate a $50 million upfront payment that would be dedicated to a variety of infrastructure improvements across the city. However, the fate of the initiative was clouded by the results of two nonbinding referenda defeated by city voters earlier this month, according to the Belleville News-Democrat. The referenda asked voters if they would approve both a sale and a lease of the water system, as well as only a lease.

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“[O]ne objection to shifting newly hired public employees to defined contribution pensions is the claim that doing so entails large ‘transition costs’ owing to a closed [defined benefit] pension plan taking less risk with its investments. If these claims were true, the massive world-wide transition from DB to DC pensions that we already have witnessed would not have taken place.”

-Andrew Biggs, “Transition Costs and Public Employee Pension Reform,” Testimony before the House State Government Committee, Commonwealth of Pennsylvania, March 24, 2015.

“America’s infrastructure needs vary greatly from project to project. Different investors have grown up to finance distinct needs. Private investment can present a genuine opportunity for governments and communities as long as both sides are attuned to the needs and requirements of the other and the right match is made.

Some want only mature infrastructure assets that they can fix up and sell. Some pursue high risk/high return projects in which they will get paid only if their projections are realized and, if not, the government gets a cost-free project. A pension fund, for instance, might be willing to build a project from scratch even if they don’t realize their return for a number of years. Other investors may agree to invest in infrastructure unable to be supported from user fees such as structurally deficient bridges, in exchange for regular payments from government over a period of time.”

-Michael Likosky, “Taxpayers Benefit If Investors Absorb Risks of Infrastructure Projects,” The New York Times, April 8, 2015.

“The use of (pension obligation bonds, or POBs) rests on the assumption that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds. However, POBs involve considerable investment risk, making this goal very speculative. […] Failing to achieve the targeted rate of return burdens the issuer with both the debt service requirements of the taxable bonds and the unfunded pension liabilities that remain unmet because the investment portfolio did not perform as anticipated. In recent years, local jurisdictions across the country have faced increased financial stress as a result of their reliance on POBs, demonstrating the significant risks associated with these instruments for both small and large governments.”

-Government Finance Officers Association, Advisory on Pension Obligation Bonds, January 2015.

“One big change afoot: Whereas previous technological developments often led to greater government centralization, the next wave of transformative technologies are more likely to herald a shift to a more distributed model of governance.”

-Janet Foutty and William D. Eggers, “Technology and Government’s Distributed Future,” Government Executive, April 14, 2015.

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