Privatization & Government Reform Newsletter #19 (June/July 2015 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #19 (June/July 2015 edition)

June/July 2015 edition: asset sales, education, ridesharing, tolling, and more

In this issue:

PENSIONS: Paying Down Unfunded Pension Liabilities Through Asset Sales and Leases

From an accounting and legal standpoint, unfunded pension liabilities have not historically been treated in the same manner as general obligation bonds and other types of public debt. As such, there is an urgent need not only to account for them properly but also to fund them in ways that impose the least additional burden on taxpayers. One promising strategy that policymakers are starting to consider is the sale or lease of government assets-such as land, buildings, infrastructure or enterprises-and the use of proceeds to pay down existing pension debts and thereby put public pension systems on a healthier financial footing. A new Reason Foundation policy brief considers such an approach as a complement to comprehensive pension reform efforts that seek to reduce future unfunded liabilities by shifting away from traditional defined-benefit pension systems.

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EDUCATION: Reviewing Recent Trends in School Choice, Funding Portability

States have continued to move forward in their efforts for more school choice, according to the newly released Education section of Reason Foundation’s Annual Privatization Report 2015. The report reviews developments over the past year in education, with topics that include the expansion of school choice programs, charter schools, education savings accounts, student-based budgeting and school funding portability in the states.
» Annual Privatization Report 2015 homepage

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TRANSPORTATION: Truck-Friendly Tolls for 21st Century Interstates

It is clear that the nation’s Interstate highways desperately need a new, reliable funding source, and few industries need a healthy Interstate system more than the trucking industry. A new Reason Foundation study details why truckers should embrace the use of tolling to finance the reconstruction and modernization of aging Interstate highways, describes how all-electronic tolling can solve the industry’s previous privacy and logistical concerns about toll roads, and proposes a set of rules to ensure that the tolls paid by truckers and motorists are used only to rebuild and widen the newly tolled Interstate corridors. Further, the report outlines federal and state legislation that could eliminate the trucking industry’s previous objections to tolling.

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RIDESHARING: California’s Regulatory Climate Is Crushing Transportation Innovation

Earlier this month, a California Public Utilities Commission judge recommended that ride-booking company Uber be fined $7.3 million and suspended from operating in California because of claims the company has failed to provide documentation about where it is picking up passengers and concerns over whether “services are being provided in a nondiscriminatory manner enabling equal access to all.” This comes on the heels of the California Labor Commission’s Office recent ruling that an Uber driver was an employee, not a private contractor. Reason Foundation’s Baruch Feigenbaum writes in the Orange County Register that California’s latest attacks on Uber could have far-reaching repercussions for today’s sharing economy and are just the latest examples of how the state’s regulatory climate is strangling transportation innovation.
» RELATED: Let Uber and Taxis Compete

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PRIVATIZATION: Using PPPs to Tackle the National Parks’ Deferred Maintenance Challenges

The National Park Service (NPS) is facing a massive $11.5 billion maintenance backlog spanning roads, wastewater systems, and buildings within national parks, monuments, and recreation areas. As I write in a new article for the Property and Environment Research Center, the agency should look to states and local governments for inspiration on how to deal with its infrastructure challenges. Over the past several decades, cash-strapped state and local governments have turned to public-private partnerships to tap into private sector capital and expertise and to stretch limited dollars further. With the NPS’ centennial fast approaching in 2016, it’s time to seriously consider creative partnerships with the private sector to address the backlog and ensure parks are sustainable in their second century-not marred by chronic deterioration.

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WATER: Six Water Reforms California Can Take from Australia

As Californians search for solutions to the worst drought in the state’s history, they can look to the example of Australia, which has dramatically improved its management of water for agriculture over the past two decades. During a severe drought in the 1990s, Australia reformed its system for allocating water, creating better-defined water rights and a water market, which allows farmers, environmental groups and the government to buy, sell and trade water. Today, the price of water better reflects its scarcity and the cost of delivering water. A new Reason Foundation report finds that California should follow Australia’s lead and focus on six primary reforms to improve water rights and to create a robust market.

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INNOVATORS IN ACTION: Taking on Infrastructure, Pension Challenges in 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-focuses on Georgia’s recent enactment of Senate Bill 59, sponsored by State Senator Hunter Hill. The bill enables the state and local governments to use public-private partnerships for the private financing and development of “social infrastructure,” such as higher education facilities, schools, public health facilities and other public buildings. Sen. Hill also sponsored legislation this past session 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. I 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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Pew Pension Debt Report Finds $968 Billion in Unfunded Liabilities: According to the latest pension debt analysis from the Pew Charitable Trusts, the nation’s state-run retirement systems had an aggregate $968 billion in unfunded liabilities in 2013, representing the gap between pension benefits promised to government workers and the funds available to meet those obligations. The aggregate pension debt rose $54 billion from the previous year. The report suggests that even though unfunded liabilities may fall somewhat in the coming years, policymakers should not rely on long-term investment returns to close the gap and should instead enact funding policies aimed at paying down pension debt. The full report is available here.

S&P Releases State Pension Roundup: Last month, Standard & Poor’s released a report on the state-level pension situation, citing a state’s commitment to funding its pension contributions as a key consideration in determining credit quality. The report cites three key pension-related issues expected to shape the policy debate moving forward, including slowing reform efforts (in part the result of legal challenges to already-enacted reforms), a growing gap between well-funded and poorly funded pension plans, and better pension funding ratios in states committed to fully funding pension contributions on an actuarial basis. Overall, the report suggests that pensions will “remain a significant public policy and funding challenge for many state governments, and, due to demographic trends, a continuing source of expanding liabilities for most.”

New Mercatus Report Ranks States’ Fiscal Condition: The Mercatus Center of George Mason University recently released a new report detailing each state’s fiscal health relative to the U.S. average, creating an overall ranking on fiscal solvency. This overall ranking is based on performance in five categories: cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency. Overall, the top five states included Alaska, North Dakota, South Dakota, Nebraska, and Florida. These states have large amounts of cash on hand and few debt obligations in the short-term future, but nonetheless still face major issues financing their pensions and health care benefits systems. The bottom five states included Illinois, New Jersey, Massachusetts, Connecticut, and New York. Unfunded pensions and health care benefits are largely the reason these states have low cash on hand and large debt obligations. The full report is available here.

Port Authority Selects Partner for LaGuardia Airport PPP: In late May, the Port Authority of New York & New Jersey announced the selection of a private consortium-LaGuardia Gateway Partners-for a $3.6 billion PPP to replace the aging Central Terminal Building with a larger, world-class facility, the first phase of an airport redevelopment plan. LaGuardia Gateway Partners-a consortium that includes Vantage Airport Group, Skanska, Meridiam, Walsh Construction, HOK and Parsons Brinckerhoff-will finance over $2 billion of the project’s cost and will be responsible for the new terminal’s design, construction, operation and maintenance. The Port Authority will now begin negotiations with LaGuardia Gateway Partners to finalize its proposal for developing, constructing and operating the terminal as well as the financial terms of the deal. More information is available here and here.

Strong Bidder Response to Ohio State University Energy Management PPP: Columbus Business First reported late last month that Ohio State University (OSU) has received submissions from 44 companies in response to its February request for qualifications from firms interested in a potential 50-year lease of the university’s energy system operations. University officials ultimately deemed 40 of the responding firms as qualified. OSU currently spends $100 million per year on energy and faces at least $250 million in needed energy efficiency projects, prompting the pursuit of a public-private partnership to reduce energy spending and tap private financing for costly efficiency upgrades, which would allow the university to redirect resources toward supporting its core academic mission. The university anticipates issuing a request for information to the qualified bidder pool in the fall to seek general details of how a PPP might be structured, followed by a request for detailed proposals in 2016. More information on the energy management initiative is available here.

Indiana Amends Private Lottery Management Contract: Last month, the Hoosier Lottery Commission approved an amendment to Indiana’s contract with private lottery manager GTECH Indiana to lower the amount of net lottery revenue it will promise to the state in exchange for lowering its management fee, changing the incentive payment structure, and providing the state an upfront payment of $18.25 million. The company has missed its revenue targets twice since taking over lottery operations in 2012, in large part due to a slowdown in Powerball sales that is affecting lotteries nationwide. Rather than cancel the contract, commissioners felt that amendment was a better option, and they remain pleased with the vendor’s performance overall, relative to other states, according to the Fort Wayne Journal Gazette.

Ohio Plans Second Prison Sale, Other Asset Divestiture: The Columbus Dispatch reports that Ohio officials plan to sell the North Central Correctional Institution in Marion to a private entity, which would make it the second state prison sold to a private prison operator in recent years; the state sold the Lake Erie Correctional Institution to Corrections Corporation of America in 2011. In addition, the state plans to sell 19 other properties, including a Toledo office tower, a halfway house in Lebanon, and several buildings in Columbus. The sales were authorized in the recently enacted biennial state budget.

New Nevada Law Allows Privatization for Some Medicaid Services: Last month, Nevada Gov. Brian Sandoval signed into law Senate Bill 514, which allows the state to consider privatizing the delivery of Medicaid services for elderly, blind and disabled persons using a managed care model. The legislation would require a review of the fiscal impact of privatization by a legislative committee before any request could be sent to the federal Centers for Medicare and Medicaid Services, which oversees the Medicaid program. The Las Vegas Review-Journal has reported on the legislation here and here.

Chicago Skyway Concessionaire Seeks to Sell Remaining Lease Interest: The Chicago Sun-Times reported late last month that the concessionaire operating the Chicago Skyway under a 99-year lease is interested in selling its remaining interest in the lease. The Macquarie and Cintra-led consortium entered the lease in 2005, taking over operations and management of the Skyway in exchange for a $1.8 billion upfront payment.

Jindal Vetoes Anti-Privatization Legislation: For the third year in a row, legislation sponsored by Louisiana State Rep. Kenny Havard modeled after Massachusetts’s Pacheco Law-widely regarded as the most onerous anti-privatization law in the nation-passed the legislature but was vetoed by Gov. Bobby Jindal last month. House Bill 137 was designed to prohibit state agencies from entering into many privatization contracts without prior legislative review and approval-significantly increasing political risks to potential bidders and politicizing what are traditionally decisions made at the discretion of executive agencies-as well as subject routine contracting decisions to onerous pre-procurement and contract review processes, including a required analysis assuming the hypothetical costs of public employees continuing to provide the service “in the most cost-efficient manner” (presumably to facilitate required cost comparisons with bids received from private firms). Similar legislation introduced by Havard in 2013 and 2014 also passed the House unanimously but stalled in the Senate Finance Committee.

Aramark Ends Michigan Prison Food Contract, Extends Ohio Contract: Earlier this month, Michigan reached a mutual agreement with prison food service vendor Aramark to end its three-year, $145 million contract over a year early after the two sides failed to agree on amendments to the contract related to food menus and billing. Aramark will be replaced by Trinity Services Group, the runner-up in the original procurement, under a contract that is more expensive for the state but still within the 10% cost savings threshold relative to public sector provision as required by state law. Meanwhile, Ohio prison officials announced plans to extend Aramark’s three-year prison food service contract through mid-2017 after rejecting a counteroffer submitted by the Ohio Civil Service Employees Association union seeking to return the service to government operation. The state’s Department of Administrative Services found that the union proposal underestimated food costs and failed to factor in increased employee wages.

Montgomery County, MD Council Advances Partial Liquor Privatization: Earlier this week, the Montgomery County (Maryland) County Council approved a resolution asking the state’s General Assembly and governor to amend state law to allow private businesses to sell wholesale specialty beer and wine products in the County and to allow the County to impose a new wholesale distribution fee to replace revenues lost through newly privatized sales. The resolution was recommended by the council’s Ad Hoc Committee on Liquor Control, which since December has been studying alternative models for the distribution and sales of alcoholic beverages in the County, which currently controls the wholesale distribution and sale of nearly all alcohol within its borders. The full resolution and supporting information is available here.

New Orleans Renews Wastewater Contract: The Sewerage & Water Board of New Orleans (S&WB) has renewed a contract with Veolia to continue managing and operating the city’s two wastewater treatment plants. The ten-year, $122 million contract will include support for capital improvements, hurricane recovery, septage receiving and biosolids disposal. The S&WB estimates that the partnership has saved taxpayers more than $35 million so far. “Our relationship has produced a stellar record for clean water quality while saving tens of millions of dollars for ratepayers,” S&WB Executive Director Cedric S. Grant said in a press release.

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“When states contribute less to their pension systems than their actuaries recommend — unless a statutory formula prescribes the contribution — it is almost always a symptom of underlying fiscal misalignment. When a state skimps on pension contributions to temporarily dodge the issue and free up revenue, it can claim that “technically” it has a balanced budget. By contributing less than what is actuarially recommended, a state can more easily finance current operations, but that adds to its long-term liabilities. In other words, it’s a way of funding current operations with long-term debt”

-Standard & Poor’s, “U.S. State Pension Roundup: Recent Court Rulings And Reform Slowdowns Make Active Management Essential,” June 18, 2015.

“The American way would be to treat our road system like a utility, the same way we treat electricity or water. We have the technical capability now, thanks to GPS, to charge at the gas pump for every mile we use rather than the current practice of collecting a per-gallon tax. Because of the high cost of adding capacity anywhere, but especially in urban areas, the per-mile charge would of course be highest when demand is highest, during peak periods, and lowest in the middle of the night. Rather than denying drivers access to the system, demand would be managed through price signals that would let drivers decide how and when it is worth it to use the system.

The concept of congestion pricing isn’t new, but it has typically been considered for only a few highways within a system or for higher-toll express lanes. In contrast, we can, and do, meter every drop of water and every kilowatt-hour of electricity. It doesn’t make sense to put a price on some components of the system and give away the rest for free. ”

-Scott Lazenby, “Why We Should Pay for the Highway Miles We Use,”, July 17, 2015.

“[L]et’s say a public pension fund has a 77% funding ratio, which means that it has assets equal to 77% of liabilities. For greater simplicity, let’s say it has assets of $77 and liabilities of $100, and therefore an unfunded liability of $23 (100-77). [Using a 7.5% assumed rate of return], liabilities grow 7.5% per annum. That means liabilities that today equal $100 will in one year equal $107.50. For the unfunded liability not to be larger than $23 at that time, that means assets have to grow from $77 to $84.50 (107.50-84.50 = 23). That means that the pension fund needs to earn 9.7% ($77 times 1.097 = 84.50). Anything less and the unfunded liability will grow.”

-David Crane, cited in Jack Dean, “David Crane explains the ramifications of CalPERS’ 2.4% return for the past year,”, July 16, 2015.

“The chemicals detected in e-cigarette flavorings present an extremely low level of risk when compared to the chemicals in tobacco smoke. The difference is essentially between a behavior that results in destruction of the lungs and a behavior that may cause, at the worst, mild respiratory irritation. Let’s keep a sense of perspective here. Most of the individuals who are regular users of e-cigarettes are former smokers who have quit or current smokers. In either case, switching to vaping is the most important thing they can do to protect their health, assuming they are unable to quit nicotine use completely, which is probably the case for most vapers (that is why they tried vaping in the first place; had they been able to quit cold turkey, they would have).”

-Dr. Michael Siegel, “Study on Potential Toxicity of E-Cigarette Flavorings Produces Unwarranted Scare,” The Rest of the Story blog, July 16, 2015

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Special thanks to Reason Foundation intern Brenna Butler for assistance in developing the News Notes for this newsletter.

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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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