Privatization & Government Reform Newsletter #24 (March 2016 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #24 (March 2016 edition)

March 2016 edition: pension reform, PPP toll road bankruptcies, urban containment, and more

In this issue:

PENSIONS: Did Pension Reform Improve the Sustainability of Pension Plans?

There is a long-running national debate over whether closing public sector defined benefit plans and replacing them with defined contribution plans-as states like Michigan and Alaska did over a decade ago-improves the sustainability of retirement systems or creates further problems. In a new Reason Foundation policy study, Anthony Randazzo and Truong Bui apply a new actuarial model to the cases of Michigan and Alaska to provide counterfactual analyses of what would have happened in those states had reforms never been adopted. They find that both states are better off having closed defined benefit plans. Unfunded liabilities have increased in both states since their reforms, but for reasons unrelated to the actual reforms: both states had underperforming investment returns and failed to make 100% of their required employer contributions. Had Michigan and Alaska not closed their pension plans, unfunded liabilities would be even higher today than under actual experience.
» ARTICLE: Confronting Myths About Closing Defined Benefit Plans
» INFOGRAPHIC: How Public Sector Defined Benefit Pension Plans Are Funded

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TRANSPORTATION: Implications of Texas Toll Road Bankruptcy Filing

Opponents of public-private partnership (PPP) toll roads have seized on the Texas SH 130 Concession Company’s recent Chapter 11 bankruptcy filing as evidence that PPPs are a bad idea. While that may turn out to be the case for the bondholders and the equity providers, the restructuring should have no adverse impact on toll road customers or on taxpayers, according to Reason Foundation’s Robert Poole. In fact, Poole notes that there have been several such bankruptcy filings for U.S. toll roads during the past decade, and in none of these cases have toll road users been adversely affected, nor have there been any taxpayer bailouts.

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LAND USE: The Social and Economic Consequences of Urban Containment

Some cities are limiting their urban footprint to curtail greenhouse gas emissions through so-called “urban containment” policies that seek to densify urban areas and substitute transit, cycling and walking for car and other light duty vehicle use. After evaluating key research on these policies, a new Reason Foundation report finds that implementation of urban containment will likely lead to more-congested cities and less mobility, as well as lower discretionary incomes as house prices rise relative to incomes. The result would be a lower standard of living and greater poverty.

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CRIMINAL JUSTICE: Reforming Connecticut’s Pre-Trial System

In Connecticut, individuals charged with crimes face very different outcomes before trial-outcomes tied more to how much money they have than the risk they pose to society. For example, those who can afford to post bail remain free until their trial date, with little accountability. But poor defendants-even those charged with low-level, nonviolent crimes-often sit in jail until their trial dates, costing taxpayers thousands of dollars without preserving public safety, or else they just plead guilty, regardless of their actual complicity. This has led to a pre-trial system that fails to prioritize public safety and that is neither just nor cost-effective. A new report by Reason Foundation and the Yankee Institute for Public Policy makes the case for systemic reform by replacing monetary bail with a system that uses effective alternatives based upon risk assessment.

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PRIVATIZATION: User Fees for River Recreation?

Recent federal legislation authorizing the use of public-private partnerships to modernize locks and dams have some advocacy groups concerned about recreational river users, not just commercial users, eventually being required to pay user fees related to their activities. While this is not part of the federal program, William Newman and C. Jarrett Dieterle write that there are many good reasons why all users-even recreational ones-should be expected to contribute user fees for the maintenance of our nation’s water infrastructure.

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New Report Advocates Reforming Public Pension Governance: A new Manhattan Institute report by James Copland and Steven Malanga finds that little attention has been paid to the governance of public pension boards and that there is a significant need for reform. Among the findings, the authors conclude that public pension boards lack diversity and financial expertise, and public pension systems are typically “not subject to federal fiduciary duties that apply to private pension plans and are instead subject to a hodgepodge of typically more lenient state-law requirements.” The full report is available here

Moody’s Expects Unfunded Pension Liabilities to Skyrocket in FY 2016: It’s been a rough year in the financial markets, and a new report from Moody’s Investors Service forecasts that unfunded public pension liabilities will increase by a minimum of 10% in fiscal year 2016 under the most optimistic set of assumptions. The press release is available here.

Positive Outlook for U.S. Infrastructure PPP Market: While the outlook for public pensions may be bleak, according to Moody’s, there is a healthy outlook for the infrastructure PPP market in the U.S. A new Moody’s analysis finds that, “[n]ew state and federal [PPP] resources and political and legislative support, combined with a strong underlying legal framework for contractual enforceability and a deep capital market ready to finance projects, are positive developments as the sector continues growing.” More information is available here.

New USDOT Report on PPP Best Practices: The U.S. Department of Transportation’s Build America Transportation Investment Center has released a new report describing how government agencies can apply best practices in working with the private sector to deliver transportation facilities through PPPs in ways that protect the public interest. It draws on research and interviews and discussions with public and private market players, and it focuses on the key areas of legislation and policy, project development, procurement, and performance monitoring and oversight. The full report is available for download here.

Indiana Supreme Court Rules on State, IBM Welfare Modernization Dispute: Last week, the Indiana Supreme Court issued a long-awaited ruling in a dispute between the state of Indiana and IBM over the early cancellation of a 2006 contract to modernize the state’s welfare eligibility system. That year, the state entered a 10-year, $1.34 billion contract with IBM to automate eligibility determinations for food stamps, Medicaid and other welfare benefits and significantly reduce face-to-face interactions. However, a variety of implementation glitches ultimately prompted former Gov. Mitch Daniels to cancel IBM’s contract in 2009, at which point the parties countersued. The high court ruling upheld a Court of Appeals determination that the state could recover up to $175 million in damages it is seeking from IBM, while at the same time allowing IBM to seek reimbursement for approximately $50 million for services delivered under the contract. The ruling is available here.

Chicago Skyway Sale Reaches Financial Close: The $2.8 billion acquisition of the Chicago Skyway by a trio of Canadian public pension funds reached financial close late last month, with the city of Chicago benefitting from a $28 million windfall resulting from application of the city’s real property transfer tax to the transaction, according to the Chicago Sun-Times. A Macquarie and Cintra-led consortium entered a 99-year lease of the Chicago Skyway in 2005-taking over operations and management of the government-run toll road from the city in exchange for a $1.8 billion upfront payment-but the parties announced an intention last June to sell their remaining interest in the lease. In November, the Canada Pension Plan Investment Board, Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan agreed to purchase of the Skyway Concession Co., and the parties will adhere to the terms of the original lease for the remaining 88 years of its duration.

New Academic Research Suggests Potential Cost Savings Through Privatized Bus Transit: A new National Bureau of Economic Research working paper by Rhiannon Jerch (Cornell), Matthew Kahn (USC), and Shanjun Li (Cornell) examined public sector productivity in the delivery of public transit services and found that full privatization of all U.S. public bus transit services could reduce per-mile operating costs by 30% and result in aggregate cost savings of $5.7 billion (using 2011 data). The full report is available for purchase here.

Tennessee Releases Privatized Facilities Management Business Case Analysis: In early March, the Tennessee Department of Finance and Administration released a business justification report analyzing the potential cost savings from privatizing facility management services for those state facilities still managed in-house, including higher education. The report estimates a first-year cost savings of $29.7 million under privatization, ramping up to an annualized costs savings of $35.8 million in the following years. The state plans to hire a third party consultant to validate the cost analysis before deciding whether to pursue additional privatization. A total of 10% of the state’s real estate portfolio has been privately managed since 2013, which officials estimate has saved taxpayers $13 million over the first two years of the contract. The full report is available here.

Arizona Finalizes First Highway P3 Project: In late February, the Arizona Department of Transportation (ADOT) announced it had finalized a contract with Connect 202 Partners to design and build the Loop 202 South Mountain Freeway, the largest-ever highway project in the state, and maintain it for 30 years after construction. The $916 million fixed contract for design and construction is $122 million less than expected as a result of innovative approaches the private partner proposed for construction and engineering, along with reductions in needed property acquisitions. “This first-of-its-kind highway contract in Arizona has not only reduced the overall cost but allowed ADOT to accelerate the entire project, meaning motorists will be able to benefit from this critical freeway sooner,” according to ADOT Director John Halikowski. More information on the project is available here.

Idaho Legislature Passes Procurement Overhaul Bill: Last week, the Idaho State Legislature unanimously approved legislation (House Bill 538) developed by an interim legislative committee convened last fall that recodifies and updates the state’s procurement laws and adds in new training requirements for all state employees involved in procurement activities. The legislation also requires the administrator of the state’s division of purchasing to develop policies and procedures for agency contract monitoring, as well as establishes a set of ethical standards applicable to anyone involved in state procurement. The legislation stems from several high-profile contracting problems in recent years, highlighted in a 2014 state audit report. At press time, the bill was awaiting signature by Gov. Butch Otter.

Kansas Senate Passes Legislation Permitting Privatization of Mental Health, Disability Services and Facilities: Earlier this month, the Kansas State Senate approved legislation (Senate Bill 422) outlining comprehensive standards and licensure requirements for the care offered by facilities and providers of mental health and disability services. The legislation includes language granting broad authority to the state’s Department for Aging and Disability Services to contract out services and facilities, with the condition that the state cannot privatize the operations or facilities of the Larned or Osawatomie State Hospitals without prior legislative approval. The bill is currently awaiting a hearing in the House Committee on Health and Human Services.

Reforming Mandatory Minimum Sentencing: A new report published by the American Legislative Exchange Council makes the case for departing from mandatory minimums and allowing judges greater flexibility when sentencing nonviolent, low-risk offenders. The report, authored by Gregory Newburn of Families Against Mandatory Minimums, includes model legislation allowing for discretion during sentencing of certain nonviolent offenders who meet certain criteria as a way to lower incarceration rates and costs without compromising public safety. The full report is available here.

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“On June 28, 1995, the Government Accountability Office reported to Congress (GAO/T-GGD-95-197) that it had a ‘major concern’ with the fact that agencies were understating the cost of government programs. The report stated, ‘Our major concern with the retirement funding process has been that agencies are charged less than the full accruing cost.’ However, no action was ever taken to correct the problem-all these years. As a result, contractors that bid on government proposals were short-changed. The contractors did not get a fair shake at winning and being awarded a contract because of the understatement of the in-house personnel costs.”

-Tom McKinney, US Army Audit Agency, retired certified internal auditor, “A million million dollar problem (Part IV),”, March 7, 2016.

“Imagine you thought your mortgage was $440,000 but then the bank called up and said it was $1.3 million. That’s really what we’re facing.”

-Charles Millard, Citigroup’s head of pension relations, on Citi’s new report finding that government debt in industrialized nations nearly triples when pension and other retirement liabilities are factored in. Quoted in Timothy W. Martin, “Global Government Debt Is Actually Triple What We Thought, Thanks to Pensions,” The Wall Street Journal, March 17, 2016.

“In addition to questionable board composition, the boards of government retirement plans often wield considerably more substantive power than their counterparts in the private sector. One survey found that 68 percent of public retirement boards have some control over benefit decisions. The survey also found that 88 percent of government pension boards exercised direct authority over the investment decisions of their funds, and 89 percent controlled the funds’ actuarial assumptions, which are key components in calculating the funding levels and risks that a plan faces. In contrast, under the federal Pension Protection Act, private-employer pension plans must discount projected future liabilities using market-based discount rates based on high-quality corporate bond yields; benefit payouts are limited for any plan less than 80 percent funded (deemed ‘at risk’); plan assets cannot be valued over more than a two-year ‘smoothing cycle’; and plan sponsors have to make up shortfalls within seven years. As such, private-employer sponsors of defined-benefit pension plans’ actuarial and benefit decisions are sharply cabined, while plan sponsors have powerful incentives to limit investment volatility risk in their portfolios.”

-James R. Copland and Steven Malanga, “Safeguarding Public-Pension Systems,” Manhattan Institute, March 9, 2016.

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