Privatization & Government Reform Newsletter #3

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #3

January 2014 edition: State of the States, student-based budgeting, e-cigarettes, pension reform, social impact bonds, and more

In this issue:

STATES: Sampling the State of the State Speeches

With President Obama’s State of the Union address getting major attention this week, it’s easy to forget that over a dozen state governors have also been busy in recent weeks giving their annual State of the State speeches. Looking across a representative sample of six recent State of the State speeches-three from “blue” states (California, New York and Colorado) and three from “red” states (Wisconsin, Indiana and Georgia)-some common policy themes emerge, including tax reform, government reform, increasing rainy day fund balances, education and infrastructure. » FULL ARTICLE

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EDUCATION: Report Ranks Houston Tops In Reducing Achievement Gaps Under Student-Based Budgeting

In the United States, state and local education funding systems are increasingly adopting a “school funding portability” framework, where funding is attached to the students and “follows the child” to the school he or she attends. While this goes by several names-including weighted student formula, results-based budgeting, student-based budgeting, “backpacking” or fair-student funding-in every case the meaning is the same: dollars rather than staffing positions follow students into schools. A new Reason Foundation report examines 14 school districts currently using portable student funding, ranking each district in 10 categories, including test scores, achievement gaps, graduation rates, and transparency. It also recommends a series of “best practices” for districts, including publishing school report cards for parents, using performance-based pay for teachers and principals, allowing students to enroll in any school in the district, and giving principals control over their hiring and budgets. » FULL REPORT

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PUBLIC HEALTH: Rush to Regulate E-Cigarettes May Harm Public Health, Anti-Smoking Efforts

Despite a recent Reason/Rupe poll that found that 62 of Americans support governments allowing the use of e-cigarettes in public places, cities like New York City and Chicago have recently enacted ordinances to include e-cigarette “vaping” in existing public smoking bans. Further, over the last year there has been a wave of local regulations enacted or proposed across the country to restrict the sale or use of e-cigarettes. In a recent Orange County Register commentary, I discuss how the misguided rush to limit the sale or use of e-cigarettes is more likely to harm public health instead of benefit it, primarily by making it more difficult for smokers to transition to safer nicotine delivery alternatives, thus keeping them smoking longer.

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PENSIONS: Rhode Island Pension Reform Case Study

In 2011, Rhode Island enacted major pension reform legislation spearheaded by State Treasurer and current gubernatorial candidate Gina Raimondo to address an unfunded pension liability of $6.8 billion and a system less than 50 percent funded relative to its obligations. Among the changes, the reforms introduced a hybrid defined-benefit/defined-contribution funding system, suspended cost-of-living-adjustments for retirees, and increased the retirement age. A new Reason Foundation report offers a detailed case study of Rhode Island’s pension reform efforts, reviewing the challenges that prompted the reforms, the specific policies enacted, and the lessons learned for other states and municipalities facing significant unfunded pension liabilities. » FULL REPORT

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SOCIAL FINANCE: New York Launches First State-Level Social Impact Bond Program

The concept of social impact bonds-in which the private sector finances and implements new social service delivery models on behalf of governments under a pay-for-success contract model-has been advancing rapidly in the U.S. in recent months. New York State recently announced the first state-level social impact bond program, which is aimed at reducing recidivism among recently released inmates. Additionally, legislators in New Jersey and Washington State are seeking to launch social impact bond pilots. » FULL ARTICLE

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LOTTERIES: Pennsylvania Ends Procurement for Private Lottery Management

All of the 44 states that operate lotteries currently outsource certain components of their internal lottery operations, but three states-Illinois, Indiana and New Jersey-have taken privatization further in recent years by entering into private management agreements (PMAs) with private service providers designed to increase net lottery revenues to the state as a means of augmenting traditional tax revenues. Privatized lottery management took a different course in Pennsylvania, however, where last month Gov. Tom Corbett’s administration announced that it was abandoning a PMA negotiated the previous year that got stalled amid union and legislative opposition and a rejection of the contract by the state’s attorney general in early 2013. » FULL ARTICLE

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PRISONS: The Challenge of Public/Private Cost Comparisons

There is an ongoing debate over the relative cost of public and private prison operations, with some research suggesting that governments can save money through public-private partnerships and other research finding that the cost difference is negligible or that public sector delivery is cheaper. One of the primary reasons for this disparity is different budgeting and accounting practices in the public and private sectors, which make “apples-to-apples” comparisons difficult and often distort cost comparisons in favor of the public sector. A new Reason Foundation policy brief examines this issue, using a 2011 Arizona Department of Corrections report as a case study. Though the report was interpreted as showing that privately-operated prisons are costlier than public ones in Arizona, it suffers from a variety of methodological shortcomings, including deficient treatment of capital assets and liabilities, retiree healthcare and pension costs for public employees, inmate healthcare costs, transferred legal risks, and taxes paid to state and local government. The Reason brief finds that rigorous cost comparisons must be undertaken carefully, lest they muddy the debate at the expense of sound policymaking. » FULL POLICY BRIEF

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INNOVATORS IN ACTION: Pioneering Road User Charges in Oregon

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 Oregon’s work in recent years to advance the concept that may ultimately replace the beleaguered gas tax: mileage-based road user charges. I recently interviewed James Whitty, manager of the Oregon DOT’s Office of Innovative Partnerships and Alternative Funding, on what prompted Oregon policymakers to explore road user charges, the evolution of the state’s pilot programs, how Oregon has addressed the public’s concerns over protecting privacy, and much more. » FULL INTERVIEW

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The Economist on Divesting Government Assets: I was honored to be cited in an article in the January 11th print edition of The Economist on the topic of divesting government-owned assets. The article cited a surge in the privatization of state-owned assets in emerging economies in recent years and suggested that advanced OECD economies take another look at their asset portfolios, as “[s]elling some of these holdings could work wonders: reduce debt, finance infrastructure, boost economic efficiency.” The full article is available here.

New Reason Foundation Study Recommends Organizational Reform of Air Traffic Control System: Despite dramatic advances in technology, the basic features and procedures of the 1960s-era air traffic control (ATC) system have remained largely unchanged in the U.S. and have fallen well behind the capacity of new technologies to provide safer, faster, more reliable and more fuel-efficient air travel and to keep pace with the increasing volume of air traffic. A new report by Reason Foundation founder and transportation policy director Robert Poole published by the Hudson Institute finds that fundamental reform of the U.S. air traffic system’s funding and governance is the key to a full embrace of cutting-edge air traffic management in this country. It’s worth noting that ATC providers in many other countries have embraced the new technologies and procedures recommended by Poole much more readily than we have in the U.S.-including providers in Australia, New Zealand, Canada, Germany and the UK-and are seeing superior performance.

New Reason/Buckeye Institute Study Recommends Public-Private Partnerships to Operate State Parks: Reason Foundation and the Ohio-based Buckeye Institute released a study in December making the case that one way to keep cash-strapped state parks open without imposing additional burdens on the taxpayer is to utilize public-private partnerships. Many states already use private concessionaires to provide piecemeal services within parks (e.g., food, retail, lodging, marinas, etc.) so a shift to more extensive involvement can build on that. Whole park operation PPPs would transfer the responsibility of maintaining the park to a private operator while allowing them to collect entrance and other fees, paying the state an annual rent payment in return. The U.S. Forest Service has used this PPP model for over 25 years to operate hundreds of its developed recreation areas nationwide, and in 2012 California became the first state to turn over the operation of state parks to private recreation management companies to avoid closure. The full report is available here.

Pennsylvania Seeking Innovative Public-Private Partnership for Bridges: The Pennsylvania Department of Transportation (PennDOT) issued a request for qualifications in December 2013 seeking qualified private contractors for its Rapid Bridge Replacement Project, a public-private partnership to reconstruct at least 500 structurally deficient bridges of similar design. The selected team will manage the bridges’ design, construction and maintenance under one comprehensive contract to streamline project delivery, and it will finance the project in an availability-payment concession. The department anticipates significant cost savings since the same basic design and construction standards can be used for multiple bridges. The project will launch in 2015, and the selected team will also maintain the bridges for as much as 35 years. A Pennsylvania Department of Transportation spokesperson told the Pittsburgh Post-Gazette last week that the initiative “gives us the ability to accelerate the delivery of 550 to 650 bridge replacements that otherwise wouldn’t happen for 15 to 20 years if we were to use a traditional contracting model.”

Privatization of School Support Services on the Rise in Michigan: The Mackinac Center for Public Policy’s Michigan School Privatization Survey 2013, released last week, finds that 357 of Michigan’s 545 local school districts (65.5%) contracted out for at least one of the three main non-instructional services-custodial, food, and transportation-in 2013, a figure that has more than doubled since the Center began publishing its annual study in 2001. The survey found that 45.5% of districts contracted with private companies for facilities maintenance and other custodial work, followed by food services at 36.5% and transportation at 21%. “Every dollar saved through privatization is a dollar that can be redirected toward the classroom where it belongs,” according to the Mackinac Center’s James Hohman. The full report is available here.

Oregon Liquor Privatization Push Begins: In 2011, Washington State became the first of the 18 so-called liquor “control states”-those with state-run monopolies over the distribution and/or sale of distilled spirits-since the end of Prohibition to fully privatize its wholesale and retail monopolies, as discussed in the October edition of this newsletter. But it may not be the last. In mid-December, a Northwest Grocery Association-backed group called Oregonians for Competition filed five different initiative petitions that would end the state-run liquor monopoly and expand the sale of distilled spirits to retail outlets over 10,000 square feet. Liquor sales are currently only allowed in state-sanctioned liquor stores, which would continue to operate under the various proposed ballot measures. The five measures are variations of a proposed Oregon Liquor Control Modernization Act, and Oregonians for Competition plans to choose one version to potentially take forward to the November 2014 ballot, according to The Oregonian. The state’s Liquor Control Commission is currently pushing the legislature to consider a modernization effort that could potentially forestall privatization, but early skepticism among legislators prompted The Oregonian’s editorial board to recently suggest that they should not “be surprised in November when voters come to the sensible conclusion that government really shouldn’t be in the booze-selling business.”

Rockefeller Institute Report on Defined-Benefit Pensions: Regardless of where one stands on the issue of reforming public employee pension systems, I would commend to readers’ attention a new Rockefeller Institute of Government report by Donald Boyd and Peter Kiernan entitled, Strengthening the Security of Public Sector Defined Benefit Plans. Starting with the premise that defined-benefit pension systems “can and should be structured to fund benefits securely,” Boyd and Kiernan present a blistering critique of the “bad incentives, inadequate rules, and little transparency” that have contributed to the massive underfunding of public sector defined-benefit pensions, and they offer a series of recommendations designed to address these systemic flaws. Defenders of defined-benefit pensions and pension reform advocates alike will benefit from Boyd and Kiernan’s analysis. The full report is available here.

Privatizing Utah’s State-Owned Golf Courses: Provo’s Daily Herald recently reported that Utah State Rep. Kay Christofferson is planning to introduce a bill in the 2014 legislative session that would require the Department of Natural Resources to contract out the operations and maintenance of the four gold courses owned and operated by the state. A 2012 Utah State Parks report found that the four courses required taxpayer subsidies to cover operating and debt expenses. “Why are we competing against people that provide that service? Let’s put it out for a [proposal] and see if we can get somebody to operate this privately,” Christofferson told the Herald.

Indianapolis Seeking Private Partners for Parks: In November, Indianapolis issued a request for proposals seeking potential private for-profit or nonprofit partners to take over operations of parks, take over existing park facilities or programs, and/or propose new facilities or programs. The city is seeking opportunities to lower operating costs and potentially increase revenue through the solicitation. According to the Indianapolis Star, the city’s $3.4 million annual park capital budget is unable to cover a $46 million backlog of facility improvements, much less the $51 million in new park facilities sought by the city. Proposals are due on January 31st.

Solid Waste Privatization to Help Eliminate Deficits in Lawrence, IN: A new contract with Republic Services for residential trash and recycling collection will save Lawrence, Indiana an estimated $5 million over the 10-year contract, helping the city eliminate its budget deficit, according to an article last month in the Indianapolis Star. The company offered positions to all nine city sanitation employees and paid the city $300,000 for its trucks and waste containers, according to the article.

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“Governments of OECD countries still oversee vast piles of assets, from banks and utilities to buildings, land and the riches beneath (see table). Selling some of these holdings could work wonders: reduce debt, finance infrastructure, boost economic efficiency. But governments often barely grasp the value locked up in them.”
-“Setting out the store,” The Economist, January 11, 2014.

“The problem [with defined benefit pensions] begins with mismeasurement of liabilities and the cost of funding them securely, for financial reporting purposes. The proper way to value future cash flows such as pension benefit payments is with discount rates that reflect the risk of the payments. This is separate from the question of the rate pension funds will earn on their investments. […] This bears repeating: The proper rate for valuing pension liabilities on financial statements is separate from the question of what pension funds will earn on their investments. Different rates may be appropriate for valuing liabilities than for assumed investment returns – and we recommend, later, that different rates be used. The major significance of valuing liabilities incorrectly is that it leads to inadequate funding policies, and encourages the mistaken belief that benefits can be greater, services can be greater, or taxes lower while still funding benefits securely.”
-Donald J. Boyd and Peter J. Kiernan, Strengthening the Security of Public Sector Defined Benefit Plans, The Nelson A. Rockefeller Institute of Government, State University of New York, January 2014, pp.vii-viii.

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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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