Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #9

July 2014 edition: Water partnerships, social impact bonds, pension reform, prison healthcare, and more

In this issue:

WATER: Recent Developments in U.S. Water Privatization

So far, 2014 has been an active year in the marketplace for public-private partnerships (PPPs) in the water and wastewater sector. While recent enactment of the federal Water Resources Reform and Development Act garnered significant attention for its provisions creating a new federal credit assistance program and new PPP pilot program for water-related projects, there have been several other state and local developments in this space worth highlighting.

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SOCIAL FINANCE: California Seeking Pay-for-Success Pilot Program

“Pay-for-success” isn’t exactly what comes to mind when thinking of how California government spends tax dollars, so we take special notice when legislators in Sacramento pass bills based on the concept. Earlier this year the California Senate passed legislation to create a new “pay-for-success” pilot program for social impact partnerships. As I wrote in a recent Orange County Register column, the idea is for the government to tap private sector dollars and expertise to advance new, evidence-based approaches to better address issues like child abuse and neglect, education, homelessness and recidivism.

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CRIMINAL JUSTICE: Prison Health Services Privatized in 30 States

Over the past several decades, state prison populations have skyrocketed, and so too have corrections expenditures. In an attempt to control costs while maintaining high levels of service, a total of 30 states have formed public-private partnerships in correctional health care by contracting out some or all of their prison health services. According to a new Reason Foundation report, private correctional health care companies provided states an estimated $1.9 billion in correctional health care services in 2013. The report offers a brief overview of the current correctional health care marketplace and explores the various options states have pursued to provide their inmates with health care while incarcerated.

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INNOVATORS IN ACTION: Advancing Pension Reform in Oklahoma

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 recent legislation in Oklahoma that will phase out the state’s defined benefit pension system for general employees by requiring new state workers to enroll in a 401(k)-style defined contribution retirement plan starting next fall.

Oklahoma State Representative Randy McDaniel has been the primary architect and champion of Oklahoma’s pension reform efforts. I recently interviewed McDaniel on what prompted him to take on the issue of pension reform, how he made the case to policymakers and stakeholders, the specifics of the reforms enacted, pension reform challenges and more.

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PENSIONS: Overprotecting Public Employee Pensions

The Constitution’s Contract Clause-which prohibits states from making laws impairing the obligation of contracts-is commonly used to challenge state and local public pension reform efforts. Courts in California and several other states follow a particularly strict rule: they hold not only that public employees are entitled to the pension they’ve accrued by their work so far, but also that they’re entitled to keep earning a pension (as long they continue in their job) according to rules that are at least as generous. In states where this “California rule” applies, one can’t constitutionally increase employee contribution rates or reduce cost-of-living allowances. According to a new Reason Foundation/Federalist Society study by Emory Law School associated professor Alexander Volokh, while there’s nothing legally invalid about the California rule, the rule is unsound as a policy matter.

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TRANSPORTATION: Practical Congestion Relief for Mid-Sized Regions

Rising traffic congestion is an increasing irritant in mid-sized regions with urbanized area populations between 200,000 and 1 million persons, regularly ranking as a top priority in local opinion surveys. While congestion is increasing more rapidly in mid-sized regions than in large regions, it is more easily solvable in the former than in the latter. A new Reason Foundation report assesses how effectively the transportation plans of 26 mid-sized regions deal with congestion. It reviews traffic forecasts against plans for improvements by quantifying how much congestion relief each plan contains. Then, it determines the potential for congestion relief contained in the plans by reviewing each proposed project for cost and effectiveness. Finally, the report offers practical suggestions for each region.

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ENVIRONMENT: Letting States Take the Lead on Species Conservation

The sage grouse-a large ground-dwelling bird that inhabits 165 million acres in nine Western states-appears headed for listing under the Endangered Species Act. But over its 40-year history, the Act has often caused significant harm to the very species it is supposed to protect by unnecessarily creating adversaries of landowners harboring these species and pre-empting state conservation efforts. In a recent article in The Hill, Coalition for Self-Government in the West director Carl Graham and Reason’s Brian Seasholes write that for the sake of the sage grouse-and all imperiled species-we need a new approach to conserving endangered species that is based on rewarding, not punishing, landowners, and letting state experts take the lead.

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New Reason Foundation Analysis Finds Phoenix Pension Reform Act Could Save $1.6 Billion: The City of Phoenix Employee Retirement System is facing a $1.5 billion dollar unfunded liability and is operating with unrealistic actuarial assumptions that underestimate future taxpayer costs. Further, reforms enacted in 2013 require future employees to contribute unsustainably high percentages of their salaries to retirement savings, making retention very challenging. A new Reason Foundation report by Anthony Randazzo analyzes a proposed 2014 ballot measure to reform the system to address these challenges and finds it would reduce taxpayer liabilities, eliminate retention risk, save taxpayers $394.7 million by conservative measures, and possibly reduce taxpayer costs as much as $1.6 billion over the next 25 years. The full report is available here, and a summary is available here.

Congressman Introduces Federal Lean Six Sigma Bill: Earlier this month, Iowa Congressman Tom Latham introduced H.R. 5064 (the “Lean and Responsive Government Act”), bipartisan legislation calling for federal agencies to implement continuous process improvement (e.g., lean six sigma) management methods to improve efficiency and reduce waste. The bill would also create a federal center of excellence in continuous process improvement within the Department of Defense, and it would require agencies to report on their progress in continuous process improvement as part of their annual appropriation requests. The full text of H.R. 5064 is available here, and more information is available here, here, and here.

New Jersey Lottery Private Management Agreement Survives Legal Challenge: Earlier this month, The Star-Ledger reported that a New Jersey appellate panel had rejected a labor union’s legal challenge to the state’s 2013 contract with Northstar New Jersey to take over sales and marketing functions of the state lottery in exchange for a $120 million upfront payment and commitments to increase net lottery revenues by over $1.4 billion over 15 years. The Communications Workers of America challenged the constitutionality of the contract-contending that state law required the lottery to be operated by the state only-as well as the legality of the annual management fee paid to Northstar. According to the New Jersey Law Journal, the three-judge panel rejected both arguments, finding that the state still retained control of the lottery despite contracting out certain functions and that the management fee was properly applied.

Savings from Privatized Risk Management on Track in Louisiana: A new audit released by the Louisiana Legislative Auditor finds that a major 2010 privatization of claims processing and loss prevention services in the state’s Office of Risk Management has saved $16 million in the first three years of the contract, representing over 70 percent of the $22 million in savings promised over the five-year contract term. State officials expect to exceed the projected savings, according to the Associated Press. The full audit is available here.

North Carolina Senate Passes Legislation to Partially Privatize Medicaid: The Associated Press reports that last week the North Carolina Senate approved legislation to create a new agency to administer the state Medicaid program and a new program allowing for-profit managed care companies to compete with state-subsidized hospital plans for contracts to serve Medicaid beneficiaries. The legislation is more aggressive than a Medicaid proposal backed by Gov. Pat McCrory and the House that does not facilitate competition from for-profit firms, making compromise in a conference committee likely.

Denver Announces Social Impact Bond Program to Target Chronic Homelessness: Last month, Denver Mayor Michael Hancock’s administration announced that the city was developing a new $8 million social impact bond program aimed at reducing chronic homelessness. The city plans to partner with consultant Social Impact Solutions, the nonprofit Corporation for Supportive Housing, and the nonprofit Enterprise Community Partners on the program, and it is receiving technical assistance developing the program from Harvard University’s Social Impact Bond Lab. The program will aim to provide supportive housing for up to 300 homeless persons in order to reduce thousands of annual emergency room and jail visits costing the city approximately $11 million per year, according to the Denver Post.

South Carolina State Land Inventory Completed: The State of South Carolina currently owns 7,815 buildings and 2,526 pieces of land, according to a newly released inventory of state real property. reported earlier this month that the long-delayed comprehensive inventory of state-owned land and buildings-the result of an executive order signed by Gov. Nikki Haley last October-was finally released after years of agency non-compliance with a state law requiring them to produce annual real property inventories. Haley told WSPA that the next step is an evaluation of consolidation and divestiture opportunities: “We need to look and see how much of that we need to get rid of. How much of that can we consolidate? What do we have that the taxpayers are paying for that’s not even being used?” The inventory is available on the state Budget and Control Board’s website here.

Georgia Regents Shortlist Developers for Privatized University Housing: The Atlanta Business Journal reports that the University System of Georgia’s Board of Regents has shortlisted three qualified bidders-Balfour Beatty Campus Solutions, Corvias Campus Living, and Education Realty Trust-to compete for the first phase of a large-scale public-private partnership for on-campus student housing. Earlier this spring, the Board issued a request for qualified concessionaires seeking a private partner to acquire and manage nearly 6,200 existing on-campus student housing assets across nine campuses statewide; develop and manage up to 3,000 beds of new, on-campus student housing on seven of the nine campuses; and obtain development rights for additional new, on-campus student housing on the nine participating campuses. More information on the procurement is available here.

Pennsylvania Counties Explore Privatizing Jail Operations: Officials in two Pennsylvania counties-Mercer County and Butler County-are currently exploring the possibility of privatizing their county jails in an effort to reduce annual costs of operation. Mercer and Butler Counties have an example to look to in Delaware County, which privatized the operation of its jail in 2009. County executive director Marianne Grace told The Cranberry Eagle that the county is saving $4 million annually and has “always been pleased with the decision.”

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“Based on the settlement terms and the assumptions made, there does not appear to be recognition that a pension plan, someday, will need to be 100% funded. [Detroit] appears to adopt an institutional philosophy of underfunding. […] It appears that the combination of a need to continue to invest in assets with risk and volatility in order to achieve investment returns and the restoration benefit to the pensioners, even at a level of low plan funding, acts as a one sided collar. That is, the City gives away much of the upside in investment earnings, while retaining all of the downside investment risk”
-Martha E.M. Kopacz, Phoenix Management Services LLC, “Expert Report of Martha E.M. Kopacz Regarding the Feasibility of the City of Detroit Plan of Adjustment,” July 21, 2014.

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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.