Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #31 (June 2017 edition)

June 2017 edition: Trump budget & privatization proposals, ATC corporatization, Arizona public safety pension reform #2, and much more.

In this issue:


PRIVATIZATION: Privatization Figures Prominently in Trump’s FY2018 Budget Proposal

The Trump administration’s FY2018 budget request offers several significant privatization proposals, including public-private partnerships, more public/private competition, and federal asset divestiture. While Congress must approve any final budget, Reason’s Austill Stuart writes that President Trump’s opening salvo offers a deeper insight into his Administration’s priorities with respect to the role for the private sector in managing and delivering federal programs and assets.
» FULL ARTICLE

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AIR TRAFFIC CONTROL: Governance of a U.S. Air Traffic Control Corporation

President Trump’s proposed fiscal year 2018 budget calls for the Federal Aviation Administration’s (FAA) air traffic control (ATC) function to be transferred to a self–funded, nonprofit corporation—a reform concept Reason’s Robert Poole has researched and advocated for decades. Poole recently testified before the House Committee on Transportation and Infrastructure on key aspects of governance for the proposed U.S. ATC corporation, which he calls a “high-tech 24/7 service business that is a poor fit for a tax-funded bureaucracy housed within a safety regulatory agency.”
» FULL TESTIMONY (.pdf)

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INFRASTRUCTURE: The Ohio State University Approves 50-Year Lease of Energy Systems

The Ohio State University’s (OSU) Board of Trustees recently approved a 50-year lease with a private consortium to manage and operate the school’s power, heating and cooling systems. The agreement provides a $1.015 billion upfront payment to the university that provides an immediate 25% increase to its endowment, plus another $150 million in academic collaboration support. In return, the university will pay the consortium annual fees for its operations and improvements.
» FULL ARTICLE

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PENSIONS: Arizona Reforms Second Public Safety Pension Plan

Arizona recently enacted pension reform legislation that will put Arizona’s struggling Corrections Officer Retirement Plan (CORP)—which has accumulated at least $1.4 billion in unfunded liabilities since 2000 and stands at only 53% funded today—on a path to financial solvency. The CORP reform is expected to shift approximately 90% of new hires into a defined contribution retirement plan and nearly eliminate the potential for new unfunded liabilities once the current pension debt is paid off.

The reform had strong bipartisan support in the legislature and garnered the support of public safety associations, employers, and taxpayer advocates. The Pension Integrity Project at Reason Foundation assisted in the collaborative process by developing and analyzing reform options and serving as an intermediary negotiator between the legislature, labor groups, and employer representatives.

That a comprehensive pension reform could attract such a diverse group of stakeholder supporters is noteworthy on its own. Even more important is that the CORP pension reform marks the completion of a two-year, bi-partisan process of overhauling retirement benefits for all public safety employees in Arizona. Taken together, these reforms demonstrate that a collaborative, stakeholder engagement process can successfully deliver substantive policy change without the typical political divisiveness often seen in pension reform debates.
» FULL ARTICLE
» PRESENTATION: Analysis of Arizona CORP Pension System and Reform (April 2017)

[NOTE: The Pension Integrity Project at Reason Foundation played a central role in designing the policy option set, providing actuarial analysis of proposed reform concepts, and negotiating the final enacted reform. For more information about the CORP reform process, contact Reason’s Leonard Gilroy.]

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NEWS & NOTES

FAA Accepts Initial Application for St. Louis Airport Privatization: In late April, the Federal Aviation Administration (FAA) accepted the application for the St. Louis Lambert International Airport to enter into the agency’s Airport Privatization Pilot Program, St. Louis Public Radio reported. The city can now launch the process to seek a private company to operate and maintain the airport, while also assuming approximately $1 billion in airport debt. If the procurement is ultimately successful, the FAA would then be required to approve the PPP agreement between the city and the private entity.

Louisiana Hospitals Study Shows Nearly $3B in Savings from Privatization: A report by a private consulting firm released in late March concluded that efficiency gains from Louisiana’s transition to privately run charity hospitals in 2013 benefitted the state treasury by $2.7 billion, while adding close to 3,000 new jobs per year. The report also found improvements in delivery of care, including lower ER wait times and elimination of wait lists for prescription medications. The Alliance of Public Private Partnership Hospitals—which represents the nine operators that manage the charity hospitals—commissioned the study, according to the Greater Baton Rouge Business Report. The full report is available here.

Gov. Rauner Vetoes Bill Banning Privatization of Prison Nurses: Last week, Illinois Gov. Bruce Rauner vetoed Senate Bill 19, which sought to prevent the privatization of Illinois’ prison nurses by keeping the level of nurses employed by the state at its January 2016 level. The bill was largely a response to a privatization proposal from Rauner that called for laying off 124 prison nurses, a proposal later rescinded after the Rauner administration and Illinois Nurses Association reached a deal on a contract agreement late last month, according to the Associated Press.

New Arizona Law Allows Leasing of Portions of State’s Mental Hospital: In early May, Arizona Gov. Doug Ducey signed legislation allowing portions of the state’s 93–acre mental hospital campus to be leased to the private sector, the Associated Press reported. Cara Christ, the director of the Arizona Department of Health and Human Services, envisions a center for psychiatric excellence being built on the campus, with PPPs supporting outpatient mental health and urgent psychiatric services, as well as upgrading and building new facilities, according to the Arizona Capital Times.

Atlantic City to Outsource Solid Waste, Recycling Pickup: New Jersey officials authorized a 3-year, $7.2 million contract to outsource Atlantic City’s solid waste and recycling pickup to Gold Medal Environmental, The Press of Atlantic City reported in mid-May. The state took over the city’s finances in November through the Municipal Stabilization & Recovery Act, with the solid waste contract representing the first time the state exercised decision–making power granted by the Act. The city council had intended to vote on the contract’s approval in late April, but the council pulled the resolution after some councilmembers expressed concerns over the lack of a cost analysis. However, state officials saw Atlantic City’s finances as too dire to delay implementation of the contract, expected to save $1.1 million per year, without any layoffs to current employees.

Mesa, AZ Privatizes Prison Operations for Low-Level Offenders: Mesa’s City Council voted in May to privatize jail operations for low-level offenders, the first city to do so in Arizona. Mesa and CoreCivic entered in a three-year, $15 million contract to manage misdemeanor inmates in a separated section of CoreCivic’s Florence facility, roughly 60 miles away, the Arizona Republic reported. Mesa officials expect the deal to save $2 million per year, while also making transfers and bookings more efficient.

Oklahoma Gov. Fallin Announces “Pay for Success” Corrections Program: In April, Oklahoma Gov. Mary Fallin announced a new, privately financed program for nonviolent, female drug offenders, offering the chance to attend intensive outpatient treatment instead of jail time in hopes of significantly reducing the state’s female incarceration rate, the nation’s highest on a per-capita basis, The Oklahoman reported. The Tulsa-based nonprofit Family and Children’s Services will provide $2 million up front annually for the program, while the state would pay the nonprofit four annual payments totaling $22,584 for each inmate who successfully completes the program.

Puerto Rico Looks to Privatize Services Amid Debt Restructuring: As part of a larger debt restructuring and bankruptcy process, the Commonwealth of Puerto Rico is looking to privatize many of its services while upgrading transportation, energy, and social infrastructure through the use of PPP arrangements. Puerto Rico’s Public-Private Partnerships Authority (PPPA) issued an RFQ seeking financial advisors for the restructuring in early May, along with a list of 22 priority privatization and PPP projects with projected costs ranging from $1.2 billion to 2.5 billion.

Phoenix Making Progress on Real Property Management after Scathing 2016 Report: After an Arizona Republic report last year found severe problems with how the city of Phoenix handles its over 90 square miles of city-owned real property—prompting city officials to launch a property divestment initiative—the newspaper is reporting some progress in unloading unneeded properties. A total of 650 city-owned properties totaling $4 million have been sold since the report, with another $6 million for sale currently and an additional 400 properties under consideration for sale. Additionally, a new city website hopes to better attract potential buyers to its properties.

Legislative Auditors Review KanCare Outcomes, Separate Audit Finds Problems with State’s Foster Care System: Auditors for the Kansas State Legislature will conduct a half-year review of KanCare, the state’s privatized Medicaid program, the Topeka Capital Journal reported in late April. The auditors will review costs of products and services provided in addition to patient outcomes. In other Kansas news, the Lawrence Journal–World reported that a legislative audit released in April revealed problems with the state’s privatized foster care system, including inadequate staffing levels and poor contractor oversight by the Kansas Department for Children and Families (DCF). DCF Secretary Phyllis Gilmore cited strict state requirements for social workers as contributing to inadequate staffing levels, while also noting that DCF recently renewed its focus on ensuring effective oversight.

Hawaii Lawmakers Approve Transfer of Maui State Hospitals to Kaiser Permanente: In late April, Hawaii legislators approved $73 million in funding to transfer the operations of three Maui state-run hospitals to private provider Kaiser Permanente. As reported in the State Government Privatization section of Reason’s Annual Privatization Report 2016, judges sought to delay the privatization of the hospitals in 2016 after lawmakers initially approved a privatization agreement with Kaiser last January. Kaiser will begin operation of the hospitals—Maui Memorial Medical Center, Kula Hospital & Clinic, and Lana’i Community Hospital—in July, a move which Gov. David Ige predicts will save the state $260 million over the next decade.

Massachusetts Inspector General Reviews MBTA Deals, Budget Includes Privatization of Bus Garages: The Massachusetts Bay Transportation Authority (MBTA) approved its annual budget in April, which calls for the private sector to handle many of its customer services jobs and operate nine of its bus garages, while calling for officials to renegotiate with the machinists’ union to avoid further outsourcing, according to the Boston Globe. In other MBTA news, the Boston Herald recently reported that Massachusetts Inspector General Glenn Cunha is in the process of reviewing one of its recent outsourcing agreements—either a 5-year, $18.7 million contract with Brink’s to operate MBTA’s cash handling and operations, or a 5-year, $28 million contract with Mancon to operate and manage a parts warehouse.

New York Governor, Lawmakers Come to Agreement to Privatize NYRA: New York Gov. Andrew Cuomo and state lawmakers agreed in April on a plan to return operations and management of the New York Racing Association (NYRA)—New York’s state horseracing association—to the private sector, the racing website Bloodhorse reported. Under the agreement, the proposed NYRA 17-member governing board will include NYRA Chief Executive Chris Kay, eight members picked by current board’s executive committee members, two chosen each by Gov. Cuomo, as well as leadership in the Senate and General Assembly.

Lincoln, RI Council Approves Sewer Operation Contract: In April, the Town Council of Lincoln, Rhode Island unanimously approved a 3-year, $1.3 million contract with Veolia Water North America to operate the city’s sewer system, The Valley Breeze reported. The contract calls for Veolia to handle daily operation and maintenance of the system, including preventative cleanings. All three current sewer division employees will keep jobs at the same pay rate within the town’s Public Works department.

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QUOTABLE QUOTES

“In my experience, they’re not good buyers, they’re not good sellers. They’re better off not to be in that business. They’re terrible landowners.”

—Former Phoenix Mayor Paul Johnson, quoted in “‘Bad neighbor’: Phoenix struggles to manage its vacant city-owned lots,” Arizona Republic, November 24, 2016.

“The transfer of operations of Maui Memorial Medical Center to Kaiser Permanente is the largest privatization effort in Hawai’i […] Once completed it will mean a more efficient and more effective health care future for the residents of Maui County.”

—Hawai’i House Speaker Joseph Souki, quoted in “Lawmakers Approve Funds for Maui Hospital Transfer,” Maui Now, April 25, 2017.

“Puerto Rico faces unprecedented fiscal and economic challenges and the administration believes that PPPs will form the cornerstone of the island’s economic development. As part of the ten (10) year Fiscal Plan prepared pursuant to the requirements of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), the administration’s economic development plans heavily depend on the establishment of PPPs for [many] government services and the delivery of new infrastructure.”

—”Request for Qualifications: List of Qualified Advisors – 2017, #002-2017,” Puerto Rico Public-Private Partnerships Authority, May 3, 2017.

“We have an asset that has a $1.1 billion runway that’s not at capacity and we may have to use other capital that’s transferred out of that asset into other purposes, whether it’s public safety or urban transit or anything else that may be designated,”
—Grow Missouri President Travis Brown, quoted in “FAA accepts application for Lambert privatization,” St. Louis Public Radio, April 24, 2017.

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Additional Resources:


Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.