Privatization & Government Reform Newsletter #22 (January 2016 edition)

Privatization and Government Reform Newsletter

Privatization & Government Reform Newsletter #22 (January 2016 edition)

January 2016 edition: state/local fiscal forecast, ATC reform, universal pre-K, pensions, and more

In this issue:


BUDGETS: GAO Report Suggests Improving State, Local Fiscal Forecast

State and local governments have continued a slow, but steady, recovery from the impact of the Great Recession the last few years, and a recent Government Accountability Office report suggests that the long-term fiscal picture, while challenging, is improving somewhat.
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AVIATION: FAA Report Underscores Need for Air Traffic Control Reform

Air traffic control reform is necessary to bring our nation’s navigational systems into the modern era to enhance safety and improve the flying experience for consumers. The Federal Aviation Administration’s Inspector General’s new report makes it clear that keeping things the way they are is not acceptable, according to Reason Foundation’s Robert Poole.
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PENSIONS: Defined Benefit vs. Defined Contribution Plans-Which Is Better at Achieving Successful Retirement?

Defined contribution plans are often perceived to be less effective than defined benefit pension plans at delivering retirement security, but recent research challenges this view.
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EDUCATION: Vanderbilt Study Casts Doubt on Benefits of State-Run Pre-K Programs

Last fall, Vanderbilt University’s Peabody Research Institute and the Tennessee Department of Education released the results of the nation’s first longitudinal study on a large-scale, state-run pre-K program. The Tennessee Voluntary Pre-K (TNVPK) study drew on five years of data going back to 2009 to evaluate Tennessee’s Pre-K program’s effect on student achievement. Contrary to expectations of universal preschool advocates, the outcome was not a ringing affirmation of the program’s merits. Rather, Vanderbilt’s study showed that TNVPK’s benefits disappeared compared to control students by the end of kindergarten, and by the second and third grades, the study showed TNVPK participants actually faring worse in achievement than their control counterparts.
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TRANSPORTATION: What Do Autonomous Vehicles Mean for the Future of U.S. Highways?

For the past several years, Americans have been bombarded with visions of a near-term future in which car ownership is a thing of the past, replaced by “mobility as a service,” thanks to fully self-driving cars. Some believe this will lead to compact urban living in which people will use highways far less than they do today-and hence, that conventional projections of continuing growth in vehicle-miles of travel are all wrong. According to Reason Foundation’s Robert Poole, those who are planning future highway projects have a lot riding on a realistic assessment of what autonomous vehicles portend.
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CRIMINAL JUSTICE: The Future of Private Prisons in Arizona

A confluence of national and local factors has led some observers to question whether or not privately operated prisons should have an ongoing role in Arizona’s correctional system. In my recent article prepared for Arizona State University’s Morrison Institute for Public Policy, I write that private prisons are playing an important role in helping states like Arizona deliver correctional services and programming, but there is room to evolve the contracting approach to better harness the power of performance-based contracting to improve results on offender rehabilitation and reduce recidivism.
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NEWS & NOTES

U.K. Releases Final Report on Pioneering Social Impact Bond Project: In December, the U.K. Ministry of Justice released its final report on the U.K.’s Peterborough Prison Social Impact Bond-the first social impact bond pilot program ever implemented-which was aimed at reducing recidivism among released short-sentence inmates. Despite some promising early results since launching in 2010, the project was cancelled in 2015 and supplanted with a larger nationwide probation initiative. The report highlights successes of the initiative and lessons learned for future projects. The full report is available here.

Institute for Justice Updates Civil Asset Forfeiture Report: In November, the Institute for Justice released the second edition of its Policing for Profit report on the abuse of civil asset forfeiture, a practice that allows law enforcement to confiscate an innocent individual’s property and keep it for their own use with virtually no due process protections. The report provides a detailed overview of civil asset forfeiture law, offers examples of forfeiture abuses, and ranks the 50 states, Washington D.C., and the federal government’s forfeiture laws. The report is available here.

Chicago Passes Asset Privatization Review Ordinance: In late November, the Chicago City Council approved the Privatization Transparency, Accountability and Performance Ordinance, which would require financial/cost evaluations, public meetings, performance reports and inspector general oversight of any future asset privatizations valued at over $400 million, as well as service privatization contracts valued at $3 million or more. The ordinance would also require the city to invest 10% of privatization-related upfront payments not used for investment earnings, expenses, debt service, public infrastructure or pension payments into an intergenerational fairness fund to be invested by the city treasurer. The ordinance is aimed at addressing lingering policymaker concerns over the process used to approve the city’s 2008 lease of its parking meter system. More information is available here.

West Virginia Health Agency Cites Savings from Privatization: The West Virginia Department of Health and Human Resources (DHHR) recently issued a press release estimating more than $50 million in savings this fiscal year resulting from expanding the population served in managed care, adding several services to managed care, and decreasing the capitation rate for the traditional managed care populations. “By privatizing the delivery of Medicaid services and strengthening oversight of managed care entities, we are experiencing greater efficiency and accountability than the traditional Medicaid model,” said Jeremiah Samples, DHHR Deputy Secretary for Public Health and Insurance.

Alaska Aerospace Corporation Seeking Privatization: In early January, the Associated Press reported that the board of the directors of the state-owned Alaska Aerospace Corporation has recommended pursuing privatization, a move that would require legislative approval. Privatization would likely require the corporation to pay the state back over $30 million in state-funded operating and infrastructure expenses. The move would help facilitate the corporation’s interest in diversifying beyond its current primary focus on rocket launches. More information is available here.

Arizona Selects Developer for First Highway P3 Project: In late December, the Arizona Department of Transportation (ADOT) announced the selection of Connect 202 Partners as the best-value developer to design, build and maintain the Loop 202 South Mountain Freeway, the largest-ever highway project in the state, valued at approximately $1.75 billion. Connect 202 Partners is a consortium consisting of Fluor Enterprises, Inc., Granite Construction Co. and Ames Construction, Inc., with Parsons Brinckerhoff, Inc. as the lead designer. As a result of the PPP, “ADOT will be able to complete this much-needed project sooner […] while increasing the likelihood of saving taxpayer dollars,” according to ADOT Director John Halikowski. More information on the project is available here.

Report Cites Flaws in North Carolina State Contracting: Early in January, the North Carolina legislature’s Program Evaluation Division issued a report that examined 133 state contracts valued over $1.2 billion and identified several shortcomings, including a general lack of accountability mechanisms to ensure cost efficiency and widespread lack of compliance with state policies limiting the length of contracts, according to the Associated Press. The report recommends the modernization of the state’s contract management system, the preparation of business case analyses to explain the rationale for contracting, and the development of an inventory of services eligible for privatization. More information is available here.

Massachusetts Mental Health Privatization Proposal Under Review: The Taunton Gazette reported early in January that Massachusetts Gov. Charlie Baker’s proposal to privatize emergency mental health services in the southeastern part of the state has been submitted to state Auditor Suzanne Bump for review and approval, as required under the state’s privatization review law. The Baker administration estimates the proposal would yield cost savings of $6.5 million and create consistency with the emergency mental health contracts used already throughout the rest of the state. A final determination in anticipated no later than March.

University of Tennessee Extends Dining Contract: The University of Tennessee announced in December that it is extending its dining contract with Aramark by five additional years, pushing the termination date to June of 2027. The Knoxville News Sentinel reports that the university will receive over $15 million and a 14% commission through 2027, and these revenues will be used to fund campus renovation and construction projects. The Aramark contract began in 1997, was rebid in 2007, and is now on its second five-year extension. In an interview with the Sentinel, University of Tennessee Senior Associate Vice Chancellor for Finance and Administration Jeff Maples said of the Aramark contract, “After 18 years, we think this has served the university well.”

Louisiana State University Selects Two Finalists for Major Mixed-Use Development: In December, the LSU Property Foundation selected two finalists for a public-private partnership to design, build, finance, operate and maintain the Nicholson Gateway Development Project. The project will include 1,260 apartment-style beds and 410 suite-style beds with associated residential support spaces, as well as 30,000 to 50,000 square feet of new retail space, on a 28-acre site adjacent to the main campus. The LSU Property Foundation, an affiliate of the LSU Foundation, is facilitating the project for the benefit of the LSU community. The final developer selection is expected in the spring. The press release is available here, and more information on the Nicholson Gateway Development Project is available at the project’s website.

Denver Approves Social Impact Bond Contracts Targeting Homelessness: The Denver Post reported in mid-January that the Denver City Council approved contracts for the city’s first social impact bond initiative: an $8.6 million privately financed supportive housing program to address the chronic homeless population. The private funds were raised from investors and philanthropic sources, and the Urban Institute will lead the evaluation team responsible for ensuring that program goals are achieved. The city anticipates reduced spending on health and law enforcement services for those that would stay in the program. Investors stand to earn up to $11.4 million if successful and as little as $2.6 million if the program fails to meet its goals. More information from the Denver Post is available here.

Fulton County, GA Renews Veolia Wastewater Contract: Last December, the Fulton County (Georgia) Board of Commissioners renewed its contract with Veolia to operate and maintain the county’s wastewater facilities, a five-year, $60 million deal. The wastewater facilities serve approximately 200,000 county residents and cover a combined treatment capacity of 40 million gallons of wastewater per day. The county will continue to maintain ownership of the facilities and rate-setting authority. More information is available here.

Scranton, PA Negotiating Wastewater System Sale: In December, the Scranton (PA) Sewer Authority approved a memorandum of understanding with Pennsylvania American Water Co. that started a 90-day negotiation window to finalize the company’s proposed $195 million purchase of the wastewater system. Last year, the authority sought proposals seeking a private partner to potentially sell or lease the city’s wastewater system in order to address an imminent pension crisis, and if the proposed sale is completed, the city would net an estimated $96 million to use to shore up an estimated $160 million in unfunded pension liabilities. Further, the sale is expected to yield lower rate increases than maintaining the status quo. More information is available here and here.

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QUOTABLE QUOTE

“We are seeking a transformational change to the way that the air-traffic control system is financed and governed […] We can do much better.”

-Doug Parker, CEO of American Airlines on privatizing air-traffic control, cited in Bart Jansen, “Airline executives urge privatization of air-traffic control,” USA TODAY, December 1, 2015.

“[A] pension fund or endowment that assumes investment returns will continue at their recent pace is engaging in doublethink. For that to happen, either profits will have to take an unprecedentedly high share of GDP or yields will have to fall to an unprecedentedly low level. In other words, for future returns to match the past, future economic conditions would have to look completely different.”

The Economist, “Many unhappy returns, Pension funds and endowments are too optimistic,” November 21, 2015.

“Cash-basis accounting is a recipe for fiscal disaster. State and local governments make long-term commitments for programs like employment compensation plans and public works projects. But they write their budgets on a year-to-year basis, as if starting all over again each year with fresh revenue and expenses. They leave out any revenue not received or, more importantly, any expense not incurred that year. The implications of this financial-planning decision can be immense. In 2010, Virginia reported that it had a cash-basis surplus of nearly $50 million in a budget of $34 billion. When converted to accrual accounting, the surplus turned into a $674.3 million deficit.”

-Jeremy Liss, “The Accounting Rules That Bankrupt Cities,” The Atlantic, November 23, 2015.

“[Pension Obligation Bonds] are a gambler’s substitute for not making the required pension contribution with current tax revenues.”

-Marilyn Cohen, “Beware Of Pension Obligation Bonds,” Forbes.com, January 5, 2016.

“Last year the nonprofit Society of Actuaries released its first updated projections on Americans’ longevity since 2000. The organization found that the average 65-year old male would live 86.6 years, about two years longer than previously forecast, and that the average 65-year-old female would live 88.8 years, an increase of nearly two and a half years. For public and private pension funds, those additional years of drawing retirement benefits translate into a 4%-8% jump in funding obligations.”

-Charles Chieppo, “Public Pensions’ Latest Challenge: Longer Lives,” Governing.com, December 18, 2015.

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Special thanks to Reason Foundation policy analyst Adam Crepelle for his assistance in developing the News & Notes for this newsletter.


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.