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This Week’s Outsourcing Scan 03-03-14

Update: Upcoming Outsourcing Issues. March 3, 2014

1) National: Public Works Financing points to an upturn in infrastructure “public private partnership” deals, most being driven by a rapid expansion of government subsidies. Eight out of twelve current projects rely on public subsidies for their debt financing. But obstacles remain, including the potential “loss of the federal capital subsidy from Private Activity Bonds and TIFIA,” and “the over use” of deals structured using public subsidies. According to Skanska’s Karl Reichelt, subsidized projects “don’t yield the full value proposition of true, market risk PPPs.” This could lead to PPP deals becoming “commoditized,” and “leave more long term funding and other project risks with public clients, and ultimately, with taxpayers.” Another factor driving strong “deal flow,” according to PWF, is the fact that in 2010 thirty-two states elected governors “whose budgets had been blown apart by the recession.” [Public Works Financing, February 2014; sub required]

2) National: Contrary to Public Works Financing, Infrastructure Investor sees a rather bleaker prospect for road privatizations, and urges politicians to take another look at long term road concessions such as the Chicago Skyway deal. “Since then, however, few such deals have closed. Despite noteworthy concessions for parking in Chicago, Indianapolis, and at Ohio State University, negotiations collapsed for similar deals in Los Angeles, Pittsburgh, and Hartford.” Notes that “opponents of these asset concessions are quick to point out that the public sector is giving up monetary benefits that governments could reap on their own,” but claims public and private entities could “share” such revenues. Infrastructure Investor says “changing the perception that infrastructure services are a market commodity rather than a public good will not be easy.”  [Sub required]

3) National: Red light camera systems, often run by private companies, are facing a major backlash from the public and in courts. “Those rulings have added to the legal and political blowback across the nation against a system whose safety benefits are disputed while its revenue-generating efficiency is not. (…) ‘All it is is a money grab,’ said Joe Brazil, a St. Charles County, Missouri, councilman jailed last year for failing to pay a $100 fine in the St. Louis suburb of St. Peters. ‘It’s almost like racketeering. It’s not about safety.’”

4) National: As end of year filings begin to tally up, Wall Street news sources list Corrections Corporation of America’s over 300 institutional shareholders, led by Vanguard Group ($498 million) and London Company of Virginia ($199 million).Vanguard Group is also the largest institutional owner of the Geo Group private prison company ($316 million), with Raymond James’ Eagle Asset Management in second place ($244 million).

5) National: Despite its multiple legal and other woes, government contractor U.S. Investigations Services LLC (USIS) “continues to rake in the federal bucks. According to USAspending.gov, USIS has won more than $142 million in contracts so far this fiscal year. Even though the government is suing USIS for fraud and has insourced some of its work, the company remains an active federal vendor.”

6) National: The head of the infrastructure advisory team at KPMG, which has an extensive government advisory business, plugs “public private partnerships“ inGovernment Executive.

7) National: The 495 Express Lanes’ “public private partnership” financing is to be restructured after weak results. “Ramp up has been slower than anticipated in traffic studies done by Vollmer Associates.” The project’s liquidity reserves “are suffering from negative arbitrage now.” The road’s owners, Transurban (90%) and Fluor (10%), will pump in $280 million of corporate equity. Transurban will also operate the soon-to-be-completed I-95 HOV lanes for at least 70 years. [Public Works Financing, February 2014; sub required]

8) National: The American Federation of Teachers and In the Public Interest have launched a website to track for-profit charter school networks, beginning with K12 Inc., Imagine Schools, White Hat Management, Academica, and Charter Schools USA. “Donald Cohen, the executive director of Washington-based In the Public Interest, said ‘for-profit charter schools that operate in the dark without basic public transparency and without strong public control too often put their bottom line ahead of the public interest and high-quality public education.’” The website reports that “as the public loses control of charter schools, especially those operated by for-profit companies, the broader public is increasingly excluded from the decision-making process about directions, policies and programs that educate our children.” [Cashing in on Kids]

9) National: Standard & Poor’s rates charter schools’ outlook as negative for 2014. “Despite overall growth and continued maturation of the sector, charter schools have limited flexibility to withstand difficult operating conditions, resulting in volatile rating activity.”

10) California: Willie Pelote, an assistant director at the American Federation of State, County and Municipal Employees, says Gov. Brown will move decisively to scale down government outsourcing and return jobs to the public sector. He says Brown’s current move to cut 102 positions “is part of a pilot project that involves the administration researching how much the state contracts out. Pelote said he is optimistic that the following steps would be an exponentially scaling down of outsourcing and subsequently expanding the public sector.”

11) Colorado: Department of Transportation closes on a contract with Plenary for the controversial privatization of U.S. 36 between Boulder and Denver. “The deal’s finalization came after weeks of tense public meetings and protestations from hundreds denouncing the contract with Plenary, which was characterized by detractors as a giveaway of a public road to the private sector.” The Drive Sunshine Institute has denounced the state for “stubbornly clinging to the fiction that the U.S. 36 expansion project has been duly authorized,” and may sue to block the deal. Colorado PIRG has released an analysis of the deal, finding some protections and some downsides.

12) Idaho: State lawmakers ask the FBI to investigate possible criminal wrongdoing by Corrections Corporation of America. “The Idaho Department of Correction asked the Idaho State Police to launch a criminal investigation into CCA last year after an Associated Press investigation showed that CCA’s staffing reports listed some guards as working 48 hours straight in order to meet minimum staffing requirements. (…) For the past 12 months, state officials have said that the investigation was underway. But after the AP filed a public records request for the Idaho State Police investigation documents late last month, the law enforcement agency revealed no investigation ever occurred.” Gov. Butch Otter (R), “a self-described champion of prison privatization, first supported the police decision not to investigate.” The state “signed an agreement releasing CCA from civil liability in exchange for a $1 million payment.” TheSpokesman-Review says the call for an FBI investigation is reasonable, and also writes “if the state is serious about adopting ‘smart justice’ reforms that seek alternatives to prison time—and save taxpayer dollars—then privatization is a bad match. Contracts with private prison companies generally include clauses that call for maximum occupancy.”

13) Louisiana: Nine out of ten students now attend charter schools in New Orleans. “Local activist Karran Harper Royal, whose children attended schools in New Orleans before and after Katrina, says the shift to charters ‘feels like something being done to us … as opposed to us working together to improve public education, which is what I was a part of before “reform” came. Creating an all-charter district takes away choice,’ she adds, especially for parents who can’t get children placed in schools near their homes or people who don’t feel charter schools are responsive to their concerns.”

14) Maryland/Transparency Tools: Wexford Health Sources was paid over $100 million by the State of  Maryland’s Department of Public Safety and Correctional Services in 2013, making it by far the largest vendor to the department. Corizon was paid $2.9 million. Veolia Transportation Services was paid $25,275,114 by the Maryland Transit Administration last year.

15) Maryland: The state has terminated its $193 million contract with North Dakota-based Noridian Healthcare Solutions, the company hired to run its healthcare exchange. “Critics of the botched rollout said Noridian should have been replaced long before now, and they renewed calls for an investigation into why Maryland stumbled with implementation of the Affordable Care Act. The website is so flawed that state officials are considering abandoning it after open enrollment ends next month.”

16) Massachusetts: Methuen Mayor Stephen Zanni returns with a proposal to outsource the town’s IT department, which would cost three jobs. “His proposal last year just after he took office in 2012 failed as the City Council balked at his push to award a contract for services to the same company that recommended privatization.”

17) Michigan/Transparency Tools: Maximus companies were paid $12,847,274 by the state last year, the largest component of which went to Maximus Health Services, Inc., $12,338,994.88. Aramark companies have been paid $2,012,895 by Michigan since the beginning of this year. The largest payment has been to Aramark Correctional Services Inc., $2 million.

18) Nevada: State officials recommend that Xerox not be terminated for problems with the state health exchange, but that “state technology staff provide in-house support.” Issues include “continued problems with the website and complaints of long wait times for telephone assistance since the exchange went live in October.”

19) New Jersey: The Closter borough council will discuss the possible outsourcing of solid waste collection at its meeting on Thursday. “A plan to privatize garbage collection in December 2012 created controversy, and the council subsequently rejected the idea. [Council member] Latner said she hoped to avoid such heated battles and to allow residents to feel they are being heard.”

20) New York: Orange County Democratic Committee comes out against the privatization of the Valley View nursing home. “Their stance comes after County Executive Steven Neuhaus said his office is exploring all options regarding the future of the nursing home.”

21) New York: Chautauqua County legislators approve the sale of the county nursing home to VestraCare. The move will require approval from the state Department of Health. “The state approval process to change ownership and operation of the site will go through the DOH certificate-of-need system, which could take up to a year.” In a letter to the Observer last week, CSEA Chautauqua County unit president Steve Skidmore detailed the numerous efforts of the union to talk to the county about “negotiating separate terms and conditions of employment for nursing home workers. Each time, our request has fallen on deaf ears. (…) For well more than a year CSEA has been ready, willing and able, to discuss a series of cost saving proposals.”

22) Ohio: The Dayton Daily News raises serious accountability and transparency questions about a “secretive” nonprofit organization set up to promote jobs and investment. The paper “found that $64.5 million in local, state and federal tax dollars since 2004 have gone to the Dayton Development Coalition, the region’s chief private economic development arm, and its two affiliates. Roughly 60 percent of the organization’s revenue during that time came from public sources. Despite the influx from taxpayers, the coalition does not release its annual budgets, conflict of interest policies or financial statements.” Furthermore, “with its 2011 designation as JobsOhio West, the coalition assumes even greater power and has a new source of funding. It is one of six regional partners of JobsOhio, the state’s privatized economic development arm. Local projects needing state or JobsOhio incentives, including tax breaks, must now go through the coalition or JobsOhio directly for consideration.” [Sub required]

23) Pennsylvania: Last Friday was the deadline for bids on the “Rapid Bridge Replacement Program,” which aims to repair or replace at least 500 bridges in the state. “By ‘bundling’ the 500 bridges into one project, PennDOT thinks it can save money on design, and ultimately maintenance. (…) Other aspects of the law could be a bane. The law explicitly permits ‘user fees’—tolls—on new or rebuilt roads or bridges, though PennDOT officials stress none of the 500 bridges in the rapid replacement project will be tolled. But, down the line, motorists could see more toll booths, or EZ Pass restrictions. Others worry about hidden costs that could ultimately cost the state and its taxpayers more than if new bridges and roads were built in the traditional way.”

24) Texas: As the deadline for bids on SH-183’s expansion comes due March 14, one bidder is relieved that the procurement will be a traditional, publically funded model rather than a “public private partnership.” Building and operations contractors will bid on the project, rather than the full panoply of P3 interests. “If it works, it significantly decomplicates these types of projects, reduces advisory fees for all players, speeds procurements, eliminates construction risks for builders, and makes hedging unnecessary,” the unidentified bidder says. [Public Works Financing, February 2014; sub required]

25) Texas: The Dallas City Council is to receive a briefing on Wednesday on the city’s pressing need for infrastructure spending for repairs and upgrades. Among the briefing’s recommendations, “raise storm water fees. Look at a ‘dedication tax for streets.’ Just stop building things. Sell or close city-owned facilities. Stop expecting the streets to be 87% acceptable. Privatize more things. Ask people with money for more money. Charge more. Expect less.” [Briefing]

26) Texas: The Employees Retirement System of Texas will refrain from investing in infrastructure right now because there are “too few good deals.” In 12-18 months the market may right itself, says ERS CIO Tom Tull. “Some people will get burnt and then we will step in.” [Sub required]

27) Virginia: The benefits of part time school workers in Roanoke County will be cut back, “but the school system will not outsource transportation, nursing or nutrition services. (…) A dozen people spoke at Thursday’s meeting, which was standing room only. About half of the speakers asked officials not to cut retirement and health insurance benefits for people who work less than 30 hours a week. ‘I think it’s a big mistake. What you have in place works real good. You should leave it that way. If you take it away, you’re going to lose people you don’t want to lose,’ Terry Oliver said. ‘Benefits are what people are here for. If they lose their insurance and stuff, it’s going to kill them.’”

28) International: The Spanish government is balking at the prospect of bailing out the thirty banks that hold $4.8 billion of defaulted debt on Spain’s bankrupt private toll roads. The government is seeking to reduce “losses to the taxpayer.” [Public Works Financing, February 2014; sub required]

29) International: White & Case releases a report on Mexico’s new “public private partnership” law. Provides a top five ranking of Latin American countries by “P3 Readiness”—Chile, Brazil, Peru, Mexico, and Colombia. Also, Counterspin asks journalist Shannon Young “is privatizing the oil industry really the reform it’s made out to be?” [Audio]

30) Revolving Door News: The Project on Government Oversight’s report on the revolving door at the Securities and Exchange Commission was named a finalist in the Society of American Business Writers and Editors annual journalism competition.

31) Research Paper on “Public Private Partnerships”: “Public-Private Partnerships for Transport Infrastructure: Some Efficiency Risks,” by Matthew Ryan and Flávio Menezes (February 2014). “As the government faces transaction costs to replace the successful bidder, firms use debt strategically to pass on some of the cost risk to the government. This distorts incentives to invest in maintenance cost reduction. Private financing therefore undermines some of the benefits from bundling construction and maintenance, which is often mentioned as an important advantage of PPPs.”

 

Legislative Issues:

1) National: Lawmakers in fifteen states are moving legislation to rein in the reckless outsourcing of public services to for-profit corporations. “The trend comes amid increased nationwide scrutiny of outsourcing deals, many of which have had disastrous unintended consequences for taxpayers.” [Out of Control]

2) Arizona: A bill would force school districts to sell off vacant buildings to charter schools and private schools. “The move approved by the Senate Education Committee is being pushed by the Goldwater Institute.” Janice Palmer, a lobbyist for the Arizona School Boards Association, “called it a bad deal for taxpayers. She said current law already allows school districts to sell off buildings, but only after approval of voters. Palmer said this not only eliminates the need for voter OK but also leaves questions unanswered. For example, she said it may be the district is still paying off bonds which were used to build the schools. Palmer questioned whether that means the buyer has to assume any existing debt. Palmer also said the legislation would force districts to dispose of buildings at a time when real estate values are depressed rather than wait until the market improves.” [SB 1100]

3) Florida: The Lakeland Ledger denounces a bill that would gut local government abilities to manage growth. “HB 703 is not only an affront to home rule and community-based growth management, but is an assault on water-supply protection and local growth decision making, but would allow some large landholders to privatize big chunks of Florida’s water supply. The list of offensive parts of HB 703 is long and inexplicable, but here are some of the key components that should rile every Floridian.” The House Agriculture and Natural Resources Subcommittee will discuss the bill tomorrow. [HB 703]

4) Georgia: The House passed HB 788 last week, just in time to beat the “crossover day” deadline to have the bill considered by the Senate this term. The bill “would allow the University System of Georgia to privatize and pass along tax breaks for the construction of student dormitories and parking decks on the campus of the state’s colleges and universities.”

5) Tennessee: Tennessee may become one of 14 states that grants vouchers to students to attend private schools. “A Tennessee voucher program of some sort may be on its way to Gov. Bill Haslam’s desk, however, aboard two similar bills that are inching through the legislative process.” The Commercial Appeal reports that “when corporate-funded education reform groups such as Michelle Rhee’s StudentsFirst pour money into the campaign coffers of pro-voucher state legislators such as Sen. Brian Kelsey, a Republican from Germantown, and Rep. John DeBerry Jr., a Memphis Democrat, they fuel perceptions that vouchers, virtual schools, charter school incentives and the like are part of a larger effort to privatize public education and diminish the influence of teacher unions.” [Sub required]

6) Utah: Park City resident opposes proposed bill to privatize the state’s golf courses. “It is true that so far, only Wasatch golf course makes money; however, because there is a multimillion-dollar bond on the two courses at Soldier Hollow, no private outfit is even going to bid to try to run them. If any non-governmental course management company were hired, prices would nearly double in order to make a profit. And I guarantee that course conditioning would suffer almost immediately as the operator tried to reduce costs.”