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This Week’s Outsourcing Scan 03-10-14

Update: Upcoming Outsourcing Issues. March 10, 2014

1) National: A criminal investigation of Corrections Corporation of America has been opened by the FBI, according to the Associated Press. The inquiry is “over the company’s running of an Idaho prison with a reputation so violent that inmates dubbed it ‘Gladiator School.’” Last year, “CCA officials acknowledged it had understaffed the Idaho Correctional Center by thousands of hours in violation of the state contract.” The U.S. Attorney in Boise said the FBI was looking into whether federal fraud and other statutes were violated.

2) National: At a Raymond James Financial Inc. Institutional Investors Conference, the president and CEO of Republic Services talks trash hauling privatization. Don Slager tells investors that “the municipal business, while it presents an opportunity for us to privatize, it has been a headwind for us, because of the tough situation that municipalities are in with their tax basis, the state of its finances is not getting necessarily better.” Says of the financial crisis that “we’ve used this economic abyss to help convince cities to give [trash hauling] up. (…) We’ve, over the last three years, added about $37 million of annual revenue through this focus of selling into this vertical. And again, these tend to be smaller cities. We basically say that when the mayor’s job is a part-time job, you’ve got a much better chance of privatizing it. So we’re aiming at smaller targets here.” [Webcast]

3) National: Sen. Bernie Saunders (I-VT) writes in the Wall Street Journal that there is no reason for the U.S. Postal Service to end Saturday delivery. “Yet the Postal Service is under constant and vicious attack. Why? The answer is simple. There are very powerful and wealthy special interests who want to privatize or dismember virtually every function that government now performs, whether it is Social Security, Medicare, public education or the Postal Service. They see an opportunity for Wall Street and corporate America to make billions in profits out of these services, and couldn’t care less how privatization or a degradation of services affects ordinary Americans.”

4) National: The Associated Press shines a light on consulting firms with potential conflicts of interest pushing casino development across the country. “The arrangement highlights an often-overlooked trend as more cities and states embrace legalized gambling around the country: Private companies are being hired to write regulations and vet casinos, even as the same firms work the other side of the fence, helping casinos enter new markets and sometimes lobbying for their interests. (…) Regulators in states that maintain control over their own rules say the move toward privatization is unnerving.”

5) Georgia: Consternation flows as President Obama leaves a possible Savannah harbor dredging project out of his budget. “The state is considering options to pay for the entire project in case federal dollars don’t come through. Georgia already has set aside $231 million and plans to add another $35 million this year. The governor said the state could float bonds or enter into a public-private partnership to fund the rest, but he hopes it doesn’t come to that.” [Sub required]

6) Illinois: Hammond Public Works Board drops its plan to outsource its recycling department. The original intent “was to save tax dollars or receive a net zero cost with better services.” Board chair Robert Lendi said “if we would have awarded the bid to either of them, it would have cost us more.” Privatizing the recycling department “still could be an option if the board decides to open up another bid process with more tailored requests from companies to reduce the overall cost.”

7) Indiana: Controversy builds over “bait and switch” on consultant fees for the Gary Airport privatization deal. “Particularly in the case of three consultants with success-based contracts, there are questions whether they should be paid at all for a deal that yielded no upfront investment and no project, according to Andrew Vasey, president of Vasey Aviation Group LLC, in Indianapolis. (…) The joint city/airport committee that negotiated the privatization had long maintained the winning bidder would pay the fees. But when the 40-year deal was signed last month with Aviation Facilities Co. Inc. (AFCO), of Dulles, Va., it lacked any such requirement.” There is also controversy about proposals to use TIF money, which is supposed to go for development, to pay consultants. “Wil Davis said the sudden move to use the zone fund to pay the consultants is incredible because it was always claimed the winning bidder would pay that expense.”

8) Maryland: The price of the Purple Line “public private partnership” has hit $2.37 billion, almost twice the initial estimate for the light rail link, according to a report by the Federal Transit Administration. “A proposal to build a 14-mile light-rail Red Line in Baltimore also has grown more expensive, with its estimated construction costs up by $70 million to a total of $2.64 billion, according to the federal report. Those increases were due primarily to higher construction costs for underground stations and a maintenance facility.” Last week the Obama administration recommended both projects for federal construction assistance.

9) Michigan: Work is to begin this summer on the controversial $3.3 billion New International Trade Crossing bridge linking Detroit with Windsor, Ontario. “The bridge is structured as a public-private partnership, with Canada taking on nearly all of the financial risk. The agreement calls for Canada to make availability payments to the private firms, with the expectations that tolls will provide most of the revenue. An intergovernmental authority will likely issue tax-exempt debt for the bridge and related construction.” [The Bond Buyer, March 10, 2014; sub required]. President Obama did not include money for the project in his budget proposal last week.

10) Nebraska: Gov. Heineman wants to do a “comprehensive” study of lower cost alternatives to building more prison beds before considering new prison construction. Nebraska has a serious overcrowding issue. “One retired prison warden said building new prison beds is ‘inevitable’ because alternatives won’t stem the rising number of offenders being sent to prison.” Three new facilities are being considered.

Last month, Corrections Corporation of America said that several states were considering deals in which CCA would provide the real estate component for relocated or new prisons, and mentioned Utah. CCA CEO Damon Hininger said there “could be opportunities where we can go in and provide a solution for them with a new build and again just be the landlord. So for competitive reasons, I won’t mention any other by name, the only one I highlighted is Utah because it is in the public domain.” Could Nebraska be another candidate?

11) New Jersey: New report by Janice Fine and Patrice Mareschal of Rutgers University finds a “systemic lack of effective oversight of [state] contractors.” Finds that no agency within the state appears to have the capacity and competence to provide effective contract oversight; that contracts typically include weak performance requirements and standards, and they do not include adequate penalties to hold contractors accountable for poor performance; and that state contracting is typically done without regard for contract costing, and New Jersey lacks an adequate number of trained staff to provide oversight. “The researchers recommend a redesign of the state’s contracting process. This includes the requirement of sufficient resources, new contract management requirements, greater transparency, and the development of appropriate data systems.” [Report]

12) New Jersey: The law firm that represented the winning bidder in last year’s privatization of the state lottery comes under scrutiny for the “vast increase” in its lobbying practices over the past few years. “One of the firm’s founding partners, David Samson, is chairman of the Port Authority of New York and New Jersey, a former state attorney general and a confidante of Mr. Christie.”

13) New Jersey: Groundbreaking begins on the state’s first hybrid district/charter school. “The academy was created in a partnership among KIPP Charter Schools; the Cooper Foundation, which is the charitable arm of Cooper University Health Care; and the Norcross Foundation, created by the Norcross family, including George E. Norcross III, who is chairman of Cooper hospital and a managing partner of The Inquirer’s parent company, and his brother, State Sen. Donald Norcross (D., Camden). The facility will be the first of a projected five KIPP schools in a mini-network serving nearly 3,000 children.”

14) New Jersey: In a letter to the editor, Edna Birch asks if Gov. Christie is out to privatize “all of New Jersey’s hospitals.” She says people should be aware “of a plan to sell struggling St. Mary’s Hospital in Passaic to Prime Healthcare Services of California, a for-profit hospital chain. Advertising by a health care workers’ union has questioned why a firm hired by Prime to do public relations for the sale, Mercury Public Affairs, has as a partner Mike DuHaime, a political strategist for Christie and the Republicans.”

15) New Jersey: Warren Haven officials are to meet with labor representatives in the next week or two to discuss the future of the nursing home. Union officials have blasted the county for scapegoating workers by using “labor costs as an excuse to privatize the county-owned nursing home. ‘If you want to close the facility and look for a bad guy, don’t put that burden on the employees, many of whom have spent their entire working lives at the facility,’ said Gerard Meara, executive director of the American Federation of State, County and Municipal Employees Council 73.”

16) New Jersey: Franklin Township Board of Education decides against outsourcing the jobs of school paraprofessionals, including school aides, but may outsource the jobs of substitute teachers. “Paula Darrow identified herself as one of the paraprofessionals whose jobs were kept safe. ‘I thought maybe we were the bottom of the barrel,’ Darrow said. ‘I see now the substitutes are the bottom of the barrel.’”

17) New York: Charter school operator Eve Moskowitz is accused of using her students to lobby for privatized education. “Of course, private corporations have long used their workforces and their economic power to try to influence politics. What’s different here is the use of an ostensibly public institution—and possibly public dollars—to lobby for private interests, and to do so in a way that uses children as the lobbyists. It is a prospective precedent that no doubt has the school privatization movement and the for-profit education sector rejoicing.”

18) New York: Dutchess County executive Marcus Molinaro wants to privatize the county airport based on a consultant’s recommendation.

19) North Carolina: The Department of Transportation names Clayton Somers as the new executive of the Turnpike Authority. Somers, who appears to have no transportation experience, was general counsel of the North Carolina High School Athletic Association. “In 2013, the Legislature passed the Strategic Mobility Formula to prioritize projects and rescinded previous annual appropriations for the Mid-Currituck Bridge and Garden Parkway projects, which had not begun construction. Though a public-private partnership is contemplated for Mid-Currituck its funding is being reevaluated, and the federal approval for the Garden Parkway toll road is being challenged in court.” [The Bond Buyer, March 10, 2014; sub required]

20) Ohio: Judicial decision leads to a high stakes appeal over the constitutionality of the privatization of Lake Erie Correctional facility to Corrections Corporation of America. “The Ohio Supreme Court has not yet decided whether it will accept the state’s appeal, filed on Monday. (…) The three-judge panel ruled that the prison-privatization language championed by Kasich and Republican legislators was inserted in the budget for ‘no rational reason,’ in violation of the constitutional one-subject mandate. (…) As a result of the budget law, the state sold the Lake Erie Correctional Facility in Conneaut to Corrections Corp. of America for $72 million and allowed another company to run the North Central Correctional Institution in Marion.”

21) Ohio: The  recidivism rate at Ohio prisons has declined, but the state’s inmate population is still near a record high. [Reports]

22) Pennsylvania: Unions rally against Philadelphia Mayor Nutter’s budget proposaland the proposed privatization of the Philadelphia Gas Works. “A morning rally outside City Hall drew several hundred workers from two city unions—AFSCME District Council 33, whose 8,800 members have gone five years without a contract or a raise, and Local 686 of the Utility Workers Union of America, whose 1,140 members are feeling threatened by one of the accomplishments Nutter touted Thursday: the proposed sale of the city-owned Philadelphia Gas Works.” City Council President Darrell L. Clarke says “this is an effort to privatize PGW. At the end of the day, we are not supportive of privatizing municipal workers.” The $1.86 billion sale of the gas works to Connecticut-based UIL Holding Corp. requires the council’s approval.

The Philadelphia Citypaper has called the privatization of the gas works “the most important local issue that you haven’t thought about at all. (…) Utility Workers Union of America Local 686, consumer advocates and City Controller Alan Butkovitz have already criticized the sale. A skeptical City Council—which, along with the Pennsylvania Public Utility Commission, must give its approval for the deal to go through—has retained consultants to analyze the sale, and whether PGW could expand and improve as a city-owned utility.”

23) Pennsylvania: Montgomery County sells the Parkhouse public nursing home complex to Maryland-based Mid-Atlantic Health Care for $41 million. An opponent of the deal “said she did not know that the county planned to finalize the sale during Thursday’s meeting and called the process ‘sneaky.’ Apart from the protests, the proposed sale drew controversy in February when County Controller Stewart J. Greenleaf Jr. issued a 15-page audit. The report said that Elliot Menkowitz, an orthopedic surgeon who worked at Parkhouse at the time, may have violated county ethics and procurement policies by passing on inside information about the impending sale to Mid-Atlantic.”

24) Tennessee: State reviews privatizing restaurants and lodgings in 11 state parks. “Skeptics say privatizing these parts of the park would result in layoffs and impact 50 jobs in Crossville. State officials are still reviewing the proposal and the impact privatization could have.”

25) West Virginia: Rep. Shelley Moore Capito (R) pushes for federal funding to support widening and development of U.S. 35, which connects I-64 and southern Ohio. “If federal funding for the U.S. 35 widening doesn’t happen, the state DOH has been looking at a possible public-private partnership. A bill approved by the Legislature last year allows private entities or contractors to front all of the money necessary to finish a project. The DOH would pay them back over a set period of time.”

26) International: At a Berlin investment conference, Julia Prescot of Meridiam Infrastructure criticizes the use of five to seven year financing in Australian “public private partnership” deals, “which creates refinancing risk.” Prescot also said “we ought to put a lot more effort into influencing politicians through a constant feedback loop.” [Sub required]. In recent years, private equity, which has a shorter-term investment horizon, has been taking an interest in U.S. PPP deals.

 

27) Think Tanks: The Canadian Centre for Policy Alternatives warns Saskatchewan to look at the dismal record of the U.S. on prison privatization before it thinks about outsourcing prison food services to a for-profit company. “From the above examples, declining quality and extra-billing appear to be the norm when it comes to private prison food services. To combat this tendency, governments will have to factor in the extra costs of rigorous monitoring and contract compliance, a cost of privatization that is rarely considered.”

  

Legislative Issues:

1) National: A tax reform package proposed by Rep. Dave Camp (R-MI) would make $126.5 billion available to the Highway Trust Fund in return for a reduced tax rate on repatriated corporate profits. It would also impose a 10% surtax on some municipal bond interest earnings, which has alarmed state and local officials. “Ultimately, that translates to higher borrowing costs for state and local governments and capital improvement projects that are delayed, scaled back or cancelled altogether,” said Mike Nicholas, CEO of the Bond Dealers of America. 137 lawmakers signed a letter to House leaders defending municipal bond tax exemption. Camp’s plan would terminate the exemption for private activity bonds, which are often used in “public private partnerships.” The Koch-backed Americans for Prosperity and right wing Club for Growth backed Camp’s proposal, which is unlikely to pass.

2) National: House Transportation and Infrastructure Committee holds a hearing on “public private partnerships.” The Congressional Budget Office testifies (includes some valuable summary data):

“* Private financing will increase the availability of funds for highway construction only in cases in which states or localities have chosen to restrict their spending by imposing legal constraints or budgetary limits on themselves. The reason is that revenues from the users of roads and from taxpayers are the ultimate source of money for highways, regardless of the financing mechanism chosen.

* The cost of financing a highway project privately is roughly equal to the cost of financing it publicly after factoring in the costs associated with the risk of losses from the project, which taxpayers ultimately bear, and the financial transfers made by the federal government to states and localities. Any remaining difference between the cost of public versus private financing for a project will stem from the effects of incentives and conditions established in the contracts that govern public-private partnerships.

* On the basis of evidence from a small number of studies, it appears that such partnerships have built highways slightly less expensively and slightly more quickly, compared with the traditional public-sector approach. The relative scarcity of data on public-private partnerships for highway projects, however, and the uncertainty surrounding the results from the available studies make it difficult to apply their conclusions definitively to other such projects.”

3) National: Food & Water Watch criticizes President Obama’s budget proposal, saying budget cuts to the Food Safety and Inspection Service “will essentially privatize poultry inspections, putting the big poultry companies in charge of food safety while removing U.S. government meat inspectors from the job. To add insult to injury, it will move slaughter line speeds up from 140 to 175 birds a minute. This rule is a disaster for poultry workers and consumers alike, and we call upon the administration to protect food safety, not meat industry profits.” FWW calls on Congress to fully fund FSIS.

4) Kentucky: Corporate-backed bill to expand “public private partnerships” is passed by the House Appropriations and Revenue Committee. “It drew objections from Democratic Rep. Arnold Simpson of Covington, who said the public-private partnership option could pave the way for tolls to finance a new Ohio River bridge between Cincinnati and Covington. He tried but failed to have the bridge project excluded from such financing plans. ‘The mere possibility of the utilization of this bill as a device to toll the bridge that lies in northern Kentucky, I feel, is an affront,’ he said.”

5) Oregon: As the state legislature adjourns without passing any bills on liquor privatization, attention now shifts to the ballot initiative process. “Grocery chains such as Fred Meyer and Safeway have now set their sights on privatizing liquor sales in Oregon, where only state-regulated liquor stores are currently permitted to sell distilled spirits.”

6) Pennsylvania: Gov. Corbett isn’t giving up on liquor privatization, which has gone nowhere in the state legislature for the past two years. “Corbett says ‘there is a lot of discussion going on’ regarding the liquor stores that the public doesn’t know about.”