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This Week’s Outsourcing Scan 11-03-14

Update: Upcoming Outsourcing Issues. November 3, 2014

1) National: As the country heads to the polls tomorrow, the Network for Public Education reports that “big outside money is flowing into school board races nationwide.” One example: “Out of state corporate education supporters are pouring money into an Austin, Texas, district race for School Board in support of a little-known candidate who is a ‘founding administrator’ of a KIPP charter school in Austin and is a Teach for America alum.”

2) NationalCommercial rocket blows up on takeoff, raising questions about the privatization of the U.S. space program. “What’s important to note, say the experts, is that NASA has always relied on outsourcing the building of rockets to private companies. But after the country’s Space Shuttle program ended in 2011, the agency shifted from intense oversight of that construction to a model of buying a service from the commercial builders. Since then, [Prof. John] Logsdon says that people who know the space business have been concerned about companies cutting corners for profit, especially when manned flights are involved.” Virgin Galactic’s private SpaceShipTwo also blew up on Friday, killing one of the pilots and raising further questions about commercial space projects. Company officials reportedly were warned repeatedly about problems with their design.

3) National: The Obama administration moves to close 1,400 programs at for-profit colleges. New rules would “cut off federal aid to career training programs where the average graduate ends up spending more than 8 percent of their discretionary earnings, and 20 percent of their total earnings, on federal loan payments.” But industry complains, and “consumer advocates say the rule, changed from an earlier version, is too watered down to make a difference. And whether it’s enforced at all could depend on who wins the White House in 2016.”

4) NationalThe debate over social impact bonds continues. “Enthusiasm among some of those involved in SIBs is high. ‘When I first heard about this concept, I was not sold, but over time, I have become a believer,’ said Kevin Hamilton, chief program officer at Clinica Sierra Vista.” But Rick Cohen, national correspondent for Nonprofit Quarterly and former executive director of the National Committee for Responsive Philanthropy, warns that SIBs “aren’t bonds, they are loans” that come with potentially high interest rates. Cohen says SIBs “reflect a mistaken view that government is incapable of creating effective programs, with measurable results, without the help of private capital.”

5) NationalTruthout’s Victoria Law looks at the role of private prison money in some of this season’s election campaigns

6) NationalCorrections Corporation of America will release its quarterly earnings after market close today, and hold its conference call tomorrow at 11 Eastern.

7) National: NPR’s John Burnett reports on the unusual, no-bid deal between ICE and the city of Eloy, Arizona, to establish an immigration detention center in Texas. “‘But here, the city of Eloy can’t say with a straight face it has anything to do with the operation of that facility because it’s hundreds of miles away,’ says [University of Texas Civil Right Law Clinic director] Ranjana Natarajan.” The first detainees arrive at the Texas facility next month.

8) National/Arizona/Texas: Jail bond issuers in Arizona and Texas are redeeming some bonds because of excessive private use. “The IRS has been concerned about jail bond issues and has argued that those bonds may be taxable private-activity bonds if the facilities house a sizable number of federal inmates or the owners contract with private parties to run the jails.”

9) National: The Department of Defense Inspector General has pledged to do a better job protecting contractor whistleblowers

10) NationalU.S. News reports on immigration detention problems, picking up on a new report by the Lutheran Immigration & Refugee Service and Women’s Refugee Commission. “Immigration detention centers additionally have come under scrutiny for being managed by private, for-profit prison companies. It’s estimated that half of all beds in immigrant detention centers are run by such companies, who fall under federal oversight that in turn has come under fire. The Associated Press reported that a single federal monitor can be responsible for as many as 1,800 detainees, and that private operators have been tipped off ahead of federal inspections. Private prison operators also have been accused of government lobbying to influence immigration policy, which companies have denied.”

11) National: Fitch forecasts that the federal government will use more loans in future “public private partnerships“ as traditional highway and transit grants decrease. “TIFIA loans are attractive to public-private partnerships as well as governments seeking to finance large transportation projects because the fixed-rate loans carry an interest rate equivalent to Treasury notes.” [Sub required] The report notes that “TIFIA takes on risks of a typical project finance lender. By utilizing TIFIA, projects that would otherwise be non-investment grade have the potential to reach investment grade through more favorable transaction terms.” Fitch also says it considers the U.S. “a subordinate lender with teeth,” and that TIFIA agreements usually contain provisions for taxpayers to share in the upside of a project if it exceeds expected toll revenues  [TIFIA: Critical for U.S. Infrastructure Funding; sub required]

12) National: The IRS has issued guidance “on how management contracts and certain accountable care organizations can be structured to avoid excessive private use that would jeopardize the tax-exempt status of bonds.” Federal tax law holds that “governmental or 501(c)(3) tax-exempt bonds can become taxable if the projects they finance have excessive private business use. Bonds generally are considered private-activity bonds if more than 10% of the proceeds are used for private business and more than 10% of the debt service is payable from, or secured by, a private party.” [Sub required]

13) National: This year’s Nobel laureate in economics, Jean Tirole, warns about the difficulties of accounting for contingencies in contracting. “In cases like Bertha or the Indiana Toll Road, the private contractor can walk away, but the state cannot. Tirole is not arguing that incomplete contracts are a deal-breaker. But their risks must be taken into account when P3 deals are structured. The message from both Prof. Tirole and Bertha is: Contracting is rough business. States and localities need help thinking through all of the challenges, especially in the blinding light of what may look like easy money.” 

14) National/International: Hastings Funds Management, an Australian infrastructure fund manager, expands its New York office. Daniel Lee, who “will be responsible for sourcing and executing new equity infrastructure investments, brings a decade of industry experience to his new role. Previous roles have included active involvement in the $3.8 billion sale of the Indiana Toll Road to Cintra and Macquarie, focusing on mergers and acquisitions at Morgan Stanley, and serving as an investment banking analyst in Goldman Sachs’ Public Sector and Infrastructure group.” [Sub required]

15) National/International: Detroit community activists, religious leaders and families without water march through the city in solidarity with Irish citizens protesting the introduction of water charges. One Irish protestor says, “I hear the argument all the time that water cannot be supplied for free, that we should pay for it. We do. I will not pay a private company, Irish Water, for water that I have paid for already. I paid the household charge—part of it was supposed to go to Irish Water; I paid the property tax—part of it was to go to water; and I pay income tax—part of that is supposed to go towards water.” 

A federal judge will rule this Friday on whether Detroit’s bankruptcy exit plan can go ahead. The week before last, the judge asked the lead lawyer from Jones Day, which is representing the city, “to discuss the professional fees that the Chapter 9 case has cost Detroit taxpayers. The fees from the 15-month case have reached nearly $140 million. Of that, $52 million goes to Jones Day, according to bankruptcy filings.”

16) ArizonaPhoenix voters are to decide on the future of public pensions in a ballot initiative tomorrow. “In the Phoenix battle, over $40,000 has come from the Action Now Initiative, a non-profit fund run by John Arnold, a former trader at Enron, the defunct energy company. Arnold went on to make an estimated $3 billion running Centaurus, a Houston-based natural gas trading hedge fund.”

17) ArizonaNational Education Association President Lily Eskelsen Garcia takes on school privatization in a visit to the state. “That push toward privatization has only increased segregation, making inequities more pervasive, Eskelsen Garcia said, arguing that the wealthy send their children to private schools, taking away advocacy for public schools. Added Andrew Morrill, president of the Arizona Education Association, ‘Isn’t it interesting? Arizona is in its first years where Anglo students are not the majority population in our public schools, almost as if someone decided that since Anglos are no longer the majority population in our public schools, it was OK to start defunding them.’”

18) CaliforniaThe key race for state school superintendent will be decided tomorrow. “On one side are those like Mr. Tuck, who say that teachers’ unions hold too much sway over the Democratic Party and that public education needs a more entrepreneurial approach. On the other are those like Mr. Torlakson, who say the proposed changes, which include the expansion of charter schools and greater use of test scores to evaluate teachers, amount to a corporate takeover of public schools.”

19) Indiana: Last week a Federal judge approved the bankruptcy exit plan of the Indiana Toll Road’s operator, which is owned by Cintra and Macquarie, two large foreign road privatization companies. The operator made it only eight years into a 75-year concession for the “public private partnership” toll road. ITR Concession’s exit plan includes a sell-off of the remaining years of the concession, and hungry investors are reportedly lining up “for a chance to swoop in and take over the lease and collect the toll revenue.” 

Meanwhile, the state is steadfastly refusing to retake control of the road, despite the fact that it is now operating at an 82% profit (net of its debt) due to numerous toll increases imposed under the private operator. The state says the road’s revenues never covered its operating expenses before it was privatized, but bases this argument on figures predating the toll increases. The state hadn’t raised rolls for 20 years before it was privatized. 

Democratic U.S. Sen. Joe Donnelly has called for the road to be brought back under state control, as is provided for in the original agreement, saying that it could become a well performing public asset that could fund other transportation needs across the state. He also points to substandard maintenance of the road and its toll plazas while under private operation. Instead it appears future profits will be channeled off to debt holders and new private investors, while Hoosiers worry about whether the new owners of ITR will spend the necessary money to fix the road’s problems and keep it up to snuff. ITR has until August 2015 to find a buyer or it will have to restructure the debt on its own.

20) Indiana: The state supreme court heard the case pitting IBM against the state of Indiana over the failed attempt to privatize welfare services. “Peter Rusthoven, an Indianapolis attorney who is representing the state, told the justices that IBM had failed to meet the ‘prime objective’ of the contract, which he said on the first page calls for IBM to improve the state’s delivery of welfare services. ‘There is zero issue in the case that IBM breached the contract,’ he told the court.” A ruling is expected in the next few months.

21) Maryland: One Baltimore rallies to protest the possible privatization of the city’s water system. One participant writes, “despite what the mayor’s office has claimed, there is a very real threat that a contract with Veolia under any name could result in privatization down the line. (…) It is a documented fact that Veolia’s private water contracts are accompanied by rate hikes, labor rights abuses and environmental destruction. In order to sell these unpopular contracts to local communities, the corporation uses phrases like ‘consulting contract’ and ‘public-private partnership.’”

22) Michigan: Employees picket outside courthouse to protest plans to outsource jobs at the Detroit Medical Center to Sodexo. “The American Federation of State County and Municipal Employees Council 25 and the Service Employees International Union filed a suit against the DMC, alleging that management entered into the contract with Sodexo in order to avoid bargaining with the unions.”

23) Michigan: The Wolverine Community School Board has voted to privatize custodial services on a “trial basis.” “As part of the contract with EduStaff, the custodian would not be provided with benefits. The hourly position pays $12 an hour and it is not a long-term commitment.”

24) New JerseyHaddonfield voters will decide tomorrow whether to privatize their water system. Veolia has reportedly submitted the highest bid. “Not everyone in the borough favors letting a private company take over. Haddonfield resident Dan Bailiff said the sale will ‘sacrifice local public control over services that are essential for public health and well-being.’ The proposal’s opponents face a pro-sale campaign waged by the municipality and the water company.”

25) New Jersey: Freehold Township care center worker says the facility should not be privatized. “These ‘typical’ other private nursing homes are perfectly fine for your average geriatric residents, but are not suitable alternatives for residents of John L. Montgomery. Our residents are in their teens, 20s, 30s and 40s who are not grandparents or your elderly parents, but they are your children, your brothers and your sisters.”

26) New Mexico: Race for land commissioner raises the issue of privatization of public lands, ecological management. “In campaign ads airing on the music app Pandora, [incumbent Ray] Powell says [Aubrey] Dunn has a ‘radical agenda’ to privatize state lands for special interests. Dunn, a businessman and rancher, has accused Powell of practicing ‘extreme environmentalism.’ (…) Powell supported conservation agreements with the federal government that aimed to help the lesser prairie-chicken and sagebrush lizard while allowing landowners to continue with their operations.”

27) North Carolina: Group looks into a legal challenge to adding toll lanes to I-77. The state is close to finalizing a contract for the “public private partnership” with Cintra, a Spanish firm that has had trouble financing private road operations in Indiana and Texas. [North Carolina Citizens Against Toll Roads]

28) Ohio: Ohio State is considering privatizing the management of its gas, water and electrical utilities. “OSU would spend the early part of 2015 assessing which companies might be fit for the job, [Sr. VP and CFO] Chatas said. Bidding could then start as early as next fall. The duration of the lease and the amount OSU might save depends on what the companies propose.”

29) Pennsylvania: A pending state supreme court decision will determine whether Gov. Corbett can close down 26 public community health centers that serve mainly rural and poor residents. “The ruling will hinge on the interpretation of a law—enacted in 1996 by the Legislature in the wake of an effort to privatize certain services provided by the state health centers (…) In court, the department argued that the law applied to a previous effort to privatize the centers, and that the legislation shouldn’t be broadly construed to stop the Corbett administration’s plan in this case.” SEIU’s Kevin Hefty says “public health risks such as Ebola remind us why having a fully staffed Department of Health is so critical.”

30) Texas: San Antonio city council approves a $3.4 billion 30-year DBFOM “public private partnership” for its water system. “According to SAWS, San Antonio’s access to the Edwards Aquifer decreases by up to 44 percent during severe phases of drought. The Vista Ridge project will deliver water from the Carrizo and Simsboro Aquifers in Burleson and Milam counties rather than the Edwards Aquifer, making the new water system ‘drought-proof.’” [Sub required]

31) VirginiaRoanoke may outsource its substitute teachers. “If the privatization comes to fruition it would mark another in a string of services division officials have opted to contract out. It would also continue a growing trend of school systems in the Roanoke Valley outsourcing services. This school year Salem started outsourcing its food services, something Roanoke is also expected to explore. Roanoke County outsources some maintenance services and last year stirred controversy when officials looked into potentially outsourcing its transportation, nursing and food services.”

Legislative Issues:

1) NationalSocial security privatization is possibly still on Mitch McConnell’s legislative agenda. “Making matters slightly worse, when Kentucky Joe Sonka asked McConnell whether voters should expect the senator to push Social Security privatization after the midterms, McConnell replied, ‘I’m not announcing what the agenda would be in advance,’ suggesting the senator is confused about the point of a political campaign.”

2) Arkansas: Republican state senator pushes to privatize the Wrightsville prison unit to LaSalle Corrections. This past summer, immigration detainees were removed from LaSalle’s Jack Harwell Detention Center in Waco, Texas, after protests about substandard conditions.

3) CaliforniaBurbank City Council rejects proposal to outsource street sweeping. “We have quality services in this city—people value the service and the courtesy that they receive from our city employees,” said Jeffrey Moulton, a journeyman in the Public Works Department.

4) New Jersey: Sweeping legislation to permit the state Department of Transportation to enter into “public private partnerships” on road and transit projects has been introduced in the Assembly and referred to the Transportation and Independent Authorities Committee. [A 3870]