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This Week’s Outsourcing Scan 4-6-2015

Update: Upcoming Outsourcing Issues. April 6, 2015

1) National: This is the last day for public comment on the Department of Transportation’s proposed rulemaking on local hire. The Partnership for Working Families says “absent these programs, major development projects typically fail to create job opportunities for local people, and in particular low-income residents and people of color. Our innovative targeted local hire policies have demonstrated that new strategies can work, and have moved over 100,000 local residents into good construction jobs.” PWF says “it’s critical that U.S. DOT hear how and why communities support this rule.” [Comment here]

2) National: The Center for Effective Government and the Economic Policy Institute issue a report making the case against Congressional proposals to give corporations a massive tax holiday on their overseas profits to fund infrastructure. “The proposed ‘tax holidays’ would generate a relatively small, one-time revenue bump while allowing large corporations to avoid much larger amounts of tax owed over the longer term. The last time we tried this, in 2004, it failed miserably. Corporations that participated shaved nearly $100 billion off their long-term IRS bills. And instead of boosting investment, they used the windfalls to buy back their stock and boost dividends while laying off more workers than they hired. Once the holiday was over, they began rebuilding their overseas profit stashes.” If the top 26 firms paid what they owed on overseas profits, this would “represent a significant down payment on the nation’s overall infrastructure investment needs and could create an additional 1.8 million jobs.”

3) National: Bloomberg looks at the national backlash against road tolls.

4) National: Wall Street is keenly pursuing water privatization. Private equity firms are touring the country trying to persuade municipalities to enter into water “public private partnership” deals. “KKR’s group got about a dozen hits, but so far, no bites.” [Public Works Financing, March 2015; sub required]

5) National: The New York Times looks at the high price of prison phone charges. “The prison phone system is now a $1.2 billion-a-year industry dominated by a few private companies that manage phones in prisons and jails in all 50 states, setting rates and fees far in excess of those established by regular commercial providers. The business is so considerable–some 500 million prison and jail phone calls totaling more than six billion minutes in 2014–that it has caught the eye of private equity firms.”

6) National: The FB Heron Foundation decides to divest from the GEO Group and Corrections Corporation of America. “We consider ourselves legally obliged to make this change given our fiduciary duties as a tax-privileged organization.”

7) National: Yves Smith asks why public pension fund managers “give private equity firms so much discretion with inadequate oversight and controls,” and finds part of the answer in the fact that it is “impossible” for public funds “to find seasoned advisors, such as pension fund consultants and attorneys, who are not beholden to private equity sources of income.” She focuses on the Los Angeles pension fund LACERS as an example. “You can see how low the standards are for soi-disant expert review of private equity funds. In some ways, it’s not quite as crazy as it might seem, given that general partners are selling hope rather than a product. (…) The fact that it can get away with such flimsy work is proof of how low the prevailing standards are. And there are reasons that the limited partners can’t do any better. The entire industry is rife with conflicts of interest.”

8) National: Systems for determining contractor compliance and noncompliance with project agreements are a touchy subject in the “public private partnerships” industry. At a January forum organized by Public Works Financing, one participant said “I hate to say it but I think this is a dirty little secret in the P3 world, and I think we all need to start opening our eyes to this because the noncompliance point system, and the financial deductions associated with them, are key to the incentive aspect of P3s.” [Public Works Financing, March 2015; sub required]

9) National: The GEO Group and Corrections Corporation of America release their proxy statements for their upcoming annual meetings. According to the investment analysts Morningstar, GEO executive compensation was up 7.08%. 2012-2014 compensation for the top six GEO executives comes to $30,721,034, excluding “performance based” stock awards. CCA’s comes to $28,038,111.

10) National: The stock prices of private education companies took a hammering last week. Apollo Education, whose stock was down 27%, experienced a sharp quarterly downturn in degree enrollment (-14.6%) and revenue from degree enrollment (-17.9%). Motley Fool, the financial services company, says “there’s no telling how much further profitability will decline.” [Sub required]. The Atlantic tries to put a brave face on the declining numbers. Seeking Alpha remarks that “a push by President Obama to make some forms of community college free is considered a threat to the sector.” [Sub required]

11) National: Mona Shattell and Sarah Callahan warn against private prison companies moving into profitable prison aftercare services while they pay lip service to sentencing reduction. “There is a critical need to continue reducing prison populations with sentencing reforms. However, in addition, political and government contracts and ties to the prison industrial complex for aftercare services need to be severed. Companies like CCA and GEO Group have monetary incentives to provide inadequate care to keep their re-enrollments high, and this presents both a moral and economic conflict with the needs of prisoners, taxpayers and community members. Given the track records of for-profit prison companies, the likelihood that the quality of the aftercare or transitional services they provide will improve, is doubtful.”

12) National: Mimi Rosenberg & Ken Nash interview education privatization opponent Diane Ravitch on WBAI’s Building Bridges.

13) California: Monterey County Supervisor John Phillips wants to do a traffic and revenue study to decide whether to develop Highway 156 as a four-lane, $268 million toll road “public private partnership.” The county transportation board meets on April 22 to discuss the proposal.

14) California: Plenary announces that it expects to reach financial agreement on the Long Beach Civic Center “public private partnership” by the end of this year. [Public Works Financing, March 2015; sub required]

15) Colorado: An audit conducted by legislative and state auditors faults the Colorado Department of Transportation for failing to secure adequate public and legislative input into the U.S. 36 “public private partnership” road improvement project. But the report treats the issue as a public relations problem involving “public and stakeholder education and involvement” (p. 67), rather than power sharing in decision-making and transparency on deal terms.

16) Illinois/Indiana: Using the Freedom of Information Act, Crain’s Chicago Business uncovers the suppression of a report commissioned by the state of Illinois on the financing of the Illiana Toll Road “public private partnership.” The state asked Fitch Ratings to determine whether the project would qualify for a federal TIFIA construction loan. When the answer came back negative, then-Gov. Pat Quinn’s administration buried the report. As the Chicago Tribune reports, the information would have been very useful to the Chicago Metropolitan Agency for Planning board when it was deciding whether to include the Illiana P3 in its regional plan. The board was trumped by its policy committee when it decided against Illiana. “And that’s too bad, because you know who else might like to see the numbers behind that decision? Gov. Bruce Rauner. Because for some reason, Rauner hasn’t yet driven a stake through the heart of this moneysucking loser of a project.” The Tribune hints that Fitch found “a high risk of default on the project’s financing plan through a private-public partnership.” This issue and the questioning of a KPMG report on the best procurement method for the Indianapolis Justice Complex (see below) raises serious questions about the objectivity and independence of “public private partnership” feasibility, “value for money,” and public sector comparator studies.

17) Illinois: Voters in O’Fallon decide tomorrow whether or not to privatize their water and sewer systems. Kristi Vetri, a former mayor, says the lease deal is just a shortsighted gimmick to raise funds for a municipality facing financial difficulties. “Our utilities have performed so well over the last few years that more than $8 million has accumulated in their reserves. Why turn that money and any future revenues over to a for-profit company who will put it into the hands of shareholders? That money needs to stay in O’Fallon.”

18) Indiana: A report commissioned by the Indianapolis Marion County City-County Council finds that using a traditional public procurement process for the proposed Indianapolis Justice Complex  would be much cheaper than a “public private partnership” (P3). The report found that the cost-benefit analysis done to justify the P3 has two major flaws: 1) that additional tax revenue will likely be required to pay for the P3, and a P3 structure would likely affect the budgets of other city and county agencies; and 2) that the proposed P3 is not the most optimal cost effective procurement method. Subsidy costs (“availability payments”) for the P3 will face a cumulative shortfall of $37.3 million, which would have to be found elsewhere.

The council report also criticizes the P3’s proposed DBFOM model, noting that Houston recently abandoned a DBFOM model for a design-build method with public financing. It also criticizes the Value for Money analysis done by the accounting firm KPMG, finding that it “used an arbitrary and unsubstantiated discount rate” to calculate the city’s costs under a P3; that KPMG “arbitrarily ignored the entire Design-Build project delivery method available to the City”; used an unsubstantiated, weak assumption to estimate the city’s public financing capabilities; and inflated the city’s estimated operating costs.

The report said that public procurement would likely cost half a billion less than through a “public private partnership.” Its authors noted the “comparatively limited review period and access to information that Council staff has been provided” to evaluate the proposal, which has a 17-page list of redactions concerning financial information.

19) Indiana: As the Indiana Finance Authority considers approving the recently-concluded deal to sell the operating company of the Indiana Toll Road, a key issue it will be looking at is operations. The auction winner, IFM Global Infrastructure Fund, has “made an agreement with the existing operator to continue in that role.” A decision is expected later this year. The deal is not expected to spur toll road privatization elsewhere, however, since it involved a large equity investment and the toll road has no federal dollars invested. (…) Nevertheless, the sale of the road’s concessionaire “delivers a windfall to hedge funds, who hold about $6 billion in debt and swap termination fees” on the Indiana Toll Road. But the deal might not go through for political reasons. [Public Works Financing, March 2015; sub required]

20) Ohio: The transportation budget signed by Gov. Kasich last week funds a number of projects with revenues generated from the public Ohio Turnpike. Ohio turned back proposals to privatize the road in 2012. “Mr. Kasich hinted Ohio may be about to borrow even more, using turnpike revenue to pay off bonds for work that, in some cases, is performed well off the toll-road corridor. ‘It’s given us an extra $1 billion,’ Mr. Kasich said. ‘We think the time may be right somewhere in the future to go back to the [bond] market.'”

21) District of Columbia: The Amalgamated Transit Union calls on Mayor Muriel Bowser to end the outsourcing of transit jobs to contractors who pay low wages and maintain miserable working conditions. They want a living wage and to be treated with dignity. “As Metro Access Operator Karen Reed told Mayor Bowser in January, that’s not happening. Paid only $26,000 per year, Reed and her daughter qualify for food stamps, housing assistance, and Medicaid. She and her daughter were homeless for three months last year. Reed would like WMATA and First Transit (her private employer) to ‘stop cutting corners and stop treating me and my fellow workers like disposable people.’ ‘Karen’s story is the story of thousands of transit workers across the DMV. WMATA should be ashamed that its outsourced workers labor in these modern-day sweatshops,’ says Anthony Garland of ATU 1764, representing DMV transit workers.”

22) Maryland: The Baltimore Post-Examiner runs two opinion pieces supporting and opposing the Purple Line “public private partnership.” In the second piece, Lewis Leibowitz writes “because the state will have to pay the private investors back by means of the availability payment, in reality the P3 in this instance is basically a loan from the private investors to the state. It is inaccurate and indeed dishonest to claim that the private investors are taking over the state’s obligation to pay for the train. The state’s taxpayers will be responsible for the debt that the state would incur, whether the train is worth the money or not.  We are back to the fundamental point—is the Purple Line worth what it costs?”

23) Massachusetts: MassDOT’s plan to turn one lane in each direction on Route 3 into a dedicated toll lane “public private partnership” sparks concern. “How much will the tolls cost you? DOT doesn’t know. They are estimating 25 cents to several dollars depending on the hour of the day. The average for similar projects has been $1.63. What’s the next step in the toll lanes? DOT is going to do traffic, finances and environmental impact studies. After that, they will seek federal and state environmental approval. Once those two steps are completed, they plan on asking for public input. By that time the project will be on a roll and hard to stop. (…) While DOT said no final decision has been made, you have to wonder when they direct all questions to route3expresslanes@dot.state.ma.us.”

Dana Levenson, now the CFO of MassDOT, once said “I think it’s a fair price” when discussing the disastrous privatization of Chicago’s parking meters. At the time Levenson was “head of North American infrastructure banking for Royal Bank of Scotland, who helped negotiate the parking lot lease in his former position with the city.”

24) Pennsylvania: The Coatesville Area School District may outsource its custodial services to Tennessee-based ServiceMaster. “Sharon Ross of East Fallowfield Township, whose husband, Rick Ross Sr. has worked for the Coatesville Area School District for 21 years, 16 years as daytime lead custodian, said her husband often puts in unpaid overtime hours, and has had to deal with a lack of management, and requests for equipment repairs or supply orders that go unfulfilled. She questioned whether workers from ServiceMaster would show that same kind of loyalty and commitment.”

25) Pennsylvania: The Carlisle Area School District is to outsource the jobs of its custodians, citing payments to the workers’ pensions and health costs. “Everyone is upset about it,” one of the custodians said. “We thought it would be coming after the summer so we could get the schools ready for the beginning of the school year.”

26) Pennsylvania: Public Works Financing says that the “secret sauce” of the Rapid Bridge Replacement Project deal was in the subcontracting. “To gain the support of local labor and small contractors, all of the bridge rehabilitation work will be subcontracted, and long-term maintenance will be staffed locally–‘to make the workforce in each community look like the people who live in the community,’ says Matthew Walsh, chairman of the Walsh Group of Chicago.” [Public Works Financing, March 2015; sub required]

27) South Carolina: An opponent of water privatization, Howard Duvall, is running for the Columbia city council. In February a strong coalition of residents and nonprofit organizations successfully beat back a water privatization scheme.

28) Texas: Community residents sound off against the Central Texas Regional Mobility Authority’s proposal to add four tolled express lanes to MoPac Boulevard in Austin.

29) Thumbnail Brief: The Economist explains “How Hedge Funds Work.”

30) Upcoming Meeting: ARTBA’s annual “public private partnerships” conference. July 15-17 in Washington, DC.

Legislative Issues:

1) National: A bill backed by the transportation department might threaten toll collectors’ jobs in the states. “The bill would allow states to set variable tolls—higher prices at rush hour—to try to ease congestion, with the department’s approval. (…) It would help phase out traditional toll collectors, requiring that after Oct. 1, 2016, ‘new toll facilities on federal-aid highways use only non-cash electronic technology for toll collection.'”

2) National: Congressmembers Todd Young (R-IN) and John Delaney (D-MD) have reintroduced their social impact bond legislation. The Harvard Kennedy School is offering technical training on SIBs to six state and local governments for 2015-2016.

3) Kentucky: Three of the four Republican candidates for governor say they support “public private partnership” legislation, but oppose tolling.

4) Texas: The House Transportation Committee has passed a bill that directs state officials to develop a plan to remove tolls on some state-owned roads. Committee Chair Joe Pickett “said while he doesn’t think the state would be able to eliminate all toll roads, he wants to know if there is ‘low hanging fruit’—some roads that could become free if debt payments were accelerated.” The bill now goes to the full House. [HB 2612]