Annual Privatization Report

Reason Foundation

Edited by Leonard C. Gilroy Reason Foundation

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Editor Contributing Authors • Leonard C. Gilroy • William D. Eggers is the global director for Deloitte Research—Public Sector. Principal Authors • Jerry Ellig, Ph.D. is the acting director • Ted Balaker of the Regulatory Studies Program at • Shikha Dalmia the Mercatus Center at George Mason • Leonard C. Gilroy University. • Amanda Kathryn Hydro • David T. Hartgen, Ph.D., P.E. is a professor of transportation studies at • Adrian T. Moore the University of North Carolina at • Amy Pelletier Charlotte. • Robert W. Poole, Jr. • Patrick R. Mullen, Ph.D. is an assistant • Geoffrey F. Segal professor of public administration and • Skaidra Smith-Heisters policy, with a joint appointment with the Institute for State Leadership and Policy, • Lisa Snell at the University of Illinois at Springfield. • Samuel R. Staley • Adam B. Summers • Steven Titch Annual Privatization Report 2007

Letter from the Editor By Leonard C. Gilroy

elcome to Reason Foundation’s Chicago, managed competition in San WAnnual Privatization Report 2007. Diego, and Georgia’s new and innovative Now in its 21st year of publication, APR contract cities. is the world’s longest running and most As always, this year’s APR provides comprehensive report on privatization news, a comprehensive overview of domestic developments, and trends. and international developments in air APR 2007 details the latest on and surface transportation, including a privatization and government reform summary of Reason’s groundbreaking initiatives at all levels of government. In 2006 study, Building Roads to Reduce addition to the latest news on President Traffic Congestion in America’s Cities: Bush’s continuing efforts to bring more How Much and at What Cost?, which competition to federal programs and provides a detailed analysis of the looming save billions of taxpayer dollars, this national congestion crisis and quantifies the issue includes an expanded section on the investments needed to remedy it. federal Performance Assessment Rating You’ll also find the latest news on Tool (PART), used by the administration highway tolling and public-private to rate programs and determine budget partnerships (PPPs) in the “Surface priorities. Dr. Patrick Mullen, professor Transportation” section. For instance, at the University of Illinois at Springfield, we offer readers a detailed overview of offers readers a detailed assessment of the long-term toll road concessions, which PART process, its successes to date, and can mobilize large new sums of capital implementation challenges that still remain. investment to meet a significant share of The “Local and State Update” section the need for new highway capacity. And offers a wide-ranging review of the latest given the controversy generated by PPPs action across state and local government and concessions over the past year, APR that includes a state privatization roundup features an article by Deloitte Research’s and budget outlook, an article on new public sector global director William Eggers accounting rules covering government responding to the most commonly-voiced liabilities, and the latest on Mayor Richard concerns, objections, and misperceptions Daley’s extensive privatization efforts in about PPPs. Two issues that have attracted a great to us. Please feel free to contact us with deal of attention in policy circles this past questions, suggestions, or for more year are examined in APR’s “Emerging information. For more privatization news, Issues” section. First, we review federal check out Privatization Watch (www. and state efforts to make government more reason.org/pw.shtml), now in its 31st transparent by allowing taxpayers access year of publication. For the most up-to- to spending information, typically through date information on the rapidly changing “Google government” Web databases. privatization world, please visit Reason’s Second, we provide a roundup of several Privatization Center (www.reason.org/ states’ proposals to privatize their lottery privatization/) and our weblog, Out of systems. Control (www.reason.org/outofcontrol/). APR’s “Education” section includes Leonard C. Gilroy, Editor comprehensive updates on school choice and child welfare privatization, as well as two articles on the promise of the weighted- student-funding program for improving low-performing school districts and giving parents more choice. APR 2007 also dives in to the ever- changing world of telecommunications policy, with updates on video franchise reform, network neutrality, and the municipal provision of broadband services. This update includes an assessment of the rocky start for Provo, Utah’s municipal broadband system, as well as a summary of Reason’s 2006 study, A Dynamic Perspective on Government Broadband, authored by the Mercatus Center’s Jerry Ellig. With private property rights remaining a hot topic in state legislatures and at the ballot box two years after the Supreme Court’s controversial Kelo vs. New London decision, this APR highlights the latest state action on eminent domain reform. We also feature an analysis of Arizona’s Proposition 207, a comprehensive package of property rights protections approved by Arizona voters last November that’s designed to protect property owners from both eminent domain abuse and regulatory takings via land use regulation. Your comments on the Annual Privatization Report 2007 are important Annual Privatization Report 2007

Annual Privatization Report

Federal Update...... 1 A. Update on the Program Assessment Rating Tool (PART): PART Nears Full Cycle Assessing All Federal Programs...... 1 B. Program Performance Evaluation Continues...... 7 C. Federal Competitive Sourcing Slows, But Continues to Demonstrate Results...... 8

Local and State Update...... 10 A. Local Privatization Update...... 10 B. State Privatization Update...... 12 C. State Budget Outlook...... 17 D. State and Local Tax Burdens Hit 25-Year High...... 19 E. New Accounting Rule Shines Light on Government Liabilities...... 20

Surface Transportation...... 22 A. Building Roads to Reduce Traffic Congestion in America’s Cities: How Much and at What Cost?...... 22 B. Long-Term Toll Road Concessions: An Overview...... 25 C. Privatization of Existing Toll Roads...... 29 D. New PPP Toll Roads & Toll Lanes...... 31 E. International Toll Road Developments...... 35 F. Answers to the Most Common Objections to PPPs...... 39

Air Transportation...... 44 A. Global Airport Privatization...... 44 B. U.S. Airport Privatization...... 46 C. U.S. Airport Security...... 48 D. Global Air Traffic Control...... 49 E. U.S. Air Traffic Control...... 51

Education and Child Welfare...... 55 A. School Choice Update...... 55 B. No Choices Left Behind: Restructuring California’s Lowest-Performing Schools.... 62 C. Experimenting With School Choice: A Tale of Two California Districts...... 63 D. Child Welfare Privatization Update...... 66 E. The Case for Privatizing University Housing...... 72 Emerging Issues...... 75 A. State Lottery Privatization...... 75 B. Government Transparency...... 77

Water & Wastewater...... 81 A. Public Works Financing Issues 11th Annual Water Privatization Report...... 81 B. U.S. House of Representatives Passes Water Funds...... 81 C. World Bank: New Generation of Privatization?...... 82

Telecommunications...... 84 A. States Push for Video Franchise Reform...... 84 B. Push for Network Neutrality Regulation Loses Momentum ...... 87 C. Problems Emerging with Municipal WiFi...... 88 D. Lessons Learned from Provo’s Municipal Broadband...... 89 E. A Dynamic Perspective on Government Broadband...... 92

Land Use and Property Rights...... 95 A. Eminent Domain Reform Update...... 95 B. Measure 37 Rewrite Sent to Voters...... 102 C. Arizona’s Proposition 207: The New Standard for Regulatory Takings Reform...... 104 D. Sustainable Development in Urban Planning: The Case for a Market-Based Approach...... 108

Public Health and Safety...... 110 A. Corrections Update...... 110 B. Journal Releases 200-City EMS Survey...... 112 Annual Privatization Report 2007

Federal Update

Contents

A. Update on the Program Assessment Rating Tool (PART): PART Nears Full Cycle Assessing All Federal Programs B. Program Performance Evaluation Continues C. Federal Competitive Sourcing Slows, But Continues to Demonstrate Results

A. Update on the Program the congressional decision-making process. Assessment Rating Tool (PART): Among other statutory obligations, GPRA PART Nears Full Cycle Assessing All requires federal agencies to publish strategic Federal Programs and annual plans describing specific program activities with the intention of By Patrick R. Mullen, Ph.D. establishing a more tangible link between performance information for these programs Under the President’s Management and agency budget requests. Agenda for performance and budget integration, the Office of Management and Budget (OMB) designed the Program 1. How Does the PART Process Work? Assessment Rating Tool (PART) to The Bush administration has taken breathe new life into performance-based several steps to strengthen the performance- budgeting as envisioned by the Government resource linkages for which GPRA laid Performance and Results Act (GPRA). the groundwork. Central to the budget Federal interest in performance information and performance integration initiative, and its relationship to budgeting practices OMB developed the PART as a means to has existed to varying degrees for over strengthen the process for assessing the 50 years. This interest resulted in the effectiveness of programs by making that passage of the Government Performance process more robust, transparent, and and Results Act (GPRA) and related systematic. PART is a series of diagnostic management reforms of the 1990s. GPRA questions designed to provide a consistent mandates that federal agencies develop approach to rating federal programs. performance information describing the Drawing on available performance and relative effectiveness and efficiency of evaluation information, the PART questions federal programs as a means of improving

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rate the strengths and weaknesses of a single weighted numerical rating could federal programs with a particular focus on suggest false precision, or draw attention individual program results. The PART asks, away from the very areas most in need for example, whether a program’s long-term of improvement, numerical scores are goals are specific, ambitious and focused combined and translated into qualitative on outcomes, and whether annual goals ranges.” The qualitative ratings and point demonstrate progress toward achieving ranges of the weighted summary ratings are: long-term goals. Effective (85-100), Moderately Effective PART is designed to be evidence-based, (70-84), Adequate (50-69), and Ineffective drawing on a wide array of information, (0-49). including authorizing legislation, GPRA Since the fiscal year 2004-budget strategic plans, annual performance plans cycle, which began with preparation and reports, and reviewing financial of the 2004 budget request in calendar statements, inspectors general reports, and year 2002, OMB has applied PART to independent program evaluations. The 977 programs (about 96 percent of the reviews of individual programs are done on federal budget) and given each program a collaborative basis by the OMB budget one of the four overall ratings discussed examiner responsible for the program’s above. A fifth category of “Results Not budget presentation in the president’s budget Demonstrated” was given—independent documents and the program, planning and of a program’s numerical score—if OMB budget offices in the respective departments decided that a program’s performance and agencies. OMB makes the final PART information, performance measures, or determinations but the departments can both were insufficient or inadequate. As appeal OMB’s decisions for a better score program and budget officers learn how to for each section where they can demonstrate satisfy PART requirements, they are able improvement. The program office can also to convince OMB budget examiners that provide more information the next year there is enough performance information to show progress; this is known as “re- to make a definite determination of where a PARTing.” PART questions are divided into program falls within the four performance four sections. Each section is given a specific categories. During calendar year 2006, weight in determining the final numerical the Administration assessed all remaining rating for a program. Table 1 shows an executive branch programs, with limited overview of the four PART sections and the exceptions, and reported the results with weights OMB has assigned. the release of the fiscal year 2008 budget The answers to the questions in each of request. Table 2 shows the distribution of the four sections discussed in Table 1 result ratings from calendar years 2002 through in a numerical score for each section ranging 2006 (fiscal years 2004-2008) budget from 0 to 100. These scores are then requests. weighted to give a summary score, again For each program assessment, PART ranging from 0 to 100, for the program. summary worksheets were published in a In the budget documents explaining PART separate volume starting with the president’s scoring, OMB states “Because reporting fiscal year 2004 budget request. For the

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Table 1: Overview of Sections of PART Questions Section Description Selected Questions (Weight) 1. Program To assess whether • Is the program purpose clear? Purpose and • The purpose is • Does the program address a specific and existing problem, Design clear, and interest or need? (20 %) • The program design makes sense. • Is the program designed so it is not redundant or duplicative of any other federal, state, local or private effort? • Is the program design effectively targeted, so that resources will reach intended beneficiaries and/or otherwise address the program’s purpose directly? 2. Strategic To assess whether • Does the program have a limited number of specific long-term Planning the agency sets valid performance measures that focus on outcomes and meaningfully (10 %) programmatic reflect the program purpose? • Annual goals, and • Do all partners (grantees, sub-grantees, contractors, cost- • Long-term goals. sharing partners, government partners) commit to and work toward annual and/or long-term goals? • Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need? 3. Program To rate agency • Does the agency regularly collect timely and credible Management management of the performance information, including information from key (20%) program, including program partners, and use it to manage the program and improve • Financial oversight, performance? and • Are federal managers and program partners (including grantees, • Program sub-grantees, contractors, cost-sharing partners, government improvement efforts. partners) held accountable for cost, schedule and performance results? • Does the program use strong financial management practices? 4. Program To rate program • Has the program demonstrated adequate progress in achieving Results and performance on goals its long-term performance goal(s)? Accountability reviewed in • Does the program (including program partners) achieve its (50%) • The strategic annual performance goals? planning section, and • Through other • Does the program demonstrate improved efficiencies or cost evaluations. effectiveness in achieving program goals each year? • Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Source: Analysis of the Budget of the United States Government, Fiscal Year 2004, Performance and Management Assessments (Washington, D.C.: February 2003) and the PART Excel spreadsheet questions.

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Table 2: PART Program Ratings by Year Completed, 2002-2006 Ratings 2002 2003 2004 2005 2006 (FY 2004) (FY 2005) (FY 2006) (FY 2007) (FY 2008) Effective 6% 11% 15% 15% 17% Moderately Effective 24% 26% 26% 29% 30% Adequate 15% 20% 26% 28% 28% Ineffective 5% 5% 4% 4% 3% Results Not Demonstrated 50% 38% 29% 24% 22% Total Programs 234 407 607 793 977

Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 2008, Analytical Perspectives, p. 15.

fiscal year 2005 and 2006 budget requests, 2. Observations About the Impact of PART similar information was provided on the Reviews OMB Web site and in an accompanying PART is credited for helping to structure CD-ROM. The detailed, supporting OMB’s use of performance information for worksheets for each program were posted its internal program and budget analysis, on OMB’s Web site. For programs assessed making the use of this information more and published with the budget request for transparent, and stimulating agency the first time, all summary sheets display interest in budget and performance the program’s goals and measures, budget integration. OMB and agency staff said information, significant findings and this helped OMB staff with varying levels recommendations (also known as follow- of experience focus on similar issues. One up program actions). Beginning with the of PART’s major impacts is its ability to FY 2006 budget request, summary sheets highlight OMB’s recommended changes in for programs that have been reassessed or program management and design. Much originally published with the fiscal year of PART’s value lies in the related program 2004 or 2005 budget requests include recommendations, but realizing these information on when the program was benefits requires sustained attention to last assessed and the status of the follow- implementation and oversight to determine up actions. Status ranges from “no action if desired results are achieved. taken” to “action taken but not completed” There are inherent challenges in to “completed.” For fiscal years 2007 and assigning a single rating to programs having 2008 reporting of PART results, OMB’s multiple purposes and goals. OMB devoted PART recommendations are generally aimed considerable effort to promoting consistent at improving program design, management, ratings, but challenges remain in addressing funding, and/or assessment. They can inconsistencies among OMB staff, such as be general or very specific. Examples of interpreting PART guidance and defining recommendations for each of the four acceptable measures. Limited credible categories are shown in Table 3. evidence on results also constrained OMB’s ability to rate program effectiveness, as

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Table 3: Examples of PART Recommendations for Categories of Program Management Category Example of Recommendations Program “Reduce unnecessary subsidies to lenders and other program participants.” Design “The 2006 Budget proposes to restructure the grant allocation process, providing the Secretary with greater discretion to award funds based on risks, threats, and vulnerabilities.” Program “Continue to improve the contractor evaluation processes and weapon program Management performance metrics to focus on schedules and performance against baselines to increase performance and cost-effectiveness.” “Increase the number of accounts supporting this program to quicken the transfer of funds with contractors and increase management flexibility to address changing security conditions and mission priorities. This will significantly improve the obligation and costing process of funds.” Funding “Maintaining funding at the 2005 enacted level until the agency can show how it will use additional funds to improve performance.” “Directly related to the PART findings, the Budget includes $37 million, a $3 million decrease.” Program “Develop a means of regularly performing independent evaluations to examine program Assessment effectiveness.” “Developed baselines for its proposed long-term measures. Without baselines for the measures, it was impossible to verify the performance of the program.”

Source: OMB PART assessments.

evidenced by the 50 percent of programs crosscutting comparisons. OMB is now rated “results not demonstrated” in the using PART to a greater extent to evaluate fiscal year 2004 budget documents. PART similar programs together to facilitate trade- is not yet well integrated with GPRA, which offs or make relative comparisons. is the current statutory framework for PART clearly must serve the president’s strategic planning and reporting. By using interests. However, the many actors whose the PART process to review and sometimes input is critical to decisions will not likely replace GPRA, goals and measures, OMB is use performance information unless they substituting its judgment for a wide range feel it is credible and reflects a consensus on of stakeholder interests. The PART-GPRA goals. It is important for OMB to initiate tension is further highlighted by challenges timely discussions with Congress concerning in defining a unit of analysis useful for both the focus of PART assessments and to clarify program-level budget analysis and agency the results and limitations of PART and the planning purposes. Although PART can underlying performance information. A stimulate discussion on program-specific more systematic congressional approach to measurement issues, it cannot substitute providing its perspective on performance for GPRA’s focus on thematic goals issues and goals could facilitate OMB’s and department- and government-wide understanding of congressional priorities

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and thus increase PART’s usefulness in OMB discussed its planned next steps to budget deliberations. improve the effectiveness of the president’s The PART process has aided OMB’s budget and performance integration oversight of agencies, focused agencies’ initiative: efforts to improve program management, 1. Ensure plans are aggressive and result in and created or enhanced an evaluation improved performance through rigorous culture within agencies. Although the PART follow-up on recommendations from has enhanced the focus on performance, the the PART to accelerate improvements PART remains a labor-intensive process at in the performance of federal programs. OMB and agencies. However, most PART This will ensure that the hard work recommendations are focused on improving done through the PART produces outcome measures and data collection, and performance and management are not designed to result in observable improvements through tracking and short-term performance improvements. reporting mechanisms established by Since these necessary first steps on the path OMB. to long-term program improvement do not usually lead to improved short-term 2. Expand cross-cutting analyses by using results, there is limited evidence to date of the PART to facilitate cross-cutting the PART’s influence on outcome-based analysis where there is a higher return program results. Moreover, as of February than approaching programs individually. 2007—the date of the most recent available The goal of these efforts is to increase OMB data—the majority of follow-up efficiency and save dollars by building program recommendations have not yet on the success of previous cross-cutting been fully implemented. By design OMB analyses. OMB states that congressional has not prioritized them within or among guidance will be a factor in choosing agencies. Because OMB has chosen to topics for the next group of cross-cutting assess nearly all federal programs, OMB and analyses. agency resources are diffused across multiple 3. Maximize www.ExpectMore.gov impact areas instead of concentrated on those areas by holding the federal government of highest priority both within agencies and accountable to the public for its across the federal government. This strategy performance. OMB states that this is likely to lengthen the time it will take “web-based tool provides candid to observe measurable change compared information on how programs are with a more strategic approach. OMB has performing and what they are doing to used the PART as a framework for several improve.” crosscutting reviews, but these have not always included all relevant tools, such as 3. Conclusions tax expenditures, that contribute to related OMB is to be commended for goals. Greater focus on electing related developing the PART to bring a renewed programs and activities for concurrent focus on individual program-level review will improve their usefulness. management and performance. PART In the fiscal year 2008 budget request, has had several successes, including

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helping structure and discipline OMB’s B. Program Performance Evaluation use of performance information over a Continues broad range of programs, questions, and evidence. PART has also made OMB’s This past year brought about another use of performance information more round of performance reviews as the transparent in terms of public reporting of administration implemented its Program judgments and sources, including explicit Assessment Rating Tool (PART). Every recommendations to change management budget submitted by this administration practices and program design in response to has used this tool to rate programs and use PART findings. This has, in turn, stimulated the ratings to determine budget priorities. agencies’ interest in performance and budget Many failing or ineffective programs have integration and in improving evidence been outlined for elimination or reduction regarding demonstrating program results. in previous budgets, however, Congress Nevertheless, several challenges have also has yet to use the rating or the outcomes in been evident during five years of PART determining funding. In the FY2008 budget, implementation, such as the consistent 91 programs will be terminated for a savings application of general principles to diverse of $5 billion and 50 programs have seen cases, which requires interpretation and major reductions providing $7 billion in judgment. Another challenge is for agencies, savings, for a total of $12 billion in savings. OMB, and Congress to define agreed-upon In the fifth year of reviewing government program outcomes and reduce complexity programs via PART, the Office of to a consensus bottom-line rating. This Management and Budget has now assessed challenge is exacerbated by the difficulty of about 96 percent (977 programs) of all obtaining credible information on program federal programs. The following chart effectiveness, which is compounded by outlines the breakdown of PART results: limited agency evaluation capacity. If these challenges can be successfully overcome— Table 4: Distribution of Program Ratings, which will be an incredibly difficult task to FY2008 say the least—OMB will have gone a long Number of Programs Assessed 977 way, through its development of PART, in Effective 17% providing performance-based information Moderately Effective 30% on individual programs to the full range of Adequate 28% actors who implement budget, policy, and management decisions. Ineffective 3% Results Not Demonstrated 22%

Patrick R. Mullen, Ph.D. is an assistant pro- The success of federal programs has fessor of public administration and policy, been growing according to PART’s standards with a joint appointment with the Institute for showcasing that now 75 percent of them State Leadership and Policy, at the University are operating “effectively.” PART’s primary of Illinois at Springfield. role is to ensure that these programs do

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what Congress mandated them to while reiterated that getting rid of the provisions being managed effectively, thus providing that limit best value contracts “would allow value for the taxpayers. The programs in taxpayers to get the best results possible the bottom 25 percent are now candidates from competitive sourcing.” for termination or reduction in funding to In May, OMB reported to Congress bring about reform. Those that are rated on the results of competitions in 2006. as ineffective “are not using tax dollars The federal government completed 183 effectively” and 22 percent cannot show competitions, comprised of 6,678 full-time any impact or results for their efforts or equivalent employees representing about spending because “they have not been able 1.7 percent of the federal workforce. While to develop acceptable performance goals a wide range of activities were studied, or collect data to determine whether it is information technology, maintenance and performing.” property management were among the most Increasingly, Congress has paid more studied areas. attention to these ratings as reflected in Federal employees won 87 percent of the number of programs terminated. For the competitions, generating savings of $1.3 example, in FY2005 only seven of the 65 billion over the next five to ten years. Each proposed reductions occurred; this year position studied saved of $34,500, or 36 91 were terminated. Additionally, OMB percent gross savings. launched www.expectmore.gov to shed Since 2003, 12 percent of the federal more transparency on PART. On this workforce has faced a competition, winning Web site, citizens are able to view which 83 percent of them and generating savings programs have been evaluated and their of $6.9 billion. Taxpayers get $31 for every ratings are searchable by keyword, topic or dollar invested in competition, for a total agency. of $226 million invested in competitive sourcing. Furthermore, average net savings are 28 percent per position studied. C. Federal Competitive Sourcing Slows, But Continues to Demonstrate Results

The FY2008 budget illustrated a continued implementation, although slow, of public-private competition for federal jobs. In the section devoted to federal management, officials revealed that since the Office and Management and Budget’s (OMB) Circular A-76 overhaul in 2003 they have seen, “process reengineering, workforce realignments, better leveraging of technology and operational consolidations.” Furthermore, the budget’s text also

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Table 5: Competitive Sourcing FY2006 Results FY2006 Total Completed Competitions Number of PMA agencies completing competitions 20 Number of competitions completed 183 Number of FTEs completed 6,678 Total estimated net savings $1.3 billion* Estimated annualized savings $220 million Competitions where federal agency selected to perform work (as a percentage of total 87% FTEs completed)** Announced Competitions Number of competitions announced 86 Number of FTEs announced 9,691 * Figure rounded to nearest $100 million. ** Calculated by FTEs competed.

Table 6: Cumulative Results (2003-2006) Four-Year Total* FTE competed 46,825 Number of competitions conducted 1,243 FTE competed under standard competitions 36,696** Incremental cost $230 million Estimated net savings $6.9 billion Estimated annualized savings $1.1 billion * Dollar savings figures are rounded to nearest $100 million. ** Standard competitions require head-to-head competition between the public and private sectors and the development of an MEO staffing plan by the federal incumbent provider.

Table 7: Four Year Averages Four-Year Average FTE competed 38 Number of competitions conducted 78%* FTE competed under standard competitions $5,000** Incremental cost $25,000 Estimated net savings 83% * Standard competitions require head-to-head competition between the public and private sectors and the development of an MEO staffing plan by the federal incumbent provider. ** Incremental cost figures are rounded to nearest thousand.

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Local and State Update

Contents A. Local Privatization Update B. State Privatization Update C. State Budget Outlook D. State and Local Tax Burdens Hit 25-Year High E. New Accounting Rule Shines Light on Government Liabilities

A. Local Privatization Update infrastructure, valued at $65 million for an initial rebuild and more than $550 million 1. Chicago Remains a Privatization Leader over the term of the lease. Chicago’s lease of its Skyway for $1.83 The city dedicated $278 million of the billion in 2005 is widely known. What may proceeds to debt retirement. $122 million not be well known is that Chicago, under will be used for city park improvements Mayor Richard Daley’s leadership for the with another $120 million invested into the past 18 years, has privatized more than two Chicago Park District “Reserve” account, dozen other functions or assets—and there’s generating annual income of $5 million. more to come. Another $35 million is dedicated for the The city recently leased four adjacent rebuilding of the Daley Bi-Centennial Plaza. underground parking garages located Daley is also considering a lease of Midway downtown. The 9,178 spaces made airport, several recycling centers and city- Chicago’s system the largest in the United owned marinas. States. Daley and his team realized that In the same vein, between 1995 and parking garage operation were not a core 2005 the city of Chicago successfully function of government. Having already privatized 27 other government functions. entered into contractual agreements on Because of these efforts, taxpayers have other city lots, leasing these lots was a saved hundreds of millions of dollars. In natural extension of the success of the additional to the capital outlay costs needed Skyway deal. Morgan Stanley was awarded to equip the city to perform many of these a 99-year lease over 12 other bidders with functions, it would cost taxpayers nearly a bid price of $563 million. Additionally, $45 million annually to bring all of the Morgan Stanley agreed to rebuild garage functions listed in this report back in-

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house today. The city estimates that it has however, is the form of operational achieved cumulative savings of $175 million government. Originally created with in that period. just four government employees, the city Furthermore, the city reports achieving decided to contract out all other non- an additional $7.9 million in annual savings public, safety-related functions. The city from seven privatizations that occurred maintains ownership of assets and ultimate before 1995, resulting in a total savings of budget control by setting priorities and $102 million. service levels. Meanwhile the contractor is responsible for staffing and all operations 2. San Diego Passes Managed Competition and services. Initiative Sandy Springs recently successfully rolled New Mayor Jerry Sanders was swept out its own police and fire departments, into office after budgeting scandals left as the Georgia state constitution requires the city in dire straits. Competition was that public safety services are provided a centerpiece of his campaign, however, by government. Counting police and fire upon entering office he learned that the City employees, the city of 87,000 has only 196 Charter limited the city’s ability to subject total employees. Nearby Roswell, a city of services to competition and contract them 85,000 has more than 1,400. Furthermore, out. Functions that were provided by public Sandy Springs’ budget is $37 million less, employees were exempted from competition and by most accounts provides a higher level even if contracting out could demonstrate of service. savings, improved services, or greater Sandy Springs only spends $803 per efficiencies. resident and has only 22 employees for A change to the City Charter was needed every 10,000 residents. It had no tax or to enable managed competition. Proposition fee increases in 2007. Couple that against C emerged and citizens were asked: Atlanta. While a much larger city with Shall the Charter be amended to perhaps more diverse challenges, the order allow the City to contract services of magnitude is still significant. Atlanta traditionally performed by City civil spends more than $2,000 per resident and service employees if determined to be has 183 public employees for every 10,000 more economical and efficient while residents. Additionally, Atlanta’s General maintaining the quality of services Fund budget is expected to increase by 40 and protecting the public interest? percent this year. Mayor Shirley Franklin With more than 60 percent of the suggested she’d find the money by looking vote Proposition C passed. The Sanders in “other people’s pockets”—code for tax or administration is now developing its fee increases. competitive sourcing plans. Following in the footsteps of Sandy 3. Sandy Springs One Year Later; Others Fol- Springs, two new cities—Johns Creek and low in its Footsteps Milton—were formed on December 1, 2006. Both employ similar operating models, with The city of Sandy Springs became five and three public employees respectively. Georgia’s first new city on December 1, Both cities have chosen the same contract 2005. What makes Sandy Springs unique,

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operator as Sandy Springs. In doing so, the The California Supreme Court cities are finding additional efficiencies. unanimously affirmed a ruling by the Two other communities—South Fulton First District Court of Appeals that the and Chattahoochee Hill Country—will vote state Department of Transportation could in June on whether or not to incorporate. indeed contract out architectural and Both would likely follow similar operational engineering services. Voters in 2000 passed models. Furthermore, the communities Proposition 35 explicitly authorizing the of Peachtree Corner and Dunwoody have state to do so. However, the Professional legislation pending in the Georgia General Engineers in California Government, the Assembly. union representing state employees, sued to By some accounts there are upwards prevent the state from outsourcing work. of a dozen upstart communities planned in Writing for the court, Justice Carlos R. the metro Atlanta area. Additionally, many Moreno said that there is “a clear intent of the new privately run cities have called by the electorate to supersede prior law, for the creation of a new county, Milton, under which the ability of state agencies which had merged with Fulton County to contract with private entities for in 1931. Given the operational model of architectural and engineering services was several of the cities that would make up limited.” Governor Arnold Schwarzenegger Milton County, its conceivable that a similar called the court’s decision “a great victory operational model will be implemented. for commuters and taxpayers.” In Colorado, SB 251 would eliminate the requirement that the Regional B. State Privatization Update Transportation District (RTD) contract Alabama’s legislature is attempting to out at least 50 percent of its bus service, authorize the Director of the Department including special services for the disabled. of Transportation to enter into agreements Furthermore, it would cap privatization of related to the privatization of roads built bus service at 58 percent. in the future. The bill, HB121 is still in The bill is promoted by the transit committee and pending action. workers union and calls for RTD to Privatization in Arizona took a step maintain employment numbers high enough forward when Governor Janet Napolitano so that RTD can “step in when private approved the privatization of public rest contractors fail.” In order to broaden areas, assuming approval from the Federal support, the union agreed to an amendment Highway Administration. that would not allow privatization In Arkansas, public-private partnerships percentages to become an issue in labor (PPPs) met a mixed bag. Legislation was negotiations. passed to strike the opportunity to use PPPs RTD officials noted that if they were in the state’s Information Office as well as in forced to bring contracted services in, their the school districts or public charter schools. budget would need to increase by $35 However, the legislature passed Act 389 million a year. Currently RTD pays about allowing regional mobility authorities to use $63 an hour for privatized bus service and public-private partnerships. $91 an hour for in-house delivery.

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If passed, Connecticut’s Clean authorizing state and county departments Contracting Standards Act would establish and agencies to provide government services a State Contracting Board and require through contracts with private entities. In that appointed members not only have addition, HB1824, currently in committee, knowledge of privatization, but that they would authorize purchasing agencies to are also part of the selection process. establish public-private partnerships for the Related bills are currently in committee. construction of state facilities. Another piece of legislation that would Efforts in Illinois would allow transition all services currently provided by public-private partnerships to be used in the Department of Mental Retardation into transportation and agriculture. S1333 private, non-profit providers is currently would create PPPs with the Passenger being heard in committee. Service Rail Act and S378 would create the Privatization efforts continue in Florida, Transportation Act. The Transportation most notably with the Florida Government Act would authorize the Department of Accountability Act, which allows state Transportation and the Illinois State Toll agencies to privatize or outsource in order to Highway Authority to enter into public- reduce cost or improve services to citizens. private agreements for the development, The Lake Okeechobee Watershed Protection operation, and financing of transportation Act was passed encouraging and supporting facilities. the development of public-private After two years of study Indiana signed partnerships for water storage to further a contract with an IBM-led consortium to restore water quality on Lake Okeechobee. reform and modernize the state’s welfare Two additional efforts were tabled in system. The 10-year $1.16 billion contract Florida. The first would have created the anticipates saving a half billion dollars over Tampa Bay Area Regional Transportation the next 10 years on administration. Savings Authority and encouraged the option of will increase as fraud and errors are brought PPPs in regional multimodal transportation down, and could balloon savings to north of improvements. The second called for an a billion dollars. evaluation of all major privatization efforts Before modernization, the application in the last five years and a comparison on process in Indiana was very paper-intensive. cost to see if money really was saved as Bankers’ boxes full of files and paper related to state information technology. literally crowded each of the state’s 107 There are some efforts to privatize county offices. Each benefit program had underway in Georgia. HB461 calls for the its own records and requirements, creating privatization of the state’s mental health large case files and an extremely laborious centers and HB291 would allow the Georgia process. Arts Alliance to employ PPPs to support the Client interaction only took place in arts. This bill was brought forth because face-to-face meetings and often required of the successful PPPs that the Georgia multiple trips. Upon entry into the system Research Alliance has gained in higher clients were assigned a caseworker, and education. regardless of availability, that’s the only Hawaii repealed the sunset of the law person they could interact with. It didn’t

Reason Foundation • www.reason.org 13 Annual Privatization Report 2007

help that the caseworker was the only one legislative authority in Indiana face a who knew where a client’s file was. difficult uphill battle for the time being. Under the new operations, a premium In fact, a proposal to allow the private will be placed on client services. By moving development of two new toll facilities was into an electronic-based system, new scrapped after achieving Senate approval. internet and phone services will become The House, now under Democratic available. For the first time in Indiana, leadership, didn’t give the bill a hearing, clients will be able to access caseworkers effectively killing it. Furthermore, it 24 hours a day, 7 days a week. Governor wouldn’t entertain a hearing privatizing the Daniels said “no longer will they have to lottery. House Speaker Pat Bauer considers contact the system only at places and times privatization a non-partisan issue, i.e., it’s convenient to the bureaucracy, then wait a the “politics of greed…and you can be a month or longer for an answer or decision.” Democrat and do that, too.” The new system will also improve There were several legislative efforts Indiana’s high error and fraud rate. In to thwart privatization efforts by creating addition, Indiana has the worst welfare- more bureaucracy in Indiana. H1062 to-work record in the country. Currently would have created a Privatization Review errors cost Indiana taxpayers $100 million a Committee that would review plans and year, not counting fraud. Simply eliminating make recommendations to the governor. that is a major benefit. However, providing Furthermore the bill would ensure that a path to self-sufficiency is perhaps even no contracts were signed that would more valuable. extend into the administration of the The IBM-led team will be responsible for next governor. H1313 would establish a adding new ways for clients to interact with general accountability office to review all benefits administrators and caseworkers. privatization contracts entered into after Additionally it will be responsible for data December 2004. collection and electronic storage. Perhaps Maryland legislators are calling for one of the most important aspects will the Maryland Transportation Authority be the development of new technological to implement PPPs with HB662, which improvements around the state’s current is in committee. However, they were able core computer system. to pass legislation requiring that notice IBM offered employment to all and information be given to the General existing state employees too. And not Assembly and the Department of Legislative just employment, but better pay, benefits, Services before issuing a public notice of pensions and career prospects than the state procurement for PPPs. Additional efforts to plan. Furthermore, employees will be able allow private companies to administer the to spend more time helping people and not programs of the Maryland Small Business just pushing paper. The modernization will Development Financing Authority and Child be phased in over several stages, as the next Placement Services were withdrawn. stage cannot begin until the previous stage is In efforts similar to Indiana’s legislation, completely and successfully transitioned. Minnesota is calling for a required state Privatization efforts that require employee cost comparison before entering

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into any transportation privatization viable option. contracts, a 10 percent savings requirement Although New Jersey has not passed and an annual report. S1278 addresses any legislation, multiple bills are currently competitive sourcing and acquisition. in committee. All bills were introduced last Bills in both chambers call for pay session, and none of them is friendly toward equity compliance meaning that “a state privatization. Companion bills require that agency may not accept a bid or proposal “no decision regarding the privatization of for a contract in excess of $500,000 any service provided by the State should be from a business with more than 40 full- made without a careful evaluation of the time employees in the state unless the long term impact of the privatization on Commissioner of Employee Relations has the State, its citizens and its employees.” approved the business’ plan to establish The bill basically requires a report detailing equitable compensation relationships for all aspects of the privatization and the its employees and has issued the business anticipated net reduction of in-house costs a certificate of compliance.” Legislation to be posted publicly and reviewed by the remains in committee. State Auditor before any outside bids can Missouri’s Public Service Accountability be solicited. A2168 would require the State Act, if it passes, would require most public Auditor to review potential Department bodies to conduct a cost benefit analysis of of Corrections Privatization contracts any privatization program. In Montana, in a similar manner. Then S1557 would a joint bill called for a privatization study require state agencies to submit notices of for state agencies, however, it did not gain request for proposals and other documents support. pertinent to privatization contracts to the Nevada legislators made a broad-based state employees who may have in fact lost attempt to privatize government services, their job to privatization. Another attempt although some of these efforts fell flat to de-privatize the Motor Vehicle Inspection because they did not take action before Program when the vendor contract a legislative deadline. Those efforts were concludes was made with S1556. privatization of motor vehicle registration, Additionally, Governor Jon Corzine privatization of the regulation of foster care, partnered with UBS Investment Bank to and the privatization of ombudsmen used conduct an evaluation of state assets, for dispute resolution in common-interest identifying which were most appropriate for communities. There is still legislation privatization and the potential value. The pending in committee: the privatization review looked at assets owned by the state of early intervention service providers for and its independent authorities. All assets infants and toddlers, the privatization of were considered, including but not limited jails, and the privatization of public works to toll roads, transit facilities, rights-of-way, as they relate to management and inspection buildings, air rights, naming rights, airports, of construction projects. Perhaps most bridges, water facilities, ports, parks, lottery notably, AB74 would encourage all agencies and the student loan portfolio. that receive money from the State General New Jersey currently has the third Fund to look at privatization of services as a highest level of debt per capita in the nation,

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as well as the highest level of property taxes. A1647 would provide for awarding of The state carries at least $29.7 billion in public works contracts as well as creation of debt with payments eating 8 percent of state a Privatization Advisory Board. Companion spending. This also does not account for bills A5644 and S153 also call for the unfunded pension liabilities. Given this, creation of a Privatization Advisory Board the state is looking to generate new value to but add statutory requirements for the have a significant reduction in existing debt, awarding of public works contracts by the allow new capital investment, and deliver Triborough Bridge and Tunnel Authority new efficiencies and quality to existing as well as the Metropolitan Transportation services. Authority and its subsidiaries. Tier 1 assets have a sound commercial While A5851 aims to promote fairness viability and a meaningful value to the in competitive bidding by providing for state. These assets are early candidates for enforcement of prevailing wage provisions privatization: applicable to public work construction • Atlantic City Expressway projects, companion bills would similarly • Development rights at New Jersey enforce competitive bidding. Additional Transit stations legislation aims to enact the Public Private Partnership Disclosure Act requiring state • Garden State Parkway agencies entering into PPPs to promulgate • New Jersey Lottery rules and regulations regarding review and • New Jersey Turnpike disclosure relating to such relationships UBS also identified several Tier 2 assets. as well as public notice and a report to Essentially, these are assets that would likely the legislature. Similarly, A1021 calls on be successful, but there just isn’t enough all public authorities owning, leasing, and information at this time. controlling critical infrastructure to study • Atlantic City International Airport the potential consequences of privatization before engaging in it. • Fiber Optic Network Ohio State Treasurer Richard Cordray • High Occupancy Toll lanes proposed creating a central inventory of • Naming Rights state properties with a goal of weeding out • Newly-Tolled Facilities unused or under-utilized land. An initial review of just 20 counties representing 36 • PNC Bank Arts Center percent of Ohio’s population found 7,364 Of the assets, the Lottery and Atlantic state-owned properties—nearly 6 percent City Expressway scored the highest in of those properties remain unimproved terms of viability. Closely behind those or unused. Those 446 properties appear two were the NJ Turnpike, Garden State to be suitable for divestiture and private Parkway, HOT Lanes, newly tolled facilities, development. development rights at train stations, naming Cordray wants government to reduce the rights and the PNC Bank Arts Center. amount of vacant land it owns and restore New York’s current situation is not that those properties to the tax rolls. Indeed, different from its neighbors in New Jersey: Cordray suggested that the state should all legislation is pending in committee.

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“feel an obligation to ensure that state- survey of state fiscal officers. Of the owned properties are being utilized to their 48 states (Texas and Arkansas did not maximum potential.” participate) in NCSL’s State Budget Update, The proposal includes a “defining November 2006, 23 reported their overall principle” for the state’s property policy: revenue collection was above the original If the State owns land that forecast. Additionally, 22 states reported is non-productive, and if there is their collections on target. Only three states, no immediate plan to make that Maryland, Michigan, and Tennessee, took in property productive, then the private less revenue than was forecasted. sector and community groups When looking at specific taxes, should be given the opportunity corporate and personal income tax to propose one or more plans to collections were either at or above improve and utilize that property, forecasted levels in most states. However, and the presumption should favor 14 states reported sales tax collections below any such proposal that results in projections—at this time last year, only the disposition or use of the land to seven states reported underperforming sales create value, jobs, tax revenue, and tax collections. community improvement. For the first time since 2002, the number Utah made an attempt to privatize its of states reporting an “optimistic” outlook correctional facilities but the bill failed. went down from 26 to 16. In addition, And Vermont’s HB272, which would the number of states that are “concerned” completely prohibit the outsourcing of tripled from the 2002 survey to six. any state services, is awaiting a vote in Officials in the remaining states expect their committee. Virginia passed legislation revenues to be “stable,” leaving no state calling for periodic analysis of outsourcing’s with a “pessimistic” outlook for the future. feasibility. In addition, any program or States with deficits also decreased in activity with privatization potential must the latest report. However, some 14 states now undergo a cost/benefit analysis. The continue to face a deficit. Historically, this Secretary of Finance must independently number is down by five from last year and certify the results of the comparison of the 9 less from 2005. The two most common private and public operations and devise, in programs over budget were Medicaid and consultation with the Secretary of Finance, corrections. evaluation criteria to be used in conducting The survey also asked officials to performance reviews of any program or identify the budget priorities for the coming activity that is subject to a privatization legislative session. Twenty-nine states recommendation. identified education as the top priority. Medicaid and health care came in second with officials from 23 states calling it a top C. State Budget Outlook priority. In this area officials specifically The 2007 Fiscal Year looks to be a good noted debate about funding the uninsured one for most state budgets, according to the and expanding coverage for all citizens. In National Conference of State Legislatures addition, corrections, transportation and

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Table 8: Notable Tax Changes Type State Action Result Sales New Jersey 1% increase; widening of base $1.25 billion and $300.6 million respectively Income Ohio 4.2% decrease Part of 21% reduction over 5 years Corporate Pennsylvania Continued phaseout of capital Decrease of $198.2 million Income stock and franchise Cigarette Texas $0.41 per pack increase Increase of $431.7 million Gas New York Cap Decrease of $109 million

Table 9: Tax and Fee Changes in the States Tax Number of States Action Sales 15 Decrease Personal Income 18 Decrease Corporate Income 17 Decrease Cigarette, Tobacco and Alcohol 4 Increase Gas 5 Changes resulted in a decrease

public employee retirement will be high on pressure will remain in Medicaid programs the agenda in a number of states. while looming issues such as pensions and FY 2008 revenue growth is forecasted infrastructure will begin to take center between 0.5 percent (New York) to 6.5 stage, an almost exact forecast as the NCSL percent (Georgia) growth—while the report. average growth was pegged at 3.6 percent. Spending in FY 2006 grew at a Less than half the states provided forecasts staggering rate—8.7 percent, significantly for FY 2009, however, the forecast is much higher than the 29-year average of 6.4 more upbeat with the range between 2.5 percent. The survey noted this growth was percent (Maine) and 7.3 percent (Nevada), largely due to states spending in programs with an average of 4.7 percent. that received cuts in recent years. In The results of the NCSL survey addition, growth of budget reserves counts largely mirror the results of the National as spending and contributed to this growth Association of State Budget Officers/ rate as many states dedicated new revenues National Governors Association Fiscal into reserves. Survey of the States. The NASBO/NGA FY 2007 spending is forecasted to be survey only covers general fund spending closer to the average and achieve a growth but found state fiscal conditions had rate of 7 percent. Pressure will continue improved in 2006 with only two states from mandatory programs, especially forced to make mid-year budget cuts. Medicaid. The survey anticipates more modest The survey also reported that states growth in 2007, however, forecasted strong enacted a net tax and fee decrease of $2.1 expenditure demand from programs that billion in FY 2007. While 15 states enacted may have been cut in the past. Further, net increases, twenty-four had net decreases.

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Personal income taxes saw the largest to the surge. decrease, $2.32 billion, while sales taxes Vermont, Maine and New York had increased $622.4 million. the highest state-local tax burdens, whereas Unlike the NCSL report, the NASBO Tennessee, New Hampshire and Alaska survey reported that 46 states’ revenues had the three lowest. Alaska is helped with exceeded expectations, while the other four large oil reserves that residents occasionally were on target. In fact, revenues were 5.9 receive royalties from. percent higher than originally estimated, 1. How Do Americans Think About Taxes? with corporate income taxes coming in almost 21 percent above forecasts. This It’s no surprise that a majority of represents a dramatic swing from FY 2002 Americans say the federal income taxes when forty-two states reported collecting they pay are “too high.” Some of the key less revenue than budgeted. findings: • Only 10 percent of Americans say they’re willing to pay higher taxes to D. State and Local Tax Burdens Hit help eliminate the federal budget deficit. 25-Year High • 66 percent of Americans favor a According to a new study by the Tax complete elimination of the federal death Foundation, state and local taxes will tax. consume a record-setting 11 percent of the • 48 percent would support giving up nation’s income in 2007. Tax burdens have some federal deductions for an across- not dipped below 10 percent since 1986 and the-board cut in tax rates. 2007 marks the first time they’ve risen above However, some of the findings from the 10.9 percent. third annual survey of taxpayer attitudes Tax collections have been boosted by the Tax Foundation may be surprising. as personal and corporate incomes have For example, respondents were asked risen for almost four consecutive years. the maximum level of income someone Additionally low unemployment has added

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Figure 1: State-Local Tax Burden and Ranks (Calendar Year 2007)

Source: Tax Foundation

should be taxed—including federal, state, E. New Accounting Rule Shines Light and local taxes. The result was an average on Government Liabilities (14.7 percent) that is less than half that of An accounting rule set in 2004 by the actual average taxpayer burden (32.7 the Governmental Accounting Standards percent). Additionally, the income group Board (GASB) goes into effect this year. that most favored lower tax rates is those The rule, GASB 45, effects state and with modest incomes, while those in the local governments and how they account highest income brackets favored the highest for employee benefits. Before GASB 45 tax rates. Education level also factored governments used cash accounting to into what people’s attitudes about tax account only for that year’s expense. Now, rates should be. The lower the education governments will have to shift to accrual level, the lower the tax rate. Conversely, accounting and to account for long-term as education level increased, so did the promises as incurred costs or liabilities. opinions about what tax rates should be. A Credit Suisse report issued in The federal death tax was deemed the March 2007 estimates that state and local most “unfair,” followed by gas and income governments have amassed more than $1.5 taxes. Locally, gas taxes were considered trillion in unfunded pension and employee the most unfair, followed by property and benefit liabilities. Almost $1 trillion of motor vehicle taxes that is held at the local level. To put that

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Figure 2: Do You Consider the Amount of Federal Income Tax You Have to Pay as Too High, Too Low, or About Right?

Source: Tax Foundation

into perspective the entire municipal bond in a recent budget address New Jersey market was $2.4 trillion at the end of 2006. Governor Jon Corzine said “the constant Furthermore, the companies in the S&P 500 focus on short-term priorities without “only” had an unfunded liability of $326 consideration of long-term costs has led to billion. financing decisions that hang over the state Only three states—Mississippi, today, tomorrow, and far into the future.” Nebraska, and Wisconsin—have no GASB 45 is a very rude awaking for many in unfunded pension liabilities. California, government and taxpayers alike. Given this New Jersey and New York likely face reality many governments are left with few liabilities of $70, $60, and $54 billion options: respectively. At the local level, Jacksonville, • Shift to defined contribution plans Indianapolis and San Jose have the three (although promises made will still have lowest liabilities among U.S. major cities. to be funded, but the bleeding can be Detroit, San Francisco and Philadelphia stopped); are at the other end of the spectrum. New • Cut benefits; York City faces a deficit of $50 billion if you • Raise taxes; account for all public employees, including teachers. • Cut services; or, When this picture is painted, government • Privatize balance sheets look a lot darker. In fact,

Reason Foundation • www.reason.org 21 Annual Privatization Report 2007

Surface Transportation

Contents A. Building Roads to Reduce Traffic Congestion in America’s Cities: How Much and at What Cost? B. Long-Term Toll Road Concessions: An Overview C. Privatization of Existing Toll Roads D. New PPP Toll Roads & Toll Lanes E. International Toll Road Developments F. Answers to the Most Common Objections to PPPs

A. Building Roads to Reduce Traffic how much additional capacity will be Congestion in America’s Cities: How needed to relieve severe congestion. These Much and at What Cost? findings are then extended to all 403 urbanized areas. The report then estimates By David T. Hartgen, Ph.D., P.E. and M. the cost of providing that additional Gregory Fields capacity. These costs include construction in each Reason Foundation’s August 2006 state, major bridge widenings, adjustments study, Building Roads to Reduce Traffic for induced travel, and requirements for Congestion in America’s Cities: How Much some elevated or tunnel sections. Detailed and at What Cost? (available at www. results are provided for each city and state. reason.org/ps346/index.shtml), quantifies The study also provides a simplified state- the magnitude of traffic congestion and the level assessment for rural areas and for cost of its removal through the provision of moderate urban congestion. additional capacity. The study defines and The study finds that severe traffic quantifies severe congestion, in which peak- congestion is pervasive in large regions and hour traffic volumes exceed road capacity, is worsening throughout the United States. and estimates future congestion if trends In the future even small, urbanized areas continue. are likely to experience congestion common With the help of 32 participating in mid-sized areas today. The cause of this urbanized areas, the study uses sophisticated increase is not wastefulness but increasing traffic modeling techniques to determine

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Figure 3: An Overview of the Congestion Problem

Figure 4: Urban Areas in the United States Requiring Congestion Relief with Costs to Relieve Congestion

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Table 10: Cities with 2030 Travel Time Delays Worse Than Today’s Los Angeles City Population in 2030 (000s) Congestion Index in 2030 Los Angeles-Long Beach 15,652 1.94 Chicago 9,522 1.88 Washington 5,973 1.87 San Francisco-Oakland 4,968 1.86 Atlanta 5,009 1.85 Miami 7,551 1.84 Denver-Aurora 3,210 1.80 Seattle-Tacoma, WA 3,963 1.79 Las Vegas 1,029 1.79 Minneapolis-St. Paul 3,370 1.76 Baltimore 2,437 1.75 Portland 2,513 1.75

population and preferences for private budgets. The benefits of an investment in mobility, combined with limited additions additional capacity would be substantial. to road capacity. Nationwide, the number In addition to reduced travel time, other of lane-miles of severely congested roads is benefits include smoother traffic flow, expected to increase from about 39,500 in reduced accidents, improved air quality 2003 to 59,700 in 2030. To relieve severe through lower emissions, lower fuel use congestion by providing additional capacity, and operating costs, more reliable travel, an additional 104,000 lane-miles of capacity lower logistical costs for manufacturing and (about 6.2 percent of current lane-miles) delivery, more choices of jobs for workers will be needed, costing about $533 billion and businesses and wider choices for over 25 years, in 2005 dollars. The amount consumers. needed—about $21 billion per year—is David T. Hartgen, Ph.D., P.E. is a professor of about 10-15 percent of the federal highway transportation studies at the University of program over 25 years, about 28 percent North Carolina at Charlotte. M. Gregory Fields of the cost of present urban transportation is a graduate student at the University of plans, and about 39 cents per day per North Carolina at Charlotte pursuing masters commuter trip. However, the travel time degrees in Geography (Transportation), Earth savings are estimated at about 7.7 billion Sciences (Environmental Monitoring) and hours annually, so the cost per hour of Sociology. The above article is a summary of delay saved is about $2.76. If moderate Reason’s August 2006 study, Building Roads congestion and rural congestion are also to to Reduce Traffic Congestion in America’s be addressed, an additional $304 billion will Cities: How Much and at What Cost? The full be needed. study, detailed appendices, interactive maps, The study also finds that congestion and overviews of state-by-state congestion relief through provision of additional data and road capacity needs are available at capacity is quite feasible, given current www.reason.org/ps346/index.shtml.

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B. Long-Term Toll Road Concessions: For mega-projects, in particular, shifting An Overview those risks from taxpayers to investors can be a major benefit of the long-term 1. Introduction & Overview concession approach. From the perspective of U.S. The other major benefit of long-term transportation history, 2006 will be toll concessions is the mobilization of large noted as the year in which long-term toll new sums to be invested in much-needed highway concessions emerged as a major highway improvements. There are other new alternative. The lease of the Indiana forms of “innovative finance,” including Toll Road for $3.86 billion in June 2006 issuing bonds backed by future fuel-tax garnered much of the attention, but the revenues. But while such mechanisms shift longer-term story is the potential for the timing of funds to permit some projects using the concession mechanism to meet to be built sooner, they do not add to the a significant share of the need for new total amount of highway investment. Only highway capacity, both on urban freeways the introduction of tolls adds new capital and on long-distance Interstates. That’s investment, making possible large-scale new why a growing number of states are either projects. enacting first-time public-private partnership The Federal Highway Administration’s (PPP) legislation or amending existing 2006 report on highway conditions and laws to ensure that they are conducive to performance, released early in 2007, finds concession-type PPP agreements. that capital investment by all levels of The basic concession model works as government averaged $70 billion in the most follows. For a given large-scale roadway recent year for which data were available project, the state selects a winning bidder (2004). To maintain pavement conditions that will design, finance, build, operate, and current congestion levels (i.e., prevent and maintain the project over a sufficiently things getting even worse) would require an long term to have a reasonable likelihood of additional $9 billion per year. To improve achieving a competitive (double-digit) return conditions, including actually reducing on its investment. The state’s commitment, congestion below today’s levels by removing by signing a legally binding long-term bottlenecks and otherwise adding capacity, concession agreement, provides the means would require a total annual investment by which the company can raise the needed of $132 billion, i.e., $61 billion per year funds to build the project (assuming the more than current levels. (This calculation underlying economics are sound). Typically, was based on doing all proposed highway such deals transfer at least three risks from projects whose benefits exceed their costs.) the state to the private partner: There are several other national investment needs studies, by groups like • The risk of construction cost over-runs; the American Association of State Highway • The risk of delays in project completion; & Transportation Officials and the U.S. Chamber of Commerce. While their • The risk of inadequate traffic and numbers differ, all agree that the United revenue. States faces a major shortfall in highway

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capital investment over the next several add infrastructure as a new asset class for decades, with serious consequences for both its $230 billion fund. Russell Read, chief goods movement and personal mobility. investment officer, has mentioned toll roads This is the context in which the introduction as one type of infrastructure that might of the long-term toll concession model to the qualify for CalPERS support. United States must be assessed. Table 11: New Equity Funds for [U.S.] 2. Capital Markets and Companies Infrastructure, 2006 Fortunately, the global capital markets Fund Size ($billions) have now “discovered” the United States. Goldman Sachs $6-7 As The Economist (Jan. 20, 2007) noted Citigroup and Blackstone $5 recently, “America is catching up with a Macquarie European Investment Fund II $4-5 trend that was pioneered elsewhere—in this DRIVE (Transurban) $2.8 case as far away as Australia. Infrastructure Macquarie Infrastructure Partners $2-3 has become the most fashionable of asset CSFB/GE Capital $1-2 classes, as governments desperate for cash AECOM $1-2 link up with pension funds desperate to Morgan Stanley $1-2 diversify out of shares and bonds.” The Carlyle Group $1-2 article cited the estimate of Michael Wilkins Reef $1-2 Babcock & Brown $1-2 of Standard & Poor’s that $100-150 Fondo Italiano (F2i) $1.5 billion was raised in 2006, worldwide, for BNP Paribas $1-2 infrastructure investment. HSBC $1 Table 10 lists new equity funds for Bahrain $1 infrastructure created during the past year. Total potential size: $29-37 As can be seen, major U.S. investment Source: Macquarie Research, Feb. 2007, as reported in Public banks and private equity companies have Works Financing. entered the field, alongside European and Australian capital. The total of these new At this point in time, the investor-owned funds is estimated to be $29–37 billion. This toll roads industry in the United States is is equity investment. Assuming that a toll still predominantly made up of overseas road concession project is funded 30 percent companies. That’s because no such industry by equity and 70 percent by debt, the total emerged in 20th-century America, as toll investment these funds could generate would roads were developed and operated almost be in the $100-125 billion range. exclusively by government toll authorities In Australia, Canada, and Europe, at the state or local level. Adding to the both public-sector and private-sector preference for state dominance of this field pension funds now invest in infrastructure, was the availability of tax-exempt toll including toll roads. Innovation Briefs revenue bonds, available only to government reported in March that U.S. pension funds entities. Long-term toll concessions today are seriously considering entering this are offering serious competition to the field. The huge CalPERS (California Public state-only model, thanks in part to greater Employees’ Retirement System) intends to willingness and ability of the private firms

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Table 12: Major Global Toll Road Players Company Market Capitalization* Miles of Toll Road** Abertis $10.4 billion 915 ACS $ 7.7 billion See note*** Autostrade $10.4 billion 2,080 BRISA $ 4.0 billion 610 CINTRA $ 2.0 billion 1,000 Cofiroute $ 1.5 billion 577 Macquarie $ 5.5 billion 930 SyV $ 4.3 billion 1,609 *Market capitalization is for the most recent available year and is for the whole company. In some cases, toll road activity is a small part of the total while in others it is the major or total business activity. Euros are converted to U.S. dollars at $1.30 = E1, and Australian dollars at A$ = $0.80. **Many private toll roads have multiple owners. The list presented here is the miles of toll road in which the company reports some share of ownership; hence, there is some degree of double-counting.

***ACS does not break out mileage numbers, but reports that it has “more than 50 toll concessions.”

to take on traffic and revenue risk (given 3. Controversy Over Concessions sufficiently long terms) plus the new Both the leasing of existing toll roads availability of tax-exempt private activity and the use of concessions for new tolled bonds (PABs) for public-private toll roads highway capacity have provoked opposition. under the federal SAFETEA-LU legislation. Although the long-term lease of the Chicago Table 11 lists the major global toll road Skyway sailed through the Chicago City companies as of 2006. This table is drawn Council with little opposition, the legislation from a 2005 Reason Foundation policy to approve the lease of the Indiana Toll study which includes brief profiles of each Road passed on a close vote; some even of the companies (see reason.org/ps334. attributed the subsequent defeat of several pdf). Since this table was created, the two Republican legislators in November 2006 to largest companies, Abertis and Autostrade, their votes in favor of the deal. And in early have proposed to merge. Although the 2007, controversy over the specifics of toll merger was initially turned down by Italian road concessions for new projects in Texas authorities, the European Commission culminated in the passage of a bill to impose overturned that decision, and in early 2007 a two-year moratorium on such projects the companies were still considering it. (though most toll concession projects Separately, Spain’s ACS in March 2007 already in the pipeline were exempted from announced plans to acquire a controlling the bill’s provisions). stake in Germany’s Hochtief AG and its Several of the concerns raised by critics U.S. construction arm Turner Corp. That apply to both existing and new projects. would further a trend in which global They include: toll-concession companies are partnering • Foreign companies; with U.S. firms—e.g. Fluor/Transurban, • The long length of the concessions; Cintra/Zachry, and Kiewit/Macquarie. The emergence of a purely U.S. toll concession • Adequacy of caps on annual toll rate company seems only a matter of time. increases;

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• Details of provisions limiting the extent deals are just too long. But the European of state competition, via new “free” terms cited are for basic, rural, inter-city roads. toll roads built in the 1960s, ‘70s, and ‘80s. Discussions of these and other issues More complex, costly, and riskier European will be found in two sets of Frequently toll projects involve longer terms (e.g., 70 Asked Questions published in early 2007 years for the A86 West tunnel near Paris by Reason Foundation (available at reason. and 78 years for the Millau Viaduct, the org/pb58_building_new_roads.pdf and world’s highest toll bridge). Under U.S. reason.org/pb60_leasing_state_toll_roads. tax law, road and bridge assets of existing pdf). In this space, we can provide only toll projects may only receive depreciation brief summary arguments on these write-offs if the concession term is greater points. They are also addressed in Robert than the useful life of the asset. That was a Poole’s testimony before the U.S. House key factor in the long terms of the Chicago Subcommittee on Highways & Transit, Skyway and Indiana Toll Road. (Companies Feb. 13, 2007 (available at reason.org/ were willing to bid more for a concession commentaries/poole_20070213.shtml). agreement that permitted depreciation write- Foreign Ownership: CNN’s Lou Dobbs offs.) For new toll facilities, depreciation and various elected officials have decried write-offs are available in any case; hence, “the sale of tax-funded roadways to foreign Texas has not had trouble getting serious companies.” This is doubly misleading, bids to develop billion-dollar-scale new toll since no actual or proposed concession deal road projects despite a legal limit of 50 years involves the sale; all—whether for existing for concession length. or new toll roads—involve long-term leases. Cap on Toll Increases: Rep. Peter Second, none of the roadways involved DeFazio (D, OR), chairing his Feb 13, 2007 was built with tax money; these are toll hearing on long-term concessions, repeatedly roads, financed based on toll revenues. As asserted that the cap on annual toll rate for the foreign-ness of the companies, as increases in recent agreements was “a floor, noted previously, the only companies with not a ceiling.” By that he meant that a toll competence and a track record of long-term road company would always select the index development, operation, and management (GDP per capita) that permitted the largest of toll roads are from Europe and Australia, annual increase, and would raise tolls to where such industries have been encouraged that level without fail. But this completely by government policy. Joint ventures are ignores what economists call “elasticity already emerging between U.S. and foreign of demand”: you cannot charge whatever companies, and (assuming politicians don’t you want, because customers have options stifle this emerging U.S. market), we are and will balk at paying rates they consider likely to see purely U.S. toll road companies more than the value they get from using the emerge over the next five to 10 years. toll road. That’s why prospective toll road Long Concession Length: Critics point developers (public or private) pay upwards to Europe as having concession lengths of of a million dollars for investment-grade 30 years and suggest that 50 or 75-year traffic and revenue studies—to determine terms in some recent and proposed U.S. what toll rate in each future year would

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maximize revenue. (Hint: it’s never the developed country has since privatized those highest rate one could imagine.) To be sure, utilities, learning from the U.S. model. But states could adopt lower annual caps (such even before doing that, those countries had as the CPI), and many deals would still get developed the concession model for investor- done. But either the up-front payment or the owned roadway utilities, mobilizing billions future revenue-sharing with the state would in private capital to develop high-quality toll be lower, as a consequence. These are policy motorway systems, both urban and intercity. choices that can be made in any concession Transportation officials and agreement. policymakers are beginning to learn from Competition Provisions: Whether their counterparts overseas, adapting public-sector or private-sector, toll roads the equity-based, long-term concession are vulnerable to unexpected competition model to U.S. highway needs. The global from large amounts of new “free” roadway capital markets have come to view the capacity. Banks and bond-buyers historically U.S. highway market as an untapped have asked for limits on such competition, business opportunity, just as consensus was and generally state DOTs have cooperated, developing that we have a major shortfall agreeing to certain, limited restrictions of highway investment. The sections that which get incorporated into bond covenants. follow detail recent developments in long- With concession projects, such limitations term concessions and toll road PPPs, both become part of the concession agreement. domestic and abroad. These days, it is rare for such provisions to ban parallel free roadways. Generally, the agreements only define certain types of C. Privatization of Existing Toll Roads competing roads as subject to compensation, 1. Leases Accomplished or Rejected if they can be shown to have diverted traffic from the toll road and thereby reduced its As of the end of 2006, three existing toll revenues. Excluded from such provisions roads had been leased to the private sector are all roads that are part of current long- under long-term concession agreements. range transportation plans and all roads The Chicago Skyway deal closed in January more than X miles on either side of the 2005, and the Indiana Toll Road deal closed toll road. As with toll rate caps, the details in June 2006, shortly after Gov. Mitch of such provisions are negotiable, though Daniels signed the enabling legislation. And provisions offering very little protection may that same month, Transurban closed a deal reduce either the up-front payment or future for a 99-year lease with the Virginia DOT revenue sharing. to rescue the ailing Pocahontas Parkway, one of two new toll roads developed under a 4. Conclusion kind of non-profit public-private partnership In the 20th century, America showed during the 1990s. The Parkway, located the world that investor-owned electric, gas, in Virginia, had attracted only about 60 and telecommunications utilities worked percent of the projected traffic and revenue better than the state-owned utilities in during its early years, and was at serious carrying out these functions. Nearly every risk of defaulting on its toll revenue bonds.

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Under the deal, Transurban will defease the Metro heavy-rail system from the Virginia existing bonds, refinancing the Parkway. It suburbs to the airport. will also build a planned extension to the Macquarie made an informal proposal Richmond airport, which will likely increase to the San Joaquin Hills Transportation traffic and revenue. Although there was Corridor Agency in Orange County, no up-front payment (given the parlous California in 2005, but the offer failed to state of the Parkway’s finances), if the road generate enough political support to go does well enough over the long term, the forward. That toll road (the San Joaquin concession deal provides for revenue sharing Hills Toll Road, SR 73) is also at some risk with VDOT. of default, though its traffic is in the 80 Several other ailing start-up toll roads percent range of its projections. would be logical candidates for such Another rejection was in Houston. rescues. Another nonprofit PPP toll road is The Harris County Commission in early the Southern Connector in Greenville, SC. 2006 commissioned three outside studies Like the Pocahontas Parkway, its traffic on possible changes to the Harris County and revenue are far below projections, but Toll Road Authority’s system (consisting thus far no offers from the private sector of the Hardy, Sam Houston, and Westpark have materialized (or if they have, they have toll roads). The J.P. Morgan team studied not been disclosed). Yet another ailing toll a possible sale of the system, estimating road is the Northwest Parkway, opened in that the county might net as much as $20 2003 as the northwestern portion of greater billion by doing so. The Goldman Sachs Denver’s beltway (of which the E-470 toll team analyzed a long-term lease, finding road forms the eastern half). In this case, the that this could yield between $7.5 billion toll agency that was created to do the toll and $13 billion, depending on the length of road has gone out to bid for a concession- the term. And the Citigroup team studied based rescue. In April 2007, the Northwest ways of leveraging the system’s revenues, Parkway Public Highway Authority selected while keeping it in county control. The from among 11 bidders the proposal commissioners liked the third option, voting of Brisa/CCR to negotiate a long-term unanimously in June 2006 to reject lease or concession agreement. sale. No written explanation was provided In three other cases thus far, proposed as to the basis for the decision. leases of existing toll roads have been 2. Leases Under Consideration rejected. Virginia had received five proposals to lease its Dulles Toll Road in October As of this writing, in spring 2007, the 2005, in amounts ranging up to $5.7 billion. most likely major toll road lease candidate But the new administration that took is the Pennsylvania Turnpike. This proposal, office in early 2006 decided to reject them, subject to enactment of the necessary opting instead to have the Metropolitan legislation, has the strong support of Gov. Washington Airports Authority (which Ed Rendell and of some leaders of both operates Dulles Airport) take over the toll parties in the state legislature. It also faces road and use a planned increase in toll opposition, not only from those opposed to revenues to help finance an extension of the tolling and to foreign companies but also

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from the Pennsylvania Turnpike Authority. billion if tolls were adjusted annually for In response to criticisms of other actual and inflation. Other lease assumptions produced proposed leases, Gov. Rendell has crafted proceeds as high as $17-24 billion for a a proposal that would (1) limit the term of 75-year lease. Schoenberg, who chairs the the lease to 30 years, and (2) dedicate 100 Senate Appropriations Committee and a percent of the proceeds to transportation, by revenue-forecasting commission, proposes creating a permanent fund whose earnings that all proceeds be used for transportation would be used for both highway and transit investment and to bail out the state’s under- projects statewide. As of this writing, the funded public employee pension system. As proposal was favored by voters, 49 to 41 of this writing, the idea is on hold, with the percent, in a Quinnipiac University poll. governor focused on leasing the state lottery. The Turnpike Authority has attacked New Jersey’s Gov. Jon Corzine has the governor’s plan, contending that it could cautiously proposed leasing a number of raise just as much money as the proposed state-owned assets, primarily to reduce the lease would raise. But a close look at the state’s severe debt problems. A report by Turnpike’s plan reveals that it would raise UBS Investment Bank identified a number of a large fraction of its total by (somehow) possible lease candidates, including the New putting tolls on the parallel I-80, a low- Jersey Turnpike Authority and its individual probability outcome. It has also not made toll roads. Enabling legislation was a credible case for how it would prevent introduced by an ally of the governor, but future governors or legislatures from legislative hearings exposed a considerable preventing the regular toll increases its amount of bipartisan opposition, and few own plan calls for (which would be legally other supporters. permitted for the life of a private concession, As of early 2007, Delaware DOT was if that alternative is voted in). And it ignores looking into the possibility of leasing its toll one of the issues that has helped lead to roads, I-95 and Del. 1. The state has a $2.7 majority voter support for the lease: endemic billion shortfall in its transportation budget corruption at the Turnpike Authority, as over the next six years; by some estimates, attested to in numerous media accounts leasing the toll roads could generate $4 and by the governor himself, at the White billion. Delaware already has PPP legislation House Surface Transportation Legislative on its books, under which a lease could be Leadership Summit, Feb. 9, 2007. offered. Leasing of existing toll roads or systems is also on the agenda in Illinois and New Jersey. In the former, the impetus has come D. New PPP Toll Roads & Toll Lanes from the legislature, where Sen. Jeffrey 1. PPP Enabling Legislation Schoenberg has publicized the idea of leasing the Illinois Tollway system. At his urging, According to a report in the March 2007 the legislature commissioned a study of the issue of Public Works Financing, measures idea by Credit Suisse. That report, submitted are pending in nine states to permit toll road in August 2006, estimated that leasing the PPP agreements, generally including long- system for 75 years could yield $5.8 to $8.4 term concessions. Two other pending laws—

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New Jersey and Pennsylvania—have been the Senate could pick up the bill again next discussed above, and are focused primarily January. or exclusively on the lease of existing toll Indiana: Gov. Mitch Daniels in late roads. March 2007 withdrew his proposal for The new measures are broader, and two new PPP highways, one a beltway focus mostly or entirely on using toll PPP around Indianapolis and the other a joint arrangements to develop new roadways and project with Illinois. In both cases, strong bridges. opposition arose from landowners, which Arizona: Competing bills on PPPs were would likely have been the case regardless in the Senate rules committee as of March of whether the roads were proposed as toll 2007, making passage unlikely this year. roads or not. Bills authorizing HOT lanes and PPPs did Mississippi: The legislature in March pass the Senate Transportation Committee 2007 passed a new PPP enabling act, which in February. will make that state the 22nd with such a California: Since the pilot program law on its books. It permits the government law enacted in 2006 has been judged or private contractors to design, finance, unworkable by the private sector, the build, and operate new toll roads and governor’s office has drafted a revised bridges. Free alternative routes must be version that deletes the objectionable available, and the tolls must be removed provisions (the legislative veto of negotiated after the construction debt has been paid agreements and the limitation of tolling off. to commercial vehicles). The bill has been Nevada: As of this writing, bills were introduced by Sen. George Runner, and pending in both houses to allow both state informational hearings have been held thus and local governments to build and operate far in early 2007. toll roads, including via private concessions. Florida: A bill revising the state’s current Tennessee: In February 2007, PPP law to permit the lease of existing toll both the Democratic chair of the roads (except the Florida Turnpike) passed House transportation committee and the House in March 2007. It would also add the Republican chair of the Senate some concession-related provisions to the transportation committee introduced PPP existing PPP law, for example to limit terms enabling legislation. Separate bills are also in to 50 years unless the state DOT shows that motion permitting toll roads in the state. a longer term (up to 75 years) is needed. It Virginia: The legislature passed a would also permit mixed (public/private) measure to amend the state’s existing PPP funding for projects that are part of the state law to permit a local agency, the Northern highway system. Virginia Transportation Authority, to levy Hawaii: A bill permitting PPPs passed tolls and pursue toll concessions. Previously, the House, but was killed by the chairman only Virginia DOT had such authority. of the Senate transportation committee, PPP legislation is also under discussion who failed to hold a hearing by the required in Kentucky, Michigan, Oklahoma, and March 23, 2007 deadline. But apparently Puerto Rico, as of spring 2007.

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2. New PPP Toll Roads metro area. But most current PPP interest Most states with existing or pending centers on a proposed $575 million toll road PPP legislation have one or more projects around the east side of Colorado Springs. in the works, generally new toll roads. The The 33-mile project’s initial feasibility study following section offers a brief recap. found it to be financeable solely with toll Arizona: A new $900 million toll revenues. road in Pinal County, in the fast-growing Florida: With its well-established public southeastern suburbs of Phoenix, seems toll authorities at the state and metro-area to be the focal point of attention as the levels, Florida might seem to have little legislature debates a PPP toll roads bill. Also need of PPP toll roads. But what appears on the agenda, via separate legislation, is the to be emerging is the use of concessions for proposed conversion of HOV lanes on I-17 riskier projects that don’t fit the conservative to HOT lanes. funding criteria used by the toll agencies. California: The Golden State first The Tampa Hillsborough Expressway authorized concession toll pilot projects Authority, for example, has gone out to with legislation in 1989, and the second of bid for its new East-West Road, a short but two such projects under that (since-repealed) costly connector between fast-growing New law is due to open in the second half of Tampa and I-275. Though only 3.1 miles 2007: the South Bay Expressway (SR 125 long, the project is expected to cost $150 South) running north-south through the million because much of it must bridge eastern suburbs of San Diego. The main the Cypress Creek swamp. Elsewhere, potential concession projects, thus far, are concession projects are being considered all in the greater Los Angeles area. The most for a new 46-mile Outer Beltway around ambitious is a toll truckway system, built Jacksonville and for proposed elevated along I-710 and SR 60 to get short-haul express toll lanes on I-95 in Miami and I- drayage trucks from the Ports of Long Beach 595 in Ft. Lauderdale. Florida is also using and Los Angeles to the distribution centers a concession for the $1.2 billion Miami located in Riverside County. Three other Port Tunnel, though in this case the revenue proposed projects are long-distance, deep- stream will be availability payments from bored tunnels: one beneath South Pasadena state and local agencies rather than tolls. to complete a missing link on I-710, Georgia: Although the state has received another between Glendale and Palmdale and is moving forward with PPP proposals to significantly shorten driving distance for three toll lanes projects (Georgia 400, and time between those two cities, and the I-75 North, and I-285 West), none of these Riverside/Orange County tunnel providing involves concessions. But in February 2007 a new east-west link between the inland Georgia DOT announced a major new 10- bedroom communities and coastal Orange year proposal for statewide transportation County. improvements. Included would be four Colorado: The Colorado DOT’s mega-projects in the Atlanta area: a network Colorado Tolling Enterprise has done a of express toll lanes, a tunnel beneath large-scale feasibility study of possible toll downtown (to relieve congestion on the roads and toll lanes, mostly in the Denver I-75/85 Downtown Connector), a new east-

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west toll road in the northern suburbs, and of three possible toll projects in the Portland a separate truck tollway system. All four area. In January 2007, MIG announced that are potential candidates for long-term toll two of the three are potentially feasible. The concessions. two are the widening of South I-205 and a Hawaii: The principal focus of proposed proposed Newberg-Dundee bypass toll road. PPP legislation is the development of Texas: Texas DOT negotiated its first reversible elevated express toll lanes to two long-term concession deals (called provide a bus and motorist congestion-relief Comprehensive Development Agreements alternative to the congested H-1 freeway. under Texas law). Cintra/Zachry will Indiana: Gov. Mitch Daniels proposed develop segments 5 and 6 of SH 130, the two major toll concession projects. The new toll road between Austin and San Indiana Commerce Connector was a 75-mile Antonio. TxDOT’s internal toll feasibility outer beltway around most of Indianapolis, study found that conventional toll financing to relieve congestion on the region’s could cover less than half the project’s numerous Interstates. The other was called estimated $1.3 billion cost, but Cintra/ the Illiana Expressway, a truck-oriented Zachry will do the entire project at no connector between northwestern Indiana taxpayer cost under a 50-year concession. and northeastern Illinois. In both cases, For SH 121 in the Dallas suburbs, the vocal local opposition from property owners fundamentals were so strong that Cintra proved to be sufficiently powerful to cause agreed to build the $560 million toll road Daniels to withdraw the proposals in early but also to provide an up-front concession 2007. fee of $2.1 billion. However, that project Kentucky: A massive $3.9 billion Ohio has been entangled in controversies over River bridges project is the impetus behind whether CDAs, as currently defined, consideration of a PPP toll roads law for actually serve the public interest, and also this state. The cost of the two bridges plus complicated by a late proposal submission interchanges has ballooned from $2.5 from the North Texas Tollway Authority, billion, and the longer the delay in going operator of several existing Dallas-area toll forward, the higher inflation is expected to roads. Despite the passage of Senate Bill boost the cost. 792 in June 2007—which places a two- New York: Although former Gov. year moratorium on CDAs, gives local George Pataki twice tried and failed to get toll authorities the first option on new toll PPP enabling legislation enacted, there are projects, and creates a new market valuation indications that new Gov. Eliot Spitzer is process for new projects—approximately receptive to the idea of a PPP concession a dozen other CDA projects under approach to fund the replacement of the development statewide were explicitly obsolete Tappan Zee Bridge across the exempted from the moratorium and will still Hudson River, north of the New York City proceed forward. metro area. Utah: Although Utah’s legislature Oregon: Under a unique contractual enacted a comprehensive PPP toll roads act approach, Macquarie Infrastructure Group in 2006, no actual toll road projects have is doing feasibility studies for Oregon DOT emerged yet. The most likely project is a 35-

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mile Mountain View toll road, estimated to toll-financed and usually done as long-term cost $2.5 billion. Running generally north- concession projects. In many such cases, a south, it would relieve congestion on surface key enabling technology is the tunnel boring streets in the western Salt Lake City suburbs machine—a giant, self-contained structure and provide an alternative route to the Salt with a rotating drill head up to 50 feet in Lake City airport. Utah’s first toll project diameter—and machinery to erect the tunnel of any kind is the new HOT lanes on I-15, walls as the drill moves forward to bore the opened in 2006 by converting former HOV tunnel. lanes. Sydney, Australia is a prime example of Virginia: Final approvals are near for a major city that has made use of tunnels the Fluor/Transurban concession to add as a critical element in developing a region- two HOT lanes in each direction to the wide toll motorway system. Tunnels southwest quadrant of the Beltway (I-495) made feasible key links in the M1 Eastern in northern Virginia. The same team has also Distributor (downtown to the airport) been selected to convert the existing HOV and the M2, M4, and M5 toll motorways, lanes on I-95/I-395 into HOT lanes. Virginia as well as providing new tunnel capacity DOT has also received three proposals parallel to the landmark harbor bridge. in response to its RFP to add 55 miles to The only Sydney tunnel that has not been a US460. The project would be funded partly financial success is the Cross City Tunnel, a by tolls and partly by state funds. 1.3 mile route that permits downtown traffic Washington: The state released a major to bypass many signalized intersections. tolling study, building on the state DOT’s Over-optimistic traffic projections misled frequently expressed view that current investors, and the tunnel company filed for funding sources, despite a recent gas tax bankruptcy at the end of 2006. However, increase, will permit very little increase in taxpayers are not at risk, and the receiver highway capacity. Legislators enacted a PPP is keeping the tunnel in operation. Sydney’s law in 2005, but thus far no specific projects success has led concession companies to have emerged. Gov. Christine Gregoire has incorporate large tunnels in Melbourne’s suggested new toll bridges, such as on I-90 first two tolled motorways, and now in Snoqualmie Pass and on I-5 at the Oregon Brisbane is doing likewise, with its first two line. Others have suggested tolls and PPPs to projects being the A$2 billion North-South replace the Alaskan Way Viaduct and the SR Bypass Tunnel and the A$1.2 billion Airport 520 Bridge. Link tunnel. Other notable urban tunnel projects are as follows: E. International Toll Road Paris’s A86 West. French toll road Developments company Cofiroute is nearing completion of the first of two large tunnels (34-foot inside 1. Large Urban Tunnels diameter) that will fill in a long-missing- One of the most notable global trends link on the A86 ring road around Paris. in recent years is the development of large Local opposition had held up the planned new urban roadway tunnels, generally surface route for decades, since it would

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have bisected historic Versailles. Cofiroute Under normal conditions, the lowest level made an unsolicited proposal to the French will be empty of water and traffic will flow government to finance, build, and operate on the two vehicle decks. Under certain the project as tunnels created via tunnel conditions of heavy rainfall, water will boring machines. The first $2 billion tunnel be diverted into the tunnel’s lowest level, is nearing completion; at 6.3 miles long, with traffic continuing to flow on both it will provide for two decks, each able vehicle decks. Only under full stormwater to accommodate three lanes of auto-size operations—expected to be once or twice vehicles (no trucks). A parallel tube, to a year—will the tunnel be closed to traffic be built subsequently, will have a single so that its full capacity can be devoted deck and one lane each way for truck-size to flood control. As of this writing, basic vehicles. The project cost is being financed construction had been completed. The based on projected toll revenues, without tunnel opened in May 2007. government guarantees. The concession Yangtze River Tunnels. Under term is 70 years. construction currently in Shanghai are twin Madrid’s M-30 tunnels. Madrid’s inner 50’ 6” roadway tunnels, being excavated by ring road, the M-30, is heavily congested the world’s largest tunnel boring machines. and in need of additional capacity. Due to The tunnels will be 5.6 miles long when land-use constraints and costs, a tunnel completed; they are key components of the solution was judged to be the best approach. Shanghai Yangtze River Tunnel & Bridge The most spectacular portion of the overall Highway, whose total cost is $1.6 billion, M-30 expansion is the South By-Pass. Twin including both the tunnels and two major tunnels of 49-foot diameter have been bridges. The overall highway is nearly 16 constructed via tunnel boring machines, miles long. This is but one of dozens of creating a bypass route that is almost a mile large tunnel projects currently under way shorter than the existing M-30 route. The in China. Another crossing of the Yangtze tunnels average 2.2 miles in length, and are River is taking place at Nanjing, using a connected every 650 feet by cross-passages. 49-foot diameter tunnel boring machine. Each tunnel provides a single main deck A third tunnel crossing is at Wuhan, using with three full-size lanes accommodating a 37-foot diameter tunnel boring machine. all types of vehicles, plus a lower deck The German firm Herrenknecht, the world’s for emergency vehicles (including full-size leading tunnel boring machine producer, fire/rescue trucks). The M-30 tunnels were told Engineering News-Record in March scheduled to open in spring 2007. 2007 that it had supplied nearly 40 tunnel Kuala Lumpur’s SMART Tunnel. This boring machines for projects in China, large project (about $650 million), in the and estimates that another 10 from other capital city of Malaysia, is the world’s first manufacturers are also at work in China. combined stormwater and roadway tunnel. City Ring Brussels Tunnel. This It combines a 6-mile stormwater tunnel with proposed tunnel would be 6.2 miles in a 1.9-mile double-deck roadway (two lanes length, with three lanes on each of two each deck), all within a 37-foot diameter decks, within a 45-foot diameter. Its tunnel created via tunnel boring machines. dimensions would permit buses as well as

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cars, but not heavy trucks. state, Queensland, has now embarked on Buenos Aires Tunnel. This proposed a major roadway expansion effort: the tunnel would run 150 feet below the surface South East Queensland Infrastructure of 9 de Julio Avenue in the center of the Plan & Programme (SEQIPP). It envisages Argentine capital. Twin double-deck tubes spending A$66 billion over the next two are proposed, each with four lanes. This decades, nearly half of it on transportation project, along with a planned riverside infrastructure. Besides the Brisbane toll highway, is intended to relieve congestion on tunnel projects mentioned previously, others the city’s streets. include a twin span for Brisbane’s Gateway Bridge, a A$2 billion Northern Busway, 2. Other PPP Toll Roads and the A$543 million Tugun Bypass. As noted in previous editions of this Queensland is following the trail blazed by report, the use of long-term concessions has New South Wales (Sydney) and Victoria become standard practice for large-scale (Melbourne) in making use of long-term toll highway, bridge, and tunnel projects in most concessions. of Europe, the urban areas of Australia, and Brazil: South America’s largest country parts of South America. Generally speaking, is also its leading practitioner of toll in Europe and Australia, most such projects concession projects, with over 5,500 miles use toll finance, with concession terms of of highway operating under 36 federal from 30 to 75 years. Several European concession agreements. In early 2006, the countries have used “shadow tolling” for government announced an expansion of some of their roadway projects, notably the program; however, it got entangled in Spain, Portugal, and the United Kingdom. politics and was put on hold for most of In politically stable countries with the rule the year. In January 2007, however, new of law, investors are willing to finance such rules were issued to get the program moving projects based on the government’s pledge forward again. The projected seven new to make annual payments over the life of concessions would cover up to 1600 miles the concession term, based either on traffic of additional highway, involving up to counts or some other formula. In developing $9 billion in investment. Two other firsts countries, little use has been made of for Brazil: the first state-authorized toll shadow tolling thus far. Instead, where new concession (a $300 million upgrade of an roads (or major upgrading of existing roads) existing highway in Minas Gerais) and the are needed, but toll revenues are insufficient country’s first express toll lanes (on a 7.5 to cover the capital and operating costs, the mile highway in Sao Paulo), to be done as a typical model is one of mixed funding. The $564 million concession. government (perhaps aided by development Britain: With only one real toll road banks) puts up a portion of the capital costs; concession project (the successful M6Toll), then the balance is raised via toll financing. Britain in 2006 continued to pursue its Below are some highlights of notable own form of shadow tolling—design, developments during 2006 and early 2007 build, finance, operate (DBFO) concessions in selected countries. in which the government commits to Australia: The country’s fastest-growing “availability payments” over the life of the

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concession. The largest of these will soon concession agreement. The $1.6 billion request proposals from five short-listed project includes 235 miles of toll road, on teams for the $8.9 billion project to widen two separate north-south routes along the and operate London’s M25 ring road, under country’s east and west coasts. It is one of a 30-year concession. The award is expected seven major toll concessions comprising a in 2008 with construction beginning major upgrade of the country’s highway in 2009. Meanwhile, debate continues system. Two additional concession contracts over government proposals to institute were signed in January 2007 and the winner nationwide road pricing. of another announced in February. The Canada: Our neighbor country has latter is a 228-mile, $3.5 billion project that only one significant toll road, the privatized includes a 10.5-mile bored tunnel. (via 99-year concession) Highway 407 in India: This fast-growing country Toronto. Most of the concession activity continues to move forward on its $13 billion these days is along British DBFO lines. That National Highways Development Project, is true of recently awarded concessions for much of which is being carried out via the Sea-to-Sky Highway and Golden Ears toll concessions. Following completion of Bridge projects in British Columbia (though the first phase—the Golden Quadrilateral, the latter will charge real tolls, to be paid linking Delhi, Kolkata, Chennai, and to the government, which in turn will pay Mumbai—the second phase is moving the concessionaire). It’s also true of several forward smartly with new concession roadway projects in Alberta. However, two projects being awarded in most parts of the notable exceptions are now under way. In country. Quebec, the 26-mile A30 project will be a Indonesia: As part of a series of good- toll road concession, for which three teams government reforms, Indonesia has joined have been short-listed and invited to submit the move to privatize existing toll roads. proposals. At the federal level, the transport The government’s toll road agency, PT Jasa minister has proposed a toll concession for Marga, announced in March 2007 that it a new crossing of the Detroit River, linking would lease all 16 of its existing toll roads Detroit and Windsor. to concession companies, so as to raise cash Chile: This country continues to have to develop new projects. Jasa Marga is the one of the most advanced toll concession largest toll road operator in Indonesia; the systems in the world. In 2006 the four country’s other toll roads were developed concession companies that have developed and are operated by concessionaires. a fully interoperable system of toll roads Mexico: This country is widely known in Santiago received legal permission to for failed private toll road projects in the institute peak/off-peak tolling differentials, 1980s and 1990s, in which bids were won to enable them to better manage traffic by the company that offered the shortest flow so as to minimize congestion. The concession period and subsequently system includes nearly 100 miles of new toll attempted to charge unrealistically high motorway. tolls. Those projects were nearly all taken Greece: In December 2006 the Greek over by the government after failing government signed its then-largest toll financially. But having learned from its

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mistakes, the country’s Secretaria de Works Financing in March 2007 reported Transportes y Communicaciones (SCT) that four international teams have been is trying again. In 2006 it began offering qualified to bid for the first such project, the new toll road concession projects, on more west section of a new St. Petersburg beltway. realistic terms. And in 2007 it is beginning Studies are under way on the second to “re-privatize” some of the toll roads project, the M10 between Moscow and St. it nationalized previously. An initial four, Petersburg. totaling 346 miles, will be offered via two concessions this year, under standard 30- year toll concessions. SCT is also offering F. Answers to the Most Common several hybrid projects, combining tolled Objections to PPPs and shadow-tolled stretches, on 20-year By William D. Eggers concessions. Panama: Thirteen years ago the Objections to public-private partnerships government awarded a concession to a (PPPs) tend to be markedly similar across Mexican firm to develop a 36-mile toll countries. For the most part, the main road parallel to the Panama Canal. That objections simply reflect a sincere desire firm failed after completing only one-fourth to protect the public purpose and get the of the project. Now Brazilian developer most value for taxpayers. Nevertheless, Odebrecht has bought out the concession some of the concerns are driven by a and will complete the project, investing misunderstanding of PPPs, while others $215 million. are based on outdated or incomplete Peru: A $1.3 billion InterOcean information. Following are answers to the Highway project is under way to link most common concerns. Brazil with Peru. The Brazilian portion is already completed, but the Peruvian 1. Higher Cost of Capital portion, crossing the Andes, has proved Objection: Government-issued debt is more difficult. It has been divided into five cheaper than the private sector’s, making sections, each one awarded as a 25-year private financing and development a bad toll concession. As of January 2007, three deal for taxpayers. of the five were under construction. The This is perhaps the major objection to other two, which involve upgrading existing PPPs. This line of argument contains some paved roads leading to coastal cities, are to truth, but it also overlooks several important be awarded in the first half of 2007. When points. completed, the highway will permit ocean- Difference between cost of capital and to-ocean trips in four days. cost of debt. First, the argument assumes Russia: The government is supporting that the cost of capital and the cost of a bill in the State Duma to provide a legal debt are one and the same. However, a framework for toll road concessions, with government’s risk-adjusted average cost the aim of upgrading Russia’s dilapidated of capital typically exceeds its cost of debt highways. The bill includes a requirement because the public sector takes on project- that there be parallel free routes. Public specific risks such as cost overruns and

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delays that need to be factored into the cost to finance PFI (Private Finance Initiative) of capital for each project it undertakes. schemes. Under the credit guarantee Moreover, even though the private sector program, the government provides funds takes on some of the risks of construction, to the PFI project through cash advances time overruns, and project performance, it governed under the terms of a loan can better control its capital costs by making agreement. The private firm repays these efficient use of resources. The comparison loans to the government after completing should therefore be between the public the project. Also the government receives an sector’s cost of capital (to which a risk unconditional repayment guarantee from premium must be added) and the private the private financier for providing this loan sector’s cost of capital (which amounts to facility in return for a fee. the weighted average of its cost of debt In the United States, the Department and equity), not between the two sectors’ of Transportation has allocated $15 billion different costs of borrowing. Moreover, the in tax-exempt private activity bonds for benefits achieved in terms of superior service qualifying PPP highway and intermodal delivery alone are often worth the extra freight facilities. This approach lowers the costs to the government. private sector’s cost of capital significantly, Gap Narrowing. Second, as the private enhancing the investment prospects. infrastructure market has grown and 2. Failure to Realize Value for Money financing mechanisms have become more sophisticated, the gap between the public Objection: When you combine the and the private sector’s cost of debt has higher borrowing costs of private financing narrowed. For example, with the maturing with the often higher transaction costs—and of the private finance market in the United subsequent monitoring costs—of engaging Kingdom, the financing costs difference in these kinds of deals, the taxpayers end up between the private cost of capital and paying far more than they would have under public borrowing is now in the range more traditional public financing. of only 1-3 percentage points. As Allen The issue of value for money should Grahame notes, the additional cost to the be an important feature of any public public sector should not be significant infrastructure project, though it gets more enough to risk losing the value for money emphasis with PPPs. Value for money of the project, provided the private sector is based on the theory that the private can deliver savings in other aspects of the sector brings in benefits and efficiencies project. that outweigh its higher borrowing costs. Creative Financing Models. Last, a In analyzing value for money, it must variety of financing approaches enables be recognized that lowest price does not governments to combine their ability to always mean best value. Value for money obtain lower interest rates with the benefits is a function of, among other things, price, of private financing and development. In the quality, and the degree of risk transfer. UK United Kingdom, the Treasury launched a government officials consistently rate PPPs program called Credit Guarantee Finance as a good value for money. In a survey of 98 (CGF) to reduce the costs of borrowing projects by the UK National Audit Office

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Table 13 Category Financing Type Characteristics User fees, Tolls Tolls (or similar user charges for use of a facility) are considered a revenue revenue source for a project, thereby providing a stream of payments sources that the bidders can use to determine their return on investment and to obtain financing. Shadow tolls Shadow tolls are typically a means by which the government sponsor can make payment, based on usage of the facility, to the private sector operator. Availability Availability payments are financial payments from the government to the private partner stipulated in a transaction to make up the difference between the government-imposed user fee (if any) and the cost of usage of the delivered service. Such payments can be in the form of tranches or in one lump sum (such as at the successful completion of the facility or for the agreed-upon maintenance requirements of the facility).

in 2001, for example, 81 percent of the “bundling” helps to spread procurement public authorities said they were achieving costs across several discrete projects. satisfactory or better value for money from 3. Windfall Profits to the Private Sector their PFI contracts, while only 4 percent described value for money as “poor.” Last, Objection: The private sector sees the conventional procurement has resulted in opportunity to make windfall profits from very poor value for money, thanks to cost infrastructure investments—particularly overruns, delays, and so on. investment banks and financiers who often Several factors contribute to value for receive big upfront fees from refinancing the money, but primary among them is efficient debt. risk allocation. Risk allocation is based on Indeed, concession holders will likely the premise that risk should be transferred seek to refinance their project debt on more to the party that is best suited to manage it. favorable terms with a greater amount of Optimal risk allocation leads to reduced cost leverage. However, this need not necessarily associated with risk, which in turn leads to prove a particular problem for governments. better value for money. For one thing, some of the biggest Evidence supports the view that PPPs refinancing gains from PPP transactions transfer construction and maintenance came in the early stages of PPP development risk to the private sector more effectively when the market was less mature and than traditional methods and are likely to interest rates dropped worldwide to deliver value for money where competition historically low levels. With market is strong and the projects are large. A review maturity, the likelihood of the private sector of eight Partnerships Victoria projects found making huge gains from refinancing falls. a weighted average savings of 9 percent Second, where it makes sense, against the risk-adjusted Public Sector governments have the option to negotiate Comparator. In the case of smaller projects, with their private partners to share

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in refinancing gains. Gain clauses can This is a complicated issue because be included in contracts, where the historically political considerations have government’s share can be either taken as a often meant that increases in user fees did cash lump-sum at the time of the refinancing not keep pace with the rate of inflation for or in the form of reduced service charges. toll roads and other public infrastructure It is important to recognize, however, that and their associated operational and such “clawback” mechanisms, while they maintenance costs. This gap contributes to may make the profits more politically funding shortfalls and deferred maintenance. acceptable, may also result in more One goal for many governments in using expensive contracts upfront. PPPs—whether explicit or implicit—has Third, explicit sharing mechanisms don’t been to move the issue of fee increases away necessarily have to be built into the contract from the political realm so that market, for the public sector to share in the gains. rather than political, considerations can General approval rights over changes in guide fee increases. contracts or financing arrangements, such as That said, governments have several termination liabilities, should put the public options to limit excessive fee increases and sector in a strong negotiating position. In protect consumers of the infrastructure. numerous cases, government agencies have First, fee increases can be limited by contract capped the rate of return of the provider and to the rate of inflation or some other negotiated revenue sharing arrangements. predetermined rate, a common practice Both can help in certain cases to enhance for toll road projects, or the government the long term political viability of the can retain the power to set rates based on partnership. objective criteria. When refinancing gains are not shared, Second, private investment presupposes such benefits should reflect reward for a revenue stream from which the private effectively managing risk and costs rather investor can earn a return. The revenue than a pure windfall gain. The key thing stream, however, does not have to consist is to seek an equitable outcome that solely of an interest in tolls or other fees protects the interests of the taxpayer and is imposed directly on users of the project. defensible publicly. In cases where governments want a toll lower than what is needed to service/repay Governments have several options to project debt, they can pay an “availability limit excessive fee increases and protect fee” to the private sector to make up for consumers of the infrastructure. the difference. Great Britain likewise has used “shadow tolling” to support its PFI program. 4. Customers of the Service Will End Up on Governments can also link the payment the Short End of the Stick for the use of the infrastructure to the user’s Objection: Since the infrastructure ability to pay. To offset the hardship that facilities often are monopolies, the particular groups might experience from private sector can raise charges as much toll charges, for example, public officials as they wish on consumers who end up can consider transportation vouchers or disadvantaged by PPPs.

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other mechanisms, like subsidies, to ease the Melbourne’s EastLink project transfers 100 financial burden, understanding that this percent of the project risk to the private will bring in less revenue. sector. To be sure, when the private provider For sectors where future needs are less faces problems with demand and is unable certain, like water and waste, the public to continue the contract, it may terminate sector can enter into an arrangement where the partnership, but it cannot take the it buys back the facility from the private facility with it. In most cases, the facility partner immediately after it is completed. reverts to the public sector. The public sector can then enter into a A variation on the conventional DBFO/ long-term leasing agreement with the M is the DB/FO/M model, a two-stage private sector to operate the facility and sell model used in the Highway 407 project water to customers at a fixed price. Both in Canada, which has been successful in the public and the private sector gain from bringing projects with uncertain revenue this arrangement and the customer is not streams to the market. The model is adversely affected. The public sector gains usually employed in situations when there ownership of the facility without having is uncertainty about the future needs. to make upfront capital investments; the Initially the public sector finances a design private sector gains more certainty about its build project undertaken by the private future revenue. partner and later sells the completed facility to a private consortium responsible for 5. The Government Is Forced to Bail Out PPP its operations. This model is dependent, Projects When Demand Fails to Meet Projec- tions however, on the availability of public funds.

Objection: Underestimating future William D. Eggers is the global director for demand jeopardizes project returns and the Deloitte Research—Public Sector. He is the fiscal solvency of the project itself. author of Governing by Network: The New As explained earlier, shifting risk to the Shape of the Public Sector (Brookings, 2004) private sector is a major part of the rationale and Government 2.0: Using Technology to for PPPs. In the United States, most road Improve Education, Cut Red Tape, Reduce PPPs transfer all or most of the demand Gridlock, and Enhance Democracy (Rowman risk to the private sector. Down under, and Littlefield, 2005).

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Air Transportation

Contents A. Global Airport Privatization B. U.S. Airport Privatization C. U.S. Airport Security D. Global Air Traffic Control E. U.S. Air Traffic Control

A. Global Airport Privatization Authority via an initial public offering. That sale of 100 percent of BAA netted the Although airport privatization is scarcely government $2.3 billion. Since then, BAA on the radar screen in the United States, it acquired partial ownership stakes in the was a banner year for such privatization overseas airports of Budapest and Sydney, around the world. According to the Centre but its principal assets remained the three for Asia Pacific Aviation, there were 15 major London airports. When it was bought major airports or airport groups privatized by Spain’s Ferrovial in 2006, BAA’s market in 2006, the second-highest ever; 1998 was value was $18 billion. the highest on record, with 21 such deals. Table 14 summarizes a number of David Bentley, author of the Centre’s Global airport privatization transactions from Airport Privatization report, cited two key 2001 to 2005, with the value of the airport factors in the growth of this market. given in local currency. To provide some In developed countries, privatization indication of how to value airports that helps avoid additional debt on government might be considered for future privatization, balance sheets, transfers risks to the private the last column divides the sale price by a sector, and introduces efficiencies in airport financial measure called EBITDA (earnings operations that may be difficult to achieve before interest, taxation, depreciation, and in the public sector. In developing countries, amortization). As can be seen, depending on privatization can tap global (as well as a number of specifics that are unique to each domestic) capital markets to fund large-scale airport, investors paid anywhere from 7.5 to projects, reducing the financing requirements 31.9 times EBITDA for airports in this time on national governments. period, with the average being around 15. Airport privatization began in 1987 There has been considerable change when the U.K. government of Margaret since 2000 in the composition of the global Thatcher privatized the British Airports airports industry. A number of privatized

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Table 14: Market Value of Recently Privatized Airports Airport Company Acquirer Year Stake Purchased Currency Value (M) Value/EBITDA Budapest BAA 2005 75.0% Euro 1,957.0 31.9 Copenhagen Macquarie 2005 37.7% DKK 15,075.0 10.2 Airport Co. of S. Africa Public Investment Corp. 2005 20.0% Rand 8,607.8 7.5 Hochtief European airports Hochtief Airport Capital 2005 100.0% Euro 432.3 9.7 TBI ACDL (Abertis/ AENA 2004 100.0% GBP 685.0 14.8 Brussels Macquarie 2004 70% Euro 1,635.0 12.3 London Luton TBI 2004 28.6% GBP 351.3 15.9 Firenze Acquisizione Prima 2003 29.0% Euro 99.3 14.3 Belfast City Airport Ferrovial 2003 100.0% GBP 35.0 14.5 Hainan Mellan Copenhagen Airports 2002 20% HK$ 1,907.2 11.3 Aeroporti di Roma Macquarie 2002 44.7% Euro 2,680.8 14.3 Sydney So. Cross (Macquarie) 2002 100.0% A$ 5,588.0 17.7 Auckland Institutionals 2001 7.1% NZ$ 1,828.3 13.1 Birmingham Macquarie 2001 24.1% GBP 417.5 10.1 Newcastle Copenhagen Airports 2001 49.0% GBP 293.8 17.5 London Luton TBI 2001 46.4% GBP 195.0 26.8 East Midlands Manchester Airport 2001 100.0% GBP 241.0 13.8 Bournemouth & Glasgow Infratil 2001 100% GBP 40.4 28.4 Bristol Macquarie 2000 100.0% GBP 234.0 16.4 Hamburg Hochtief & Air Rianta 2000 36.0% Euro 804.5 8.6 Aeroporti di Roma Leonardo 2000 51.2% Euro 2,591.6 17.4 Centro Norte (Mexico) ADP consortium 2000 15.0% US$ 606.7 11.2 Beijing Capital ADP Management 2000 10.0% HK$ 12,688.0 17.4 High 31.9 Low 7.5 Average 15.6 Median 14.5 Source: Macquarie

airports have even become acquirers of Bristol, Glasgow, Belfast City). Since stakes in airports being privatized, only to being acquired by Ferrovial, BAA has be acquired themselves by other firms (e.g., been selling off its non-UK airports (e.g., BAA, Copenhagen). As of 2007, there are Budapest). six major global airport firms with annual • AENA ($2.9 billion in 2005): Although revenues in excess of $1 billion, plus a still government-owned, AENA operates number of smaller players. The six majors commercially. It owns 47 airports in are as follows: Spain and has ownership stakes and/or • Ferrovial/BAA ($4.04 billion BAA management contracts for 29 others in + $0.9 billion Ferrovial revenues in seven countries including several major 2005): This combined company owns airports in Colombia and a stake in Heathrow, Gatwick, and Stansted plus one of four regional Mexican airport a number of smaller U.K. airports (e.g.,

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groups, GAP. In a joint venture with B. U.S. Airport Privatization Abertis, it bought U.K. airport company TBI in 2004, thereby acquiring airport After languishing for a number of years, management contracts in the United airport privatization was put back on the States and Bolivia, as well as the U.K. U.S. policy agenda in 2006 by Chicago • Fraport ($2.65 billion in 2005): The Mayor Richard Daley. After successfully parent company of Germany’s Frankfurt raising several billion dollars via the long- Airport, Fraport was privatized in 2001 term leasing of the Chicago Skyway and though state and municipal governments the city’s parking garages, Daley proposed still hold stakes. Fraport owns major to lease Midway, filing an application portions of Hahn and Hanover airports with the Federal Aviation Administration in Germany, Lima airport in Peru, New under the terms of the 1996 federal Airport Delhi airport in India, and one of the Privatization Pilot Program. Mexican regional airport groups. The pending lease hit some bumps in the road early in 2007. Crain’s Chicago Business • Aeroports de Paris ($1.44 billion): The reported that Southwest Airlines, which has French government sold a minority stake the lion’s share of service at the airport, is in ADP in June 2006. The company thus far not persuaded that the deal would owns the two major Paris Airports (De give it any significant benefits. After the Gaulle and Orly) and a part interest in city shared with the airlines an outline of Liege airport in Belgium; it is selling the financial details of a possible lease— its 33 percent stake in Beijing Capitol basically offering operating cost savings Airport. ADP also has management and controls on rate increases—Southwest contracts and joint venture interests in hired Citibank to analyze the plan. After other airport services. this review, the airline sent a letter to the • Schiphol Group ($1.17 billion): The city in February 2007 stating that “While previous Dutch government had new information could change our minds, planned to privatize Schiphol, but presently we believe that privatization is did not complete this action prior to threatening to the interests of [Midway] and losing power in 2006. Schiphol is fully the airlines and passengers who rely upon commercialized, owning the airports in it.” Amsterdam, Rotterdam and Lelystad, This matters, because under the terms plus important stakes in Kennedy of the federal Airport Privatization Pilot Airport’s Terminal 4 and Brisbane Program, in order for the city to make Airport in Australia. use of lease revenues from such a deal for • Macquarie Airports ($1.1 billion): general city purposes, the lease must receive Macquarie owns the large majority of the approval of both 65 percent of the Sydney Airport, and major stakes in airlines operating at Midway and airlines Copenhagen and Rome, plus a number representing 65 percent of the annual landed of other U.K. and continental airports. weight. That gives all Midway carriers, and especially Southwest, considerable

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bargaining power. The potential attraction other state-owned airports. Chicago just of such a lease is reduced operating costs happens to own a second airport, O’Hare. and more predictable rates and charges And O’Hare just happens to have a $15 for using the airport. Under the current billion expansion under way, not all of it arrangements at Midway, those rates depend funded. That should give Mayor Daley an on each year’s airport operating results, and excellent fallback position in negotiating can differ considerably from year to year. with Southwest (which has no presence at If the Midway privatization succeeds, O’Hare). it is likely to stimulate interest in doing Ironically, Stewart (thus far the only likewise in other cities. Officials in airport to be privatized under the Pilot Milwaukee and Austin have raised the issue Program) was “de-privatized” in 2006, not in their communities, as has a candidate for by design but due to circumstances. The mayor in Philadelphia. Just as Mayor Daley company that won the bidding in 2000 was set off an earthquake in the toll road field National Express, a diversified U.K.-based by leasing the Chicago Skyway for $1.86 transportation company. Within a few years billion, so would a win-win lease deal for of acquiring the 99-year lease of Stewart (its Midway Airport. first airport acquisition), National Express Yet the current Airport Privatization made a corporate decision to refocus the Pilot Program would restrict other cities’ business on its bus and rail operations— options. There are only five “slots” in the thereby making Stewart an orphan business. program, and only one can be a large hub, By the start of 2006, it has decided to sell as defined by the FAA. Since Midway meets its leasehold. Although other firms were this definition, none of the other 29 large interested, the winning bid was submitted by hubs would be eligible (though both Austin the Port Authority of New York and New and Milwaukee, as medium hubs, would Jersey. PANYNJ seeks to develop Stewart, be). The FAA’s reauthorization proposal, over the longer term, into the fourth major introduced in February 2007, would remove airport for the greater New York City that restriction, while expanding the number region. It is also able to cross-subsidize of slots to 15. It would also remove the 65 Stewart’s development from its overall percent airline approval requirement, which revenues, in particular improving its ground some have dubbed the airlines’ poison pill. access to the New York metro area. There is also a chance Midway will be In the United States, there are still plenty leased without the airlines’ OK. That would of skeptics who argue that since this country not be as good a precedent (unless Congress has tax-exempt revenue bonds and business- removes the poison pill), but what some like airport authorities, privatization doesn’t people forget is that the 65 percent approval have much to offer, apart from possible one- is only needed for the city to use the lease time financial windfalls to hard-pressed local proceeds for general-fund purposes. When governments. But there are still important New York State leased Stewart Airport in differences between a business that is 2000, it did not win airline approval. So it accountable to shareholders and a not-for- was required to use all the lease proceeds profit government entity that is not. One for airport-related purposes—at Stewart and way in which this difference may show up is

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in willingness to think outside the box to get TSA certification to go nationwide. So it things done. scrambled to get operations up and running These days, one of the hardest things by the first of the year at the airports it had to do is to expand an urban airport. In already signed up: Cincinnati, Indianapolis, Germany, Frankfurt has been struggling for San Jose, and Terminal 7 at Kennedy. It took years with this problem, needing to acquire until March 2007 for Unisys’s competing land for a fourth runway to keep pace with RT operation, RT Go, to get certified. Two projected growth. Late in 2006 it announced other providers were still working on getting a breakthrough deal. Fraport will spend $898 certified as of April 2007. million to move a chemical plant owned by During the roll-out, Verified introduced Celanese, to clear the way for the new runway. its GE-developed shoe scanner at Atlanta. Celanese had been prepared to engage in The original idea of Registered Traveler was costly litigation to prevent the runway from that TSA’s background check would pre- being built, arguing that the plant would be so clear RT members, so they would not have close to the runway as to pose an unacceptable to go through all the rigamarole that regular safety risk. Under the agreement, Celanese passengers must endure at the checkpoints— will end production at the plant in June remove shoes, remove sweaters and jackets, 2011, and the whole area now occupied by take out laptop, etc. But no, TSA apparently the plant will be turned over to Fraport by doesn’t trust its own background check (even 2015. Fraport hopes to have the runway built to the point of insisting that RT members and in operation by 2011, and will use the present their easily counterfeited driver’s acquired land for purposes compatible with license in addition to their biometrically the runway’s presence. coded RT membership card!) So the only way RT members can be exempted from any of the checkpoint requirements is if the RT C. U.S. Airport Security provider employs technology that does the job instead. Hence, Verified’s shoe scanner, In 2006, the Transportation Security on which the member stands while having Administration finally allowed the private his iris scanned and compared with what’s on sector to begin rolling out Registered Traveler the membership card. If the scanner detects programs—which allow travelers who have no metal or explosive particles, the member paid for prescreening background checks to need not remove his shoes. (Verified is still bypass onerous airport security lines—though hoping to develop additional tools to obviate everything seemed to take a long longer than jacket removal; no word yet from TSA about expected. TSA’s announced June target date laptops.) for national roll-out came and went, with By April a number of other airports TSA later announcing it would only approve were holding competitions to select their RT a dozen or so airports at first. More than 20 provider. had applied to be in the program by July, The other area of security privatization yet still the TSA-approved pilot program is the ability of airports to opt-out of TSA- at Orlando was the only one in operation. provided passenger and baggage screening. It was not until November that Orlando’s Due to TSA, rather than airport, control company, Verified Identity Pass, finally won

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of all the key decisions about selecting D. Global Air Traffic Control and managing a private security firm, and such rigid controls as to make cost savings The move toward transforming difficult, very few airports have chosen to government air traffic control departments exercise this option. The five original pilot into financially self-supporting ATC program airports (San Francisco, Kansas corporations continued during the past City, Rochester, Jackson Hole, and Tupelo) year. The number of full members of the have continued with the companies they got Civil Air Navigation Services Organization used to during the pilot phase. But only one (CANSO) reached 45 by year-end, with the new airport signed up in 2005, Sioux Falls, addition during 2006 of France, Iceland, and just two more in 2006. Both of those and Tunisia, among others. Most of these (Marathon, Florida and New York’s 34th are government corporations, analogous to Street Heliport) were airports not previously the U.S. Postal Service and the Tennessee having scheduled passenger service, so by Valley Authority. Like those familiar entities, going with private contractors, they eased the air navigation service providers (ANSPs) TSA’s burden of trying to add new airports do not receive their funds out of the national within their fixed number (43,000, as government’s budget; instead, they are paid capped by Congress) of airport screeners. directly by their customers, and can go to Sonoma County, California was set to do the bond market to raise funds for large- likewise in spring 2007. scale modernization projects. In one other area private security firms Two of these ANSPs won awards from have emerged: airport worker screening. the International Air Transport Association Attention was focused on Orlando Airport for outstanding service to their member early in 2007 after airport workers sneaked airlines. Sweden’s commercialized LFV through an unguarded entrance into a secure won IATA’s 2006 Eagle Award, and the area after hours as part of smuggling guns runner-up was Denmark’s NAVIAIR. At to Puerto Rico on a next day’s flight. The year-end, IATA singled out Airservices airport’s board voted in March to physically Australia, Austrocontrol, Nav Canada, screen 100 percent of workers with access and ROMATSA (Romania) for excellent to secure areas, whether employed by the cooperation with airlines on issues such as airport, airlines, tenants, or vendors. Since charging and modernization. Nav Canada, TSA has no screeners to spare (and did not which celebrated its 10th anniversary in mandate worker screening), the airport 2006, is a previous winner of the Eagle allocated $5 million to hire Covenant Award. Aviation Security (a TSA-approved screening Germany’s commercialized ANSP, DFS, company) to do the worker screening. had been slated for privatization in 2006, Orlando was not the first. Since 1998, with the government planning to sell 75 Miami International has been screening 100 percent to investors. But late in the year the percent of airport workers with access to German president vetoed the sale (which secure areas, as part of combating a serious had been approved by the parliament earlier drug-smuggling problem. It, too, uses private in the year), contending that the legislation security firms to carry out this screening. was counter to constitutional provisions

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requiring ATC to be carried out by a state positive. organization. The government is expected to “The major finding is that try to amend that provision. commercialization models that provide the Two new studies of the performance right balance of incentives have resulted of this new generation of self-supporting in significant cost reductions, dramatic ANSPs were published in 2006. One was improvements in modernization, and major conducted by a Canadian consulting firm improvements in service quality, while in conjunction with three universities. The improving safety.” other was sponsored and published by the One of the most interesting findings IBM Center on the Business of Government. is that “Providing more autonomy for the ANSP has tended to cause a reorientation 1. The MBS Ottawa Study from treating government as the primary MBS Ottawa, in conjunction with client to responding to the needs of the George Mason University, Syracuse aviation community. There is no longer University, and McGill University, any doubt as to who the customer is. published its study, Air Traffic Control Commercial ANSPs have demonstrated Commercialization Policy: Has It Been enhanced ability to respond quickly Effective? (available at mbsottowa.com), to customer needs.” Along with this, in January 2006. The project was overseen “there has been a . . . clarification of the by a 15-member international advisory government’s role. Governments have committee. The project team made site visits ensured the public interest through effective to, and collected detailed quantitative data safety and economic oversight, financial from, the 10 commercialized ANSPs listed regulations, environmental laws, protection in Table 14. In addition to documenting of consumer rights, and recourse through the performance of the ANSPs since they the legal system.” were commercialized, the study (and its In summing up the findings, the report appendix) provides considerable detail on notes the following: the governance structure and institutional Commercialized ANSPs exhibit framework of each. three main strengths—sensitivity to Overall, the study judged ATC customer needs, agility in reaching commercialization to be a success. Trend a decision, and ability to carry it analysis found the following with respect through. These characteristics have to commercialization’s impact on key led to continuous improvements in performance measures: efficiency, business discipline that • Safety: neutral or enhanced; delivers projects on schedule and • Modernization: greatly improved; on budget, and rapid deployment • Service quality: improved; of modern technology to enhance service quality. • Costs: generally reduced, significantly in some cases; 2. The IBM Study • Financial stability: maintained; The most recent study, Reforming the • Public interest: most areas neutral or Federal Aviation Administration: Lessons

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from Canada and the United Kingdom, on that transition, the authors conclude: was published in mid-2006 by the IBM “The adoption of a user charge system in Center for the Business of Government. principle increased the desire for users to Researched and written by Clinton Oster play a role in governance. The not-for- and John Strong, its focus is on applying profit structure with board representation lessons learned from the commercialization by stakeholders creates good incentives for of ATC in Canada and the UK to reform of cost control and improved capital program the U.S. system. Thus, the report provides management, and reduces the need for three parallel studies of ATC reform: the economic regulation.” Also, “The customer long history of efforts to reform the FAA, orientation appears to extend to a capital plus case studies of the commercialization of program and planning approach that has Nav Canada and NATS. Since FAA reform been much better at both modernization and will be discussed in the next section, we will the development of new technology, with focus here on the lessons the authors draw respect to cost, delay, and performance.” from the Canadian and UK reforms of air Turning to the need for Nav Canada to traffic control provision. cope with the economic downturn following This report provides considerably more 9/11, the authors conclude that “Nav detail on how both Nav Canada and NATS Canada’s organization structure turned came into being, in an effort to solve long- out to be an asset . . . . The stakeholder standing problems in the provision of ATC model in effect required all parties to services. Although the organization models make contributions and sacrifices. The are quite different, and both had to cope nonprofit status established a clear financial with the serious downturn in North Atlantic objective during the period, while the rate airline traffic in the several years following stabilization fund allowed the company to the 9/11 attack, the authors conclude manage the consequences of the downturn that both ANSPs “have emerged from over a longer period.” the 2001-2004 period as financially solid organizations that are both well positioned not only to modernize to meet the growing E. U.S. Air Traffic Control needs of their own airspace, but also to extend their provision of various air traffic The Federal Aviation Administration management services to other parts of the in February 2007 released its long-awaited world.” proposal to revamp the way its activities Several other lessons specific to Nav are funded. As expected, it would shift Canada are worth highlighting. Unlike most from taxes on airline tickets to user fees for European and Asia-Pacific countries, where air traffic control services. It would permit ATC user charges have been in effect since FAA to issue revenue bonds to fund some at least the end of World War II, Canada of the large capital expenditures needed to was one of the few remaining countries that implement the proposed Next Generation funded ATC by means of a tax on airline ATC system. And it would attempt to give a tickets (like the United States still does), stronger voice to its aviation customers via a prior to ATC commercialization. Reflecting new advisory board. The proposal represents the culmination

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Table 15: Characteristics of Major Commercialized Air Navigation Service Providers Country Date Established Name Ownership Economic Regulation Safety Regulation Australia 1995 Airservices Australia Government corporation Commission oversight Separate agency Canada 1996 Nav Canada Not-for-profit corporation Self-regulating per statutory Separate agency charging principles France 2005 DSNA Government department Approval by Minister Internal but separate Germany 1993 DFS Government corporation Approval by Minister Internal but being separated Ireland 1993 IAA Government corporation Regulatory commission Internal but separate Netherlands 1993 LVNL Government agency Approval by Minister Separate agency New Zealand 1987 Airways Corp. of NZ Government corporation Self-regulating, per charging Separate agency principles South Africa 1993 ATNS Public company Ministry of Transport Separate agency Switzerland 2001 Skyguide Not-for-profit company Approval by Minister Separate agency United Kingdom 2001 NATS Public-private partnership Commission oversight (price- Separate agency cap regulation) Source: Table 4.1 in Air Traffic Control Commercialization Policy: Has It Been Effective? MBS Ottawa, January 2006 (www.mbsottawa.com)

of several years of analysis and rethinking 67 percent of the FAA’s budget is accounted at the agency, led by Administrator Marion for by the ATO, but if you subtract out Blakey and Air Traffic Organization (ATO) the safety-related Flight Service Station chief Russ Chew. They have learned a lot program, the ATO budget that should be by studying ATC reform in the rest of the recovered from users is 61 percent. The Western world, where virtually all other FAA’s traditional safety regulatory functions countries have converted their government account for 7 percent, but adding in FSS ATC departments into self-supporting air boosts that to 13 percent. Nearly all the navigation service providers (ANSPs) that rest—25 percent—is the airport grants can operate on a commercial basis, regulated program. (at arm’s length) for safety and subject to some form of external control over their The FAA proposal argues that the rates and charges. government’s general fund should be The FAA’s proposal rests on an paying only for those functions that are impressive piece of work: the “FY2005 Cost clearly public interest issues. Allocation Report,” January 2007, available at www.faa.gov. The methodology was Refreshingly, the FAA proposal argues developed by PriceWaterhouseCoopers, and that the government’s general fund should it was applied by GRA, Inc. to the agency’s be paying only for those functions that FY2004 and 2005 costs. Everyone involved are clearly public interest issues: the safety in debating the user fee issue should read functions (13 percent) and the use of the this report; it’s the best and fairest FAA system by government users (military and cost-allocation study to date—and the first civilian) that Congress has always exempted one based on data from the FAA’s new cost from paying, another 2.8 percent of the FAA accounting system. total. So in round numbers, that’s 16 percent Thanks to this study, we now know that of the total that should come from general

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taxpayers. (The actual legislative proposal ends up at 19 percent). Airport grants (AIP) should be paid for by some kind of tax on all airport users, and ATC should be paid for by ATC users, in proportion to their use. The ATC cost allocation study parses the data, based on three underlying principles: • Different air traffic services have different costs; • Different types of aircraft affect ATC costs differently (with the main difference being between high- performance/turbine planes and piston/ helicopter planes); • ATC costs vary according to activity volume, with miles flown in the system used to measure en-route activity and the number of operations (landings & takeoffs) used for terminal-area activity. These principles are applied all over the world by ANSPs, and are reflected in the charging principles promulgated by the and exempt) for each flight regime: oceanic, International Civil Aviation Organization. en-route, and three types of terminal areas (large hubs, middle terminal, and low- If this proposal were enacted into law, it activity tower). The resulting tables and pie would represent a far bigger reform than charts show how much cost each of these is the creation of the ATO three years ago. responsible for. The legislative proposal would authorize The underlying principles for allocating the FAA to charge ATC fees to commercial costs take seriously the point made by users only: passenger and cargo airlines general aviation groups that some major plus fractional jet operators and air taxi/ elements of the system (fixed costs) are there charter operators. It also takes seriously the primarily to serve high-performance users, repeated plea from the National Business so those fixed costs are allocated entirely to Aviation Association that its mostly turbine the principal users, with only the variable users should continue to pay for their share costs allocated among all users, based of costs via a fuel tax, rather than direct on percentage use. There are many more fees for service. So, in accordance with the details, but the end result is to break down cost allocation study, the fuel tax for all GA cost responsibility among high-performance (piston and turbine) would be more than users (commercial, General Aviation, and tripled to 70 cents/gallon to recover their exempt) and piston users (commercial, GA, share. A portion of that—13.6 cents/gal.—

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would be the new AIP tax, which would also turbine GA paying fuel taxes for ATC, be paid by airlines. the proposal further muddies the waters, Overall, this is a solid proposal. It since user fees paid to the Treasury could clarifies who should be paying for what— eventually be converted to user fees paid to general taxpayers, high-performance users, a revamped ATO—but a fuel tax is a tax, and low-end (in terms of demands on the and by definition must be appropriated by system) users. It provides clear funding Congress before it can be spent, creating sources for each major FAA activity. And it a stronger barrier to subsequent financial authorizes a modest amount of borrowing independence. Third, the modest bond authority to help pay for the major funding would allow ATO to access only upcoming capital investments needed to Treasury borrowing, and only for five implement the Next Generation system. years, unlike the access to the private What’s not to like? Compared with the capital markets afforded self-supporting financially autonomous ANSPs that are the government corporations like the Tennessee inspiration for these changes, the proposal Valley Authority and the U.S. Postal Service, falls short in several ways. First, the fees let alone virtually every air-carrier airport in would still be paid to the Treasury, and have the land. to be appropriated each year by Congress. Still, if this proposal were enacted into That’s a long way from financial autonomy, law, it would represent a far bigger reform as is now common in Europe’s, Canada’s, than the creation of the ATO three years and Australia’s ANSPs. Second, by keeping ago.

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Education and Child Welfare

Contents A. School Choice Update B. No Choices Left Behind: Restructuring California’s Lowest-Performing Schools C. Experimenting With School Choice: A Tale of Two California Districts D. Child Welfare Privatization Update E. The Case for Privatizing University Housing

A. School Choice Update the next five years, with a maximum of 400 students each. Principals and teachers at 1. School Empowerment Surges Ahead in those schools would work under a separate 2007 contract that would free them to determine In his 2007 State of the City Address, school calendars, curricula, budgets and New York City Mayor Michael Bloomberg administrative structures. called for school empowerment through By decentralizing school dollars and the “weighted-student formula,” a growing allowing school funding to move with the trend in which public funding moves child, principals have greater control of their with the child, for all of New York City’s resources and can give innovative teachers 1,467 schools. One week later, Nevada more flexibility. In cities like Oakland, Gov. Jim Gibbons echoed Bloomberg’s Houston, Santa Monica, and Edmonton, proposal with his own weighted-student Alberta (where the first weighted-student formula plan, which would affect more formula program was implemented), than 100 schools and empower families schools are offering improved curricula and with greater educational choice. Finally, better instruction. Public schools compete the Los Angeles Unified School District for students by improving the quality of and union officials have agreed in concept teaching and diversifying their curricula, so to develop a group of independent small that students who are proficient in math can schools in the Pico-Union area, allowing find a school where calculus is offered, or students to choose a campus that best fits students looking for a language immersion their interests. The Belmont Pilot Schools experience can attend a school where they Network would consist of five to ten fully can have classes in Spanish or Tagalog. autonomous high schools launched over Similarly, Nevada Governor Jim

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Making Schools Work

In a March 11, 2007 New York Times commentary, William Ouchi, a professor of management at the University of California, Los Angeles, and the author of Making Schools Work, explains how school empowerment has worked in New York City: In New York City, Schools Chancellor Joel Klein and Mayor Michael Bloomberg have proposed school empowerment changes that would radically alter financing formulas for the city school system and revolutionize its existing bureaucratic management structure. City lawmakers and the State Board of Regents are nervous, but they shouldn’t be. Despite what the critics say, the changes will work. Over the last five years, my team has visited 66 New York City public schools and 42 of the city’s more than 300 empowerment schools. At the empowerment schools, where principals on average control 81 percent of the money spent in their schools, we found fewer administrators, more teachers and an array of unique instructional innovations. At the regular schools, we found that the average teacher was responsible for 121 students. At empowerment schools, however, the average teacher had 86 students. As a result, the teachers at the empowerment schools were spending more time working directly with their students either in small groups or one on one. New Yorkers should not underestimate the magnitude of the innovations that the mayor and the chancellor have put forward. The extension of autonomy to all of the city’s 1,467 schools is a natural step and one that will almost surely benefit all students. And allowing the money to follow students will remedy inequities of long standing and strengthen the autonomy of each school. Moreover, continuing to give parents a choice in where they send their children creates a powerful incentive for schools to perform and address specific needs.

Gibbons has introduced legislation to 100 schools. In addition to Nevada and decentralize much of the authority that New York City, statewide adoption of currently rests with districts down to the school empowerment plans is now under school level, and give school principals consideration in Ohio, South Carolina, control over nearly a school’s entire budget. Delaware, and Florida, though at early Empowerment schools also would have stages. authority over hiring and firing staff, and Decentralized districts demonstrate that be able to implement pay incentives. They it is possible to allow parents to choose any also allow all children zoned for other school in a district and that the resulting district schools the opportunity to apply competition and need to attract parents can to an empowerment school. Additionally, help improve even the lowest-performing Gibbon’s program provides funding for schools and encourage them to adopt

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best practices and unique programs that way it receives revenue from the state: will benefit the children in their schools. unrestricted Average Daily Attendance Weighted-student formula programs have (ADA) funding is allocated to the resulted in positive outcomes in terms of schools based on their current year choice and student achievement for students enrollment. According to Education in several districts: Week, Oakland is the only district in • In 2004 the Oakland Unified School the nation that gives principals direct District transformed its budgeting control of their ADA funding. The formula from a centralized process to bottom line for Oakland is that in three “results-based budgeting.” As reported years, Oakland went from failure to in a new Education Trust West report, having the highest academic gain among “California’s Hidden Teacher Spending California’s 33 largest unified districts, Gap,” the Oakland District allocates urban or otherwise. funding to its schools based on the • In Boston, pilot schools opened in 1995 number and type of students at each as a result of a unique partnership school. Oakland gives each school among the Boston mayor, school administrator the flexibility to allocate committee, superintendent and teachers this funding in whatever way fits the union. Pilot schools are part of the school’s instructional needs. Oakland Boston Public School system (BPS), allocates funds to the school in the same but have autonomy over five key areas:

Table 16: API Gain in California Large CA District (20,000 or more students tested) Number Tested 2006 API 2005 API 2006 Growth 2005 to 2006 Oakland Unified 28,689 634 653 19 Rialto Unified 21,890 646 664 18 Fresno Unified 49,687 644 661 17 Montebello Unified 25,467 641 658 17 Pomona Unified 24,313 666 682 16 Garden Grove Unified 36,554 740 756 16 San Jose Unified 22,098 737 752 15 Long Beach Unified 55,984 713 727 14 Compton Unified 21,378 592 605 13 Orange Unified 21,324 765 778 13 Clovis Unified 26,856 806 816 10 Glendale Unified 21,426 794 804 10 Capistrano Unified 38,219 813 823 10 Moreno Valley Unified 25,540 652 662 10 San Francisco Unified 39,547 745 755 10

Fremond Unified 23,786 833 842 9

Los Angeles Unified 502,491 649 658 9

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budget, staffing, governance, schedule reduced the number of failing schools and curriculum, and assessment. under No Child Left Behind from 20 to Attendance at pilot schools averaged 18, even as the state raised the bar for 95 percent, compared to 89 percent at proficiency. other schools. The average number of students for high school teachers in the 2. Charter School Enrollment Soars pilot schools is 66 compared to 81 in the Charter schools continue to be the traditionally managed schools. Scores on largest example of school privatization with state tests at these pilot schools are 30 more than 4,000 schools holding contracts percent to 50 percent higher than they with government agencies in the 2006-2007 are at regular public schools with similar school year, serving more than one million student bodies. children. • In 2005 Cincinnati Public Schools, According to a September 2006 study where 70 percent of students are on charter school market share from African-American, improved from the National Alliance for Public Charter “Academic Watch” to “Continuous Schools, in some communities large numbers Improvement,” and test scores were up of students enroll in charter schools: for most students in most grade levels. While charter schools enroll a modest percentage of students • Seattle continues to see increases in nationwide, some communities far student achievement and in 2005 exceed national and state averages

Table 17: Charter School Market Share Community Charter Market Charter Non-Charter All Share 1. New Orleans, LA 69% 7,815 3,578 11,393 2. Dayton, OH 28% 6,374 16,365 22,739 3. Washington, DC 25% 18,000 54,000 72,000 4. Pontiac, MI 20% 2,563 10,385 12,948 Kansas City, MO 20% 6,457 25,766 32,223 Youngstown, OH 20% 2,326 9,248 11,574 5. Chula Vista, CA 18% 4,640 21,832 26,472 Detroit, MI*** 18% 28,047 131,643 159,690 Southfield, MI 18% 2,233 9,907 12,140 Toledo, OH 18% 6,561 30,200 36,761 6. Cincinnati, OH 17% 7,029 35,479 42,508 7. Brighton, CO 16% 1,632 8,818 10,450 Cleveland, OH 16% 10,858 59,035 69,893 Milwaukee, WI 16% 15,059 81,275 96,334 8. Buffalo, NY 15% 6,332 37,000 43,332 Mohave County, AZ 15% 4,315 23,593 27,908 9. Dearborn, MI 14% 3,016 18,094 21,110 Oakland, CA 14% 6,668 41,467 48,135 10. Minneapolis, MN 13% 5,558 38,532 44,090

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to enroll high percentages of charter or 25.3 percent of the 167,490 city students school students. In fact, 19 different enrolled in district schools. A teachers’ communities educate over 13 percent strike last fall delayed the start of classes in of their public school students in the Detroit school district, and enrollment charter schools. fell 9.6 percent, according to the Michigan New Orleans leads the pack with 69 Department of Education. The district is percent market share, due primarily to the considering a proposal to close 52 schools post-Katrina reconstitution of the schools. by next summer in response to declining Ohio alone has five different communities enrollment. in the top ten, with Dayton leading the pack New York: In March 2007, New York at the #2 spot on our countdown with 28 legislators passed an estimated $120.9 percent. Our nation’s capital, Washington billion budget, doubling the maximum D.C., comes in at #3 with 25 percent. And number of public charter schools to the largest community on the list is Detroit, 200, including up to 50 new schools in with 18 percent of its nearly 160,000 New York City. A year-long freeze on students in public charters. As of 2007, approvals, however, means the next wave Detroit has a 25 percent market share. of new charter schools may not open Several states and individual until September 2008. The new legislation communities are demonstrating the impact requires the Education Department to hold of charter schools at scale. Let’s examine hearings before placing a charter within an some brief profiles in market share: existing public school. The bill also bows Michigan: Enrollment in Michigan to union demands by requiring a provision charter schools has reached nearly 100,000. that automatically unionizes the employees The 2006 Michigan Educational Assessment of any charter school serving more than Program (MEAP) tests show that elementary 250 students in its first two years. In 2005, charter school students are matching or charters in New York outperformed non- outpacing their district counterparts in charters in surrounding schools districts English and math testing. More importantly, in 4th and 8th grade reading and math. In Michigan’s charter public schools exceed the Buffalo, New York 15 public charter schools average scores of their host districts on 23 serve more than 5,500 students in the city, of 27 MEAP tests this year. Canton Charter catering to about 13 percent of public school Academy boasts a waiting list of nearly enrollment. Data gathered by the Buffalo 1,000 children. The 58 charter schools run News reveals the city’s charter schools by Central Michigan University have waiting achieve better results than traditional public lists of more than 10,000. Charter school schools despite having a higher proportion success has spread throughout Michigan of students living in poverty. and parents are clamoring for a lift of the Washington D.C.: Charter school charter school cap. Perhaps most telling is enrollment in the District of Columbia their success in urban areas. Detroit is the has increased by 2,260 over the past year. leader in market share in Michigan. The Charter schools now serve 19,733 students, number of children from Detroit enrolled in 26 percent of the city’s children. At the same public charter schools last fall was 42,378, time, enrollment in the D.C. public school

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Table 18: Charter School Enrollment and Closures by State State Total Schools Operating Enrollment Average Enrollment Closures 1992 Alaska 24 4,814 201 5 Arizona 462 105,422 228 83 Arkansas 15 3,998 267 4 Calfornia 637 219,460 345 83 Colorado 132 47,443 359 6 Connecticut 19 3,577 188 4 Delaware 19 7,826 412 2 Washington, D.C. 68 19,143 282 13 Florida 347 96,007 277 53 Georgia 59 25,882 439 4 Hawaii 27 5,538 205 0 Idaho 28 9,384 335 1 Illinois 55 21,343 388 8 Indiana 38 8,274 218 2 Iowa 8 1,249 156 0 Kansas 26 2,588 100 8 Louisiana 6 17,315 376 8 Maryland 23 4,870 342 0 Massachusetts 60 21,987 366 6 Michigan 241 96,200 399 22 Minnesota 137 23,455 171 24 Mississippi 1 367 367 0 Missouri 27 11,134 412 4 Nevada 22 5,979 271 5 New Hampshire 8 388 49 1 New Jersey 53 15,381 290 17 New Mexico 62 10,034 162 2 New York 95 23,972 252 7 North Carolina 99 29,070 294 27 Ohio 301 87,288 289 20 Oklahoma 15 4,606 307 1 Oregon 71 10,105 142 8 Pennsylvania 120 55,760 465 9 Rhode Island 11 2,723 248 0 South Carolina 31 5,844 189 8 Tennessee 12 1,891 158 0 Texas 283 94,429 334 27 Utah 54 18,985 352 1 Virginia 3 241 80 3 Wisconsin 198 32,667 165 18 Wyoming 3 235 78 0 Total 3,940 1,156,874 267 494

Source: The Center for Education Reform, April 2007

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system has declined by 2,670 students from 3. Competition Key for Future of New Orleans the previous school year. Total public school Schools enrollment remained relatively steady, with One unexpected by-product of 75,088 students in 2006-07, compared with Hurricane Katrina: New Orleans is now 75,498 the year before. Charters outperform the only city in America offering unfettered non-charter schools in reading and math on public school choice. the most recent national assessments. Schools fought to attract customers Milwaukee: Not only is Milwaukee with radio and TV advertising, enrollment home to one of the nation’s largest publicly fairs, visits to local churches and community funded voucher programs with almost groups, and roadside signs pitching the 15,000 students in the program in 2005-06, benefits of their programs.The New it also boasts a robust charter school sector Orleans Times-Picayune told parents, with over 15,000 students in 2005-06. “Think of yourselves as consumers in a The types of charters in Milwaukee range brand new marketplace.” from district-sponsored charters largely Critics predicted chaos all summer. In independent of the district, to district- August 2006, The New York Times ran sponsored charters that are still part of a negative piece headlined “Rough Start the district, to charters authorized by non- for State’s Efforts to Remake Faltering district entities (the city or a local university) Schools in New Orleans.” Tulane University that are completely independent of the education professor Lance Hill told the district. Times, “We’ve created the most balkanized school system in North America. The The New Orleans Times-Picayune told average parent is mystified.” parents, “Think of yourselves as consumers But as the Times-Picayune reported in in a brand new marketplace.” fall 2006, 53 schools with 34,000 students have opened with relative calm and few New Orleans: Although enrollments snafus. Parents somehow managed to change daily, enrollment in charters by navigate their choices without mass chaos, the fall of 2006 was 69 percent. Schools and now one of America’s pre-eminent cities have dropped residency requirements, is getting a dose of educational liberty. so any student living anywhere in the All of the schools have a fresh start city can register at any school on a first- and a level playing field in terms of come, first-served basis. In 2007 students accountability and performance outcomes. can choose from 31 charter schools, 20 The schools will have two years of fresh test state-run schools, and five schools run by score data and graduation and attendance the local district. Twenty-five different rates to establish baseline data for school organizations, from nonprofits to national performance. Schools starting anew this charter chains, are running schools, and the year will not receive their first post-storm options run from comprehensive curricula performance scores until the fall of 2008. to niche schools featuring early college, An inspiring story from the Times- French immersion, Montessori, the arts, and Picayune from March 2007 describes architectural design. a compelling example of the new

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opportunities open to all students in New to sort out. However, this new choice-based Orleans: system offers students a fresh start and new In the city’s bold new landscape opportunities for high-quality education. of charter schools, Science and Math, well-respected before Katrina for producing strong performance from B. No Choices Left Behind: students of a wide range of ability, Restructuring California’s Lowest- has expanded to become its own, Performing Schools full-day charter school in Uptown. The school works on a theory that The federal No Child Left Behind Act an open-access school—with no (NCLB) requires states to show that students admissions standards—can do just in every subgroup, including minorities, as well, if not better, than one with low-income, and special education students admissions standards—if it commits are proficient in reading and math. In to focus solely on academics and 2005, each subgroup in elementary and jettisons the all-too-common stand- middle school had to have at least 24.4 and-deliver lecture method. Instead, percent of students proficient in reading the school strives for daily lessons and 26.5 percent proficient in math. In high that engage students with concepts school each subgroup needs 22.3 percent and require them to wrestle with of students proficient in reading and 20.9 problems. percent of students proficient in math. Science and Math is, in A total of 2,215 California schools are essence, a thinly veiled challenge listed as “needs improvement” under NCLB to the very existence of the city’s and have entered program improvement selective admissions schools, who status. Of these, 355 have been chronically by their nature teach fewer low- low-performing for more than five years. performing students, and in the case Process improvements such as class-size of some, such as the exclusive Ben reductions, bigger budgets, or threatened Franklin High, no low-performing sanctions have failed to address the problem. students[...] California needs school improvement At the start of this school year, legislation requiring schools with five or just 14 percent of its freshman class more years of failure to choose a competitive could read at grade level—some model that offers students meaningful scored as low as second- and third- alternatives to the current low-performing grade levels. Now, after making use public school including: of phonics lessons, 43 percent of 1. offering opportunity scholarships to freshman read at grade level. students in failing schools;

New Orleans schools still have an uphill 2. competitively bidding out low- battle. Implementation issues from teacher performing schools to outside operators; shortages to decisions about where to 3. restructuring the district to a weighted- develop new school capacity will be difficult student formula system where a student

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could choose any school in the district, or approaches to fixing their schools. And 4. converting the low-performing school to so far, Oakland’s policy of giving parents a charter school. more choice is showing far more success Students need the right of exit from than Compton’s strategy of micromanaging these low-performing schools. School classrooms. funding needs to be put into the backpacks Oakland and Compton are not identical, of children and follow them into the school of course. Compton, located in the outskirts of their choice. Offering parents and of Los Angeles, does not have the gorgeous students “buying power” will help inspire San Francisco Bay scenery of Oakland. It excellence in low-performing schools if they has a quarter of Oakland’s population and have to compete for students in order to no wealthy neighbors. But they are both receive funding. high-crime inner cities. Both have a large The weighted-student formula is a Hispanic and black population, and a small simple and equitable per-pupil funding Asian and white population. Average family system that allows money to follow each incomes are comparable—about $40,000 child. This reform wins out over other for Oakland and $33,000 for Compton. competitive reforms because it allows They both became targets of a state California to develop a stable school takeover and a large financial bailout in funding stream and would put every the last decade. And the federal No Child school provider—whether public, charter, Left Behind Act for two years in a row has or private—on a level playing field in ranked them both among California’s 162 California. districts “in need of improvement.” In short, the two districts have similar This piece was adapted from the Reason student bodies, similar challenges, and— study, No Choices Left Behind: Competitive until now—a similar history of failure. But Models to Restructure California’s Low- Oakland is beginning to break away from est-Performing Schools, which is available this history, and the reason is the weighted- online: reason.org/ps354.pdf. student-formula program it embraced some years ago and fully implemented last year. Under this program, kids are not C. Experimenting With School required to attend their neighborhood Choice: A Tale of Two California school, especially if it is failing. Rather, Districts they can pick any regular public or charter school in their district and take Policymakers, unlike scientists, don’t their education dollars with them; more have the luxury of conducting controlled students therefore means more revenues experiments to test competing solutions for schools. Furthermore, as the name to social problems. But when it comes to suggests, the revenues are “weighted” based reforming failing public schools, something on the difficulty of educating each student, close to that is occurring in two California with low-income and special-needs kids school districts: Oakland and Compton. commanding more money than smart, The districts, comparable in many well-to-do ones. Schools have to compete respects, are opting for completely different

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for funding, but the upside is that they have and 60 percent passed math, a 6-point jump total control over it. from the year before. By contrast, Compton Compton has stuck to a completely showed no gains in English—staying stuck different approach that does not involve at 58 percent—and posted a 2-percentage- empowering parents—or decentralizing point drop in math, from 50 percent to 48 control to schools. Instead, it has tried to fix percent. its failing schools by mandating “classroom Similarly, Oakland’s score on the state’s inputs.” To this end, all Compton schools Academic Performance Index—a numeric over the last few years have been ordered grade that California assigns to its schools to reduce class size by 12 percent, improve based on the performance of their students teachers’ credentials, adopt a tougher on standardized tests—went up by 19 curriculum, and even clean up bathrooms. points. Compton, in contrast, gained only What are the results so far? Oakland 13 points. schools have shown a remarkable flexibility Yet even this overstates Compton’s in responding to student needs, while performance, because almost all of its gains Compton has stagnated. In 2003-04, for came at the elementary level, where students instance, Oakland’s high schools offered are not so intractable. Compton’s middle 17 Advanced Placement classes. Last year, schools lost an average of 6 points, while they increased this total to 91, or about Oakland’s gained an average of 16 points. one AP class for every 143 students. By Meanwhile, half of Compton’s high schools contrast, Compton’s AP offerings went up lost points on the API score—including by two that year, to one class for every 218 Compton High, where now fewer than 6 students. Oakland students also are taking percent of males are proficient in reading, high-level math and science courses more and fewer than 1 percent in algebra. frequently. About 800 high school students Conversely, Oakland high schools gained, studied first-year physics last year—nearly on average, 30 points. Even Oakland’s triple the number taking the course in the economically disadvantaged and limited- 2004 school year. English students have shown major improvements. In 2006, its economically Oakland kids have shown major disadvantaged students gained 60 percent improvement on the California High School more on the performance index than Exit Examination. Compton’s, and its English-language learners gained 120 percent more. More to the point, of course, are student Nor is Oakland’s progress in any performance measures. Oakland kids have way anomalous. Oakland borrowed shown major improvement on the California the weighted-student program from San High School Exit Examination, which all Francisco, where the approach has already students must pass in English and math had six years of success. San Francisco before graduating from high school. Sixty- kids in every grade level in every subject two percent of high school students passed have consistently performed above the the English-language-arts portion, compared state average. Since 2001, its low-income with 57 percent in 2005—a 5-point gain— students have posted gains of 83 points,

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16 percent more than Los Angeles’s and 25 community and the school board. The state- percent more than Compton’s. Last year appointed administrator for the Oakland alone, San Francisco students overall earned schools was forced to hire a bodyguard the highest API test scores of any urban because of threats to his life at community district in California—97 points higher than meetings. But because the weighted-student Los Angeles and 150 points higher than formula decentralized control to individual Compton. Even San Francisco’s minority, schools and effectively put parents in charge poor, and special education students have of enforcing accountability, principals were shown major improvements. English- insulated from this ugly infighting, allowing language learners, a challenging group, them to focus on what matters: students. gained 12 points in 2006, compared with In essence, this mechanism proved stronger zero points for Los Angeles’s. Similarly, San than district politics. Francisco’s special education students gained The success of the weighted-student 19 points that year, whereas Los Angeles’s formula program has not gone unnoticed. gained only 1 point. The Washington-based Thomas B. Fordham What’s more, a wide array of schools Foundation last year touted the approach as have cropped up in the city, catering to an important tool for school reform. Former practically every student need and interest U.S. Secretary of Education Rod Paige has by offering dual-language programs, praised it in The New York Times. Although college-preparatory classes, performing-arts most teachers’ unions resist handing electives, and advanced math and science control of school funds to principals, out courses. In fact, every public school in San of fear that this might dilute their ability to Francisco is fast developing its own unique enforce such union work rules as seniority- blend of size, pedagogic style, and course based promotions, some unions have given offerings. cautious approval to the concept. Meanwhile, Oakland hosted a day-long Nationwide, close to 10,000 schools fair last month at which the district’s 120- are considered to be failing under the No plus schools could vie with each other to Child Left Behind Act, hundreds for more entice parents, handing out information than five years. Yet less than 1 percent of about course offerings, highlighting students in these schools manage to transfer accomplishments, and answering questions. to a higher-performing school, even though In short, schools are being forced to sell they have that right under the federal law. themselves to each and every parent. Political leaders can change this by building Compton and the majority of low- on Oakland and San Francisco’s modest performing schools nationwide that can experiment in school choice. No student count on a captive audience have no such deserves anything less. plans. A version of this article by Reason’s Lisa What’s more remarkable is that Snell and Shikha Dalmia appeared in Educa- Oakland’s turnaround happened at a time tion Week. when the state had initiated a hostile school takeover, triggering protests from the

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D. Child Welfare Privatization Update performance of the 22 community-based care lead agencies and found mixed results In 2007, the privatization of child for the state’s child welfare system since welfare services received mixed reviews in fiscal year 1998-99, the year before the state Florida and Texas and became the subject began the transition to outsourcing these of a national study on the effectiveness of services. performance-based contracting for child Most significantly, the OPPAGA report welfare services. revealed an increase in the percentage of children who experienced re-abuse over the 1. Mixed Reviews on Florida’s Child Welfare past six years. It found that 11 percent of Privatization children were victims of re-abuse in 2004- In 2005 Florida became the first state 05, compared with 8 percent in 1998-99. to complete the transfer of all foster care, Some of the increase in the re-abuse adoption, and child welfare licensing rate can be attributed to a more aggressive operations across the state to private focus on child-abuse investigation. In 1999, agencies, making Florida the first state in legislation was passed that broadened the the nation to fully privatize its child welfare definition of abuse, increased the number programs. The state Department of Children of people and agencies responsible for and Families (DCF) has 22 contracts—some mandatory reporting of child abuse, and representing single counties, and others increased the penalties for caseworkers multi-county areas—with a “lead agency” who left children in dangerous situations. that is responsible for the social work that All of these factors have contributed to an was once handled by DCF. increase in child-abuse reports overall, re- Lead agencies, having taken over abuse reports, and an increase in the number responsibilities from DCF over the last four of children removed from their homes. years, are responsible for all social services Therefore, it is somewhat inappropriate to in their area. They typically contract with compare current re-abuse rates with pre- community providers for most of those 1999 rates, which were reported under a services, including substance abuse, case completely different legal framework for management and foster care. child abuse and investigations. The 22 community-based care agencies Despite the reported increase in re-abuse that manage state child welfare services have rates, the OPPAGA report did reveal several annual contracts that require them to meet other positive trends that should contribute targets for eight performance measures. to the future safety of Florida’s children: As of May 2007, none of the lead agencies • The number of children who exit foster that manage abused and neglected children care within 12 months increased by 24 in Florida’s 22 areas is meeting all eight percent. benchmarks. • The number of children reunified A 2006 study (www.oppaga.state.fl.us/ with their families within 12 months reports/pdf/0650rpt.pdf) by Florida’s Office increased by 20 percent. of Program Policy Analysis and Government • The number of children in licensed foster Accountability (OPPAGA) analyzed the care decreased by 15 percent.

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• Case loads for case managers and case foster care. To measure the effectiveness of manager vacancy rates both decreased the waiver, an independent evaluator will by one-third. conduct an assessment of the results. Florida • The number of adoptions finalized will receive federal funding during the by community-based care agencies course of a five-year period based on what (CBCs) has more than doubled. Florida the state would have received under IV-E has repeatedly been recognized as a rules. This amount increases by 3 percent national leader in this effort. In 2006, per year over federal foster care funding in Florida received the highest adoption the federal fiscal year that ended September incentive bonus in the nation from the 30, 2005. The program puts funding U.S. Department of Health and Human incentives in line with the program goals Services. of maintaining the safety and well-being One achievement not mentioned in the of children and enhancing permanency by report is that Florida ranks second in the providing services that help families remain nation in the visitation of children in foster intact whenever possible. care, as reported by the U.S. Department The bottom line for Florida is that of Health and Human Services inspector hundreds of millions of dollars that formerly general. In May, for example, more than 97 could be used only to warehouse children percent of these children were seen by case in foster care now will be available to fund managers. better alternatives. It also means DCF gets Two other developments in Florida the money as a flat grant—no automatic should lead to even more positive outcomes increases for taking away ever more for children. First, Florida is the first children. state to accept a waiver from the federal The second positive development in government that reduces some restrictions Florida is a huge improvement in real- on how federal child welfare dollars are time data collection. A data “DashBoard” spent. The U.S. Department of Health provides real-time information about all and Human Services’ Administration for performance-based expectations for child- Children and Families (ACF) authorized welfare. Department of Children and the five-year waiver under Title IV-E of the Families (DCF) Secretary Lucy D. Hadi Social Security Act, allowing Florida to today unveiled a new way for Floridians demonstrate that flexibility in funding will to see a DCF “report card” that can be result in improved services for families. accessed through a Web-based performance The waiver allows federal foster care Dashboard at: dcfdashboard.dcf.state.fl.us/ funds to be used for any child welfare The Dashboard displays over 200 purpose rather than being restricted to performance measures, so the public out-of-home care as generally required can view the most recent and accurate under federal law. It also enables funds to data compiled about adoptions, missing be used for a wide variety of child welfare children, abuse investigations, and substance services including prevention, intensive abuse treatment outcomes among others. in-home services to prevent placement of Concerned citizens can now monitor how children outside the home, reunification and well DCF is meeting federal and state

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legislative mandated standards for all its to see trends as they occur and to address programs including substance abuse, mental concerns before they become problems. health, adult services, child welfare, refugee DCF managers and providers are held services, homelessness, domestic violence, accountable for corrective action if child care regulation and economic self- performance expectations are not met. sufficiency. 2. Child Welfare Privatization Slows in Texas Most reports found on the Dashboard are updated daily, weekly or monthly. The In 2007 Texas has slowed its efforts to information is displayed by geographic completely privatize child welfare services in regions and by contracted providers with the state. The House and the Senate passed statewide totals. Definitions of performance legislation that would roll back almost measures and descriptions of data sources all of the privatization of foster care case are also available on the Web site. management that lawmakers ordered in the Monitoring this significant data previous legislative session. News reports enables DCF and its contracted providers about the beating deaths of three foster

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children in North Texas since August 2005 that should have been prevented by the have revealed spotty state oversight of foster state child welfare agency. At the same time care contractors and state officials’ lack of states privatize child welfare, they also often information about Texas’s nearly 10,000 increase efforts in child-abuse investigation. foster homes. In Florida and Texas privatization Senate Bill 758 appropriates $100 resulted in an unexpected and large increase million to the Department of Children and in children entering foster care. This also Families to increase child protective service happened when Kansas implemented workers and to outsource a maximum of its statewide child welfare privatization 10 percent of the 30,000 children under program in 1996. In each case, privatization the Texas foster care system. This bill freed state social workers from managing eliminates the Independent Administrator foster-care placement and allowed them role for contractors and will require that to focus on investigating child-abuse organizations compete for the Outsourcing cases. This results in many more children Pilot as direct service providers working being removed from their homes, which under the supervision on the State. The overwhelms the capacity of the private legislation must still be signed by the foster care system. governor. For example, according to a May 8, The 2007 legislation eliminates a 2005 2007 article in the Dallas Morning News, law’s call for private contractors to manage improvements to child-abuse investigations each region’s supply of foster homes and ordered by the Texas legislature in 2005 mandate that all CPS “case management” have increased the number of children duties be outsourced by 2011. The new removed from their birth families, which legislation also calls for annual inspections has increased caseloads for state-employed of all foster homes; currently, about one- caseworkers who are currently responsible third are inspected each year. The measure for permanency placements for foster also would require a database be kept on children. foster parents who have been dismissed This has led to two stresses on private by private child-placing agencies. Some foster care agencies. First, there are more lawmakers fear that a small number of children in the system because of increased foster parents are evading detection by child-abuse investigation and there are jumping from agency to agency. fewer children leaving the system to find permanent placements through adoption or 3. Reducing the Foster Care Population: the family reunification because of the increased Illinois Model caseloads of state social workers. In Texas, The experience in Texas with more privatization is blamed for a system change abuse in foster care and the problems in that has very little to do with privatization Florida with the large foster care population and more to do with large increases in the reflect a familiar pattern when child welfare foster care population. services are initially privatized. Child Similarly in Florida, tougher child- welfare privatization is often called for after abuse investigation requirements have horrific examples of child abuse or deaths led to a huge expansion of the foster care

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population. It doesn’t have to be this way. of focusing the work on maintaining kids Performance-based contracting with the in care rather than aggressively pursuing correct incentives can reduce the foster care permanency. population and bring safe and permanent In Illinois the state realigned contracts living arrangements for children in state with financial incentives to secure care. Both Florida and Texas could learn a accountability and reinforce the importance lesson from Illinois. of achieving outcomes over maintaining Illinois tried a different approach children in care. Agencies were allowed to when it privatized its child welfare system. use superior performance in moving children The Illinois Department of Children and to permanency as a way of lowering their Families took steps to reduce the number of caseloads, maintaining their contract level children who require foster care. Through and financially enhancing their program. new early intervention services, called Front This shift was accomplished through End Redesign, contractors have financial redesigning how agencies receive new incentives to give families help immediately cases for placement services. Upon the after their needs become apparent, even implementation of performance contracting, before a child-abuse or neglect investigation all agencies were required to accept 24 is completed. These services may help percent of their caseload in new referrals. prevent the need for a child to be placed Added to this was the expectation that all into foster care. In accordance with state agencies would move 24 percent of their and federal laws, an increased emphasis caseload to permanency—an outcome has been placed on early permanency that expectation reflecting a nearly three-fold includes a child’s return home, adoption, or improvement over the then system-wide guardianship. average of 8 percent in 1998. Illinois changed its financial incentives The benefits and potential consequences to reward contractors for permanency. With were immediately apparent to contracted so much of Illinois’s child welfare system agencies. By exceeding the 24 percent privatized, the renewed focus on securing benchmark in permanency expectations, permanency for children posed unique an agency could secure caseload reductions challenges. Longitudinal data collected by without a loss in revenue. Falling short of the Department showed that the rate of the benchmark meant serving more children children exiting the system fell below the without a change in the contract level. rate of new cases coming in system-wide. Since the implementation of performance A significant part of the problem was contracting, the dramatic increase of inherent in Illinois’s basic contracting children moving to permanency has been structure. Contracts based upon a fee-for- nothing less than stunning. At its height in child payment can undermine permanency, fiscal year 1997, 51,331 Illinois children as once the child welfare issues have been were living in foster care. Because of an resolved and the child is discharged, an increased emphasis on early intervention and agency faces losing revenue unless the permanency services such as adoption, that child is replaced with a new referral. This number has declined to 16,157 children in dynamic leads to the predictable practice April 2007—a 67 percent decline compared

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to June 1998. Through a competitive application As notable as these gains are, the process, the QIC PCW and the Children’s single most important accomplishment of Bureau selected three performance-based performance contracting is the reinvestment contracting projects for funding for January made possible through consistent gains in 1, 2007 through September 30, 2010. permanency. These reinvestments support These projects will be testing models of better service delivery for children and performance-based contracting and quality families in Illinois’s child welfare system. assurance systems. Florida and Texas both have an Florida’s Department of Children opportunity to learn from Illinois. The and Families (DCF) District 13 will be federal waiver in Florida would make it implementing the Performance Based easier to implement an Illinois model of Contracting and Quality Assurance performance-based contracting. If Texas Systems Demonstration Project which is moves at a slower pace in case management a partnership between DCF / District 13 privatization, it should make performance- and Kids Central, Inc. The state intends to based contracting a crucial component of demonstrate that a comprehensive planning future pilot projects and new legislation. process leading to the development of performance-based contracts and inclusion 4. Projects Underway to Assess Effectiveness of performance measures in the quality of Performance-Based Contracting assurance process leads to improved At the national level, an effort is outcomes for children in out-of-home care. underway to extend the lessons learned The local site evaluation will be conducted about the effectiveness of performance-based by Jean K. Elder & Associates. contracting in child-welfare privatization. The Illinois Department of Children The Children’s Bureau in the federal and Family Services will be partnering Department of Health and Human Services with the Child Care Association of Illinois has designed a five-year project to study to implement the Striving for Excellence: the effectiveness of performance-based Extending Performance Based Contracting contracting in the privatization of child to Residential and Independent Living welfare services. The Quality Improvement Programs project. Its partnership will design, Center on the Privatization of Child Welfare implement and evaluate the extension of Services (QIC PCW) at the University the state’s existing performance-based of Kentucky will study evidence of the contracting and quality assurance system outcomes of performance-based contracting to residential, independent living and in the provision of child welfare services. transitional living programs in order to The QIC PCW will serve as a resource for improve outcomes for this population of information on child welfare privatization out-of-home care youth. The state agency efforts and provide lessons learned from will examine outcomes that are appropriate these efforts. The center will test innovative to the early adult child welfare population strategies for implementing performance- such as increased rates of educational and based contracting and quality improvement vocational goal attainment, improved systems in the private sector. employment experience and stability, and

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improved independent living skills. The local a national performance-based contracting site evaluation will be conducted by the symposium and in journals such as Research Child Welfare Institute. on Social Work Practice. Missouri’s Children’s Division is partnering with seven consortiums to implement the Maintenance Needs in E. The Case for Privatizing University Performance-Based Contracting Success: Housing The Missouri Project on Privatization of Out-of-Home Care for Children. College students who expect more from This project will examine the long-term their living spaces are forcing universities maintenance supports and quality assurance to come up with creative approaches to processes needed to successfully implement resolving housing shortages, renovating a performance-based contracting system dilapidated dorms, and providing appealing for case management services for out-of on-campus options to compete with off- home care and adoption. An independent campus alternatives. Some universities evaluation will be conducted by the have called upon the expertise of private University of Missouri-Columbia School of housing providers to develop comprehensive Social Work. solutions to these problems. In return, they The three projects will measure child have reaped the rewards of lower cost, well-being outcomes such as the rate of higher-quality student housing. abuse while in state care, decreased time Despite these success stories, until permanent living arrangements, privatization of student housing remains increased rates of family re-unification, underutilized. A 2005 survey of 73 public and reduced rates of re-entry into the child universities revealed that less than 14 welfare system. These types of outcomes percent of new residence halls were to be will be measured in an experimental funded with private developer dollars. Only design where some cases are assigned 16.6 percent of new residence halls will be to a treatment with performance-based owned by private developers or foundations, incentives and disincentives and some cases and 15.3 percent will be privately managed. are handled based on a traditional child welfare contract without performance The private sector has shown that it can incentives. Each experiment will measure build, renovate, operate, and maintain the effect of performance incentives and higher-quality housing communities at less disincentives on very specific outcomes for cost than traditional military construction children. methods. After the individual experiments are completed, the QIC PCW will also complete Just as apartment-style living spaces a cross-site evaluation to report on shared and updated buildings are replacing some themes and lessons learned across the three of the 11 by 14 foot dorm rooms and child welfare privatization experiments. 1960s residence halls, it is time to replace The findings from the three studies and the old notions of government-subsidized cross-site evaluation will be presented at construction and management of university

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Benefits of Military Housing Privatization By examining the nature of the benefits that have accrued to military housing as a result of privatization, it is possible to understand how similar partnerships would alleviate most universities’ housing woes. • Cost Savings: Private project development is significantly cheaper than government housing construction and management. According to the DoD, it would have cost $16 billion to make necessary housing improvements based on the traditional military construction (MILCON) program. Privatization is expected to cost only $14 billion, which represents a savings of $2 billion. DoD concluded in 2004 that private development is much cheaper: Life cycle analyses have shown privatization to be less costly than military construction for all projects so far. Our most recent data reflects for the 20 projects we’ve analyzed thus far, a life cycle advantage for privatization of about 10-15 percent. Under the Military Housing Privatization Initiative (MHPI), the private developer pays the vast majority of the development costs. DoD policy requires that a privatized housing project must generate at least $3 of housing development for every $1 appropriated by Congress to support the project, or a “leverage ratio” of 3 to 1. For the 43 projects awarded as of February 2005, government construction costs totaled $767 million for developments that would have cost $11 billion under the traditional MILCON approach. This represents a leverage ratio of over 14 to 1, far exceeding program guidelines and expectations. • Speed in Addressing the Housing Shortage: Not only are private-sector housing developers cheaper than government developers, they are also much faster. Using MILCON, DoD estimates it would have taken another 20 years to fix all of the military’s substandard housing. Assuming DoD’s budget requests are fulfilled, the Department anticipates eliminating all inadequate military housing units in the United States by the end of FY 2007—and all inadequate units overseas by the end of FY 2009—by allowing the private sector to manage the process. • Better Housing Quality: According to DoD, in January 2001 approximately 180,000 of the Department’s 300,000 family housing units worldwide were deemed “inadequate,” requiring significant renovation or repair. In 2005, on-base housing had an average age of 33 years, and 25 percent of it was over 40 years old. Primarily because of the military housing privatization program, DoD expects to eliminate all inadequate units by the end of FY 2007. This represents a dramatic improvement from the 60 percent inadequacy rate of just a few years ago. • Better Property Management: Privatized military housing offers better property management and maintenance. For example, private management companies reportedly fix maintenance problems much more quickly. Chris Crennan, Vice-President of Lincoln Military Housing, Mid-Atlantic Region, proudly reported his company’s maintenance track record at NAS Patuxent River housing privatization project: It addresses 97 percent of reported problems within 24 hours and meets emergency needs within 30 minutes. At Fort Meade, the base handed over a maintenance backlog of 4,000 repairs to the new private management company, which fixed all problems within eight months.

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housing. The innovation and efficiency inspired by privatization benefits students, universities, and the states themselves. Those who doubt the promise of privatized university housing can look to the U.S. military housing model for reassurance. The Military Housing Privatization Initiative (MHPI) has proven to be a remarkable success since its creation in 1996. In less than a decade, the military services have made impressive strides in utilizing private housing developers to replace inadequate on-base housing. The private sector has shown that it can build, renovate, operate, and maintain higher-quality housing communities at less they can use MHPI as a model for cost than traditional military construction harnessing private sector efficiency and methods. Privatization has resulted in innovation to offer students higher-quality greater efficiency for the services and housing more quickly and at lower cost. By greater quality of life and morale for service taking advantage of private sector expertise members and their families. in delivering housing services, universities Universities that face the challenge of will be free to focus more of their attention providing new or modernized housing, on their primary mission of providing high- especially those historically dependent quality education to their students. on state appropriations for construction This piece was adapted from the Reason and renovation, can learn a great deal study, Privatizing University Housing, which from the success of the Military Housing is available online: reason.org/ps356.pdf. Privatization Initiative (MHPI). Specifically,

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Emerging Issues

Contents A. State Lottery Privatization B. Government Transparency

A. State Lottery Privatization may, for the first time, truly operate as a Several states including Illinois, Indiana for-profit business function with the goal of and Texas floated plans to privatize their generating more sales. state lotteries in 2006-07. The plans are Several states including California, fairly similar to toll road concessions: a New York, and Florida have contracted out long-term concession would be signed aspects of their lottery operations; however, establishing the guidelines and expectations this form of lottery privatization is new to of both parties, as well as what the state’s the United States. However, it is not new regulatory role will become. to the world. Leading up to the Athens Since no deal has formally been Olympic Games in 2004, Greece sold off a 5 completed it is not totally clear what a percent stake in the nations’ lottery. Italy’s final deal would look like. However, the lottery is run under a concession that lasts concessionaire will likely pay an upfront fee until 2012. The concessionaire operates (possibly in the billions of dollars) for the 22,000 lottery machines in retail outlets— right to operate the lottery on behalf of the the machines are also used to pay car taxes, state. In addition, some states asked for an traffic fines, and television license fees. The annual royalty and/or revenue sharing plan United Kingdom’s lottery also currently on top of the upfront fee. operates under a seven-year concession. Like toll roads, there is little doubt that In Indiana, 10 companies expressed lotteries are valuable assets. They have a interest in leasing the Hoosier Lottery. fairly stable revenue stream and one that Governor Mitch Daniels said that at least certainly can be maximized under private half of those are “north of a billion and a management. Private operators will likely half,” with two offers of at least $2 billion. introduce new, more popular games. The state was also requiring concessionaires Marketing will also be professionalized to commit to an annual $200 million a year using the latest technology to target games in royalty payments. to markets. Under this arrangement, lotteries Funds would be directed to creation of an ambitious Hoosier Hope Scholarships

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program to high school students attending years, slightly more than what they received Indiana colleges and universities and then last year in lottery income. remaining in the state to work at least Colorado was the only state to put three years; to bring top researchers and forward a proposal generated by the professors to Indiana, and to keep top legislative branch. Senator Josh Penry, R- students in the state; the idea of directing Grand Junction, and Senator Chris Romer, proceeds to pay down public employee D-Denver, teamed up to offer legislation to retirement fund obligations, reduce the allow the Colorado lottery to be privatized. excise tax on automobiles and fund capital The legislation would have required an up- building projects front payment of at least $2.2 billion. Of The enabling legislation, SB 577, passed the proceeds, $1.5 billion would be invested the Senate 27-20. However, the bill did not in a trust fund while the remaining $700 get a hearing in the House. Daniels said million would be used for veterans’ health he is putting off the plans to privatize this care, open space acquisition, and college year—but that it would be back on the table scholarships. The bill was scuttled because next year. One issue facing the governor is of an adverse opinion from the state’s what to do with proceeds nearly twice the Attorney General. anticipated levels. However, a volunteer lobbyist has In Texas, Governor Rick Perry given second life to the concept. Marvin suggested using the proceeds from a lottery Meyers, legislative chairman of the United privatization to develop a host of new Veterans Committee of Colorado, has filed government programs in his State of the the paperwork to pursue a citizen-sponsored State speech. With expectations of $14 initiative that would put lottery privatization billion the governor wanted to use $2.7 on the November ballot. Similar to the billion for health insurance plans and $3 Penry-Romer bill, Meyers anticipates that billion for cancer research. The balance the state would receive between $2.2 and would be left, earning interest for public $2.6 billion upfront. Those funds would schools. However, the enabling legislation also go to veterans’ services, buy open space, (HB 3973) was not moved out of committee create a college scholarship fund and fund during the 2007 legislative session. other projects. The initiative still needs legal Illinois went the furthest with its effort approvals, draft ballot language and more in 2007. Hoping to attract as much as than 76,000 signatures. $10 billion from investors the state issued Governors in Michigan and New Jersey a request for qualifications in January. have also initiated discussions about lottery Under the plan the state would receive a privatization. Lawmakers in Maryland and multibillion-dollar one-time payment, and the District of Columbia also mulled the the lottery’s new operators would receive all idea over without offering concrete plans. revenue and profit for 75 years. There are serious policy considerations During his reelection, Governor Rod about the use of proceeds from lottery Blagojevich called for privatizing the lottery. privatization. Again, while similar to Under his plan he would provide the schools road and highway concessions, there are with $650 million a year for the next 18 significant differences when it comes to

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the allocation of proceeds. Many have federal legislation. It has been designed expressed concerns about proceeds being in a user-friendly manner and allows for used to create new programs or fund access to regular e-mail alerts, information ongoing operating expenses. on how the bills if passed into law would affect taxpayers, and a catalog organized by topic. Although it was just launched by the B. Government Transparency Sunlight Foundation it is quickly becoming a great tool for activists, lobbyists and the While transparency has always been public policy community. coveted, new efforts at both the federal Over the past few years, there have and state level hold promise to add more been many efforts at the state level calling sunshine on how government operates. In for similar efforts, commonly known as September 2006, President Bush signed “Google government”-type databases. These the Federal Funding Accountability and Web sites would make state government Transparency Act (S. 2590) into law. This more transparent by allowing taxpayers bipartisan legislation was co-sponsored access to spending information and clarity by Senator Tom Coburn (R-OK) and on where their tax dollars are being spent. Senator Barack Obama (D-IL) and The governors of Indiana, Florida, and requires that a free, searchable database Texas have led the most successful efforts on be created to include all federal grant this issue. and contract funding information on In 2005, Indiana Governor Mitch payments over $25,000 (with exceptions Daniels (R) signed Executive Order 05-07 on classified information and individuals’ directing the Department of Administration federal assistance). This Web site, www. to post written state contracts on this Web federalspending.gov, will formally be site: www.in.gov/gov/media/eo/EO_05-07_ launched in 2008. Log_Contracts_On_Internet.pdf. On Tax Day, April 17, 2007, Senator In January of 2007, Florida Governor Robert Byrd (D-WV), Chairman of the Charlie Crist issued Executive Order Senate Appropriations Committee, called 07-01 which created the Office of Open for implementation of disclosure on Government, whose sole purpose is to earmarks, since the larger ethics bill, HB provide “the Office of the Governor and 1136, does not look likely to pass. Also known as the Ethics Reform Act of 2007, if passed it would abolish the Committee on Standards of Official Conduct in the House of Representatives and establish an Independent Ethics Commission to perform the same duties. As transparency and accountability efforts sweep the nation, a new Web site was launched in April; www.washingtonwatch. com, is a Web site designed to get citizens the opportunity to post and track pending

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each of the executive agencies under his Finally, HB 2560, sponsored by Rep. purview with the guidance and tools to serve Bill Zedler (R), went a step in a different Florida with integrity and transparency.” SB direction calling for school districts to post 2516 was also introduced by Sen. Rhonda their check registers online; it passed out Storms (R) calling for the Department of of the House but was left on the Senate State to create a “Google government” calendar. Web site which is now in the Economic Furthermore, Texas House Joint Development Appropriations Committee. Resolution 19 was unanimously passed At the end of January, 2007, Texas in both chambers giving voters the option Governor Rick Perry (R) called for of adopting a constitutional amendment government transparency as one component requiring a roll-call vote on the final passage of his “Five Point Budget Reform Plan” of all substantive bills passed through calling for all state agencies to publish the legislature. If approved by voters on expenditures online in a clear and consistent November 6th, no measure could be passed format. Believing on leading by example, through via an anonymous voice vote. the governor has already made all of the Missouri Governor Matt Blunt’s office governor’s office expenditures available is currently building a “transparency online: www.governor.state.tx.us/divisions/ website” that it plans to launch in June. press/files/2007Q1_expenditure.pdf In Georgia, SB 300 sponsored by Sens. State Comptroller Susan Combs Chip Rogers (R) and Chip Pearson would followed suit, posting not only her office’s require the Department of Audits and expenditures, but also those of eight other Accounts to create a searchable Web site on agencies (available at www.cpa.state.tx.us). the expenditure of state funds; it has been The Texas State Legislature unanimously referred to the House. passed HB 3430, mandating the creation of Arizona has created an online database an easy to search, free database listing state (www.spirit.az.gov) that provides a expenditures, including grants and contracts. searchable database of statewide contracts This will allow Texans to literally open up for its agencies and over 400 colleges and the state’s checkbook and see for themselves universities, counties, cities, school districts, where taxpayer dollars are being spent. and qualified non-profits. Additional bills were introduced in Hawaii’s Rep. Marcus Oshiro’s (D) the Texas legislature. Rep. Ken Paxton (R) HB 122 passed, requiring the creation of a sponsored HB 42 which would create a searchable Web site. Senate versions, SB 157 database of all state contracts; this bill was and SB 1689 would have imposed a $25,000 given a public hearing but died at the end threshold. of the session. Rep. Bryan Hughes’ (R) HB Illinois Rep. John Fritchey (D) 640 would have required online posting of introduced HB 473, the Funding expenditures by state agencies, and Rep. Accountability and Transparency Act, Corbin van Arsdale’s (R) HB 1007 would requiring full disclosure of entities and have required the online disclosure of state organizations that receive funds from the grant information in a searchable format; state. In addition, the Governor’s Office of both bills were left pending in committee. Management and Budget would have to

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commodities. Additionally, Kansas considered HB 2207, which would have created a comprehensive searchable Web site for the state’s expenditures, including grants, contracts, subcontracts, tax refunds, rebates and credits, payments made under the Kansas Investments in Major Projects and Comprehensive Training Act, as well as expenditures pursuant to any compact between the governor and any federally recognized Indian tribe or nation in Kansas; this bill was left pending in committee. Del. Warren Miller (R) sponsored HB 1252 in Maryland which would have required the Department of Budget and Management to disclose pertinent information regarding state grants and contracts by the start of 2008; it died in committee. Minnesota’s HF 376 and SF 416 were placed in the State Government Omnibus bill, signed into law by Governor establish a searchable Web site; there is a Pawlenty on May 25, 2007. Although, $25,000 threshold for disclosure. HB 473 grants and contracts to local government passed the House and has been referred to units won’t be included, the database will the Senate Rules Committee. allow Minnesotans to search for detailed Kansas was the first state in 2007 information on state grants and contracts to sign comprehensive government which are valued over $25,000 starting in transparency legislation into law. HB 2457, 2008. This information will be stored online also known as the Taxpayer Transparency for 10 years. Act, sponsored by Rep. Kasha Kelley (R) Although no legislation has been in February of 2007, was signed by the proposed yet, New Hampshire Gov. John governor and became law in April. The Lynch has made his monthly spending Taxpayer Transparency Act requires the reports publicly available. Officials expect to Secretary of Administration to develop make the spending side of the state’s budget and maintain an easily searchable Web available soon; citizens can already track site containing: certain state and local what goes into the budget. revenue and expenditures including annual In New Mexico, both Rep. Kathy expenditures such as disbursements by state McCoy (R) and Rep. Larry Larranaga agencies from funds in the state treasury, (R) introduced similar bills calling for the salaries and wages including compensation Department of Finance and Administration paid to individual state employees, to create a transparency Web site contractual services, capital outlay and

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information pertaining to supplies and services contracts via a variety of search criteria at www.procure.ohio.gov/proc/ index.asp. Following a large turnover in the General Assembly, Pennsylvania has launched www.passopenrecords.org to bring sunshine on the state’s expense account records. Currently, the state asks for a burden of proof from a citizen to open a record. This blog points out that the records should be presumed open and that a particular office or agency should have to prove otherwise. In February of 2007, Tennessee Rep. Matthew Hill (R) introduced HB 943, the Transparency in Government Act, which would require the state and its agencies to create a searchable Web site and post the lost revenue report from the previous fiscal year. This bill is still pending in committee. Although they never moved out of committee, Kentucky’s HB 159 called for creation of a Web site providing access to most state expenditures, and Washington’s HB 2342, would make state showcasing info on state revenues and budget information available to the public expenditures. North Dakota’s SB 2093 (although Washington’s Department of passed the Senate unanimously and recently General Administration currently provides passed the House; in addition to the information on state-awarded contracts on creation of a Web site, this bill also calls for www.ga.wa.gov). And in Connecticut, HB transparency of government purchase cards. 6809 would have required the Department Oklahoma state senators modeled of Information Technology to create one of legislation after the federal bill and called these “Google” Web sites with information for creation of a Web site showing all state on state grants, contracts, projects, and spending. This bill—unanimously passed loans. Colorado also suffered a loss when in late May and signed into law by the HB 1164 was killed in committee; the Governor in early June—is known as The Transparency Act would have created a Taxpayer Transparency Act. This new “Google government” Web site requiring “Google government” Web site is scheduled postings within five days of the treasurer to be launched by January 1, 2008. receiving the information. In Ohio, citizens are able to look-up .

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Water & Wastewater

Contents A. Public Works Financing Issues 11th Annual Water Privatization Report B. U.S. House of Representatives Passes Water Funds C. World Bank: New Generation of Privatization?

A. Public Works Financing Issues 11th B. U.S. House of Representatives Annual Water Privatization Report Passes Water Funds

Water and wastewater services continued The U.S. House of Representatives on their path of expansion, although at a passed HR 720, the Water Quality Financing slower rate than in recent years, reports the Act of 2007 by a margin of 303-108. The 11th annual water report from Public Works bill dedicates $14 billion over the next four Financing. The survey is based on a review years for the Clean Water State Revolving of the eight largest water utility operators. Loan Fund. The market has grown steadily by Another $1.7 billion in grants over five 5 to 12 percent a year since 2000 (total years was authorized in HR 569, the Water dollar value)—with 2006 reporting as Quality Investment Act of 2007. Both bills one of the slowest yearly gains in recent await action in the Senate. years. There are 1,038 wastewater and While these bills may be a step in the 746 water facilities under private operation right direction, they fall short of what the in the United States. In 2006, a total of U.S. Environmental Protection Agency 1,463 municipal, state, or federal clients says is needed. Some $350 billion or outsourced their water or wastewater an additional $22 billion each year in operations to the private sector; representing new investment is needed in our water a 4.3 percent increase over 2005. infrastructure. One tool that would be The industry’s contract renewal rate helpful is not included in the either of these remained high, averaging 95 percent over bills. Last heard in the previous Congress, the last four years. lifting the cap on Private Activity Bonds (PABs) would offer private service providers access to low-interest loans. HR 1708 (in

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the 109th Congress) would have enabled 2005 investment totals amounted to $1.5 public-private partnerships to flourish billion—comparable to investment levels for water and wastewater systems, likely over the last five years (with the exception of resulting in more progress toward closing a single $2.5 billion concession in Malaysia the investment gap. PABs would make in 2004). Private investment was prominent public-private partnerships more attractive in China and Algeria. because the private sector could offer lower Forty-one projects were finished in prices because of new access to cheap capital 2005—the most since 1990. So even and debt. though total investment, in dollar value, has declined, the private sector remains very active and engaged. There was a shift in the C. World Bank: New Generation of type of investment though—sewer treatment Privatization? plants saw investment increase significantly, raising their share of investment from 9 to A recently published report from the 35 percent. World Bank, Private Participation in Water: There were 36 concessions between Toward a New Generation of Projects?, 2002 and 2005, with most of them granted examined the role of the private sector in in Chile, China, Columbia, and Malaysia. international water and sewer investment Management and lease contracts have and development. been gaining ground—now consisting of a While private participation has slowed, quarter of all private activity. it has become more concentrated. In

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Figure 5: Investment Commitments Slowing, Number of Projects Increasing in Recent Years (Private Participation in Water Projects in Developing Countries, 1995-2005)

Source: World Bank and PPIAF, PPI Project Database.

Figure 6: A Changing Allocation of Private Activity (Investment in Water Projects with Private Participation in Developing Countries by Segment, 1995-2005 (US$ billions))

Source: World Bank and PPIAF, PPI Project Database.

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Telecommunications

Contents A. States Push for Video Franchise Reform B. Push for Network Neutrality Regulation Loses Momentum C. Problems Emerging with Municipal WiFi D. Lessons Learned from Provo’s Municipal Broadband E. A Dynamic Perspective on Government Broadband

A. States Push for Video Franchise franchising authority—there are 700 of Reform them in Missouri alone, according to the American Legislative Exchange Council As the consumer benefits become clear, (ALEC). Franchise reform also lowers the more state legislatures are expected to adopt legal burdens traditionally imposed by local franchise reform measures over the course of franchise agencies—burdens that have made 2007 and 2008 that permit new entrants to it costly, time-consuming and difficult for apply directly to the state to offer cable TV competitors to enter. In addition, statewide and cable-like video service. franchise reforms restrict or eliminate the Video franchises are the revenue-sharing sometimes arbitrary concessions imposed by agreements that cable TV companies sign local franchise agencies. with local governments for the right to offer 1. Statehouse Groundswell video services to customers. In return for a portion of the gross video revenues the States are increasingly embracing video company pays to the municipality, cable TV franchise reform as a way of accelerating companies get use of the city’s right of way competition for cable TV services. As of and a right to sell cable service in the area. mid-May, at least 12 states had introduced Statewide franchising eliminates legislation to allow new entrants to apply the need for applicants to go from directly to the state for franchising authority, municipality to municipality to negotiate bypassing the need to engage in often costly individual agreements, a process that can and time-consuming negotiations with local take 24 months or longer. Under current towns and municipalities. franchising rules, new entrants must Of these, the Missouri General Assembly negotiate individually with each local was the first to pass franchise reform in 2007. The Missouri House of Representatives voted

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March 14 143-4 in favor of the measure, by passing statewide franchising bills known as the 2007 Video Services Providers by wider and wider bipartisan margins. Act (SB 284), following a 32-2 vote in favor Studies in 2006 by Reason Foundation, of the bill in the Senate. Gov. Matt Blunt the Mercatus Center at George Mason signed the bill March 22. The law will take University, and the George Mason University affect August 28. School of Law, among others, looked at the Lawmakers in Georgia followed in way the local franchising process inhibited April, approving statewide franchising by competitive entry, and the results that margins of 166-2 and 52-2, respectively, in occurred in Texas and Indiana, which in the state House and Senate. As few weeks 2005 and early 2006 became the first two later, the Florida legislature passed statewide states to create statewide schemes. franchising, and Gov. Charlie Crist signed After Texas created statewide video the bill May 21st. In both states the act franchising in August 2005, Verizon began became effective July 1. extending its new FiOS fiber-to-the-home Elsewhere, Nevada Gov. Jim. Gibbons network in Keller, Texas, which had until signed AB 526 on June 4, creating a that point been operating as a pilot project, statewide franchising process in the Silver into surrounding communities in north State. Compared to similar legislation in Texas. By the end of that year, Charter other states, where reform has taken a year Communications, the incumbent cable or two to happen, Nevada moved rapidly. company in Keller, had cut some cable rates The bill was introduced on March 23. by 27.5 percent. The Illinois House of Representatives As AT&T ramped up its 2006 U-Verse passed a franchise reform bill June 1 by a launch in San Antonio, Time Warner Cable unanimous 113-0 margin. At presstime, the boosted the speed of its Road Runner bill was awaiting vote in the Senate, where Internet service. Once AT&T went on-line, it was expected to pass. Once it clears the Time Warner began discounting TV and upper chamber, Gov. Rod Blagojovich is phone plans, throwing in premium movie expected to sign the bill. channels and faster Internet connections. The only setbacks thus far have in In October, Time Warner introduced an Tennessee and Colorado, where bills have innovative new service feature called “Start stalled in committee and are unlikely to Over” that allows viewers tuning in late to come up for vote. watch their shows from the beginning. Other states that have introduced After statewide video franchising took statewide video franchising this year are effect this past summer in Indiana, Verizon Iowa, Massachusetts, New York, Utah, stepped up FiOS deployment. Comcast Washington and Wisconsin. responded by increasing the speed of Opposition to legislation tends to come broadband service in Verizon territories such from municipalities, which fear both loss as Howard County to keep up. of franchise revenues and that new entrants In Ft. Wayne, Indiana, Verizon began will not serve all parts of the community. deployment of FiOS service in the low- But the case for competition is proving more income Hanna-Creighton neighborhood. compelling, and legislators are responding AT&T has rolled out U-Verse service across

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all parts of San Antonio, not just the tony bills currently under consideration vary in neighborhoods. the deadlines they impose on new entrants Where enacted thus far, franchise regarding coverage of the entire area. reform’s benefits have been undeniable. The Tennessee bill imposes no build- Consumers have enjoyed greater choice out requirement, allowing new entrants and a range of new services, including to deploy service in response to market on-demand video and “a la carte” content conditions and economies of scale. Illinois selection, at lower cost. Incumbent and Missouri require that within five years cable providers have responded to new at least 30 percent of households where competition by lowering costs and service is available must qualify as low- improving service. income. Some bills, including those in Colorado 2. Bills Differ in Details and Illinois, require the incumbent cable Although all the bills introduced so far company to remain bound by its existing create statewide video franchising authority, local franchise agreement until it expires. there are some differences. Others, such as in Florida, Missouri, and Most states cap the franchise fees Tennessee, permit incumbents to apply for percentage formula at 5 percent of gross a statewide franchise upon the entry of a video revenues, although some bills, competitor. The Wisconsin bill would permit including the one in Illinois, designate an incumbent to apply for a statewide an additional 1 percent to fund public, franchise with or without competition. educational, and government (PEG) All legislation calls for statewide channels. franchisees to provide PEG channels, usually The definition of gross video revenues a minimum of three, often more based can also differ. All bills consider income on population. Franchisees must provide from service provision—billings for set- a means of connection from PEG studio top box rental, monthly service, premium facilities to the head-end. channels and pay-per-view—as video All the pending legislation prohibits revenue. More controversial has been cities from discriminating against some the inclusion of cable-related income service providers by denying access to rights that does not come from consumers, of way or charging higher prices for access including revenues from local advertising, than to other providers. commissions paid by programmers such as the Home Shopping Network and QVC 3. FCC Action on sales of merchandise to franchisee As state action proceeded, the FCC customers, and promotional fees paid issued a new set of rules and guidelines to franchisees by cable programmers for for local franchise authorities that regulate including their channels on the system. cable operations within their specified Bills in Colorado and Tennessee use the jurisdictions. The rules became effective broader definition, while the Illinois’ bill, for March 5th, the date the FCC released the example, does not. order. Regarding build-out of new services, the The FCC rules, contained in the March

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5th Report and Order and Further Notice Industry concerns about the effect the of Proposed Rulemaking, are designed to exploding amount of video traffic will have strengthen the existing provisions of Section on Internet transmission in general have 621(a)(1) of the Communications Act of tempered the urge to ban tiered pricing 1934, as updated over the years, which structures that would allow major content prohibits franchising authorities from and applications providers such as Google, unreasonably refusing to award competitive Yahoo, Sony and Disney to upgrade the franchises for the provision of cable services. speed and quality of their commercial The new rules require local authorities services as they cross the Internet. to decide on a franchise application within By way of measurement, the monthly 90 days or the license will be deemed volume of Internet traffic grew by 35 percent granted. In addition, local authorities can between December 2005 and December no longer make extraordinary requests from 2006. The Internet in December 2006 applicants for the deployment of hardware handled about 700 million gigabytes (1 or for requests unrelated to the provision of billion bytes), compared to 450 million video service. in December 2005 and 300 million The FCC also listed several other in December 2004. This snowballing practices as an “unreasonable refusal to growth has technologists coining the term award a competitive franchise,” including: “exaflood.” The word derives from exabyte, • requiring an applicant to agree to which equals 1 quintillion bytes (1 followed unreasonable build-out requirements, by 18 zeros). In terms of equivalency, 700 • demanding additional fees and million gigabytes equals 0.7 exabytes. compensation that are not counted In and of itself, the exaflood does not toward the statutory 5 percent cap on necessarily pose a crisis. Right now the franchise fees, and global Internet has the capacity to handle the traffic. The question is, when the amount • demanding unreasonable obligations of Internet data truly begins to reach the relating to PEG channel and institutional capacity of the network, as it inevitably will, networks. how will the industry be able to respond? Free market proponents argue that deep- pocketed companies will likely be willing B. Push for Network Neutrality to pay for quality guarantees. At the same Regulation Loses Momentum time, their high-bandwidth applications will be partitioned away from the conventional Both Congress and the states are moving “best effort” Internet that supports the slowly on network neutrality, which would great majority of Web-based content and regulate, and perhaps prohibit, the use of applications, allowing these to perform network-based techniques to improve the free of the congestion the few big players performance of time and error-sensitive would otherwise generate. In fact, many Web-based applications, such as two-way of these companies already rely on Web voice, video and interactive games. caching, compression and other server-based The push for regulation has lost some techniques that enhance the way their Web momentum from the last half of 2006.

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sites work and mitigate congestion at the neutrality provisions to the upcoming same time. It is not as if today all Web sites spectrum auction of frequencies in the 700 operate on neutral footing. MHz band. The FCC opened the band with As of mid-May, there had been no an eye toward creating more channels for movement on a congressional network wireless data services. The move is part of neutrality bill introduced by Sens. Olympia a broader effort to push for caveats and Snowe (R, Maine) and Byron Dorgan (D, restrictions that would bar some groups of N.D.). Efforts in Maryland and Michigan companies from participating in the auction. to enact network neutrality rules at the state At presstime, it was unclear how these level were voted down. efforts would play out. Some early industry proponents of network neutrality, including Microsoft, have backed off. In addition to service C. Problems Emerging with Municipal providers such as AT&T, Verizon and WiFi Comcast, most U.S. telecom manufacturers have urged lawmakers and regulators to As more cities launch municipal wireless deal with any market abuses should they systems, many of the predicted problems are occur, and not pre-empt the market with a emerging, ranging from higher costs to low new law that addresses no current problem. usage to poor coverage. Even Google, which until now has been The problems are not limited to purely among the most vocal corporate backers of city-owned and operated systems. Recent neutrality regulation, has started sending news indicates that companies participating mixed messages. Although a spokesman in public-private partnerships are revisiting reassured net neutrality supporters at their business models and hedging on their SavetheInternet.com that Google remains promises. committed to the cause, a number of key For example, MetroFi, one of the Google executives have been hedging on leading wireless network companies in the their support for government intrusion in municipal space, has told cities it will not the market for network and applications offer a tier of free services unless the city management. agrees to become an anchor tenant on the Alan Davidson, Washington policy network. The company said that while a free, counsel for Google, said at a Federal Trade advertising-supported tier of wireless access is Commission workshop in February that not viable, it cannot by itself support a city-wide all network management is anti-competitive. network infrastructure. Adrian van Haaftan, Two weeks later, Andrew McLaughlin, MetroFi’s vice president of marketing, told Google’s head of global public policy, told a Wireless Week, an industry trade publication, Silicon Valley audience that he believed market that revenues from municipalities must be mechanisms will ultimately solve Internet part of the sales “equation.” congestion problems. “None of us want any Both private companies and kind of heavy-handed regulation,” he said. municipalities are also learning that As of early June, proponents were infrastructure costs are higher than thought. pushing the FCC to attached network Early studies estimated that a “mesh” of

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25 WiFi antennas per square mile would be access to the city system were required to adequate to assure wide area, in-building purchase $100 signal extenders. coverage. Many cities based their spending plans on these estimates. As WiFi systems build out, engineers are discovering that it D. Lessons Learned from Provo’s Mu- takes up to 50 mesh antennas per square nicipal Broadband mile to assure adequate coverage. Meanwhile, many municipal wireless After only two years, the municipal systems that were once highly touted are broadband system in Provo, Utah has begun limping along. Lompoc, California, which to show the pattern seen in other cities spent $3 million on a citywide municipal that have mounted expensive fiber optic wireless network reported in April that networking projects. With less than half the had signed up a only 281 customers, subscribers expected by this date, iProvo, the representing an investment of $10,676 $39.5 million system launched in July 2004, for every customer. The town’s original has had to request $1 million in additional feasibility study said the system would need funds from the Provo’s electric utility to 3,000 subscribers to break even. meet its costs. The wireless system in Foster City, The request for additional funding Calif., covered only 60 percent of the town comes after a troubled first 18 months of as of early April. The private contractor, operation marked by slow growth and a MetroFi, had promised residents 95 percent rocky relationship with a retail partner coverage by then. It blames the coverage that came to an abrupt end during a heated problems on the layout of homes in Foster mayoral campaign. The sole bright spot City and the geography of the city itself. is that iProvo construction has stayed on Meanwhile an independent evaluation schedule. The iProvo Web site reports that of the municipal wireless system in Portland, all eight construction phases were completed Ore., another MetroFi project, found just 50 by the initial July 2006 deadline. percent coverage. The evaluation was done iProvo is set up as a city-owned fiber by a Portland user group unaffiliated with optic network that wholesales capacity the city. About two weeks afterward, the city to retail service providers. The unit refuted the user group with its own study that operates under the administration of the it commissioned and funded, which found Telecommunications Division of Provo that 99 percent of the municipal system’s hot City’s Energy Department. Construction spots were functioning as specified. on the iProvo network began in July And the latest news from St. Cloud, 2004. As of December 1, 2005, fiber optic Fla., reports that the town had to replace connections were available to more than half every antenna on its network due to water of Provo’s approximately 27,000 residences damage. The change-out did not cost the and 4,100 small businesses, making it city any money directly, but it did require the largest municipal broadband system considerable time from city employees. Last in the United States to date, according to year, the town fell short of its promised Broadband Business Forecast, an industry in-home coverage. Residents who wanted newsletter. Local newspaper reports place

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the subscriber total at 7,700 as of October HomeNet and iProvo started with, as few as 2006. iProvo also owns and operates a cable 1,600 were left by the time HomeNet closed television distribution facility. up shop. This occurred as Mayor Billings iProvo began with high hopes. But was in the middle of a heated re-election for all the optimism that the city had campaign in which iProvo performance was found a better formula in wholesaling, the an issue. This put pressure on Billings to find experience remains a warning to other cities replacements for HomeNet quickly, giving that municipalities, even when they take a more leverage to would-be partners to wholesale role, cannot compete with the extract favorable concessions from the city. private market. Despite the advantages it had at the outset, just two years into the For a project that began as an example of project, iProvo is dealing with the same innovative urban planning and pro-active struggles other municipalities have had in technology policy, iProvo has had an the past. inauspicious 18 months. iProvo is behind on its business plan and is being forced to borrow more money. In Cable and Internet prices charged by February 2006, Mayor Billings and iProvo iProvo partners are not significantly lower officials asked the Provo City Council than pricing from Comcast or Qwest. An to approve a transfer of $1 million from original goal of iProvo had been to offer Provo’s electric utility reserve to cover fiscal broadband services at “affordable” rates, 2006 costs. In June, iProvo requested and implying the rates charged by private service received a line of credit for an additional providers are too high. Yet, when compared $2 million to cover costs in fiscal 2007 and with similar service packages from the 2008. iProvo officials also said in October incumbent cable and telephone companies, that the operation will need 12,000 to iProvo’s two current retail partners (Veracity 15,000 customers to break even, an increase Communications and MStar Metro) do not the original break-even target of 10,000 offer sizable discounts. customers. The original plan had anticipated There is little evidence to suggest iProvo iProvo achieving 10,000 customers by has generated any significant growth in December 2005. With revenues and broadband usage or penetration in Provo. customer uptake short of goals, there is All reports suggest that the great majority mounting pressure on asset value and cash of iProvo’s 5,000 customers had broadband flow. iProvo’s “burn rate” (the rate at which service prior to iProvo, either as customers expenditures exceed income) in fiscal year of bankrupt Provo Cable or as customers of 2005 was $325,000 a week. Veracity and MStar. iProvo’s wholesale plan attracted iProvo’s current retail partners, Veracity only one retail partner, HomeNet and MStar, are two local Internet service Communications, in its first year of providers (ISPs). They replaced HomeNet in operation. That relationship proved a August 2005. While the city of Provo funds disaster that ended with HomeNet pulling construction and maintenance of the fiber out of the market in July 2005 and declaring optic backbone and cable head-ends, fiber- bankruptcy. Of the some 2,400 customers to-the-premises (FTTP) connections to each

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home and business are the responsibility Set up under a wholesale model, iProvo of Veracity and MStar, which are principal also was touted to be immune from the points of contact for consumers. The problems municipalities have had with retail two iProvo retailers compete with other FTTP systems. That has turned out to be a broadband and cable TV providers, false hope. Indeed, while financial reports including Qwest Communications looked good in the first year of operation, International and Comcast Corp., as well as much of iProvo’s revenues were generated direct broadcast satellite (DBS) companies from interest accruing on bond funding that and other ISPs. Large users, such as Brigham had been banked. Although the warning Young University, do business directly with signs were there, namely in the form of poor iProvo. The city of Provo is also a customer customer growth, iProvo officials chose to of iProvo. play them down. It was only in its second Yet just two years into operation, year, when cash from the bond issue began iProvo has had to call on the city’s power to deplete, that iProvo’s revenue shortfalls of the purse. In the free market, failing and cash flow problems came into high companies close shop, and that is the relief. end of the financial loss. In requesting an For a project that began as an example allocation from the city’s electricity reserve, of innovative urban planning and pro- iProvo can do what no private company active technology policy, iProvo has had can: cross-subsidize broadband operations an inauspicious 18 months. In its first from other utility funds. The electricity year, certain aspects of its balance sheet reserve fund was created as a hedge against and revenues appeared sound, but they price increases in the cost of electricity, a do not stand up on closer examination. volatile market as it is. Provo’s electricity Because it calls for a smaller investment, the customers, not its broadband users, pay into wholesale model appears more attractive. it. Although iProvo seeks only $980,000 of The wholesale model is getting more the $17 million in the reserve, it establishes a consideration as more cities contemplate precedent and leaves the electric utility, and municipal wireless networks. Yet the its customers, that much more vulnerable. cautionary tale of Provo is that operating In addition to engaging in overt cross- as a wholesaler is not enough of a hedge subsidization, iProvo demonstrates more against the financial and logistical problems subtle problems municipal broadband that occur when a city seeks to compete systems create for taxpayers and the local with commercial service providers in a economy when they attempt to compete competitive business sector. with the private sector. For example, The above is the executive summary from when the city of Provo sold Provo Cable’s Reason’s study, Spinning its Wheels: An customers to HomeNet at 40 percent of Analysis of Lessons Learned from iProvo’s true market price, it indirectly subsidized First 18 Months of Municipal Broadband, HomeNet’s market entry. In selling a key available online at www.reason.org/ps353. asset for less than what it was worth, Provo pdf. cheated both local commercial service providers and Provo taxpayers.

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E. A Dynamic Perspective on Govern- year, or 20-50 percent in subsequent years, ment Broadband appears highly unrealistic in most cases. A wireless system might expect to serve about By Jerry Ellig 25 percent of the residential market and 10-20 percent of the business market. The Debate over government provision only exceptions might be small communities of broadband has generated many of the serviced only by expensive alternatives, or usual arguments over the pros and cons municipalities willing to commit to very of government service provision. On the large subsidies for their broadband systems. one hand, such initiatives might make 2) Performance Competition: broadband more affordable and hasten its Competitive businesses seek to continually adoption. On the other hand, they could improve performance—or even develop also generate significant costs for taxpayers new aspects of performance that were not and stunt incentives for cost containment. previously thought capable of improvement. Such arguments commonly occur when Speed is perhaps the most measurable aspect governments consider direct provision of of performance. Comparing prices and electricity, gas, water, roads, and many services offered by government-sponsored other services that tend to be provided by Internet provision to those in the private monopolies that invest in long-lived assets. sector, the prices and performance of Less extensively discussed, however, existing government systems are inferior are some unique challenges that arise to those of existing private systems. An because broadband is a new, fast-changing effective government-owned competitor technology available from competing must be prepared to offer a price/ suppliers. Policymakers need to consider performance combination that a significant some unique problems when a government number of consumers will prefer to those enterprise enters a dynamic market such as offered by competitors. If government the provision of Internet services. ignores performance competition, it could Scholarship on dynamic competition end up offering a fairly plain service suggests seven new issues that are likely appealing only to customers who want to be significant in municipal provision of relatively slow broadband speeds, and may Internet service: not be willing to pay much for it. While 1) Competition: Unlike a monopolist, such an approach might be attractive as an enterprise that faces competition cannot social policy, it is unlikely to pay for itself count on a captive market. In many cases, over the long term and would likely require government-sponsored broadband will ongoing subsidies. have to compete with incumbent firms, 3) Continuous Improvement: One such as cable, telephone, and wireless indicator of the extent of change is the companies that already have a substantial pace at which prices of goods and services head start. After reviewing many cities’ fall as technology improves, costs fall, or actual experience with cable and broadband competition intensifies. This has occurred enterprises, research concludes that an frequently in the market for Internet service, assumed penetration rate for a municipal as well as in related or analogous markets system of more than 10 percent in the first

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such as wireless communications, telephone plus interest, but also recover the initial equipment, and telecommunications capital outlay in three to five years. services. Real consumer price indices for 6) Risk: Financially, investment in a wireless, telephone equipment, and long- dynamic field such as Internet provision is distance service have fallen even faster—by less of a “sure thing” than a conventional 45-65 percent. If recent experience is a government monopoly. That means the guide, government broadband operations cost of capital should carry a higher will need to be prepared to continually risk premium than normally considered improve in the future if they want to keep appropriate for government enterprises. But pace with private sector competitors. just how risky is it? Comparing risk levels 4) Technological Change and Lock-In: shows clearly that investments in electric, “Lock-in” occurs when an initial decision gas, and water utilities have involved much gives one technology a slight edge, then less risk than investments in firms that sets in motion a process which leads that sell broadband or wireless data services. technology to dominate the market. If Electricity, gas, and water are precisely the the technology that gets locked in is truly types of static, monopolized industries where the superior technology, then there’s no governments have traditionally invested. harm done. But if an inferior technology In terms of risk, broadband is a whole new gains a temporary edge in market share, ballgame. Investing in broadband is much some scholars argue that it might remain riskier than investing in the overall stock dominant even though it is inferior. The market. Nevertheless, some governments market gets locked in to the inferior have financed broadband initiatives as if technology due to the decisions of the early they were traditional, low-risk investments adopters, and often has to rely on subsidies in infrastructure that provides necessities. to stay afloat when better technology is A government enterprise that faces an available elsewhere. Government broadband artificially low cost of capital is more likely plans should squarely address the potential to waste the public’s money by “investing” for lock-in and explicitly evaluate whether in capabilities that produce little value for subsidies would give an inferior technology customers, or do so only after an excessively an artificial boost. long time. 5) Obsolescence: In a dynamically 7) Uncertainty: A private business competitive market, networks become firm’s shareholders bear uncertainty as obsolete faster. Technology improves more well as risk. The prospect of additional, rapidly, and as a result capital investment higher returns entices them to bear that becomes obsolete more quickly. Business uncertainty. The fact that uncertainty affects plans for government broadband enterprises shareholders’ financial fortunes gives them need to assume faster depreciation rates, strong incentives to seek out management and concomitantly higher prices, than have that will exercise sound judgment. The traditionally been used for government most likely method would be to organize utilities. For example, a workable plan the enterprise as a for-profit company, for municipal Wi-Fi needs to assume that with explicit expectations from the owner revenues will not just cover operating costs (the government) that it be successful. The

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Figure 7: Utility Risk Levels (Beta Coefficients, Where Stock Market = 1)

2.5

1.5

0.5

0 Electic Utility Gas Water Utility Cable TV Telecom Wireless Distribution Services Networking

Source: Aswath Damodaran, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

most credible way governments make these The factors outlined above need not types of commitments is by enacting a imply that government-provided broadband plan to privatize the enterprise. But in this is a bad idea. However, no plan for context, a privatization plan would beg the government-sponsored broadband should question of why the government is getting be considered complete or responsible unless into the broadband business to begin with! it addresses many factors. Government For government broadband enterprises, faces the daunting challenge of entering a taxpayers bear the uncertainty in their role market where technological change is swift, as the ultimate owners. At a minimum, the future is uncertain, and competitors’ therefore, effective accountability requires actions are unpredictable—a playing field that government broadband initiatives fundamentally different from the stable, should have accountability and transparency predictable utility markets that have for taxpayers at least as good as that which traditionally attracted public investment. publicly held companies must have for their Jerry Ellig is a senior research fellow at the shareholders. These transparency measures Mercatus Center at George Mason University. may not be sufficient to make government The above article is a summary of Reason’s managers as accountable to uncertainty- December 2006 study, A Dynamic Perspec- bearing taxpayers as corporate managers tive on Government Broadband Initiatives, are to uncertainty-bearing owners. But it is available online at www.reason.org/ps349. difficult to see how accountability is possible pdf without them.

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Land Use and Property Rights

Contents A. Eminent Domain Reform Update B. Measure 37 Rewrite Sent to Oregon Voters C. Arizona’s Proposition 207: the New Standard for Regulatory Takings Reform D. Sustainable Development in Urban Planning: The Case for a Market-Based Approach

A. Eminent Domain Reform Update land for clearly defined public uses—such as roads, parks, and public buildings—but Kelo 1. Property Rights Win Big in November 2006 opened the door for government to condemn Election property for almost anything that it could Besides Democrats, the big mid-term argue had a public “benefit.” election winners in November 2006 were The backlash was immediate. Since homeowners in the nine states that passed the Kelo ruling over two dozen states have initiatives protecting property rights and passed legislation to curb eminent domain reining in government’s power to take abuse, and in the November 2006 election, homes and businesses. These initiatives voters passed a variety of measures intended were sparked by the Supreme Court’s to do the same thing. controversial ruling in the 2005 Kelo vs. New London decision, which gave the Kelo opened the door for government to government a green light to use eminent condemn property for almost anything that domain to take private property and it could argue had a public “benefit.” turn it over to developers for “economic development” purposes. An overwhelming majority of voters Many Americans were incensed at the in Florida, Georgia, Louisiana, Michigan, notion that government could arbitrarily New Hampshire, and South Carolina evict people from their homes, businesses, approved constitutional amendments that and churches simply because it could forbid the use of eminent domain to transfer generate more local tax revenue if these land from one private party to another for properties were redeveloped as condos, economic development purposes. Similar offices, and hotels. Traditionally, eminent voter-initiated constitutional amendments domain was only used to acquire private passed in both North Dakota and Nevada,

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though Nevadans will need to pass the same the two biggest threats to property rights in amendment in 2008 for it to take effect. one fell swoop. Of all states, voters in Oregon have However, two similar “Kelo-Plus” taken one of the strongest stands in recent measures failed to pass. California’s years to protect their property rights. Proposition 90 was defeated by a 52 to 48 Measure 39, a statutory initiative that margin. Idaho’s Proposition 2 also failed reins in eminent domain abuse, passed to pass. Opponents of these measures— in November by more than a two-thirds including environmental groups, municipal margin. Moreover, Measure 39 followed associations, and urban planners—mounted on the heels of voters’ passage of Measure a vigorous campaign to defeat them, 37 in 2004, which was designed to protect outspending measure proponents by a wide Oregonians from “regulatory takings,” a far margin. Voters in Washington State also more pervasive threat to private property defeated Initiative 933—a regulatory takings rights than eminent domain abuse. measure modeled after Oregon’s Measure 37—by a 56-44 percent margin. Local governments routinely pass Despite the success in Arizona and restrictions the owner’s property—without Oregon, the defeat of the California, Idaho, compensating owners. and Washington measures indicates that regulatory takings reform faces higher Local governments routinely pass hurdles to voter appeal than pure eminent restrictions on the ability of property owners domain measures. Not only do they generate to use their land in ways that were legal more opposition from a variety of special at the time they bought their property— interests that benefit from government’s resulting in enormous losses to private unfettered ability to regulate, but the issue is property values—without compensating inherently complex and largely unfamiliar to owners. After several decades of enduring voters. egregious regulatory abuse, Oregonians And given that regulatory takings passed Measure 37 to require government to frequently occur in conjunction with zoning either pay landowners for these “regulatory regulations preventing development on takings,” or waive the regulations. agricultural land or open space, the issue Voters in Arizona followed Oregon’s resonates more with rural voters than city lead and passed Proposition 207—the dwellers, as the geographic breakdown of Private Property Rights Protection Act—by voting for California’s Prop 90 suggests. a 65-35 margin, breaking new ground in Support for Prop 90 was strongest in the the process. Proposition 207 was designed Central Valley, the Northeast, and Southern to address both eminent domain abuse and California, while opposition centered in regulatory takings in one comprehensive the Bay Area and Los Angeles County. The set of property rights protections in what key for future campaigns will be to craft a has come to be known as a “Kelo-Plus” message that more effectively connects with initiative. Untested prior to this election, urban voters. the passage of Proposition 207 establishes However, viewed in total, the election “Kelo-Plus” as a feasible strategy to target results indicate that the property rights

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Table 19: 2006 Election Summary: Property Rights Ballot Measures State Ballot Measure Status Scope %For %Against Arizona Proposition 207 Passed Eminent Domain/ 65% 35% Regulatory Takings Florida Amendment 8 Passed Eminent Domain 69% 31% Georgia Amendment 1 Passed Eminent Domain 83% 17% Louisiana Ballot Measure 5 Passed Eminent Domain 55% 45% Michigan Proposal 06-4 Passed Eminent Domain 80% 20% Nevada Question 2 Passed Eminent Domain 63% 37% New Hampshire Question 1 Passed Eminent Domain 86% 14% North Dakota Initiated Constitutional Passed Eminent Domain 67% 33% Amendment 2 Oregon Measure 39 Passed Eminent Domain 67% 33% South Carolina Amendment 5 Passed Eminent Domain 86% 14% California Proposition 90 Defeated Eminent Domain/ 48% 52% Regulatory Takings

Idaho Proposition 2 Defeated Eminent Domain/ 24% 76% Regulatory Takings Washington Initiative 933 Defeated Regulatory Takings 41% 59%

movement is alive and well. Millions of states, the ban in S.B. 167 does not extend citizens nationwide sent a clear message to to cover the use of eminent domain for elected officials: they care very deeply about economic development purposes. S.B. 167 property ownership, and they understand makes several other changes to state eminent that the government is there to protect their domain law: right to that property, not to take it away. • Requiring a public hearing before a property may be taken and requiring 2. 2007 Eminent Domain Reform Legislation local officials to approve proposed Continuing the trend seen in 2005 and takings by a two-thirds vote; 2006, 11 state legislatures (as of press time) • Imposing a ten-year deadline for modified their eminent domain laws during completing a taking; the 2007 legislative session. These states include: • Requiring that property owners are to Connecticut: After two years at the be compensated at 125 percent of the center of the national eminent domain average of two independent property backlash in the wake of the U.S. Supreme appraisals; Court’s Kelo vs. New London, eminent • Giving the former owner of condemned domain reform finally came to Connecticut property the right of first refusal to in June 2007 when Gov. Jodi Rell signed buy it back if it is not used for a public Senate Bill 167 into law. The bill, passed purpose; and overwhelmingly in both houses, prevents • Allowing homeowners to appeal a the use of eminent domain for the primary taking in state court. purpose of increasing local tax revenues. Some lawmakers and property rights However, in contrast to reforms in other advocates complained that S.B. 167

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represents weak reform that would not have future citizen initiatives like the invalidated prevented the taking of homes in the Fort Initiative 154 from 2006—a “Kelo-Plus” Trumbull neighborhood of New London, measure that would have addressed both the actions which gave rise to the Kelo case. eminent domain and regulatory takings According to Michael Cristofaro, whose reform—which some feared would home was among those condemned in New negatively impact local land use planning London, “[t]here’s nothing in [S.B. 167]. No and zoning. one’s rights are saved yet.” Nevada: The Nevada Assembly passed Maryland: After more than 40 eminent two eminent domain bills in 2007 that could domain bills died in the 2006 legislative supersede a ballot measure—the People’s session, the 2007 session brought modest Initiative to Stop the Taking of Our Land eminent domain reform to Maryland. (PISTOL)—passed by Nevada voters in Gov. Martin O’Malley signed Senate Bill November 2006. 3 on May 8th, increasing the caps on the Assembly Joint Resolution 3, a proposed amount paid to homeowners, tenants, and constitutional amendment restricting the small business and farm owners who are use of eminent domain, won final legislative displaced as a result of a condemnation approval in May. Under Nevada law, action. S.B. 3 also requires governments A.J.R. 3 must pass the legislature again in to file condemnation action within four 2009 before facing voter approval in 2010. years after the date of the administrative Assembly Bill 102, signed into law by Gov. or legislative authorization to acquire the Jim Gibbons, is a statutory companion property; governments exceeding the four- measure to A.J.R. 3 that takes effect year window period would need to obtain immediately. A.B. 102 was a compromise a new authorization to proceed with a bill negotiated between PISTOL proponents condemnation action. and opponents concerned that PISTOL Montana: In May 2007 Governor Brian would negatively impact government’s Schweitzer signed Senate Bill 363, sponsored ability to complete necessary public works by Sen. Christine Kaufmann (D-Helena), projects. modifying state code to prevent private PISTOL will remain on the 2008 ballot, property condemned for urban renewal and if passed by voters, it would supersede projects to be transferred to another private the provisions of A.B. 102. If A.J.R. 3 party for economic development and tax were to then pass in 2010, it would in revenue generation purposes. According turn supersede the provisions of PISTOL. to one of the bill’s supporters, Sen. Dave PISTOL would require higher compensation Lewis (R-Helena), many legislators agreed payments than A.B. 102, and it would give that the Montana Constitution and state government five years to complete projects jurisprudence already prevented Kelo- on land taken through eminent domain, in style takings, but that S.B. 363 makes it contrast to the 15 years allowed under A.B. “absolutely clear” that eminent domain 102. should only be used for traditional public New Mexico: Having been the nation’s use projects. Some supporters felt the first governor to veto eminent domain clarification was also necessary to prevent reform legislation in 2006, New Mexico

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Gov. Bill Richardson signed House Bill demanded by the owner, shall be determined 393 and Senate Bill 401 in March 2007, by a jury.” repealing statutes allowing governmental Utah: In March 2007, Utah Gov. Jon entities to redevelop blighted areas and Huntsman signed House Bill 365, making encourage economic development through Utah the first state in the nation since the use of the power of eminent domain. the Kelo decision to roll back its eminent These bills repeal the state’s Community domain protections. The legislature Development Law, most of the Urban approved Senate Bill 184 in the 2005 Development Law, and provisions in session, preventing local governments from the Metropolitan Redevelopment Code using eminent domain to acquire property allowing to the use of eminent domain to in blighted areas. By contrast, House Bill acquire property for economic development 365 expands eminent domain authority purposes. This legislation was developed to by allowing redevelopment authorities address the key recommendations offered to condemn property if they receive by the eminent domain task force Governor approval (via petition) from 80 percent of Richardson appointed after his veto of residential property owners or 75 percent House Bill 746 in early 2006. of commercial owners in a project area. North Carolina: Building on statutory Redevelopment condemnations could also eminent domain reforms passed in 2006, the proceed with approvals from the equivalent North Carolina House of Representatives of 70 percent of residential property value or overwhelmingly passed House Bill 878 60 percent of commercial value. in May 2007, which would place a Virginia: In April 2007, the Virginia constitutional amendment on the next General Assembly approved Gov. Tim statewide ballot to restrict government’s Kaine’s amendments to House Bill 2954, ability to use its power of eminent domain. which limits government’s use of eminent If passed by the Senate, H.B. 878 domain to traditional public uses (such as would ask voters whether the following roads, schools and public buildings), tightens language should be inserted into Section the state’s previously broad definition of 19 of Article I of the North Carolina “blight,” and prevents the seizure of non- Constitution: “Private property shall not blighted properties in “blighted” areas. The be taken except for a public use, including bill also provides that a property owner preservation for that use. Public use does may challenge that a taking is a pretext not include the taking of property for the for an unauthorized use. H.B. 2954 passed purpose of thereafter conveying an interest overwhelmingly in both chambers, and Gov. in the property to a third party for economic Kaine offered mostly minor amendments. development. This paragraph does not However, one amendment exempts the apply to the taking of blighted properties as Norfolk Redevelopment and Housing defined by general law, nor to takings for Authority from the provisions of H.B. 2954 access by the owner to property. As used until July 2010 while that city builds a new in this paragraph, blight includes only the recreational facility. physical condition of the property taken. Washington: On April 17th, Washington Just compensation shall be paid and, if Gov. Christine Gregoire signed Substitute

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House Bill 1458 into law, requiring introduced in the 2007 legislative session governments to provide better notification but failed to pass. Another eminent domain to citizens whose property is condemned reform bill passed overwhelmingly in through eminent domain. Condemning the Texas legislature but was vetoed by authorities will now be required to send Gov. Rick Perry after a late amendment notices to property owners by certified raised objections from state and local mail in advance of the public meeting in transportation agencies; these agencies which they will issue a final decision on asserted that the amendment would a condemnation action. The bill was a expand landowners’ ability to demand response to a Washington Supreme Court compensation for diminished access to ruling that found that governments could private property during road projects, satisfy the state’s notice requirement by increasing the potential for litigation and merely posting notices of condemnation bringing billions in new costs. Finally, hearings on government Web sites. In eminent domain bills were still pending addition to certified mailings to property in Massachusetts, New Jersey, New York, owners, SHB 1458 requires condemning Ohio, and Rhode Island as of press time. authorities to publish advance notices of 3. California Likely to Face Competing Emi- public meetings in major area newspapers. nent Domain Measures SHB 1458 was unanimously passed by both houses of the Washington legislature. Despite the narrow defeat of Proposition Further eminent domain reform may be 90—the property rights measure on the on the legislature’s 2008 agenda. In January November 2006 ballot—the push for 2007, Attorney General Rob McKenna substantive eminent domain reform remains announced the creation of a task force to very much alive in California. In fact, review state eminent domain statutes and California voters will likely decide the fate recommend changes to the 2008 legislature. of at least two competing ballot measures on Wyoming: In March 2007, Gov. Dave eminent domain in 2008. Freudenthal signed House Bill 124, the Assemblyman Hector De La Torre legislature’s response to complaints that introduced a package of eminent domain Wyoming’s current eminent domain law legislation in May 2007 entitled The leaves landowners at a disadvantage in Eminent Domain Reform Act (EDRA) negotiations with industry and utilities of 2007/2008 that figures to be the main seeking their land. H.B. 124 requires vehicle for eminent domain reform this private companies to provide better notice legislative session. The package includes to landowners, engage in good faith both statutory changes and a ballot initiative negotiations, and pay fair market value that, according to proponents, would amend for private land taken by eminent domain the state constitution to prohibit state and for pipelines, utilities and other public use local governments from taking homes or projects. small businesses for private developers In other legislative news, eminent through eminent domain. Some of the most domain bills in four states—Arkansas, notable supporters of De La Torre’s measure Hawaii, Oklahoma, and Mississippi—were are groups that were strongly opposed to

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Proposition 90 and who funded much of the enough to protect private property rights. $14 million campaign against it, including According to an analysis of EDRA prepared the League of California Cities, California by the Institute for Justice, the Act “will State Association of Counties, labor unions, do little to prevent the actual taking of homeowner, and environmental groups. property in California—and this flaw is Among its provisions, EDRA would: fatal.” Assemblywoman and Proposition • Prohibit the use of eminent domain to 90 proponent Mimi Walters agreed: “This acquire owner-occupied homes and is just an attempt to placate the voters transfer them to another private person. who were outraged by the Kelo decision.” • Prohibit the condemnation of small Walters introduced a separate eminent businesses of less than 25 employees domain proposal—Assembly Constitutional and subsequent transfer to a private Amendment 2—in late 2006, though as of person, unless the taking is part of a press time the bill had still not been heard in “comprehensive program to eliminate committee. blight.” An analysis prepared by Pacific Legal Foundation attorney Tim Sandefur found • Allow small business owners to avoid that De La Torre’s legislation would offer condemnation by agreeing to make “virtually no protection for property physical improvements as part of an owners.” According to Sandefur’s analysis, urban revitalization project. deficiencies in the proposal include: • Give small businesses opting not to • Limited scope: The Act protects only participate in the revitalization plan “owner occupied residences,” not the choice of either relocating or selling apartment buildings, rental homes, their business. Businesses choosing to churches, farms, or investment property. relocate would receive fair market value Further, the proposal prohibits the for their properties, moving expenses taking of property for the benefit of up to $50,000, and up to three years of “private persons” but then fails to define compensation to adjust for higher rents “private person.” or mortgage payments. The owners • Weak small business protections: EDRA of businesses choosing not to relocate proponents claim that the Act protects would receive fair market value for the small businesses, but its protections property, though they could be eligible only extend to small businesses with less to receive 125 percent of the value of than 25 employees. Because California their business if it could not be moved law defines a small business as having and still remain economically viable. less than 100 employees, many small • Allow small businesses and homeowners businesses in California would not be the right to repurchase their properties protected. if they were condemned for a public use • Loopholes and vague legal definitions: that was ultimately never built. The Act’s protections would be Property rights advocates contend undermined by loopholes and weak that the new measure would not go far legal definitions. For instance, California

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law defines “blight” so vaguely that party, or transferred to a public agency for virtually any property can be declared the same use as that of the private owner. blighted and taken through eminent Former owners of condemned property domain proceedings. This is significant, would be offered an option to repurchase as De La Torre’s proposal allows for their property at the price at which it small businesses to still be taken as part was taken if the stated public use for the of a “comprehensive plan to eliminate property fails to occur. Reaquired property blight.” would be taxed at its pre-condemnation • No attorney’s fees: The proposal does value. not provide for attorney’s fees, so Further, property owners would be many property owners could find it entitled to compensation for temporary prohibitively expensive to defend their business losses, relocation expenses and property against eminent domain abuse. reimbursement of reasonable attorney If California lawmakers approve EDRA, fees under CPOFPA. It would also entitle the constitutional amendment would be property owners to immediate possession of placed on the ballot in 2008. If EDRA fails the compensation offered, while maintaining to pass, then the California League of Cities the right to challenge the fair market value has already submitted language to the state determination. Attorney General for a very similar ballot CPOFPA would also phase out existing initiative containing many of the same rent control restrictions on property owners provisions as EDRA. Supporters would once current tenants vacate the property. need to gather nearly 700,000 signatures to Finally, unlike Proposition 90, CPOFPA qualify it to go to ballot in 2008. does not include any regulatory taking Property rights advocates critical of provisions to compensate landowners the De La Torre and League of California for the impacts of land use regulations Cities measures are also planning to qualify that act to reduce the value of private an eminent domain measure for the 2008 property. Hence, CPOFPA would not affect ballot. communities’ ability to enact land-use The Howard Jarvis Taxpayers restrictions and enforce zoning ordinances. Association, California Farm Bureau Federation and the California Alliance to B. Measure 37 Rewrite Sent to Protect Private Property Rights submitted Oregon Voters language to the Attorney General’s Office in May 2007 for the California Property Since it was passed by 61 percent of Owners and Farmland Protection Act state voters in 2004, Oregon’s Measure (CPOFPA), a constitutional amendment 37—the landmark regulatory takings ballot measure that could be slated for the measure granting landowners the right June 2008 ballot. to seek compensation for (or exemptions Under CPOFPA, private property could from) land use regulations that restrict not be seized for economic development the uses of their property—has survived purposes, transferred to another private numerous legal challenges (including a

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2006 Oregon Supreme Court decision received to date, unless landowners with upholding its constitutionality), as well as already-approved claims have vested a sustained media attack from a variety of their development rights (through, interest groups interested in thwarting its for example, substantial financial implementation and dissuading other states investments in improvements) before from adopting similar measures. However, December 2007. bills passed during the 2007 legislative • Establish maximum caps on Measure session make significant changes to Measure 37 claims of between 3 and 20 homes 37 and would send a series of additional (depending on the property location and changes to voters via ballot measure. other factors), with a limit of 10 houses After several failed attempts early in in any contiguous block. the 2007 session to craft statutory changes • Place a maximum cap of 20 homes to Measure 37, the Oregon legislature on successful Measure 37 claimants, passed House Bill 3546B-Engrossed on a regardless of how many properties a party line vote in both houses, with Gov. landowner owns or how many claims Ted Kulongoski signing the bill in May they have filed. 2007. HB 3546B extends the period for governments to process Measure 37 claims • Expedite claims processing for Measure submitted after November 1, 2006 from 37 claimants who want to build three or 180 days to 540 days, after which claimants fewer houses, without requiring them to would be entitled to file civil lawsuits for prove losses in property values resulting just compensation. Bill proponents argued from land-use regulations. that the extension was necessary to give • Require existing claimants seeking to governments enough time to process the build between four and 10 houses to large number of claims (accounting for half demonstrate that the loss of property of the nearly 7,000 claims to date) filed value due to land use regulations equals immediately before the December 2006 or exceeds the value of the homes that deadline for retroactive Measure 37 claims. would be built. Measure 37 proponents counter that the • Prohibit home sites larger than two acres extension represents a de facto moratorium on high-value farm and forest land and on processing Measure 37 claims. HB areas with water shortages. 3546B also appropriated $100,000 from • Allows outside parties to obtain a the general fund to the state’s Department judicial review of Measure 37 claims, of Land Conservation and Development to opening the door for lawsuits and defray Measure 37 claim processing costs. lengthy delays in claim resolution. Next, in June 2007 the legislature passed House Bill 3540C, referring a package of • Prohibit any Measure 37 claims made substantial amendments to Measure 37 on property whose highest and best use to voters in a special election to be held was non-residential (e.g., industrial or in November 2007. Among its changes to commercial) at the time the challenged Measure 37, HB 3540C would: land use regulation was passed. • Invalidate all Measure 37 claims • Establish that Measure 37 waivers

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are transferable to future property C. Arizona’s Proposition 207: the owners; however, subsequent property New Standard for Regulatory Takings owners are required to build the homes Reform authorized by a waiver within 10 years of the conveyance. On November 7th, over 950,000 The changes proposed in HB 3540C, Arizonans voted to adopt Proposition if passed by voters, would effectively 207, one of the strongest sets of property invalidate the roughly 3,600 existing rights protections in the nation. Dubbed Measure 37 claims currently being processed the “Private Property Rights Protection and would radically alter Measure 37’s Act,” Proposition 207 was designed to provisions. According to State Senator counter the two biggest threats to private Roger Beyer, “[o]f the over 1,000 words in property rights—eminent domain abuse and Measure 37, almost 900 are gone…[y]ou regulatory takings—in one comprehensive can change terms, deadlines and groups package. In total, 65 percent of Arizona affected, but at the end of the day this is voters, and a majority in all 15 counties, still a repeal of Measure 37.” Oregonians supported Proposition 207. in Action (OIA) president and Measure 37 1. Provisions of Proposition 207 author David Hunnicutt vows to mount a campaign to defeat the legislative ballot The eminent domain reform component measure: “We are going to go forward, of Proposition 207 is a direct response to the tell the public what it does and doesn’t do U.S. Supreme Court’s 2005 Kelo vs. New and we are pretty sure the public will reject London decision and was drafted with input it—again.” from the Institute for Justice, the public The legislature also passed HB 2640 in interest law firm that defended Suzette Kelo the closing days of the session approving a in that case. Changes to Arizona eminent ballot title, vote explanation, and summary domain law include: for the HB 3540C measure, portraying it • Prohibiting the use of eminent domain as a way to protect private property rights for economic development purposes; while limiting large developments and • Narrowly defining the term “public use” protecting farmland, forests, and water to include only (1) use by the general resources. This responsibility typically falls public or by public agencies; (2) uses to the state Attorney General, but legislators involving the creation or functioning opted to deviate from that process. State of utilities; (3) acquisition to eliminate Republicans, who unanimously opposed direct threats to public health or safety; HB 2640, complained that the wording was and (4) acquisition of abandoned crafted to deceive voters into approving the property. measure. According to Hunnicutt, measure • Requiring determinations of “blight’ to proponents have taken a page from OIA’s occur on a parcel-specific (i.e., property- playbook: “What they’ve realized is, voters by-property) basis; in this state care very strongly about their right to own and use their property.” • Requiring that local governments must offer to locate and purchase a

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comparable home for landowners whose The November 2006 election primary residences are taken through demonstrated that a retroactive measure can eminent domain, though landowners be a tough political sell. Washington State’s may instead choose to receive monetary Initiative 933 was designed to be retroactive compensation. 10 years, opening the door to opponents’ The regulatory takings component claims that such a measure would undo requires government to compensate 10 years of planning mandated under that landowners when new land use state’s Growth Management Act. regulations reduce the fair market value By contrast, a prospective-only measure of their properties. Similar to Oregon’s has two key advantages: landmark Measure 37, Proposition 207 • It would undermine opponents’ claims gives governments an alternative to that the measure would generate a compensation—a waiver that exempts fiscal impact—if governments do not the landowner from the provisions of the impose any new regulations that infringe regulation(s) in question. Proposition 207 on property owners’ rights, then the exempts several categories of regulations measure will not impose direct costs to from its provisions: (1) public health government. and safety regulations; (2) regulations • The merits of a prospective-only measure that address historically recognized are easier to convey to citizens; they can public nuisances; (3) regulations to limit be assured that all of the laws currently pornography, liquor sales, and other adult- on the books will stay on the books and oriented businesses; (4) laws that establish that the regulatory takings provisions locations for utility facilities; (5) regulations would only apply to future regulations. adopted to fulfill a federal requirement; and The other key difference between (6) all pre-Proposition 207 land use laws. Proposition 207 and Measure 37 is 2. Contrasting Proposition 207 with Oregon’s that Proposition 207 has an explicit Measure 37 provision that any waiver issued in lieu While the regulatory takings provisions of compensation is transferable to future in Proposition 207 were modeled after property owners, as opposed to only Oregon’s Measure 37, it differed in two applying to the current landowner. Measure key ways. First, Measure 37 was designed 37 did not include such a provision, and to be retroactive to the point at which an the issue is still under litigation in Oregon. owner (or his family, if heirs) purchased Put simply, non-transferable waivers his property, while Proposition 207 was would essentially be worthless, as very few designed as a prospective-only measure. property owners would be in a position to While retroactivity has a built-in appeal finance development projects themselves, to property rights advocates interested in and lending institutions used to working offering relief to property owners already with established developers would find impacted by regulation, a prospective-only such independent ventures extremely risky. measure may be a more politically pragmatic Waivers that run with the land provide the approach in most contexts. mechanism by which landowners can ensure that the resale value of their properties

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captures the full range of development buildings and replace them with luxury rights, including those previously “lost” to condos. In response to complaints from regulation. some local NIMBY activists, the city Proposition 207 is now best regarded bypassed its normal procedures for historic as the state-of-the-art model for regulatory district designation (which would require takings reform, superseding Measure 37. approval from two-thirds of affected While the passage of Measure 37 stands property owners) and instead declared the alongside the U.S. Supreme Court’s 2005 area historic in November 2006—over the Kelo decision as the two most pivotal and objections of most affected landowners—to galvanizing forces in the property rights prevent Haskins from demolishing the movement in decades, Measure 37 was apartments for a year. After that, he would designed to address a very specific context. have been subjected to a far more onerous It represented the culmination of public plan review and design approval process. discontent with three decades of the most Haskins responded by filing a $40 aggressive form of land use regulation in the million lawsuit, claiming that under country—Oregon’s centralized, statewide Proposition 207, the city was lowering the land use planning system. By contrast, value of his land. City officials were quick Proposition 207 offers a reform model that to repeal the historic district designation may be more appropriate and viable in to defuse the issue. According to Phoenix states that have yet to experience the same Mayor Phil Gordon, “[the repeal of the degree of regulatory excess as Oregon. historic district] was on the advice of attorneys. I’ve got a fiduciary duty to the 3. Changing the Way Communities Approach citizens not to risk $40 million.” Haskins’s Land Use Regulation response to the repeal was especially blunt: In just the first seven months of “[the City] wanted to play Socialist Republic implementation, there have already been of Phoenix and got their hands slapped, several indications that Proposition 207 hard.” is changing the way Arizona communities Even the Arizona State Senate has had approach regulation and growth to factor Proposition 207 into its decision- management issues. making. In the 2007 legislative session, Sen. For example, in April 2007 the Phoenix Robert Blendu proposed an amendment City Council voted to repeal a historic to House Bill 2102 which would forbid designation it had placed on an area in counties from issuing building permits central Phoenix after being threatened for houses, churches and schools near with a Proposition 207 challenge from two auxiliary airfields of Luke Air Force an aggrieved landowner. Scott Haskins Base for safety reasons. Other lawmakers bought two blocks of World War II-era, countered that the denial of such building run-down apartments along the north side permits could run afoul of Proposition of McDowell Road in central Phoenix in 207 by potentially diminishing property 2006. Before paying $5.4 million for the values (even though Proposition 207 land, Haskins verified that the city’s rules contains an exemption for public health would allow him to raze the apartment and safety regulations), and the amendment

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subsequently failed. Many cities and counties have begun to Some observers predict that the first adopt waiver requirements as a precondition Proposition 207 lawsuit could arise from to rezoning and permit approval; however, a current land use controversy in Tuscon. there is a significant degree of variation in The Tuscon City Council is considering the both policy strategies and implementation adoption of a neighborhood preservation among local governments. overlay district designed to change the Some cities and counties, such as zoning in a ring surrounding the University Tucson, Marana and Pima County, have of Arizona to protect these areas from confined their approach to asking the the construction of new mini-dorms. property owner to sign waivers stating they The proposed overlay zone would place will not to sue the city for taking the specific more stringent restrictions on building action requested. Other cities are requiring heights, setbacks and lot sizes than those landowners to sign waivers before they contained in current zoning. A group of will grant routine approvals for activities property owners is opposing the creation that have little chance of reducing property of the district on Proposition 207 grounds, values. arguing that it would restrict the use of their Other cities, such as Apache Junction, property and decreased its potential value. are going much further by asking for In response to these potential legal property owners to indemnify the city ramifications, the City Council voted in against future Proposition 207 claims April to delay its decision on the overlay brought by others. In Scottsdale, one district until August 2007. developer attempting to gain approval for a new housing development complained 4. Cities Requesting Proposition 207 Waivers that the city asked him to sign a waiver that In early 2007, the League of Arizona would have required him to assume legal Cities and Towns began encouraging its responsibility for defending the city against member governments to require property Proposition 207 claims from future owners. owners seeking a rezoning or conditional When the developer balked, the city agreed use permit to sign waivers agreeing not to to change the language in the waiver. The seek future Proposition 207 claims for the city of Scottsdale has not yet decided on a action requested. This came in response formal policy of whether it will mandate to complaints from local government that applicants sign its waiver before representatives that Proposition 207 projects can be approved. contained a loophole that would allow a In April 2007, Peoria became the first property owner to request a rezoning and city in Arizona to mandate waivers as a then subsequently file a Proposition 207 precondition for project approval when it claim if the rezoning lowered his property adopted an ordinance clarifying Proposition value. Proposition 207 contains a provision 207. The ordinance outlines the conditions allowing agreements between cities and that constitute a legitimate claim, specifies property owners to waive diminution who is eligible to make them, and prohibits claims, forming the basis of the League’s the approval of projects in which applicants recommendation for a waiver requirement. refuse to sign a Proposition 207 waiver.

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D. Sustainable Development in Urban about urban development. Unfortunately, Planning: The Case for a Market- these benefits are rarely recognized in urban Based Approach planning or understood by professional planners. Markets efficiently aggregate and Sustainability has become part of the disperse information about resource scarcity orthodoxy of contemporary professional across national and global economies planning. Unfortunately, the concept itself through trade, often at lightning speeds. lacks a clear definition or focus, creating Nowhere is this more evident than in the opportunities for special interest groups technology sector of the economy. The rise to carry out their own goals. In many U.S. and fall of global giants such as Motorola, cities, “sustainable” development programs Microsoft and Apple Computer depend on have become little more than thinly veiled their ability to remain nimble and on the attempts to impose a radical environmental cutting edge of technological innovation agenda that limits consumer choice and since product lifecycles may last less than a market-based innovation. This doesn’t have year. to be the case. This contrasts with the slow, deliberative On the surface, sustainable development procedures that bog down public decision seems to be a noble goal—ensure current making where bureaucracy reigns (by resource use does not limit the ability of design, as a way to establish public future generations to meet their needs. accountability) and petty local politics can But what does this mean in practice? stop an innovative idea dead in its tracks for Unfortunately, policymakers have months and years. little concrete guidance for developing Indeed, the Achilles’ heel of sustainable workable sustainable development policies, development planning may be its failure particularly if they recognize the value to recognize the role markets and private markets, entrepreneurship, and private initiative play in fostering innovation initiative play in creating sustainable and ensuring new technologies spread to economies and communities. the broadest population base possible. In principle, sustainable development Innovation increases a society’s resiliency, can be achieved through any number of flexibility and capacity for self-correction. means; in practice, sustainable development Markets, not governments, were responsible has substituted highly centralized and for economic shifts brought about by new prescriptive planning for decentralized, technologies in the face of the rising scarcity market decisionmaking. Urban planning of “critical” resources such as wood and shifts decision-making about land use, urban whale oil, and virtually eliminated the form, energy use, resource conservation environmental impact of horse-drawn and environmental protection away from transportation in urban areas. market-based institutions toward political In the United States, sustainable ones. development planning is hampered The market has advantages over further by a strong cultural emphasis conventional urban planning as an favoring free markets and democratic rule, institutional basis for making decisions directly challenging the more top-down,

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centrally directed planning implicit in most 3. Recognize the institutional limits sustainable development programs. Market- of implementing sustainable development based sustainable development does not programs within a legislative decision- require either consensus or majority rule in making framework. Sustainable development order to progress. programs often attempt to take a Local community leaders, policymakers comprehensive approach to managing land and professional planners who want to development when in fact they have little encourage sustainable development policies control over many factors that influence consistent with property rights and markets urban development and growth. Professional should consider the following approaches planners and local policymakers should and strategies. adopt a more realistic and open-ended 1. Develop strong performance criteria approach to implementing sustainable for sustainable development. As in previous development principles by resisting the planning periods, planning activity, temptation to adopt specific technologies, regardless of outcomes, has often been strategies or approaches to meeting goals, considered evidence of its success. Cities such as mandating specific construction experimenting with sustainable development techniques or land uses. Moreover, planners programs, however, find achieving their and local public officials should be aware of goals difficult. The city of Santa Monica— the trade-offs implicit in their policy making. arguably the most aggressive U.S. city For example, encouraging public transit use adopting a sustainability agenda—has failed will likely increase commute times and urban to significantly reduce per capita water use, congestion, reducing the overall quality of life energy use, solid waste and wastewater for many people within the community. flows despite increases in recycling and 4. Embrace technological innovation as transit use. By making performance criteria a key component for achieving sustainable explicit, errors and problems with the development, recognizing that current framework will be more transparent and technologies are likely to evolve or become avenues for reform more evident. obsolete as resources become more or less 2. Adopt a realistic understanding of the scarce. Planners should avoid relying on way economic markets work. Prices convey straight-line trends to justify changes in important information about risk and public policy, particularly those changes scarcity and are much more dynamic than such as sustainable development that conventional planning recognizes. Planners attempt to fundamentally alter lifestyles and cannot possibly assimilate the amount of habits. Technology fundamentally changes information markets do on a consistent the choice set faced by different generations. basis. The key is for planners to recognize Planners are limited, as are economists, in and harness that information in order to predicting the future and anticipating the ensure the effectiveness of public sector needs of future generations. planning by complementing market shifts The above article is a summary of a forthcom- based on changing prices and industrial ing Reason Foundation study, Sustainable profitability. Planning has a poor record of Development in Urban Planning: The Case for overcoming market trends. a Market-Based Approach.

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Public Health and Safety

Contents A. Corrections Update B. Journal Releases 200-City EMS Survey

A. Corrections Update Representing a 13-percent jump would raise the prison population to a total of 1. Private Prison Population Nears 100,000 more than 1.7 million people. The cost to There are currently 264 private build and operate the needed capacity is correctional facilities in 34 states housing significant and leaves a clear role for the more than 97,000 inmates. While the bulk private prison industry to play. of inmates in private facilities are considered 3. Israel’s First Private Prison to Open in medium security, private prisons operate 2009 facilities at every security level. The Israeli Prison Service has announced Various federal agencies contract that it expects the 800-bed public-private for more than 30,000 private prison correctional partnership to be ready to beds. Immigration detention centers are receive its first inmates in 2009. The facility considered a strong growth opportunity is being built by Emerald Correctional for private facilities. More than 58,000 Management. According to the IPS, this beds are contracted at the state level. The privatization project will save Israel $83 remaining private beds are under county or million per year for the 25-year period of municipal contract. the agreement. That amount is almost a 2. Prison Population to Continue to Grow quarter of the cost of operating an identical A new report by the Pew Charitable Trusts facility by the state. suggests that U.S. prison population will Israel will join the United Kingdom, continue to grow. According to Public Safety, Australia, Canada (Province of Ontario), Public Spending: Forecasting America’s Prison New Zealand, South Africa, Germany, Population 2007-2011, state and federal France, Japan, Brazil, and the Netherlands prisons will swell by more than 192,000 in having at least one private prison. inmates over the next five years.

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Table 20: Private Prison Capacity by Facility Type Facility Type Male Female Either Total Prison 69544 2762 1289 73595 Detention Center 4356 300 5126 9782 Com./Rel. Center 497 0 1671 2168 Jail 0 0 5765 5765 Treatment/Educ. 1434 521 1950 3905 Mental Health 157 17 652 826 Non-Residential 0 0 1825 1825 Total - All Types 75988 3600 18278 97866 Source: Association of Private Correctional & Treatment Organizations www.apcto.org

Table 21: Private Prison Capacity by Security Type Security Type Male Female Either Total Maximum 7782 1298 7994 17074 Medium 56973 1749 2877 61599 Minimum 9795 388 857 11040 Residential - Secure 1263 260 888 2411 Residential - Open 599 172 1454 2225 Non-Residential 50 39 3428 3517 Total - All Types 76462 3906 17498 97866

Source: Association of Private Correctional & Treatment Organizations www.apcto.org

4. Texas Public and Private Comparison Con- comparisons using a new methodology of tinues comparing prototype facilities. While the The Texas Legislative Budget Board savings were not as dramatic, they were still (LBB) issued another two-year set of data significant at $2.67 per inmate, per day. comparing public and private prisons in 5. Two New Studies on Contracting for Perfor- Texas. This extends the best historical mance and trend data of the costs between public A January 2007 MTC Institute study, and private facilities as well as the impact Contracting for Success: Improving private facilities and competition can have Performance in Corrections, suggests that on a prison system. The average daily cost the debate surrounding prison privatization of operation in a government-run facility should not be about who is providing was $40.05 and $42.54 in 2005 and 2006 correctional services, but how well the respectively. Costs in private facilities provider is performing. Noting a general under contract in Texas were only $34.61 public frustration with growing correctional and $35.23, representing savings of 13.5 costs, the paper argues that correctional and 17.2 percent. Savings are even more performance needs to be front and center. dramatic when the operational costs of jails That correctional performance needs to are compared. be measured by established standards to The LBB completed a second set of produce desired outcomes; perhaps the most

Reason Foundation • www.reason.org 111 Annual Privatization Report 2007

critical outcome is preparing inmates to overview of the factors that should be rejoin society. weighed when a government is considering Naturally the paper notes the value privatizing a prison. The study provides of competition but focuses on how elected officials and public policy makers accountability can be built into operations. with a planning document containing For starters, the report argues that both detailed information about public public and private facilities should be policy issues (e.g., constitutional, legal bound by similar contracts or agreements. and financial), roadblocks, practitioner It outlines the following tools to improve considerations, and operational information performance: for entities considering contracted #1 Tool – The Contract or Agreement correctional services. Directs Performance The study is available at: www. #2 Tool – Monitoring Provides Essential mtctrains.com/institute/publications/ Oversight Contracting_Prison_Operations.pdf #3 Tool – Data Is Collected and Publicly Available B. Journal Releases 200-City EMS #4 Tool – Performance-based Budgeting Survey and Contracting The Journal of Emergency Medical #5 Tool – Staff Performance Evaluation Services released its 2006 Survey of the Systems Create an Important Linkage 200 largest cities in the United States The bottom line, according to the for emergency medical services (EMS) report, is that it is essential that programs operations. It’s no surprise that there and facilities be held accountable for the are three dominant forms of EMS service results they produce. Further, it argues delivery: public fire-based, private, and that simply spending money on education hospital-based service. Indeed, the public or career and technical training does not versus private operational model is a relative guarantee success—corrections departments 50/50 split and has become common for need to focus on programs that work. The years. Because of this, JEMS suggests this use of performance contracting elevates and presents an opportunity to stop arguing focuses the discussion on who can perform, over which operational model is best, and meet qualitative standards and outcomes, be rather focus on how to establish the best accountable, and limit costs to the taxpayer. EMS delivery system. However, in making The study is available at: www. this pronouncement JEMS ignores some key mtctrains.com/institute/publications/ data points in its own report. ContractingForSuccessReport.pdf First, JEMS examines the relative A second MTC Institute study response time of different models. The released at the same time, Contracting survey found that cities with public/private Prison Operations: A Plan to Improve partnerships used patient-centered models, Performance, serves as more of a “how- i.e., response time was measured from the to guide” for elected officials considering instant the patient called for help. About prison privatization. It provides an half of the pure private providers also used

112 Reason Foundation • www.reason.org Annual Privatization Report 2007

this methodology, whereas the other half a third higher operating budget than private used another methodology that begins once EMS services. Given that private EMS the EMS unit has been dispatched. Hospital services are able to operate at acceptable systems were more likely to include call performance levels on a third less budget is processing in their measurement. Fire-based significant. This suggests that the debate systems, by a margin of 2-to-1, ignored between which operational model is superior dispatch time and only counted travel time is far from over. in their calculation. Of the 100 largest U.S. cities only 33 Why does this matter? Call processing cities used private sector EMS, whereas and dispatch can take upwards of two 58 of the next 100 largest cities do. Large additional minutes. Therefore response cities generally have more powerful times may seem comparable, even though public employee unions, thus preventing they truly aren’t—or certainly are less contracting out from occurring. accurate than the patient-centered model. Given that more private and public-private Table 22: Ten Largest U.S. Cities with Private partnership operators use this method EMS suggests a higher level of accountability, Houston (partial) transparency and performance in their San Diego operations. Furthermore, under a San Jose contractual arrangement governments set Indianapolis (partial) performance standards—this could include Milwaukee (multiple operators) patient-centered measurement. Las Vegas Second, the annual operating budgets Portland between the models point to another major Tucson (partial) Albuquerque difference. According to the JEMS survey, Sacramento governmental EMS services average almost

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