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20th Anniversary Edition Annual Report 2006

Transforming Government Through Privatization

Reflections from Pioneers in Government Reform Prime Minister Governor Mitch Daniels Governor Mark Sanford Robert W. Poole, Jr.

Reason Foundation’s mission is to advance a free society by developing, apply- ing, and promoting libertarian principles, including individual , free markets, and the rule of . We use journalism and public policy research to influence the frameworks and actions of policymakers, journalists, and opin- ion leaders.

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Copyright © 2006 Reason Foundation. Photos used in this publication are copyright © 1996 Photodisc, Inc. All rights reserved. Authors

Editor the Association of Private Correctional & Treatment • Leonard C. Gilroy • Chris Edwards is the director of Tax Principal Authors Policy Studies at the • Ted Balaker • William D. Eggers is the global director • Shikha Dalmia for Deloitte Research— • Leonard C. Gilroy • Roger D. Feldman is a partner in the law firm of Bingham McCutchen LLP in • Adrian T. Moore Washington, D.C. • Amy Pelletier • Lawrence L. Martin, Ph.D. is a • Robert W. Poole, Jr. professor and director of the Center • Geoffrey F. Segal for Community Partnerships at the • Lisa Snell University of Central Florida in Orlando, Florida • Samuel R. Staley • Glen McDougall is a senior research • Adam B. Summers fellow at the School of Public Policy, • Steven Titch George Mason University and president of mbs ottawa inc. in Canada Contributing Authors • Dr. Francois Melese is a professor of • Baroness Margaret Thatcher was Prime at the Defense Resources Minister of and the United Institute, Naval Postgraduate Kingdom from 1979-1990 School in Monterey, • The Honorable Mark Sanford is the • Grover Norquist is the president of governor of South Carolina Americans for • The Honorable Mitchell E. Daniels is the • Barry W. Poulson, Ph.D. is a professor of governor of economics at the University of Colorado, • The Honorable Stephen Goldsmith, Boulder is the former mayor of , • E. S. Savas is a professor of public affairs Indiana and a professor of government in Baruch College of the University at ’s Kennedy School of New York of Government • Ronald Utt is a senior research fellow • John Blundell is the director general of for the Thomas A. Roe Institute for the Institute of Economic Affairs Studies at The Heritage • Paul Doucette is the executive director of Foundation Letter from the Editor Leonard C. Gilroy

elcome to Reason Foundation’s Annual Privatization Report 2006. Now Win its 20th year of publication, APR is the world’s longest running and most comprehensive report on privatization news, developments, and trends. Since the firstAPR was published two decades ago, privatization has continued its evolution from novel concept to a proven policy management tool that delivers higher quality services at lower costs and more efficient, effective government. This year’s 20th anniversary edition of APR recognizes the tremendous advances in government reform over the last two decades and features special contributions by several pioneering policymakers and researchers at the forefront of privatization and government reform, including Margaret Thatcher, South Carolina Governor Mark Sanford, Indiana Governor Mitch Daniels, former Indianapolis Mayor Stephen Goldsmith, and Reason founder and transportation director Robert Poole, Jr. We are honored to have them share their expertise and insights on privatization, competition, and government reform in this APR. APR 2006 also details the latest on President Bush’s efforts to bring more competition to federal programs, saving billions of taxpayer dollars in the process. The “Federal Update” also includes the latest news on federal program performance, military postal privatization, and a major government reform bill. The “Local and Update” section highlights two key projects in which Reason assisted local officials in developing plans to streamline government and save taxpayer dollars: the incorporation of Georgia’s first contract city (Sandy Springs) and the launch of a county-wide managed competition program in Hamilton County, . This issue also includes an expanded section on tax and expenditure limitations (TELs). Dr. Barry Poulson, distinguished scholar at Americans for , offers an update about the progress that states and local governments have made toward constraining the growth of government by enacting TELs similar to Colorado’s Taxpayer Bill of Rights (TABOR). This year’s APR provides a comprehensive overview of domestic and international developments in air and surface transportation, including the significant growth in highway tolling and the increasing use of public-private partnerships for toll projects. The “Surface Transportation” section includes a profile of Reason’s groundbreaking Mobility Project, our -term, nationwide effort to help stimulate urban by improving mobility and reducing congestion. Reason played a key role in the debate over California’s Proposition 82—the universal preschool initiative defeated at the polls in June—through an extensive research and public outreach program. The “Education” section includes a review of continuing state efforts to adopt universal preschool programs, as well as articles on school choice, the benefits of shared services, and child welfare privatization. For the first time,APR includes a section on the fast-moving arena of policy, featuring articles on the deployment of municipal broadband services, network neutrality, and video franchise reform. Our “Emerging Issues” section includes articles on policy strategies to speed hurricane recovery, foreign management of domestic infrastructure, the government pension crisis, government offshoring, and free-market alternatives to occupational licensing. The protection of private rights continues to be a hot button issue a year after the U.S. Supreme Court’s 2005 decision in Kelo vs. City of New . This APR features an update on reform in the states, as well as state-level efforts to replicate Oregon’s Measure 37, a voter-passed initiative designed to protect property owners from regulatory takings via land use . Your comments on the 20th Annual Privatization Report are important to us. Please feel free to contact us with questions, suggestions, or for more information. For more privatization news, check out Privatization Watch (www.reason.org/pw.shtml), now in its 30th year of publication. For the most up-to-date information on the rapidly changing privatization world, please visit our Privatization Center (www.reason.org/privatization/) and our weblog, Out of Control (www.reason.org/outofcontrol/). Leonard C. Gilroy, Editor Annual Privatization Report 2006

Transforming Government Through Privatization

Introduction...... 1 Privatization in Perspective ...... 3 Reflections from Privatization Pioneers...... 6 1. Rebuilding an Enterprise Society through Privatisation...... 7 by Margaret Thatcher 2. Reforming Government Through Competition ...... 10 by Governor Mitchell E. Daniels 3. Advancing Limited Government, Freedom, and Markets ...... 14 by Governor Mark Sanford 4. Privatizing to Improve Government...... 16 by Stephen Goldsmith 5. Reflections on 30 Years of Promoting Privatization...... 21 by Robert W. Poole, Jr. 6. Privatization: Past, Present, Future ...... 24 by E.S. Savas 7. Privatization: Are We Finally Turning the Corner?...... 29 by Ronald Utt 8. “Q” Privatised? James More Efficient?...... 32 by John Blundell 9. The New Public-Private Landscape...... 35 by William D. Eggers 10. The New Privatization: Applying Old Lessons to New Problems...... 39 by Roger D. Feldman 11. Privatization: Looking Backward, Looking Forward...... 42 by Lawrence L. Martin, Ph.D. 12. Cutting the Government in Half: Three Reforms...... 45 by Grover Norquist Federal Update...... 47 D. Driving More into the Classroom: A. Competitive Sourcing Continues to The Benefits of Shared Services...... 139 Expand...... 47 E. Child Welfare Update...... 142 B. Rating Program Performance...... 48 Emerging Issues...... 147 C. Senate Budget Committee Approves Major A. Rebuilding After a Disaster: Policy Budget Reform Bill...... 49 Strategies to Speed Recovery...... 147 D. Defense Board—Military Mail... 50 B. Foreign Management of U.S. E. Capping Federal Spending...... 51 Infrastructure...... 154 C. The Government Pension Crisis...... 160 Local and State Update...... 55 A. Local Privatization Update...... 55 D. The Truth About Occupational Licensing B. State Privatization Update...... 60 and Free-Market Alternatives...... 166 C. State Update...... 64 Environmental Services and Issues...... 174 D. State Revenue Boom Paves Way for Tax A. Update...... 174 Cuts...... 68 B. Supreme Court Issues Murky Decision in E. Surveying the Battleground on Tax and Wetlands Case ...... 178 Expenditure Limits (TELs)...... 70 Telecommunications ...... 182 F. TABOR at the Ballot Box...... 85 A. Why Governments Should Stay Out of G. Trends in Government Offshoring...... 86 the Telecom Business ...... 182 B. The Rise and Fall and Rise of Municipal Surface Transportation...... 89 Broadband...... 183 A. Why Mobility Matters...... 89 C. Network Neutrality Update...... 190 B. Reason’s Mobility Project...... 90 D. Video Franchise Reform Update...... 193 C. Surface Transportation Update...... 92 D. The Many Benefits of Telecommuting.....105 Growth and Land Use...... 199 E. Coming to America? A Cautionary View on A. Eminent Domain Update...... 199 Importing London-Style Congestion Pricing...... 110 B. Protecting Landowners From Regulatory F. Virtual Exclusive Busways: Houston Takings...... 202 Leads the Way...... 112 C. Do School Impact Fees Make Sense?..... 207 D. Denver Launches Permit Reform Effort.. 210 Air Transportation...... 119 A. U.S. Airport ...... 119 E. Privatizing the Inner City? ...... 211 B. U.S. Airport Privatization...... 120 Public Health and Safety...... 215 C. Global Airport Privatization...... 121 A. Privatizing Public Hospitals: A Win-Win D. U.S. Air Traffic Control...... 123 for Taxpayers and the Poor...... 215 E. Air Traffic Control Commercialization B. New Prison Cost Comparison Study in Policy: Has It Been Effective?...... 124 Arizona Flawed...... 223 C. Federal Privatization Study Demonstrates Education and Child Welfare...... 131 Privatization Success...... 225 A. Charter Schools Lead Efforts D. Axes Criminal Justice Policy Council, for Choice...... 131 Comparison Continues...... 227 B. School Choice Update...... 133 E. Book Review: Merchandising Prisoners—Who C. The Case Against Universal Preschool....136 Really Pays for Prison Privatization?...... 228

Annual Privatization Report 2006

Introduction By Leonard Gilroy, Editor, Annual Privatization Report 2006

n the two decades since the publication of political ideologies like and IReason’s firstAnnual Privatization Report, spread the belief that society’s governments of all political complexions have needs and problems are best addressed increasingly embraced privatization—shifting through government intervention. Statism the production of a good or the provision even spread to capitalist economies; of a service from the government to the for example, the British government private sector—as a strategy to lower the nationalized its coal, gas, rail, , costs of service delivery and achieve higher and steel industries, and the performance and better results. nationalized the facilities of the Tennessee Once considered a radical concept, priva- Electric Power into the Tennessee tization has largely shifted from an ideo- Valley Authority and adopted a number of logical concept to a well-established, proven government-run social welfare programs policy management tool. Policymakers (such as Social Security, Medicare, and from Phoenix to Prague, to , and Medicaid) under the New Deal and Great North America to the Middle East have used Society programs. As governments grew, privatization to better the lives of citizens by they increasingly constrained and offering them higher quality services at lower free enterprise, consumed an ever greater costs, delivering greater choice and more ef- share of personal and business income, ficient, effective government. Virtually every and restricted rights and government service—from local services like personal freedoms. road maintenance, public safety, and water The tide began to turn in the latter to national services like passenger rail, energy half of the century as the folly of this production, and social security systems—has approach became apparent through bloated been successfully privatized somewhere in the , sluggish economies, stifling world. Decades of successful privatization , and failing government programs. policies have proven that private sector in- , policymakers, and citizens novation and initiative can do certain things became increasingly interested in market- better than the public sector. based policy solutions to improve the For much of the 20th century, the trend efficiency and performance of government. was clearly in the opposite direction. This It is in this context that the concept of period saw the rapid expansion of state privatization began to flourish. control over the lives of citizens. Prominent

Transforming Government Through Privatization  Annual Privatization Report 2006

Reason’s Annual Privatization Report:

Twenty Years at the Cutting Edge of Privatization and Government Reform

or almost four decades, Reason Foundation Fhas worked to advance a free society by developing, applying, and promoting the principles of individual liberty, free markets, and the . In steadfast pursuit of this mission, Reason works at the forefront of privatization policy through its research, outreach, and publications like the Annual Privatization Report (APR). Reason Founder Robert W. Poole, Jr. with Margaret Now in its 20th year of publication, APR Thatcher has become the world’s longest running and What emerged in early 1987 was Privatization most comprehensive annual report on news, 1986, a report on the status of privatization to developments, and trends in privatization, date and important developments of that year. competition, and government reform. APR helps The publication garnered enough attention policymakers and leaders at all levels of government from policymakers that Messrs. Koch and Poole understand this fast-moving policy arena, determined that it was worth continuing. For highlighting tools and trends to help them improve subsequent editions, the report was re-titled the efficiency and performance of government and Annual Privatization Report. emphasizing best practices, problem- Reason owes a of gratitude to David solving, and structural reform. Koch, and APR would not have flourished without APR is the brainchild of Reason his commitment to market-based tools that enable Foundation Trustee , individuals, institutions, and societies to survive executive vice president of the and prosper. It is thanks to Mr. Koch’s vision and nation’s largest privately owned support that the Annual Privatization Report company, Koch Industries, Inc. has become the nation’s foremost publication During a 1986 visit from Robert on privatization, , and government W. Poole, Jr., founder of Reason Foundation, reform. Messrs. Poole and Koch engaged in a wide- In addition, the organization that has evolved ranging discussion on how privatization had into Reason Foundation would not exist without grown to become a global issue, largely due to the dedication and vision of Robert Poole. In the innovative, market-based policy programs 1978, Robert launched Reason Foundation to developed under the aegis of U.S. President advance the values of individual freedom and and U.K. Prime Minister Margaret choice, limited government, and market-friendly Thatcher. In that conversation, Mr. Koch proposed policies. He popularized the term “privatization” the idea of an annual report on the status and to refer to contracting-out public services, and his progress of privatization efforts around the globe, book Cutting Back City Hall (Universe Books, with a particular emphasis on privatization’s 1980) was the first book-length examination of the impact on U.S. public policy. subject.

 Reason Foundation • www.reason.org Annual Privatization Report 2006

Privatization in Perspective Over the years, privatization has taken Privatization as Societal Transformation many meanings. In its purest form, the term In 1969, famed man- refers to the divestiture of government- agement guru Peter owned assets like airports, rail systems, real Drucker published The estate holdings, and oil production facilities. Age of Discontinuity, As the concept has evolved, privatization in which he foresaw has grown to resemble more of an umbrella the transition from the term to account for greater private sector industrial age to the participation in the delivery of services. For information age. According to Drucker, example, over 1,000 local governments in this transition would be accompanied the United States—including Indianapolis, by profound, transformative change in Seattle, and Beverly Hills—have entered society, business, and government. One into public-private partnerships for water of Drucker’s predictions was that govern- services, contracting out the operations and ments would eventually “reprivatize” the maintenance of water systems to private state-owned industries in Europe, moving . Similarly, multi-billion dollar them back into the private marketplace. public-private highway, bridge, and tunnel The term reprivatize resonated so strongly projects are operating or under construction with Reason Foundation founder Rob- across the United States, in , ert Poole that when he began writing Canada, Italy, France, and other countries. about outsourcing municipal services in Regardless of the specific form it the early 1970s, he popularized the term takes, privatization introduces market- “privatization” to describe the concept. based competition into government where it otherwise does not exist. Competition benefits the public by offering expanded evolution from novel concept to choices, higher quality services, and lower idea, both in the United States and costs. Adrian Moore, Vice President of internationally. Some examples illustrate this Reason, offers a concise articulation of the point: benefits of privatization: • In 1986, air traffic control (ATC) services Privatization exposes things we were exclusively the province of national otherwise would not see—ideas, processes, governments. Today, over 40 countries in service delivery. Within have “commercialized” their ATC government rarely is success adequately systems since New Zealand launched this rewarded, and and new ideas trend in 1987, shifting the responsibility are often quashed. But when privatization for providing ATC services from the brings competition, accountability, and a national government to an independent chance for customers to have a say, then supported by user fees excellence and innovation are rewarded, and instead of government appropriations. mediocrity and failure are penalized. Benefits of ATC commercialization Since the firstAPR was published two include improved safety, improvements decades ago, privatization has continued its in service quality through increased flight

Transforming Government Through Privatization  Annual Privatization Report 2006

efficiency and delay mitigation, and performing specific functions. President lower costs relative to the United States’ Bush’s competitive sourcing effort is government-run FAA. saving taxpayers money; • According to a 2005 World report, over the last three years alone are 120 developing countries carried out expected to save approximately $5.6 7,860 privatization transactions between billion over the next few years. 1990 and 2003, generating close to • The FAIR Act inspired similar legislation $410 billion in privatization proceeds. in Virginia, and other states use it as a • When Margaret Thatcher was first baseline for determining which services elected prime minister in 1979, the are commercial and which should be British government still owned the coal, contracted out. steel, oil, and electricity industries, • In the last seven years, Florida state several auto companies, the telephone government has launched more than 130 system, and a major , among other government reform and privatization holdings. By the time of her resignation initiatives saving more than $550 in 1990, all had been privatized by million. That focus on management Thatcher. Under her , the excellence has also enabled more than rose from 19th to 2nd $20 billion in tax cuts during that same in the OECD rankings. Further, between time, and the number of state jobs has 1979 and 1997, among fallen from 127,000 to 113,000, an the British population had increased impressive feat that would have been from 7 to 23 percent, the middle class much larger if not for the addition of increased from 33 to 50 percent of the workers in education and public safety. population, and the homeownership rate • According to the National Solid Wastes increased from 53 to 71 percent. Management Association, the percentage of contracted solid waste collection Congress passed the Federal Activities and disposal services increased from 30 Inventory Reform (FAIR) Act in 1998. percent in 1987 to 54 percent by 2000. • According to the National Council for • Congress passed the Federal Activities Public-Private Partnerships, the average Inventory Reform (FAIR) Act in 1998, American city contracts out 23 of its 65 which classifies every federal job basic municipal services—such as road into categories, the most basic being maintenance, solid waste collection, and “inherently governmental” (activities water/wastewater—to the private sector, that can only be provided by government and states contract out approximately employees) and “commercial in nature” 14 percent of their activities. Further, (activities that can and are provided by a 1997 survey of 1,400 and the private sector). FAIR facilitated the counties by the International City/ adoption of “competitive sourcing”—a County Management Association process for determining whether the found that more than 90 percent of the private sector or government is the governments surveyed said they were most efficient and effective source for contracting out services that had been

 Reason Foundation • www.reason.org Annual Privatization Report 2006

done in-house just five years earlier. and many billions of dollars worth • Contract cities—cities that contract with of electromagnetic spectrum. It also outside public or private sector providers conducted competitions for the operation for major municipal services, such as of more than 100 airport control towers police and fire services, public works, and numerous military base functions. and building and safety—have continued It was also Clinton’s Environmental to grow in number since Lakewood, Protection Agency that declared public- California—a pioneer contract city—was private partnerships for water and sewer incorporated in 1954. Sandy Springs, systems a “classic win-win.” Georgia, incorporated in late 2005, is • Florida Gov. ’s Republican the latest contract city and the first new administration has opened more than city in Georgia in 50 years. Instead of 138 public services to competition, creating a new municipal bureaucracy, generating cost savings of at least $550 the city opted to contract out nearly all million and improved service delivery. government services. Inspired by Sandy Governor Bush also created the state’s Springs and impressed by its cost savings Center for Efficient Government, which achieved by contracting, citizens in four has developed a centralized process for nearby Fulton County communities evaluating when and where competition will hold elections in the near future on is appropriate, as well as assessing the cityhood, and feasibility studies for at competitions. least three more new Georgia cities are • During his term as mayor of currently underway. Indianapolis, Stephen Goldsmith, a • A LexisNexis search of the keyword Republican, identified $400 million “privatization” showed that the term in savings and opened up over 80 city appeared in 957 articles in major services—including trash collection, U.S. periodicals in 1986. In 2005, the pothole repair, and sewer services—to term appeared in over 20,000 articles, competitive bidding. As a result of suggesting a significantly increased Goldsmith’s leadership, Indianapolis media focus on privatization. is considered the municipal leader in competition and privatization. Privatization is not the domain of any one political party or ideology. In the United • Chicago’s Democratic Mayor Richard States, privatization is used by leaders of Daley has privatized more than 40 both major political parties, and they have services. In fact, he was so satisfied demonstrated that not only can politicians with the $1.8 billion privatization of at all levels successfully privatize public the Chicago Skyway—one of Chicago’s services, but they can get re-elected after major highways—that he is lobbying for doing so. For example: similar deals for city-owned parking lots • Under the Democratic administration of and the Midway airport. Pres. Bill Clinton, the federal government • When Democrat Ed Rendell, governor of sold the Elk Hills Naval Petroleum Pennsylvania, was mayor of Philadelphia, Reserves ($3.6 billion), the U.S. he privatized 49 city services, saving $275 Enrichment Corporation ($3.1 billion), million. The list of services privatized

Transforming Government Through Privatization  Annual Privatization Report 2006

included golf courses, print shops, • Mitch Daniels, governor of Indiana; parking garages, and prisons. • Mark Sanford, governor of South Looking abroad to number, size, Carolina; and type of being done in • Stephen Goldsmith, former mayor of other countries, it is clear that we have Indianapolis; barely scratched the surface in the United • Robert Poole, Jr., founder and States. Many federal government services transportation studies director of Reason and agencies that are being privatized Foundation; routinely in other countries are still firmly in government hands, such as Amtrak, the • Professor E.S. Savas, former assistant Social Security system, the Tennessee Valley secretary of the U.S. Department of Authority, the U.S. Postal Service, the air Housing and Urban Development and traffic control system, and the nation’s former first deputy city administrator of power marketing authorities. ; At the state and local level, there • Ronald Utt, senior research fellow at the is also tremendous potential for saving Heritage Foundation; taxpayers money and improving the • John Blundell, director general of the delivery of services. More than half of Institute of Economic Affairs in London; the U.S. population still gets its drinking • William Eggers, formerly with Reason, water from government agencies and then now global director for Deloitte gets its wastewater treated by government Research—Public Sector; agencies. There are still large numbers of municipal electric and gas utilities. And the • Roger D. Feldman, partner at Bingham United States has only just begun to tap the McCutchen LLP and former Chair of private sector for airports and highways, the National Council for Public-Private where dozens of other countries are already Partnerships; enjoying the savings and improvements. • Dr. Lawrence Martin, director of the In , the ideas of privatization and Center for Community Partnerships at competition have advanced a long way since the University of Central Florida; and Privatization 1986, yet there is still a long • Grover Norquist, president of Americans way to go. for Tax Reform. Reflections from Privatization It is impossible to look back on the Pioneers last 20 years of privatization without In this 20th issue of APR, we present acknowledging the leadership and a series of exclusive articles by the world’s dedication of these individuals in advancing leaders in privatization. Our contributors the idea of competition in government. include pioneering policymakers and Reason Foundation is honored to have researchers at the forefront of privatization them share their expertise and insights on and government reform, including: privatization, competition, and government reform in the 20th anniversary edition of • Margaret Thatcher, prime minister of our Annual Privatization Report. the United Kingdom from 1979-1990;

 Reason Foundation • www.reason.org Annual Privatization Report 2006

Rebuilding an Enterprise Society through Privatisation By Margaret Thatcher, former Prime Minister of the United Kingdom

ll too often the state is tempted into The policies we introduced in the Aactivities to which it is either ill-suited were fiercely opposed. Too many or which are beyond its capabilities. people and industries preferred to rely Perhaps the greatest of these temptations on easy subsidies rather than apply the is government’s desire to concentrate financial discipline necessary to cut their economic power in its own hands. It begins costs and become competitive. Others to believe that it knows how to manage preferred the captive customers that a business. But let me tell you, it doesn’t—as monopoly can command or the secure job we discovered in Britain in the 1970s when in an overmanned , rather than the nationalisation and prices and incomes strenuous life of liberty and enterprise. policy together deprived management of the But we understood that a system of free ability to manage. And when we came to enterprise has a universal truth at its heart: privatise and deregulate in the 1980s it took to create a genuine market in a state you some time before these skills returned. have to take the state out of the market. A system of state control can’t be made For Britain, the 1970s was a decade of good merely because it is run by “clever” decline: even worse than that, our people people who make the arrogant assertion seemed to accept it. Our nationalised that they “know best” and that they are industries were inefficient, overmanned serving the “public interest”—an interest and weakened by restrictive practices. which of course is determined by them. Government had no business being in State control is fundamentally bad because business. it denies people the power to choose and the We tackled privatisation in the way opportunity to bear responsibility for their which best suited us. own actions. First, we had to put the balances of the Conversely, privatisation shrinks the industries we wanted to sell in good order. power of the state and free enterprise Where redundancies had to be made because enlarges the power of the people. of overmanning we were determined to

Transforming Government Through Privatization  “We showed that privatisation worked.” Annual Privatization Report 2006

ensure that those who lost their jobs would necessary redundancies and to help build receive a sum related to the length of a modern effective industry in the private their service. For the first time in their lives sector. This recipe, also applied to other this put capital into their hands and each industries, offered a way forward in the industry helped them to find other jobs or worst cases. to set up of their own. Thus we We faced vociferous opposition, made clear our concern to look after those particularly when we came to privatise the who were losing their livelihoods as well as public utilities, but the facts show that they those who were staying on. too are much more efficient in private hands Second, I saw it as part of my purpose and that they have become some of our most to have a policy which extended ownership successful businesses. of capital more widely. It is most people’s Altogether, through our programme, ambition to have something to pass on to we demonstrated that we could rebuild their children. In doing so, we link the an enterprise society and we showed that generations and create a deep and abiding privatisation worked. It was better for interest in the future. I have already the consumer, better for the taxpayer and outlined how we achieved this goal for those better for the health of an industrial and leaving an industry, but we also wanted commercial country. Many others followed those remaining in the newly privatised our example. industries to have a greater stake. So we Indeed as put it: reserved a block of shares for employees Nationalisation, once all the rage, is out; which they could purchase at a discount. privatisation is in. And the followers of the Third, those companies which could not new are of , the right and all be floated on the were sold to hues in between. companies who were willing to buy them at Baroness Margaret Thatcher, LG, OM, PC, the best possible price. FRS was Prime Minister of the United King- Fourth, some industries were so dom from 1979 to 1990. Baroness Thatcher thoroughly outdated that they would have is widely credited with reviving the British cost too much money to modernize. Others economy, reforming outdated government such as shipbuilding had lost their markets institutions, and reinvigorating the nation’s as business had moved to the Asia Pacific. foreign policy during her term of office. By The subsidies required by our shipyards each successfully shifting British economic and year were equal to their entire wage bill, foreign policy in a free-market direction, her and we were told that we could not stop governments helped to encourage wider them because people would lose their jobs. international trends which broadened and Clearly we could not go on that way. Some deepened during the 1980s and 1990s, as shipyards had to be closed, others were the end of the Cold War, the spread of de- offered for “sale”. mocracy, and the growth of free markets It was an unusual type of sale, buyers strengthened political and were not asked to pay anything for the in every continent. land or for the plant. They were even offered substantial capital sums to cover the

Transforming Government Through Privatization  Annual Privatization Report 2006

Reforming Government Through Competition By Mitchell E. Daniels, Governor of Indiana

n a moment of apparent epiphany, Mario The orthodoxy of Big Government ICuomo is recorded as having said “It was so rigid that it produced some true is not government’s obligation to provide absurdities. Having built a $135 million services, but to see they’re provided.” prison, our bankrupt state government However sensible and straightforward this found it could not afford to open the facility notion seems, it remains heresy in much at the state’s cost of nearly $60/inmate/day. of American public administration. The Rather than accept private service provision Indiana state government our crew inherited within our state, Indiana left its white a year ago was still doggedly cooking its elephant vacant and shipped hundreds of own , cleaning its own buildings, prisoners to a in Kentucky. and running its own power plants. Six When our administration took the obvious departmental print shops sat side by side step of inviting private management to a few blocks from the nearest Kinko’s; the run our paid-for prison, our state reaped state owned one motor vehicle for every multiple pluses: we “brought our boys three employees. Predictably, dysfunction home” and began using the empty facility; and inefficiency were rampant. 300 Hoosiers were hired to replace the More than ineptitude was at work; Kentuckians guarding our offenders; and the shrewd was a central factor. On taxpayers saved $2 million per year. arrival, we found dozens of state employees The case for judicious private spending 100% of their time on public contracting rests, of course, not just on employee union business, zero for the superior efficiency but also on grounds taxpayer. By gubernatorial executive of sound philosophy: anything that order, 25,000 state employees were paying strengthens the private sector vs. the state compulsory union dues of almost 2% of is protective of personal freedom. And in their pay, money faithfully recycled into an economically struggling state like ours, political campaigns of the staunch union channeling more public dollars to private allies running state government. businesses can make a modest contribution

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to a stronger economy. We couple our authorized an immediate competition. privatization initiatives, and all government A well-established food service company procurement, with strong and unapologetic won most of the business, at a cost of 98 preferences for Indiana firms. cents per meal (nutritional quality and But basically our choices are driven by consistency improved, by the way, by the the duty of stewardship. We approach each terms of the contract). But, in one delightful activity with the question, “Assuming this outcome, the employees of one facility service is proper for government at all, what trimmed middle management, reorganized is the best way to deliver it?” Personally, their processes, and won the right to I never use the word “privatization”, continue while cutting a minimum of 30% because it connotes an orthodoxy of its from the previous costs. At this writing, own, a preconception that things should be they are doing even better than that, and done privately as a matter of doctrine, not seem sure to qualify for substantial bonus practicality. checks at the end of the fiscal year. Applying these approaches first at the We have applied the “Yellow Pages” federal level, as Director of OMB, and test (if you can find a service there, maybe now as governor, I’ve labeled our policy government should not try to do it itself) to “Competitive Sourcing,” to indicate that a host of activities, ranging from janitorial it is the cost-reducing, service-enhancing service (annual savings = $500,000) to debt power of competition that we seek to collection of delinquent taxes (achieving a capture for government’s customer, the return of 16:1). Next, we hope to contract taxpayer. Wherever possible, we encourage for the more accurate adjudication of and assist incumbent public employees to entitlement claims—Medicaid, food stamps, submit their own bids, and I confess to a welfare, and so forth—to improve on a special gratification when any such bid is the system where error rates average 25%, and winner. administrative costs are exorbitant while deserving citizens are left stranded in long Specializing in delivering a given product waiting lists. or service and spurred to constant Again and again these reforms improvement by competition and the demonstrate that people specializing in motive, people can achieve their goal better delivering a given product or service, than the best-intentioned administrators and spurred to constant improvement by of the best-organized government competition and the profit motive, can bureaucracies. achieve their goal better than the best- intentioned administrators of the best- Shortly after taking office, our new organized government bureaucracies. Corrections Commissioner asked me “Did To date, the most noteworthy of you know we’re cooking our own food Indiana’s new initiatives involved our in 26 separate kitchens, and we’re paying approach to transportation infrastructure. $1.41 a meal to feed the offenders?” “No,” In a problem almost universal among the I answered, “is that a lot?” “It only cost us states, we faced a shortfall of some $3 95 cents where I worked last” he said, so I billion, equal to ten years of new road

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construction at the current level, between a check in this amount and commence road-building needs and projected revenues. the largest building program in our state’s Meanwhile, a 40-year-old Indiana Toll history, while transferring the burden and Road across the northern part of our state the of running the toll road to the continued losing money and deferring private firm. At one stroke our seemingly maintenance and expansion, while charging insurmountable transportation gap will the lowest tolls of any comparable highway. be closed. Needed projects that have sat Tolls had not been raised in twenty years; around in blueprint stage for years will now at some booths the charge was 15 cents. become reality. The jobs generated by the (As the new governor, I innocently inquired construction alone will be measured in the what it cost us to collect each toll. This tens of thousands, and the permanent payoff being government, no one knew, but after in incremental economic activity should far a few days of study the answer came back: exceed that. “34 cents. We think.” I replied, only half Any will recognize our in jest, that we’d be better off going to the decision here as the freeing of trapped honor system.) With politicians in charge, from an underperforming asset, to neither sensible pricing nor businesslike be redeployed into a better use with higher operational practices were likely, ever.

As a faithful Reason subscriber, I was well aware of the growing role around the world of private capital in financing public infrastructure.

As a faithful Reason subscriber, I was well aware of the growing role around the world of private capital in financing public infrastructure. Without knowing what level of interest to expect, we offered to lease our toll road long-term to any interested operator willing to pay for the privilege. Independent estimates of the road’s Indiana Northwest of Times The / Gearhart Gregg Source: net present value in state hands ranged from $1.1 billion to $1.6 billion, the latter figure aggressively presuming that all future politicians, unlike all their predecessors, would raise tolls at least in line with . I had resolved that only a bid far in excess of that range would be worth advocating to my fellow citizens. In the event, we received a best bid of Indiana Toll Road looking west in LaPorte $3.8 billion. Upon closing, we will County.

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state that is home to hundreds of foreign- owned firms was lost on many Hoosiers. Over time, one hopes that a modernized, more customer-friendly toll road, coupled with the highly tangible benefits to our state as the proceeds are reinvested, will overcome misplaced patriotism. I often advocate policies of competitive sourcing as “antitrust for government,” appealing to Americans’ natural suspicion Toll booth on the Chicago Skyway. of bigness, whether in business, labor, or government. But the very best arguments returns. We viewed it as critical that the are usually pragmatic: which approach will

Source: Christopher Smith / The Times of Northwest Indiana Northwest of Times The Smith / Christopher Source: dollars liberated from one capital asset must get the food cooked, the offices cleaned, or all be reinvested into long-term capital uses, the roads built in the most effective way, at and not dribbled away on any short-term the least cost to taxpayers? operating purpose. However obvious from a business and However strong the philosophical case economic standpoint, this proposal touched for freedom and a limited state, it is the off enormous controversy and opposition relentless march of the evidence, through when proposed in the political realm. statism’s many spectacular failures, Many citizens, with a sincere sense of that has discredited Big Government in responsibility, misperceived that value was the minds of our ever-practical fellow simply being pulled forward from future Americans. years. Many have not yet understood that the state is being paid more than $2 billion More than a decade has passed since a more than the road conceivably would president who had just attempted the biggest have been worth in public hands. Far from expansion of American government ever “stealing from our children,” we have acted proclaimed “The era of Big Government is to leave our children billions in new public over.” However strong the philosophical assets—roads, bridges, airports—that they case for freedom and a limited state, it is the would otherwise not have enjoyed. Turning relentless march of the evidence, through down this deal would have been the real statism’s many spectacular failures, that has from the future. discredited Big Government in the minds But we almost did turn it down. The fact of our ever-practical fellow Americans, and that the winning bidder was an Australian- that furnishes the template for progressive Spanish joint venture struck many of my proposals of better ways forward against fellow citizens negatively, and this reaction our common challenges. emboldened a partisan opposition that The Honorable Mitchell E. Daniels is the united to almost defeat the necessary governor of Indiana. He previously served as enabling legislation. The irony of this “anti- the director of the federal Office of Manage- foreigner” argument in an export-dependent ment and Budget from 2001 to 2003.

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Advancing Limited Government, Freedom, and Markets By Mark Sanford, Governor of South Carolina

ny read through history demonstrates leverage in talking about how Thomas Ahow essential limited government Friedman’s new-found and so-called Flat is to preserving freedom and individual World necessitates limits to government. liberty. What life experience shows us is that The point we have made continually over limited government is equally important in the past three-plus years is that for our state both making your economy flourish and in to survive and thrive in this new competition enabling citizens to get the most for their of 6.5 billion people across planet earth, we investment in government. must make changes to our government cost Let me be clear up front that in the structure. long run the only way to make government Business principles trump ideology truly efficient is to make it smaller, and this in advancing limited government: As an seems to me to be the real clarion call in example, many of the successes that were highlighting the importance of privatization built into the $100 million in last year’s efforts. Efficiency and government are budget savings in South Carolina were mutually exclusive in our system, and if our sold by talking about business principles. Founding Fathers had wanted efficiency We argued that in the world of business, I suppose they would have looked more when your business model changes, you closely at totalitarian systems. They wanted change with it. South Carolina used to not efficiency, but checks on power in our institutionalize every mental health patient republic. in the state on a single piece of property, In attempting to advance limited but then the business model changed government, personal freedom and free and the number of patients our state markets over government fiat, here are a few institutionalized dropped from several things we have found in South Carolina: thousand to fewer than 200. Despite the Friedman, not freedom, sells: So much change, we continued to hold on to the of why we should limit government is tied $50 million piece of property. We made the to freedom, but sadly we have found greater business case, and pointed out that if the

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vastly underutilized property were sold, the Great Powers who talked about how there would be three : one to not foreign policy but, ultimately, economic mental health patients, another to taxpayers might was the driver of a nation’s viability and a third to children in the local school in the long run. district because the property would be back Finally, you can go back to the Ten on the rolls. Commandments to see warnings on Similarly, in the business world, you envy—on coveting what someone else has. constantly reshuffle the cards, from low Tragically, envy is part of human nature performers to high performers. Government and in some cases it can be used as a tool in doesn’t. The case in point for us was the attempts to limit government. We frequently port in Port Royal, which does less volume make the point that government shouldn’t in a year than the Port of Charleston does grow faster than the people’s pocketbooks in a week. We said let’s reshuffle the cards and wallets—and what we’ve found is and after a fair amount of consternation, people, when they compare their wallets the sale is now in motion. That’s been with the growth of government, nearly matched by our efforts to maximize always agree! return on investment to taxpayers through Long story short is that it occasionally privatization of things as wide ranging as gets lonely holding our in the the state-owned car fleet, golf courses and struggle between the growth of government even bait and tackle shops once run by state and freedom—and in advancing market- government prior to this administration’s based solutions in areas such as education arrival! or . And, as a consequence, I’ve There is no substitute for time and grown to that much more appreciate fellow focus: once said the soldiers in this greater battle for freedom. ultimate measure of government is what On this front, Reason Foundation has it spends. This is certainly not the only been a great partner in our efforts to infuse measure—but it is a very good place to a business mindset in government through start. As a consequence, we have spent a competition and principles, to lot of time digging into the budget—in fact, improve services and reduce costs—and ours is the first administration in South in our greater efforts to bring change to Carolina history to have ever produced an South Carolina. Congratulations to Reason operational executive branch budget. It is on 20 years of privatization success. The said in Washington that Presidents often 20th anniversary edition of the Annual get diverted and focused on foreign policy Privatization Report clearly establishes because it is seemingly a loftier issue. At the Reason’s role as the world leader in state level, there are a wide variety of things privatization and government reform ideas. to take a chief executive’s eye off budget The Honorable Mark Sanford is the gover- matters, but I think we all need to remember nor of South Carolina. He previously repre- the first real barometer on whether we are sented South Carolina’s 1st Congressional advancing the conservative cause of limited District in the U.S. House of Representatives government is the budget. It was Paul from 1995 to 2001. Kennedy is his book The Rise and Fall of

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Privatizing to Improve Government By Steven Goldsmith, Kennedy School of Government, Harvard University

he conditions facing the privatization simply implementing privatization. Thus, Tmovement today differ fundamentally the choices seemed more varied: Should I from conditions 30 years ago, when Reason sell the wastewater plants, contract out the Foundation first began documenting and operation of them, or keep the ownership analyzing this important shift in government and management inside government? management and policy. In the United Today, however, a mixture of private, States, local, state, and federal government not-for-profit, and government employees all deliver ever-increasing high-quality works together to produce almost every government services through third-party complex government service. The right and providers. The continuously declining ratio left continue to frame the public/private of government employees to contractors choice as a bilateral one, pitting private provides evidence of the of profiteers against lazy bureaucrats, but these this trend. At the same time, the public opponents miss the point entirely. Whether continues to witness all too frequent the issue involves welfare-to-work, roads, headlines touting examples of poor services, defense, or health, the solution requires corrupt or flawed processes, and personal sectors working together. Government abuses resulting from contractual services. monopolies cannot measure up; nor does This article looks at not only the the private sector provide optimum value inevitable future growth of privatization without the oversight of talented public but also why the term “privatization” is less employees. relevant today and how success should be Neither critics nor advocates should measured and ensured. Thirty years ago, evaluate success based on how much in the wake of the Thatcher initiatives, privatization has occurred; success should privatization often dealt with the ownership be determined by how well government of a public asset. In my tenure as mayor of performs as a result. The real test for those Indianapolis, though, I found that framing who advocate this process must not be the choices was more a matter of inducing whether government is smaller but whether competition for the delivery of services than outsourcing furthers better government,

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enhancing the quality of life and providing the foundation for a robust economy. The defenders of privatization must argue in units of public value: the more units of public value produced per dollar spent, the more successful the trend. Governments of developed countries face hugely complex problems, from providing homeland security to mitigating social ills, and must utilize delivery systems that do more than efficiently deliver antiquated processes. For government to move forward, private and not-for-profit providers need to contribute public value by providing solutions. For example, Mayor Anthony Williams of Washington, D.C. did not privatize the operation of an obsolete public hospital to reduce losses; rather, he worked with private and not-for-profit community health partners in order to achieve the true goal of “making better health” for citizens (Governing by Network, p.58). Governments of developed countries face Fundamentally, privatization will hugely complex problems, from providing increase because government simply cannot homeland security to mitigating social ills. successfully discharge all of its current and future responsibilities by itself. The horizontal problems with vertical solutions. stark reality, for better or worse, is that Inherently, public officials cannot run fast bureaucratic, “progressive” government can enough in their assigned places to deal with no longer produce enough good government these problems. and meet citizen demands with the money In addition to the increasing complexity available. Progressive government (now a of public problems, a rising imbalance misnomer) started 75 years ago as local and between citizen demands and available national reformers imposed bureaucratic resources will strain even the best-run “command-and-control” procedures in an operations. An aging population will attempt to reduce corrupt or patronage- demand health, pension, and nursing home infested governments. Progressives did indeed services that will exceed the most optimistic reduce corruption and abuse of discretion, projections of tax revenues. but they did so by eliminating discretion. Faced with complexity and service This arrangement ensures that as problems demand growth, government officials become complicated, government cannot must figure out how to better manage a keep up. In fact, traditional government government whose role is transforming processes struggle to solve complex from that of service provider to that of

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network facilitator; government is doing less officials apply in order to produce positive itself and more through third parties. Until results? Of course, external factors can government officials adapt and respond to provide momentum or create obstacles, but, this transformation, taxpayers will not get after competing-out 80 public services (and the results they deserve. As suggested in observing or advising dozens of officials Governing by Network, this new generation engaged in privatization), I highlight six of issues requires more than “privatization issues that if managed well will dramatically to save money,” which is worthwhile but increase the chances of success. Despite a not enough. It demands “outsourcing relatively strong foundation, the future of the as part of government transformation.” privatization movement depends on getting Outsourcing an antiquated system in order these issues right. to more efficiently deliver an outdated process skips the threshold question: What 1. Control Results, not Processes is the public value I am trying to add? Officials worry about the wrong things With the goal of adding public value when they focus on control. Public officials in mind, what rules should government stay wary of surrendering control of service delivery to nongovernmental agents and employees because they are painfully aware An Ominous Future? of the ultimate responsibility they have for An aging population will demand health, meeting public expectations. However, this pension, and nursing home services reasonable anxiety should take officials that will exceed the most optimistic down another track, one in which they allow projections of tax revenues. processes to be flexible but retain control over quality outcomes. Put another way, it Workers per Retiree is not so important whose uniform the meter 45 40 reader wears, but whether clean drinking 35 water—a public value—can be secured in 30 25 all parts of town for an affordable price. 20 The private sector produces, in a generally 15 10 agnostic way, what it commits to, so it is the 5 public sector that must impose the values. 0 1930 2004 2050 For example, how can both fairness and efficiency be achieved? How can access and State and Local Expenditures on Nursing Home Care be enhanced? And, how can privacy $45 and transparency be protected? Safeguarding these values is the responsibility of public $30 officials. and requires scrutiny and rule- making at every stage of the process, from $15 initiation to management. Governments that insist on spending all their management talent

$0 on the delivery system and not on larger 1990 1999 2001 2003 2005 2007 2009 2011 2013 values often get both wrong.

.

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2. Manage the Flexibility/ manager must be on-guard against using Accountability Tension extreme amounts of authority and control and mindful of how they are deployed. The new shape of government by network requires the management of 3. Articulate the Case for both flexibility and accountability. Not- Privatization for-profit and for-profit partners produce better results when they are free to use Strangely, often even bold public officials their talents to deliver services. These do not spend enough time making the case private partners should be given substantial for change. A full list of stakeholders, discretion because they are closest to the including the inchoate ones that will benefit problem or client. Micromanaging slows from change but do not yet know or believe down the provider’s ability to be responsive. it, provides a starting point. Usually, the However, private providers must remain immediate benefits fail to inspire, but accountable when they use public dollars. the immediate , including employee Clearly, too little oversight can also lead to displacement, energize opposition. In these problems, namely, cost overruns, services situations, taxpayer savings alone usually failures, and even scandal. Public officials do not carry the day. Documenting poor must allow flexibility in what is delivered customer service and weak infrastructure and how it is delivered, but accountability that will be improved will help garner the in terms of performance outputs and support necessary for privatization. outcomes. We based the Indianapolis privatization/ managed-competition strategy on a pro- growth agenda that was necessary to Fundamentally, privatization will increase generate private-sector jobs. City employees because government simply cannot and citizens came to understand that making successfully discharge all of its current and public units competitive with their private future responsibilities by itself. counterparts was the only way to decrease taxes and still offer better services.

I have observed this tension in my own 4. Establish Benchmarks Early work as chairman of the Corporation for National and Community Service, the quasi- Privatization initiatives often stir government parent of AmeriCorps and controversy. Even if the status quo is other programs. When one organization mediocre, change produces the prospect or out of thousands does something wrong, perception of loss—job layoffs, less human the natural tendency is to enact new interaction with providers (more automated that burden thousands of high- services), or cutbacks in service—and often performing grantees. Government agencies attracts strident critics. A favored media all too frequently act similarly—rather than technique involves finding something targeting the response to the individuals wrong with an outsourcing, even a highly or vendors in the wrong, they place new personal anecdote, and promoting it requirements on all partners, thereby through headlines as an example of failure. restricting flexibility. The innovative public While no approach will inoculate the

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innovator against this attack, an important public services through private-sector mitigation strategy involves carefully and agents requires some degree of aptitude accurately benchmarking the process before in negotiation, mediation, risk analysis, outsourcing: i.e., how long do people wait trust building, collaboration, and project in line to get their welfare checks? How management. Considering these factors in many trips to the motor vehicles registration advance will go a long way in ensuring that department are unnecessary? How much privatization results in public value. does it cost to fill the (proverbial) pothole? These metrics help both the public 6. Treat Public Employees Fairly relations aspect of an outsourcing and An official interested in government by the eventual contract monitoring, as the network can assume that a large percentage government must ensure that the private of government workers will respond provider is meeting the specified service well to appropriate incentives and good requirements. In addition, having accurate management. Indeed, many of these workers cost and performance data is crucial, not operate in very difficult environments with only to guard against low bidding by mediocre management, unclear performance vendors who later wish to modify their standards, and no reward for . contracts for greater profit but also to In a privatization initiative, communication counter understated or overstated in-house must happen early and frequently, and cost estimates. Finally, benchmarking helps affected unions and public employees have a foster realistic expectations about what the right to understand the rationale, direction, vendor can actually deliver. and range of possible outcomes. Clearly explaining options to existing employees, 5. Implement Successful Contract reassuring good employees about their Monitoring futures, and encouraging vendors to be open High-quality contract monitoring to continuity of will help to enables both good vendors and the public ensure success. at large to benefit from privatization. In Over the last two decades, privatization order to carry out this type of monitoring, has grown into a well-respected aspect officials must overcome a number of of government at all levels. But, as serious obstacles: inadequate knowledge outsourcings attempt to solve more complex management tools that restrict information problems and become more complicated to from passing easily from one sector to manage, the stakes will increase. Officials another, poorly conceived quality or service- who pay attention to these six issues will level agreements, too much prescriptive increase their chances of adding public value input oversight, too little output oversight, and garnering public support. and the inability to capture dynamic Stephen Goldsmith is the Daniel Paul changes. Technological tools allow private Professor of Government and director of the In- and government organizations to be merged novations in American Government Program at and managed as a seamless delivery system. Harvard University’s Kennedy School of Gov- The challenge lies in balancing the burden ernment. He also served as the two-term mayor of risk placed on each party. Managing of Indianapolis, Indiana from 1992 to 1999.

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Reflections on 30 Years of Promoting Privatization By Robert W. Poole, Jr., Founder and Transportation Director, Reason Foundation

n the early 1970s I read two books that 1976 Reason article about fire privatization’s Iwould have a profound effect on my success would lead to a very positive “60 career in public policy. In his 1969 book, Minutes” story two years later, the first time The Age of Discontinuity, Peter F. Drucker Reason hit the major networks. used the term “re-privatization” to refer to In the course of my work with cities the eventual return of nationalized industries and states, I encountered case after case of to the private sector. It was an electrifying privatized (or as we say today, “outsourced”) thought to a young libertarian, eager to public services, mostly in fast-growing shrink the state. And then I discovered Sunbelt states. A few political scientists William C. Wooldridge’s 1970 book, Uncle had noticed the phenomenon, and I eagerly Sam, the Monopoly Man. Here was a series snapped up UCLA and Indiana University of chronicles of entrepreneurs who had papers on the California contract-cities developed private-sector alternatives to phenomenon—newly incorporated cities set government services, some unsuccessful (e.g., up without service-delivery departments, ’s private mail company) relying largely or entirely on contracts with and others that were great successes. private firms and larger nearby governments In those (pre-Reason Foundation) years, (e.g., the county sheriff’s department) for I was working for a consulting firm in Santa their public services. Barbara that worked with city and state Yet the world at large seemed almost governments. On assignment in Phoenix, I entirely unaware of this phenomenon, and realized that right next door was Scottsdale, I was itching to make it better known. the largest client of one of the successful So when my friend and colleague Mark privatized services profiled in Wooldridge’s Frazier in 1976 challenged me to document book: Rural/Metro Corporation, a for-profit privatization of municipal services, and fire department company. How could I not provided a publishing opportunity, I pay them a visit? researched and wrote a 46-page handbook, In the course of that visit, I got to know “Cut Local Taxes—without Reducing founder and CEO Louis A. Witzeman, who Essential Services.” It was widely distributed became a good friend over the years. My by the National Taxpayers Union (on

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whose board Mark sat) in hopes of giving credibility to the budding grassroots tax revolt movement around the country. The booklet created enough interest that it led to a contract with Universe Books in New York for what became the first-ever book on privatization, my Cutting Back City Hall, published in 1980. Mark also made a deal with NTU to distribute a monthly column by me on these ideas to local newspapers around the country. Beginning in autumn 1976, it was called “Fiscal Watchdog.” It eventually evolved into the Reason Foundation’s Robert W. Poole, Jr. testifies at the United Privatization Watch newsletter. But even in States House of Representatives. its fledgling days as a newspaper column, “Fiscal Watchdog” (and the “Cut Local there was much talk of privatization in Taxes” handbook) had a much wider Reagan’s first term, but it never seemed to impact than I imagined. At some point in lead to any serious policy proposals. the late 1970s, I was contacted by a young After having done a few consulting Conservative Party local council member in assignments for people in the White House , John Blundell. He’d heard about Office of Policy Development, I finally municipal privatization in the United States made a persuasive case that the second-term and wanted some details. So I sent him the Reagan administration should at least try to assembled “Fiscal Watchdog” columns and develop a Thatcher-type privatization agenda. the handbook, and wished him well. Only So Reason Foundation helped to organize many years later did I learn that the booklet a White House seminar on privatization. he co-authored on the subject, “Reservicing It took place in late July of 1985, and it Britain,” had helped to introduce Margaret laid the groundwork for the creation of the Thatcher to the concept of privatization. President’s Commission on Privatization. Needless to say, watching the Thatcher And during the second term, DOT Secretary revolution of the 1980s dismantle the edifice Elizabeth Dole managed an all-out effort of state-owned industries and utilities in the that privatized Conrail (the northeastern United Kingdom was breathtaking—not freight railroad that the government had only the traditional targets of British Coal, nationalized some years previously) and Britoil, British Steel, British Airways, and divested the two Washington, D.C. airports (autos), but also the airports, from the federal government to a newly seaports, electricity, gas, water, and telephone created local airport authority. monopolies. As this grand strategy was Unfortunately, the federal government put into action, and with great political moves very slowly, so the President’s success, I was increasingly frustrated that no Commission was not appointed until 1987, comparable privatization agenda emerged which meant that its report appeared from the Reagan White House. To be sure, in 1988, at the end of Reagan’s second

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Presidents Who Privatize

epublican and Democratic administrations alike have taken the idea Rof privatization seriously. During his term, Ronald Reagan changed the nature of the debate over the size and scope of the federal government, leading to the establishment of President’s Commission on Privatization, the privatization of Conrail, and the divestiture of the two Washington, DC airports to a new local airport authority. Upon Reagan’s departure from office, privatization was a low priority in George H.W. Bush’s administration, but was subsequently embraced by the Clinton administration. In fact, the Clinton administration’s privatization successes exceeded those of Reagan. Under Clinton, the federal government sold the Elk Hills Naval Petroleum Reserves ($3.6 billion), the U.S. Enrichment Corporation ($3.1 billion), and many billions of dollars worth of electromagnetic spectrum, as well as the competitive contracting of more than 100 airport control towers and numerous military base functions. Further, a 1994 plan by Vice President Al Gore called for air traffic to be converted into a self-supporting government corporation, though the administration’s 1995 proposal to create the U.S. Air Traffic Services Corp. failed to get congressional support. In 2001, the Bush administration adopted the President’s Management Agenda, and one of its elements—competitive sourcing—has had a significant impact. Since 2003, agencies have conducted almost 1,100 public-private competitions for about 41,000 federal positions, generating $5.6 billion in cost savings over the next few years. Fixed costs and expenses to provide central direction and oversight between 2003 and 2005 totaled $211 million—better than a 27 to 1 return on investment; i.e., for every dollar spent on competitive sourcing, 27 were saved.

term. The many recommendations in the Despite the fact that we still have report were not embraced by the new government-owned electric utilities (TVA, Bush administration. Ironically, after Bonneville, and the rest), a government- languishing for more than four years, some monopoly post office, and a whole raft of of them were picked up by the new Clinton other government corporations, the worldwide administration, especially due to the work of embrace of privatization by governments of Vice President Gore’s National Performance all stripes over the past 20 years has been Review. Hence, the Clinton years saw exhilarating to me. If Canada can privatize the privatization of the Naval Petroleum its air traffic control system, France its major Reserve and the Helium Reserve, the U.S. highways, and China its and countless Enrichment Corporation, the Power other state-owned enterprises, I still have Marketing Administration, Sallie Mae, hope for privatization of the many remaining extensive spectrum , and a serious federal enterprises in the USA. effort to create a nonprofit corporation to Robert W. Poole, Jr. is director of transporta- take over air traffic control. tion studies and founder of Reason Foundation.

Transforming Government Through Privatization 23 Annual Privatization Report 2006

Privatization: Past, Present, Future By E. S. Savas, City University of New York

rivatization means relying more on the which first appeared in a dictionary in 1983. Pprivate institutions of society—the market, The profound change from the past role of the family, and voluntary groups—and less the private sector in public services was the on government to satisfy people’s needs. deliberate use of privatization to improve Privatization ultimately led to the founding the performance of government and, indeed, of the United States inasmuch as Queen of society by introducing competition and Isabella hired a private Italian contractor to alternatives in the delivery of public services. explore the western ocean instead of relying The first media notice of the idea of on the Spanish navy. But privatization almost which I’m aware was in 1970, when the New thwarted American independence: the British York Times featured a front-page story about hired contract troops, Hessians, to prevent the my plan, as First Deputy City Administrator colonies from breaking away. History is rich of New York, for an experiment in which with such examples, but a significant change in private firms would compete against the privatization took place in the last third of the city agency for garbage and trash collection. Twentieth Century. In 1971 Harper’s Magazine published my article, “Municipal Monopoly,” and in 1977 The Past the first two books on the subject (both by Governments have always used the this author) were published. One of those private sector for public purposes. They books and several research articles showed bought supplies from private firms: horses unambiguously that public garbage collection and trucks, desks and books, food for was 30 percent more costly on average prisoners, uniforms for soldiers. Public than collection by private contractors. infrastructure was also constructed by The National Solid Wastes Management private firms: roads, schools, courthouses, Association picked up these research findings city halls. All this long preceded the concept and heralded them to virtually every city, of privatization. The word “reprivatize” was town, and village in America in the late introduced in 1969 by the management guru 1970s; it played a vital role in arousing Peter Drucker, referring to the need to have interest in privatization by disseminating the private sector resume many functions the information to decision-making public that had been ceded to big government a officials that books and journals did not generation or more earlier. Robert Poole, Jr. reach. In the meantime, in 1976, Bob Poole, seized the term and coined “privatization,” the founder of Reason Foundation, started

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an invaluable newsletter—still published classifying government jobs as either monthly—that keeps readers abreast of commercial in nature, and therefore slated privatization happenings. He authored the for competitive sourcing, or inherently first solo-written book on privatization, governmental and exempt from competition. Cutting Back City Hall, in 1980. After that The Office of Management and Budget came a deluge of books and articles about conducted an inventory of 173,000 jobs in this new concept for improving government. 35 federal agencies in 2003 and found that 51 percent (88,000) were commercial. One The Present wishes that more details about individual Schopenhauer once said, “All great ideas A-76 competitions were readily available, but go through three stages: In the first stage, raw statistics show that 879 competitions they are ridiculed. In the second stage, they were conducted in FY 2003–04. They are strongly opposed. And in the third stage, covered 30,168 full-time positions and they are considered to be self-evident.” resulted in estimated net savings of $2.5 Privatization has reached the third stage. billion over three to five years. As is generally It is now a worldwide practice, adopted in the case, competition forces the in-house unit and dictatorships, developed and to improve its performance or see its jobs developing nations, and communist, socialist, outsourced. In fact the government agency and capitalist countries. In the United States won 90 percent of the competitions but only it is a routine management tool, employed at after it made large efficiency improvements all levels of government by Democrats and under the threat of outsourcing. Contractor Republicans, liberals and conservatives, and associations complain that in-house costs are black, white, and Latino officials. not calculated properly. The changed nature of public A different kind of privatization has administration is called “the New Public emerged at the local level: the private Management,” which recognizes a large role community. More and more of these for civil society and for market principles: private, voluntary, self-governing units are privatization, public-private partnerships, springing up, appealing to those who like choice, competition, , user charges, the features of such neighborhoods. In the and pricing strategies. They are all of a piece: meantime, some newly chartered cities are less reliance on conventional government tools. adopting the Lakewood Plan: private and The bipartisan nature of privatization intergovernmental contracts for most of their is illustrated by President Reagan’s sale of services and only a skeleton workforce. Conrail, the government-owned freight The difficulties of contracting under railroad, and President Clinton’s sale emergency conditions were highlighted by of Teapot Dome, the U.S. Enrichment the experiences in Louisiana after Hurricane Corporation, and a dairy owned by the Katrina and in . Large-scale fraud is easy U.S. Naval Academy. Vice President Gore in hectic circumstances and honest costs headed the National Performance Review, are inevitably high because many layers of in which privatization was prominently subcontractors are necessarily involved. featured. Private security firms in the United States President George W. Bush aggressively perform expedited screening of trusted pursued A-76 competitions, that is, travelers, and other kinds of security firms provide security for individuals and offices

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in dangerous areas, including Iraq. Overall, African-American community has shifted in the 1990 Gulf War there was one contract decisively in favor of school choice, diverging employee for every 50–100 soldiers; in the from its “leaders” who reflexively support Iraq War there are 10 for every 100. teachers’ unions that vigorously oppose it. One can list the imaginative ways that This augers well for continued growth in innovators are privatizing a vast array of charter schools and vouchers, as well as tax public activities, but space does not permit for private-school tuition and even that luxury. One can however, look ahead. home schooling. Mayor Anthony Williams of Washington, D.C., in desperation, provided The Future the breakthrough by endorsing a Republican With respect to social security reform, voucher plan for his city, saying that any President Bush’s plan did not gain enough change had to be better than the status quo. legislative support and neither did Governor Local government privatization seems to Schwarzenegger’s plan for the California be reaching a plateau in terms of outsourcing. system. Nevertheless, I have The average city contracts out about a enormous confidence that government will third of the 70 common city services and make the right decision—but only after it has growth is tapering off. In many cases the exhausted every other conceivable alternative. services like public works have After trying higher social security taxes, later already been extensively outsourced; those retirement, reduced benefits, and increased are services for which it is easy to write taxes of all kinds, a future administration good contract specifications and to monitor must ultimately produce a more privatized and measure contractor performance. But system. Deferred tax plans are already other services are also outsourced, such as proliferating; what remains is to make them emergency ambulances and social services. available to all workers and to displace much The latter are often contracted to nonprofit of the current social security system. agencies although these services pose more Costs are rising for all medical services difficult problems of assuring competition, in today’s malfunctioning health-care system specifying desired outcomes, and monitoring except one: cosmetic surgery—which is the performance. only part that is based purely on market Municipal services are frequently forces with no or government dominated by strong public-employee subsidies. Therefore I see a more privatized unions; therefore stronger political will—so health care system unfolding in the United often in scarce supply—is needed if further States, with medical savings plans, health- progress is to be made. Those unions are insurance vouchers for low-income families, getting very sophisticated in their opposition, and a variation of Governor Romney’s for example, pressuring public-employee compulsory health-insurance plan for retirement systems to disinvest in firms that Massachusetts. Countries proud of their provide privatized services. socialized health care are quietly allowing There is still ample opportunity in city, private medicine to return as their citizens county, and state governments, however, to complain about long delays and rationing of divest government-owned buildings and land medical care. and to form public-private partnerships to Recent opinion surveys show that the finance, design, build, operate, and maintain

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Another well-known example is the Business Improvement District (BID). Property owners, typically in commercial areas, form a corporation and levy a special property tax on all (collected by the state on their behalf) in their defined geographic area. The BIDs provide extra security and cleaning, and beautification through fancy street lighting, well-designed street signs and newspaper vending boxes, Even in liberal bastions like New York, Mayor trees, and plantings. They realize higher Rudolph W. Giuliani outsourced, divested, in their stores and increased property values. and privatized several municipal services. Adopt-a-highway, adopt-a-library, and adopt-a-school programs attract needed infrastructure such as high-occupancy private sponsors who improve services that toll lanes, roads, bridges, tunnels, airports, suffer from government . Cultural water systems, and government buildings. institutions were successfully encouraged, Mayor Rudolph W. Giuliani through a matching grant program, to seek demonstrated that there are many other ways more funds from donors and accept less from to introduce privatization even in a liberal the city; that is, the city partially withdrew bastion like New York. An examination from providing its costly support. of his accomplishments shows, besides These examples from New York might outsourcing and , numerous small profitably be emulated elsewhere. They privatizations carried out by a combination represent an expanded pattern of municipal of methods including municipal withdrawal privatization that goes beyond conventional or default and voluntary organizations outsourcing and . stepping in to take over and provide, in At the federal level, the greatest whole or in part, city services the groups opportunities lie in continuing the A- found wanting. For example, what is perhaps 76 competitions for activities deemed the world’s most famous urban park, Central commercial, and, even more important, Park, was judged by nearby (wealthy) privatizing the numerous federal residents to be poorly maintained and corporations: Amtrak, the United States managed, an example of municipal default. Postal Service, the Tennessee Valley They formed the Central Park Conservancy, Authority (TVA), and the power marketing raised funds for the Park, and soon entered administrations (PMAs) are the most into a contract with the city to manage attractive candidates. the Park; the city pays the contractor, but The large, continuing, and widely the latter raises four times that amount of deplored drain on the public purse by private money and maintains a much higher Amtrak suggests that this might be the standard than the city ever achieved. In first to go. New Zealand, Germany, The effect, the city outsources to a philanthropic Netherlands, France, and Denmark are well organization. This model has been adopted along on privatizing their postal services. In for other selected sites. the United States postal services are partly

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privatized: Federal Express, UPS, and DHL The role of government has evolved from a (which is majority owned by Germany’s hierarchical producer of services to a partner Deutsche Post) provide private mail services, with private organizations—outsourcing, but more privatization can bring large public-private partnerships, “third-party efficiency improvements. TVA and the PMAs government”—and is now becoming a have long outgrown their special status as facilitator, convener, and broker engaging government corporations; they can and the talents of all sectors of society and should be set free to make their way in the often multiple government levels. That is, marketplace. government now addresses many of its The welfare states of Western Europe policy objectives by involving and managing are stumbling toward , but external partners. The authors call this backward-looking economic chauvinism governing by network, because problems remains a force that weak politicians have transcend organizational boundaries. not tackled. Unless the move to free markets One can look ahead with hope to the is accelerated and the remaining state-owned gradual acceptance of Charles Murray’s enterprises are privatized, the countries are revolutionary proposal to transform doomed to continued economic stagnation entitlements. It is breathtaking in its as well as demographic decline. The post- simplicity. Instead of politicians gaining socialist states of , on the votes by dispensing largess through a other hand, emerging from the bleak past to multitude of particular benefits going to which they were consigned for four decades selected segments of the population, an and hardened by that involuntary experience, annual payment would go to every adult. are determined to avoid the errors of their This would be funded by eliminating all western neighbors. current transfer payments. Neither tax Free-market environmentalism can revenue nor total government spending also be expected to grow. It is the proven would decline, but government would be far private alternative to costly and ineffective less powerful in this better-balanced society, command-and-control schemes for protecting and the benefits would be enormous: a civil endangered species and habitats. To avoid society in which individuals live meaningful the tragedy of the , one can look and secure lives in an age of plenty. to the creation of more private, voluntary Both the Goldsmith-Eggers insight arrangements for “property rights” over and Murray’s vision fit the definition of animals, fish, and ecologically sensitive privatization cited at the beginning of lands—via auctions of cleverly designed this essay: Relying more on the private contracts to limit kills and catches and institutions of society and less on government via binding covenants to preserve natural to satisfy people’s needs. lands in perpetuity. Conservation banks, E. S. (Steve) Savas is a professor of public first created in 1995, now number 70 and affairs in Baruch College of the City University represent another approach to environmental of New York. He served under President Reagan protection for endangered birds and animals. as assistant secretary of the U.S. Department of Stephen Goldsmith and Bill Eggers offer Housing and Urban Development, and was first a compelling, expanded view of privatization. deputy city administrator of New York.

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Privatization: Are We Finally Turning the Corner? By Ronald Utt, Senior Research Fellow, The Heritage Foundation

ow odd it is that the United States , Japan, Britain, Australia, and Hcontinues to lag most other nations in others have all turned—with great success— privatization of government activities—the to the private sector to own, operate or process of shifting commercial activities from manage their passenger rail systems, the U.S. government ownership and operation to remains committed to the kind of socialist private sector providers. With government business model that Russia and other former involvement in our economy lower than most communist countries have been abandoning other advanced nations (36 percent of GDP since 1990. in U.S. compared to 55 percent in France Although the reasons for America’s slow and 45 percent in the United Kingdom in progress in shifting government commercial 2005), and where the virtues of operations to the private sector are many and competitive markets are openly endorsed and varied, chief among them is America’s by both political parties, the U.S. has yet to comparatively greater and prosperity embrace the concept to the extent that other that has allowed us to avoid making tough nations have. financial choices for the sake of budgetary Where Britain, Canada and 38 other savings that many other countries have had to countries have privatized or commercialized adopt and endure. So what if Amtrak loses their air traffic control systems, the U.S. $1.2 billion per year serving a tiny fraction maintains an inefficient and high cost of the traveling public? Unlimited access to government monopoly, whose overpaid global capital markets allows us to borrow worker force is now lobbying Congress for the money to pay the subsidy and avoid a a compensation package that would average rate hike for passengers, thereby burdening more than $200,000 per year per controller. future generations with the irresponsible self- Even worse is our warm and generous indulgence of those now in power. embrace of a socialist passenger rail system But are things changing for the better? (Amtrak) whose losses nearly match the Twenty years ago I had the good fortune to revenues it earns from ticket sales. Whereas be appointed by OMB Director Jim Miller

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to be the federal government’s first (and less than Reagan’s. Nonetheless, a few of last!) director of privatization at the U. S. the Reagan ideas quietly progressed—the Office of Management and Budget. With Naval Petroleum Reserve and the uranium the full support of President Ronald Reagan, enrichment program—and these were we proposed a bold agenda that included the ultimately privatized during the Clinton privatization of federal lands, Coast Guard Administration. rescue responsibilities, adjudication of But with the exception of a renewed federal tax disputes, the U.S. Postal Service, commitment to competitive contracting the Naval Petroleum Reserves, the U.S. within the federal bureaucracy (and Helium Reserves, the uranium enrichment some notable achievements including the program, and many others. I would like contracting out of FAA’s flight service to say that but for an obstinate, left-wing stations), the Bush II administration has Congress we would have quickly prevailed not pursued the kind of privatization and put the nation on a course of money- opportunities that have been proven saving, service-enhancing privatization; in successes in other advanced countries, point of fact, the most serious opposition to particularly in air and surface transportation our bold privatization agenda mostly came programs. Nor has the president revived from the people President Reagan appointed the position that I held—OMB Associate to run the many departments that comprise Director of Privatization—to ensure that the federal government. at least one federal official has full time Worried about congressional reaction responsibility for the program. Instead, and opposition from the civil servants responsibility is diffused throughout the who were opposed to any change in their government, and privatization becomes jobs, and who saw privatization as a threat everybody’s secondary concern, and not to their power and status, many of the much happens. president’s political appointees opted to protect their workforce from the competitive Indiana’s $3.8 billion windfall got the pressures that President Reagan wanted to nation’s attention, and many states are now incorporate into the federal bureaucracy. looking for ways to cash-in on the bonanza. Indeed, had it not been for OMB Director Jim Miller’s success in getting the president Although federal enthusiasm for to agree to devote time at one of his cabinet privatization has waxed and waned over the meetings to review each agency’s progress past 25 years, support for the concept has on privatization—thereby forcing action to been picking up steam at the state level— avoid embarrassment—the outcome would especially in highways where a number have been even less impressive. Despite this of states have embarked on ambitious clever gambit, agency opposition and foot programs in partnership with private sector dragging persisted and limited our progress, , builders and operators. Virginia, and much of what was accomplished Georgia and Texas have enacted legislation during the 1980s was undone during the to encourage private contractors and subsequent Bush I administration, whose investors to build new roads in their states enthusiasm for privatization was markedly in partnership with the state’s department of

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Because the user fees/taxes that fund most state transportation programs have been growing slowly in recent years, and voters and motorists have been reluctant to support an increase in taxes, many state (and federal) transportation programs have been experiencing funding shortfalls in comparison to their building and maintenance needs. With their traditional Texas has already received an offer of about options for new revenues shrinking or $7 billion for a new toll road. closing, more and more state transportation programs are adopting, or seriously transportation. Virginia’s program has been considering, different forms of privatization in operation for more than a decade, and in as a substitute for traditional construction recent years the state has received proposals and . from major corporations that, combined, Whether the growing interest in would provide more than $10 billion in privatized roads will spill over into other private money for new roads in the state. public programs and infrastructure remains Texas enacted a similar law a few years ago, to be seen. State transportation systems are and it has already received an offer of about generally self-funded with dedicated taxes $7 billion for a new toll road, while another and operate independent of a state’s overall group of investors has proposed a billion budget. As a result, financial shortfalls dollars for a new road in Georgia. confronting the transportation sector may Once some states became comfortable extend no further, in which case the pressure working with private investors to fund and to privatize may be isolated just on roads. operate new roads, the selling or leasing of Still, some of the recent successes existing roads to private investors was less are hard to ignore, and more and more controversial than would have been the case states will likely begin looking to convert had these transfers occurred in isolation. other tangible assets to cash that can be Thanks to this growing acceptance, both redeployed to meet public needs. Indiana’s the city of Chicago and the state of Indiana $3.8 billion windfall got the nation’s were able to lease existing toll roads to attention, and many states are now looking private /operators for a combined for ways to cash-in on the bonanza. sum in excess of $5 billion. As a result of Advocates of privatization should be these successes, a number of other states prepared to help them meet that goal. with potentially valuable toll facilities are Ronald Utt is a senior research fellow taking a closer look at converting their for the Thomas A. Roe Institute for Economic roads to cash to fund other public needs. Policy Studies at The Heritage Foundation. One reason these recent road Utt also served as former associate director privatizations and partnerships have of the U.S. Office of Management and Budget succeeded where others have failed has been during the Reagan administration. the financial necessity of such transactions.

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“Q” Privatised? James Bond More Efficient? By John Blundell, Director General, Institute of Economic Affairs

iven the British was the fans of the James Bond books and movies. Gprimary architect of the nationalisation Nobody doubted the scientific ingenuity of of so much of the UK economy, it is worth these units but it had not occurred to any remarking how the tide of privatisation has Tory Minister they could be brought to the risen so high the reinvented New Labour market. Given a radical overhaul, Quiniteq Party has not blocked further privatisations plc was floated on the stock market to and indeed has gone to areas where others acclaim. feared to tread. It has been bold where the As I write Mr. Blair is in a tussle with Tories were diffident. It has also adapted the producer groups to open up the state’s regulatory regimes to open previously closed near monopoly of hospitals and schools. markets. New Labour is trying to devolve decision- The UK Air Traffic Controllers were an taking down to local clinicians and break agency of the state that the Conservatives the hierarchical system of the National had funked reforming. Where Ronald Health Service. The Government is bringing Reagan had had in 1981 one of his in private companies to supplement or greatest victories, Mrs. Thatcher and her displace NHS units now deemed expensive team were reluctant to privatise these and slothful. The arrival of alternatives is functions. I think they were intimidated by impressive in its ability to confound long- the synthetic but real fears that air safety standing assumptions. might be compromised or even perhaps By a subtle process the dental profession sabotaged by militant unionists. Prime has been discreetly privatised by changing Minister Blair insisted that the tentative the contract of dentists with the NHS. proposals were conducted through to full Most British dentists are ceasing to be civil privatisation. servants and becoming private practitioners, Another remarkable New Labour sell off both screening services and specialist was the diverse Research and Development operations. I think it fair to say this is laboratories of the UK Ministry of Defence. something Mrs. Thatcher would not have These were the “Q” figures familiar to dared to attempt—nor .

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Technical innovations have changed much of the British commercial landscape. The British Broadcasting Corporation, a state body often “lovingly” called Big Bunch of Communists, has seen its superior status challenged and dissolved as first satellite then broadband and other “platforms” were Source:http://www.g8.gov.uk allowed to transmit. The BBC still exists, cozy in its protective cocoons, but it is now just another broadcaster amongst many albeit tax financed. There is no shortage of candidates for market principles to be applied afresh in Britain. The brilliant Macquarie Infrastructure Group of Australia constructed and now runs a significant chunk of the M6 Motorway, a prime British trunk route. The road system of the UK is Mr. Blair is in a tussle with the producer run by the state and impervious to price groups to open up the state’s near information...or rather pricing and timing. monopoly of hospitals and schools. The nominally hard Leftist regional regime in London, led by Mr. Ken Livingstone has imposed a “Congestion Charge” in Central Tony Blair is investing much of his London. This is a relatively crude innovation political capital in creating a network of but it has shown that something rare and semi-private schools which will be no part precious—road space—can be priced. of the local authority schools, which seem Central London’s roads flow much more to be as flawed as U.S. public schools. This freely and as soon as you leave the zone the is inviting the vehement hostility from the difference is startling. The Conservatives, for National Union of Teachers but the schools rather short-sighted tactical reason opposed that have opted out of municipal control road pricing throughout its birth but have seem to be prospering. Parents are clear— suddenly welcomed it on environmental they value them. We are still however far grounds. In my view it will be applied short of creating a true schools market. extensively after the next election. How odd The very first act of the new that we should be told to “Vote Green Vote government in 1997 was not quite to Conservative” while “Red” Ken delivers privatise the but to road pricing. instruct it to act autonomously. This was The Labour Government has not sold as bold and radical as Mrs. Thatcher’s off the Royal Mail, the state’s delivery very early decision to abolish exchange system akin to the U.S. Mail. It has not been controls. The setting of interest rates and privatised but its privileges have been lifted. other policy matters are no longer done on Rival postal services are entering a market command from the UK Treasury.

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property portfolio of the Royal Family, owns all the marine foreshore and estuarial acres of the country. The pace is slow but Defence, Commission, and Crown Estate are

Source: HM Treasury HM Source: selling off or leasing their vast estates. It would be false to depict New Labour as disciples of Mrs. Thatcher. Yet they do invoke the mantra word “reform.” Tony Blair seems to regard the public services as slothful and expensive and slow to experiment. For three successive elections, the once emboldened Conservatives have been as frozen as a popsicle when it comes to innovation. Perhaps a significant sign is the acclaim and respect afforded to by the heir apparent to Mr. Blair, the Chancellor of the Exchequer, Mr. Gordon Brown. He is particularly clear about the need for and is an unyielding critic of the with its protectionist and interventionist instincts. In a sense I fear more for the British Gordon Brown is particularly clear about Conservative Party’s attachment to liberal the need for free trade and is an unyielding economics. Its new leader has spoken out critic of the European Commission with its against “Big Business,” whatever that is. protectionist and interventionist instincts. He is adopting all the nostrums of Global Warming and prescriptions that I fear will handicap the market’s price signaling. He has from which they have been barred since an uncanny ability to latch onto every crazy 1660. My assumption is that a slimmed- green notion and bit of junk science going. down Post Office will be converted to a Perhaps an occasional appointment with company before the decade reality is the best ploy to teach politicians is out with a heavy bias towards shares what their options truly are. being given or sold at knock down prices There is no shortage of opportunities for to their staff. It is about the last place we liberalising British institutions but the pace of ever see strikes and they too will disappear. reform since 1979 has created a phenomenon We will be a no-strike country soon. that seems unstoppable and other nations are The British State is still a holder of now following. a vast portfolio of land. The Ministry of John Blundell is the director general of the Defence is the single biggest landowner Institute of Economic Affairs. He is a former followed by the Forestry Commission. In president of the Atlas Economic Research Foun- addition Estate, nominally the dation and the Institute for Humane Studies.

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The New Public-Private Landscape By William D. Eggers, Global Director, Deloitte Research, Public Sector

can’t say I was around for the Annual to develop and deliver all manner of IPrivatization Report’s inaugural issue but infrastructure, from schools and hospitals to I had the opportunity to help pull together roads and defense facilities. More than 100 the third one—and many more after that. new schools and 130 new hospital projects The world has changed dramatically since have been developed using private finance those early issues—the fall of the Berlin since the mid-1990s. Wall, end of the Cold War, rise of China The United Kingdom’s creative use and India—and so not surprisingly has of PPPs has produced a bevy of benefits: the privatization landscape. Four trends in faster construction, big gains in on-time particular define the new environment. and on-budget delivery, reduced lifecycle costs, better value for money, and a vastly Dramatic Growth in Public-Private improved overall investment climate for Partnerships infrastructure. When Tony Blair first became prime Prior to the PPP push, decades of minister, many analysts wondered whether neglect had resulted in deteriorated schools, or not the first Labor party prime minister hospitals and other public assets. The since the 1970s would undo much of introduction of private finance reversed the Thatcher reforms. was this trend, with £50B invested in capital rampant that many of the newly privatized infrastructure projects over the last decade, enterprises would be renationalized. These and a £26B expansion of Private Finance fears thankfully proved unfounded. Initiative (PFI) deals pledged this year. Prime Minister Blair surprised many Moreover, a 2002 U.K. audit office survey by building upon the Thatcher successes found that 78 percent of PPP projects to bring—for the first time really—private- were delivered on budget (compared to sector finance and innovation to bear on 27 percent of public projects), and cost the core businesses of government. Over overruns were far less frequent. the past decade, the United Kingdom has To be sure, there have been failures— become the world’s undisputed leader in both big and small—over the course of the using public-private partnerships (PPPs) hundreds of PPP projects delivered in the

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United Kingdom. In the face of these, many otherwise be unable to offer.” governments would have backtracked or Across the pond, in British Columbia, abandoned the enterprise completely. The 20 percent of all new infrastructure is now Blair/Brown government, however, didn’t designed, built and operated by the private “go wobbly.” They instead learned from sector. The United States has been slower each failure and used them as an opportunity to this party. However, with about half to continually innovate in the PPP models the states passing PPP-enabling legislation employed, developing more creative and in recent years and huge PPP projects flexible approaches. underway or planned in Texas, Florida, and elsewhere, some analysts predict the Traditional PFI states could soon become the world’s largest Projects over budget 73% 20% market for PPPs. Projects late 70% 24% Post Ideological Just as the Thatcher privatization program stirred governments around the Back in the mid-1980s when the APR world to sell off state-owned enterprises, the was first published, the concept of turning success of the Blair PPP program has inspired over public services or infrastructure to imitators the world over. In India, for the private sector was strongly associated example, the once-socialist Congress party with center-right parties and politicians like government has targeted $30 billion in new Ronald Reagan and Margaret Thatcher. infrastructure to be done through PPPs over the next five years. In Europe, the volume of PPP deals is doubling, tripling and even quadrupling year to year in many countries. One hotbed is Ireland where over 100 water and wastewater PPP projects are either operational or in construction and planning. Meanwhile in the emerging democracies of Central Europe, public-private partnerships are becoming the delivery model of choice for new infrastructure, with governments viewing PPPs both as a way to complete projects on time and on budget, and as a means to attract foreign investment. Explains Prime Minister Jiri Paroubek: “Just like any other , we are trying to multiply the economic potential of the Czech Republic and implement projects for which the public sector alone has neither the strength nor the Center-right parties and politicians like Ronald resources. We are striving to make services Reagan led the charge for greater private accessible to taxpayers that we would sector provision of government services.

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Not anymore. Since then center-left levers of public value inside the web of (often Labor) governments in Australia, multi-organizational, multi-governmental New Zealand and the United Kingdom and multi-sectoral relationships that now have championed far-reaching PPP and constitute modern government. The issue privatization programs. Meanwhile, in the is how to conceptualize, configure, and United States, Democratic politicians such manage a network of public, private and as former Virginia Gov. Mark Warner and nonprofit providers in a way that produces Chicago Mayor Richard Daley outsourced more value for citizens for each dollar spent. major areas of government and pioneered Government by network has become partnership approaches for infrastructure. a fixture at every level of government in All in all, private provision of public services nearly every area of the public sector, from has been increasing relative to government —where a network of nonprofit and delivery for decades in every region of the for-profit providers delivers all foster care world regardless of which party is in charge and adoption services—to the battlefield at the time. in Iraq—where the U.S. military relied on The result: a far more pragmatic and thousands of contractors to do everything sophisticated view of private involvement from maintain computer systems to set up in public services has come to the fore. The base camps. polarized and simplistic debates about the The U.S. Department of Interior’s pros and cons of privatization or contracting new partnership model illustrates the out government services haven’t completely networked governance trend. Deputy gone away, but thankfully they’re becoming Secretary Lynn Scarlett, a former Reason increasingly rare. Foundation president, has spearheaded a major transformation in the agency Emergence of “Governing by toward a heavy reliance on partnerships, a Network” philosophy of leveraging non-governmental The post-ideological phase we’ve entered organizations to enhance public value, and means that the important question is no varied and innovative business relationships. longer whether a service should be delivered At the 76,000-acre Golden Gate National by a private or a public player. The question Recreational Area (GGNRA), for example, now is how the sectors, including nonprofit partnerships are so extensive that National groups, should be arrayed and managed Park Service employees constitute only to produce the best public services. In a 18 percent of the workforce; partners, book I co-authored in 2004 with Stephen concessionaires, contractors, cooperative Goldsmith, we term this development associations, and volunteers compose the “Governing by Network.” other 82 percent. GGNRA’s partners have In this model, government executives contributed more than $100 million in redefine their core responsibilities from capital improvements to the park. managing people to coordinating resources for producing public value. Government Choice Movement agencies, bureaus, divisions, units and Governing by network represents the offices become less important as direct confluence of several important trends; one service providers and more important as is the growing number of governments that

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are injecting choice into public services. The services by itself is no panacea. Newspaper provincial government in Alberta, Canada headlines reveal the serious difficulties now offers parents a wide range of publicly governments often have getting this right. funded schooling options including online, In Iraq, private-sector involvement has public, charter, and private. Meanwhile, been critical but also at times controversial. state governments in the United States are Atlanta’s effort to outsource wastewater beginning to shift job training, elder care, treatment failed miserably. And in mental health, education, and other services Kansas, two large, venerable nonprofits to choice-based approaches. South Carolina’s went bankrupt as a result of too much new Personal Choice proposal establishes risk-shifting in the state’s child welfare personal health accounts for most of the privatization. state’s 850,000 Medicaid recipients, allowing Figuring out how to avoid such failures beneficiaries to customize the healthcare they and better manage a government to do less receive to suit their individual health needs. of the work itself has become one of the Across the pond, the U.K. National Health central public management issues of our Service, public schools and social services time. Management must move to center are offering increased consumer choice, stage. Holding providers accountable and along with more diversity and competition measuring and tracking their performance among service providers. Propelling these has to become a core government initiatives forward is the belief that letting responsibility that is as, or perhaps even people choose encourages a greater diversity more, important than managing public of providers, which in turn allows for a employees. better match between citizen preferences and The government’s ability to meet the services received. Choice can also help its obligations depends on both sides improve service quality by weeding out poor understanding that a profound change is performers and driving competitors to deliver occurring in how governments fulfill policy a consistently higher standard of care. goals. If this change is managed well, we’ll The choice movement builds on a have a new model of government that steadily emerging post-World War II protects the public better but produces less trend: government funds and sets the rules itself, focuses on goals instead of processes, for safety nets while injecting market- and harnesses the dynamism, efficiency, and based creativity and freedom into the flexibility of the private sector. And that, delivery of those services. Instead of inputs ultimately, can only lead to greater public and processes, government focuses on good. accountability, rule setting, and outcomes, William D. Eggers is the global director such as a quality education. Watch for for Deloitte Research—Public Sector. He is continued growth and innovation in this the author of Governing by Network: The New area. Shape of the Public Sector (Brookings, 2004) and Government 2.0: Using Technology to Lastly, a Cautionary Note Improve Education, Cut Red Tape, Reduce Reformers need to acknowledge that Gridlock, and Enhance (Rowman greater private provision of government and Littlefield, 2005).

38 Reason Foundation • www.reason.org Annual Privatization Report 2006

The New Privatization: Applying Old Lessons to New Problems By Roger D. Feldman, Partner, Bingham McCutchen LLP

rivatization’s most important future role exchange for finely tuned governmentally Pis in the national energy and security negotiated project acceptance and fields. The basis of this New Privatization performance risks. challenge lies in its evolution over the past Privatization/public-private partnerships two decades. continue to emerge throughout the Twenty years ago, “privatization” infrastructure world, albeit glacially. was about dismantling or “reinventing” The rearguard defensive action of public government, depending on whom you employees has been supplemented by the asked. In either case, it involved letting determined defense of the public treasury privately performed personnel or businesses and dogged efforts to shift public risk to the relieve government of its growing pseudo- private sector through the efforts of public commercial role, in such key agencies officials guided by very diligent counsel. as national defense. Privatization was Some efforts to achieve public/private philosophically linked with deregulation: partnerships expired or lumbered into it too involved removal of “unnatural” limbo. We are now seeing a resurgence in government constraints on the operation of fields like transportation where project costs markets in areas like energy. The resulting exceed public budgets and the will to tax “city on a hill” would be better, because directly. whatever was done by it would be operated Today, the national challenge has shifted: more efficiently and its resources would be in a physical security sense and in terms of more productively allocated. the sustainability of our energy resources, Privatization then moved into a “public- we are a nation at risk. We are all suddenly private partnership” phase, particularly in a maelstrom together. And when that in the infrastructure development and happens, throughout history, there is always operation sphere. This has proved to a cry for stronger central government. involve an on-going struggle to entice Confidence in private marketplace solutions private developers to accept the carrot of to serve the commonweal, as opposed to government-compensated concessions in private providers’ interests, tends to wane

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When systems fail, if only because of the technical complexity involved, and the eggshell is broken, the yolk is on us. Only Katrina isn’t laughing.

rapidly. The need for dramatic innovation Nowhere is the need for effective seems to cry out for the risk-taker or collaboration clearer than in the areas of regulator who will go where no single profit- introduction of “distributed generation” and driven enterprise can independently take “renewable resources.” . The significant unremarked The nervous system of our nation is problem is created of the headstrong “public made up of many “critical nodes” that flip entrepreneur” who sees insufficient longer- on and off in response to predefined decision term danger in the suspension of markets. roles and user commands. It is ultimately Therefore now, more than ever, in the energy-driven. Not only do we have mas- nation’s most critical areas—security and sive national grid and pipeline networks, we energy—we need public-private partnerships have hyper-reliability-sensitive computers that link the capabilities of government to and communications switches. That system affirmatively provide governance effectively in America is to a large extent serviced, at and of private entities to achieve the the macro level, by our oldest public-private performance levels identified by government. partnership, “public” utilities regulated by

40 Reason Foundation • www.reason.org Annual Privatization Report 2006

“ commissions” and our newest goals (taking into account national policy federal effort of regionalizing electric system requirements) can be set. Private action, operations, so-called “Regional Transmission overseen by enlightened public regulation Organizations.” In the event of natural or and an emphasis on civic cooperation, is the man-made emergencies, all the king’s horses necessary combination to perpetuate these and men cannot hold this thin-shelled sys- aspects of American security. tem together. And when systems fail, if only So looking back at privatization over because of the technical complexity involved, the past 20 years, I come to the following and the eggshell is broken, the yolk is on us. conclusions: Only Katrina isn’t laughing. • It was good the battle was fought; it The technology to enhance operating broke the ground for ideas for future energy security exists. It needs to be es- action; tablished on a distributed basis that corre- • We face a new and stronger struggle sponds to our modern telecommunications- with a higher ticket: national survival linked (and vulnerable) society. Government (perhaps the way Margaret Thatcher needs to respond to this fact by finding saw privatization in the 1980s for the ways to tap from the private sector the new U.K.); technologies (some of which, happily, can also be lower polluting and many of which • To fight that struggle requires learning do not use foreign fuels) to deal with this from our recent history, saving the best problem. of government but making sure it guides In addition to taking up this physical private innovation into new markets, vulnerability challenge, government needs thereby reducing the vulnerability of help to reduce reliance on insecure fuel our systems or making possible needed supplies. Under the Energy Policy Act, changes and improvements to national Congress sought to direct public capital and fuel patterns. resources to stimulate private solutions to In short, the privatization we helped public problems through use of bio- and build over the past 20 years will have earned coal-based fuels. Less emphasized was the its place in American history if it provides need to open up regulatory bottlenecks and the foundation for an enlightened New private inertial resistance to the national Privatization effort which responsively and consumption of these fuels. blends public and private initiatives. That, New public-private interstate networks vital I believe, is the challenge for those of us to the American future need to be fostered. who were present at the first “birth” of In short, new public-private partnership privatization. formats to foster distributed power and Roger D. Feldman, a partner in the law domestic renewable energy use are needed. firm of Bingham McCutchen LLP in Wash- Policy innovations can draw from the ington, D.C., was one of the founders of The lessons learned—some better from the Privatization Council and long time Chair of trying experience over the last 20 years— its successor, The National Council for Public- both as they relate to the question of who Private Partnerships. should do things and how performance

Transforming Government Through Privatization 41 Annual Privatization Report 2006

Privatization: Looking Backward, Looking Forward By Lawrence L. Martin, Ph.D., University of Central Florida

an this really be the 20th anniversary to this special 20th anniversary issue and Cof Reason Foundation’s Annual that privatization will be addressed from Privatization Report? It seems like only a number of perspectives, I would like to yesterday that Reason Foundation began its focus my comments around three specific quest to bring research and policy analysis areas. First is the general acceptance of to bear on the then still relatively new privatization by public managers today. phenomenon of privatization. Twenty years Second is the continued equivocation of ago was also just about the time the term academics and scholars on the question: “privatization” first entered the popular Does privatization work? And third is the lexicon. While the concept of privatization issue of privatization and partnerships. had bounced around for a few years, it was the increased public attention created The General Acceptance of Privatiza- first by Prime Minister Margaret Thatcher tion by Public Managers (1979-1990) in the United Kingdom and Two indicators of the general then by President Ronald Reagan (1981- acceptance of privatization by public 1989) that put it firmly on the public policy managers today are the decline in anti- agenda. privatization rhetoric and the actual use of In the same year (1986) that Reason privatization at the federal, state and local Foundation published its first Annual government levels. Privatization Report, I defended my How the term “privatization” has doctoral dissertation on privatization. been viewed over the last 20 years tells Since that time, I have continued to observe us much about its growing acceptance. with keen interest the progress of both In 1989, the National Academy of Public privatization and Reason Foundation. This Administration (NAPA) released a report 20th anniversary provides an opportunity as entitled, Privatization: The Challenge to well as the motivation to pause and reflect Public Management. The report could just on the past and future of privatization. as easily have been called, Privatization: the Realizing that others are also contributing Challenge for Public Management. Perhaps

42 Reason Foundation • www.reason.org Annual Privatization Report 2006

At the federal level, an estimated $400 billion is now being spent annually on the purchase of and services from the private sector.

never in the history of public management unclear that anyone today take this research has a preposition contained more policy seriously. significance. The general view 20 years Additional evidence of the general ago was that privatization constituted an acceptance of privatization by public assault on public management, an assault managers today is provided by the that had to be repulsed. A few enlightened International City/County Managers individuals, primarily at the state and Association (ICMA). In a series of five local government levels, recognized that studies conducted between the years 1982 privatization was actually a new tool that and 2003, the ICMA documents the increase public managers needed to master, but this in the number, as well as the proportion, view was in the minority. of local governments utilizing privatization Fast forwarding to the present strategies. For some specific services day... Lester Salamon, of Johns Hopkins (e. g., solid waste collection), the most recent University and one of the principal ICMA data suggest that some slowing down authors of the 1989 NAPA report, now may be occurring. However, this leveling off sees privatization in its many forms is more in keeping with the normal S-shaped (e. g., contracting, vouchers, public-private growth curve that would be expected of any competition, public-private partnerships) as mature public policy. part of the basic tools of government. Much At the federal level, an estimated of the literature on privatization today is no $400 billion is now being spent annually longer ideologically driven, but rather seeks on the purchase of to better understand this tool, its uses and from the private sector. And the Office of limitations. Of course there are exceptions Management & Budget (OMB) Circular to this statement. The American Federation A-76 continues to mandate public-private of State, County and Municipal Employees competition as the official privatization (AFSCME), for example, continues to policy of the federal government. publish anti-privatization studies, but it is

Transforming Government Through Privatization 43 Annual Privatization Report 2006

Does Privatization Work? be made that the research is less clear. Why The bottom line for privatization, or academics continue to cling to the standard any public policy, is the basic issue: Does it of beyond a reasonable doubt says more work? To the question “Does privatization about social science “niceties” than it does work?,” the unequivocal answer is YES! about the realities of the complex world in I am amazed, and sometimes appalled, which public policy plays out. by many of my learned academic colleagues Privatization & Partnerships who continue to equivocate when it comes to addressing the question: Does The comedian Mort Sahl was found of privatization work? The most frequently saying that “The future lies ahead.” While heard response is that the “data conflict” somewhat of a tautology, his comment or that “no clear pattern has emerged.” nevertheless reminds us that the future Nothing could be further from the truth. is always just out of reach and therefore What exactly do the data say? our crystal ball will always be just a little In a forthcoming book Contracting bit cloudy. What then can be said or for Public Sector Services being published ventured about the future of privatization? by the National Institute of Government My crystal ball is probably as cloudy as Purchasing, I make the following any. However, one bright point of light statement: “the preponderance of the does shine through clearly: partnerships. creditable evidence from domestic as well My crystal ball says that in the future, as international experience suggests that privatization will be concerned less with privatization generally results in lower competition and market forces and more service delivery costs and equal or better concerned with creating partnerships service quality.” Now, in the spirit of between the public and private sectors. transparency, I am referring specifically to In support of this contention, I refer to contracting out and outsourcing. How do the pragmatic words of the Copenhagen I come to this conclusion? By reviewing Institute, “No single actor, public or private, hundreds of research reports and case has the all-encompassing knowledge, studies compiled over the last 20 years. overview, information, and resources to What then accounts for the academic solve complex and diversified problems.” equivocation when the question is posed: I can also point to recent domestic and Does privatization work? I suggest that the international research that supports this answer lies in the standard of proof utilized. contention. In this future of privatization Borrowing terminology from the legal field, and partnerships, trust will become the basic if one uses the preponderance of the credible building block. Consequently, we will need evidence from domestic and international to understand better the role trust plays in experience as the standard of evidence, then public-private partnerships and how best to there is no doubt that privatization results develop and maintain it. in lower service delivery costs and equal Lawrence L. Martin, Ph.D. is a professor or better service quality. However, if one and director of the Center for Community insists on using beyond a reasonable doubt Partnerships at the University of Central as the standard of proof, then a case can Florida in Orlando, Florida.

44 Reason Foundation • www.reason.org Annual Privatization Report 2006

Cutting the Government in Half: Three Reforms By Grover Norquist, President, Americans for Tax Reform

he goal of the modern conservative movement all grumble. They would all like Tmovement is to cut the cost of government less spending. But there is no organized anti- as a percentage of the economy in half over the spending NRA equivalent. Thus overspending next twenty-five years—one generation. is the issue that gets ignored. Why then has federal spending as a Second, this administration has targeted percentage of national income increased the wrong metric by announcing that its from 19 percent in 2000 to 23 percent in goal is to “cut the deficit in half.” The real 2006 during a period of Republican control measure of success is reducing spending of the House, Senate, and Presidency? And as a percentage of the economy. This can this after federal spending as a percentage of be accomplished by slowing the growth of national income had fallen from 23 percent spending and by having pro-growth tax cuts to 19 percent from 1992 to 2000—with (like cutting capital taxes) create a larger Clinton facing a Republican Congress? economy. Both are issues conservatives dominate: spending cuts and pro-growth Three Reasons tax cuts. Focusing on the deficit suggests First, the modern conservative that tax cuts are part of the problem, not movement consists of the “leave us alone part of the solution. And tax hikes are the coalition” of groups where concerning economic equivalent of spending cuts if you their primary, vote-moving issue, what are targeting the deficit. they want from the government is to be Lastly, it is politically difficult to “cut” the left alone. This includes gun owners, small budget. Even reducing the growth of spending businessmen, taxpayers, property owners, in Washington is considered a “cut.” and homeschoolers. Within this context, three major areas Raise taxes as Bush 41 did and taxpayers of government spending for our federal, leave the room. Challenge gun rights and state, and local governments exist. The first National Rifle Association (NRA) members area of reform is retirement security such as leave the room. But no constituency walks out Social Security, and federal, state, and local of the room when government spending creeps government worker pensions. The second too high. The moving parts of the conservative area of reform is health care costs, such as

Transforming Government Through Privatization 45 Annual Privatization Report 2006

Medicaid, Medicare, and Veterans Affairs Today it is more than 50 percent of hospitals. And the third reform is education, households and two out of three voters in K-12 and state universities. One never cuts the 2004 election. That number grows as education, pensions, or health care. all new companies use defined contribution The solution to the spending problem retirement systems rather than defined is to replace politically suicidal, or at best benefit plans. And the old-line defined difficult, efforts to “cut” spending with benefit plans are ebbing in the airline, auto, politically profitable “reforms” of programs and steel industries. Even government that will reduce their long-term costs. pensions are moving to defined contribution The best example of this is “privatizing” plans in a number of states. Eight of the or “personalizing” social security, moving last 10 changes to state pension plans over the system from the pay-as-you-go, the past decade have been towards defined unfunded, Ponzi scheme to a fully funded, contribution. independently held personal savings account Health Savings Accounts (HSAs) have system. When fully phased in, every jumped from one million in 2004 to three American will be required to save, say, 10 million in 2005 and Forrester Research percent of their income and accumulate real predicts 24 percent of all Americans will be resources to buy an annuity at retirement covered by a consumer health plan by 2010. that will keep one out of poverty and Education choice is within spitting allow one to keep all savings beyond that distance in New Hampshire, Florida, Texas, minimum to be spent as one wishes. Social Wisconsin and steps have been made in Security can be reformed to cost not its Pennsylvania, Arizona, and Minnesota. A present 20 percent of the federal budget breakthrough in one or two states is the from rather remove it from the budget. breach of the dam we need. Scare tactics Medicare can be similarly financed against school choice (they will sell your through allowing Americans to save their kids to the Arabs or harvest their organs) Medicare tax payments. Health savings will fall apart with a major state’s experience accounts can give Medicare and Medicaid for all to see. programs real competitive pressures to Other reforms with real savings include reduce costs without voting for any “cuts.” expanding competitive sourcing, where On education the only reform worth the private sector competes regularly to enacting is real parental school choice. With provide the services now done by 800,000 private schools costing half of government government employees whose work can be schools, over time public schools will have found in the yellow pages—food services, to become as cost efficient and effective as lawn care, fixing eyeglasses, etc. private schools. Cutting small spending programs like Pipe dream? No. We are on track to the National Endowment for the Arts is make all three key reforms a reality in the satisfying. But real reduction in the cost and next decade. The case for Social Security scope of government flows from reforming reform is politically strengthened as more government spending towards zero rather and more Americans own shares of stock than nicking it. directly through mutual funds, IRAs, and Grover Norquist is president of Americans 40lKs. When Reagan was elected only 17 for Tax Reform. percent of adults owned stock directly.

46 Reason Foundation • www.reason.org Annual Privatization Report 2006

Federal Update

Contents A. Competitive Sourcing Continues to Expand B. Rating Program Performance C. Senate Budget Committee Approves Major Budget Reform Bill D. Defense Business Board—Military Mail E. Capping Federal Spending

of 9,979 positions (see Table 1). In addi- tion, competitions for nearly 5,000 other positions have already been announced and are working through the process. While agencies used competitions for a wide range of services, they focused on logistics, main- tenance and property management, and information technology. Collectively the competitions are esti- mated to generate net savings, or cost avoid- A. Competitive Sourcing Continues to ance, of approximately $3.1 billion over Expand five to ten years. Fixed costs and expenses to provide central direction and oversight President Bush’s plan to bring more between 2003 and 2005 totaled $211 mil- competition to federal programs—competi- lion—better than a 27 to 1 return on invest- tive sourcing—continued to expand in 2005, ment, i.e., for every dollar spent on competi- though competitive sourcing was used less tive sourcing, 27 were saved. often than in the previous two years. Making Savings from 2005 total $3.1 billion government jobs that are considered “com- over the next three to five years. When mercial in nature” compete with the private combined with the previous years’ savings, sector, thereby forcing them to be efficient to competitive sourcing is estimated to save survive, has resulted in taxpayer savings of taxpayers $5.6 billion, with annualized billions of dollars so far, and promises to save savings expected to approach $1 billion. billions more in the coming years. Competitions resulted in savings of $23,000 In FY 2005 federal agencies completed per position studied when studied on a cost 181 public-private competitions for a total

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basis alone, yielding a 29 percent savings (a mance review called the Program Assess- slight increase over 2004). When best value ment Rating Tool (PART). Every budget is considered, involving a mix of cost and submitted by this administration has used quality, savings jump to $68,000 per posi- this tool to rate programs and use the rat- tion—three times the average expected net ings to determine budget priorities. Many savings. failing or ineffective programs were outlined To date agencies have conducted almost for elimination or reduction in previous 1,100 competitions or about 41,000 posi- budgets, however, Congress has not used tions, representing approximately 11 percent the rating or the outcomes to determine of the commercial activities identified as funding. Legislators have largely ignored suitable for competition. This falls far short previous ratings and fully funded failing or of the president’s goal of submitting half the ineffective programs, enacting only seven federal workforce to competition. of the 65 proposed reductions in FY2005 There are plans to rapidly expand the for $366 million in savings. FY2006 saw a program in FY 2006. While 5,000 positions much larger acceptance where 89 of the 154 have already been slated for competition, recommendations were either cut or saw officials estimate that up to 21,500 more reduced funding for $6.5 billion in savings— positions could be put up for public-private largely due to PART results. competition in this fiscal year. And PART’s results are gaining trac- tion. While not called by name, PART and B. Rating Program Performance its findings were outlined in the president’s Once again the administration subjected State of the Union address where he said numerous federal programs to a perfor- he will recommend reducing or eliminat-

Table 1: Competitive Sourcing Results in FY 2003, 2004, and 2005 Element FY 2003 FY 2004 FY 2005 Completed Competitions Total competitions completed 662 217 181 Streamlined 570 116 124 Standard 92 101 57 Total FTEs competed 17,595 12,573 9,979 Streamlined 5,474 1,201 1,296 Standard 12,121 11,372 8,663 % of competitions where agency 89% 91% 61% determined best result provided in- house (based on FTE studied) Results from completed assessments Gross savings (over 3-5 years) $1.2 B $1.5 B $3.1 B Net savings (over 3-5 years) $1.1 B $1.4 B $3.1 B Annualized gross savings $237 M $285 M $375 M Annualized net savings per FTE $12,000 $22,000 $23,000

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ing more than 140 programs this year. This percent of the 407 programs in FY2005 and year Congress is listening too. A large effort 29 percent of the 607 measured in FY2006. headed by the Republican Study Commit- In an effort to bring more attention to tee, a group of over 100 House Republicans, PART the Office of Management and Budget initiated “Operation Offset” to stem the tide launched a new Web site: www.expectmore. of ever increasing federal budgets. PART gov. assessments were often used as a platform to call for cuts. C. Senate Budget Committee Ap- To date about 80 percent of all federal proves Major Budget Reform Bill programs have been reviewed. The remain- On June 20, 2006, the Senate Budget ing 20 percent will be reviewed in time for Committee approved a comprehensive the FY2008 budget. Four percent of all budget reform plan entitled “The Stop Over- programs are deemed “ineffective.” Put Spending Act of 2006” (S.O.S. Act), de- simply, these programs are not “using tax signed to curb federal spending and restore dollars effectively” and they have been un- discipline to the budget process. Sponsored able to “achieve results.” An additional 24 by Senate Budget Committee Chairman Judd percent of programs are listed as “results Gregg and joined by Senate Majority Leader not demonstrated,” i.e., these programs have Bill Frist and several other co-sponsors, the not “been able to develop acceptable per- S.O.S. Act includes the following among its formance goals or collect data to determine provisions: whether it is performing.” In other words, more than a quarter of all federal programs Caps on Discretionary Spending cannot show any impact or results for their The S.O.S. Act would cap discretionary efforts. spending at $873 billion in fiscal year 2007, Table 2 outlines the breakdown of PART allowing it to rise by 2.6 percent annually results: in fiscal years 2008 and 2009. It would also The administration notes that scores limit emergency spending by building in as- have been improving over time—especially sumptions of emergency spending into the with the number of agencies able to measure discretionary caps. Exceeding these statutory effectiveness and demonstrate some sort of caps would bring about automatic, across- results. In fact, half of the 234 programs the-board cuts in discretionary spending. failed to demonstrate results in the first re- Presidential Line-item Veto view in FY2004. That number shrank to 38 The S.O.S. Act would create a line-item Table 2: Distribution of Program Ratings veto tool that allows a President to target FY2007 wasteful spending, ask that it be rescinded, Number of Programs Assessed 793 and send it up to Congress for expedited Effective 15% consideration. Moderately Effective 29% Creation of Commission on Accountability Adequate 28% and Review of Federal Agencies (CARFA) Ineffective 4% CARFA would study the accountabil- Results Not Demonstrated 24% ity and efficiency of government programs

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(similar to the BRAC Commission) and rec- D. Defense Business Board—Military ommend the termination of agencies and/or Mail programs. The commission’s proposal could The Department of Defense (DOD) has be approved with a simple majority vote and been employing privatization and other Congress would have no opportunity to pro- business practices for years. There is even a pose amendments. dedicated commission—the Defense Busi- Creation of Commission on Entitlement Sol- ness Board (DBB)—made up of executives vency who examine various lines of business and The S.O.S. Act would create a commis- operations that DOD is involved in, looking sion empowered to provide solutions to for opportunities to introduce better results, the impending entitlement crisis and bring cost savings, and better mission focus on Social Security and Medicare into long-term core functions. solvency. Secretary Rumsfeld has been an avid supporter of the effort and of privatization, Switch to Biennial Budgeting especially in areas where the private sector The S.O.S. Act would would convert the can take over military support functions in annual budget, appropriations, and autho- order to shift more uniformed personnel rizing process to a two-year cycle. The first into core war-fighting functions. In 2004, year of would be reserved for submission of he asked the DBB to study the handling of the President’s two-year budget, the congres- mail services within the Department, ask- sional budget resolution, and appropriation ing the board why DOD does not currently bills. The second year be free for Congress outsource its military mail functions and if to conduct oversight and consider authoriz- it could. ing legislation. A task force was formed to study these questions, finishing its work in December. Deficit Targets In its report, Report to Secretary of Defense, The S.O.S. Act would set a budget Military Postal Service Task Force Report deficit target (2.75 percent of GDP in fiscal FY05-5 “Recommendations Regarding the year 2007, declining to 0.5 percent by 2012) Military Postal System of the Department of and require budget committees to reduce Defense” the DBB concluded that military entitlement spending if the deficit is expected mail services were a prime opportunity for to exceed the target. A failure to make cuts privatization and that they should be. The would trigger automatic reductions in enti- rationale is simple. Privatization would save tlement spending (excluding Social Security). money, improve mail service, and free up Provisions similar to those in the S.O.S. troops for other core functions—a perfect Act have also been gaining momentum in the trifecta. House of Representatives. Republican leaders The report notes that DOD has long indicated that a Sunset Commission similar struggled to deliver mail in a timely fashion, to the S.O.S. Act’s CARFA would get a vote which has negatively impacted troop mo- on the House floor as early as late June. Also, rale, especially for those serving overseas. on June 22, 2006, the House voted 247-172 With a focus on achieving results, a strong in favor of a line-item veto bill. contract with performance measures can

50 Reason Foundation • www.reason.org Annual Privatization Report 2006

all but guarantee better performance. One Secretary Rumsfeld reportedly concurs with example the report noted was an increased the DBB recommendations, which should use of technology that would catch packages help move the initiative forward. that are undeliverable before they ever leave the United States. E. Capping Federal Spending The DBB noted that defense mail costs by Chris Edwards, Director of Tax Policy Stud- are at least $1.8 billion a year, however, the ies, Cato Institute true total cost is unknown because DOD Federal spending has increased 45 per- can’t actually calculate it. However, relying cent in the last five years. The government on research from other postal privatizations has run deficits in 33 of the last 37 years. the board concluded that privatization could The costs of federal programs for the elderly cost savings of 30 percent or more. are set to balloon and impose huge burdens Finally, and not surprisingly, the board on coming generations of young workers. concluded that “delivery of mail is not a Federal policymakers are clearly fail- core military function.” Privatization would ing to run a “wise and frugal government” indeed free up military personnel to serve in as Pres. Thomas Jefferson advised in his core areas. Currently the work is performed first inaugural address. One problem is that by 352 civilian employees, 4,470 military current budget procedures stack the deck in personnel and 363 contractors. favor of program expansion without regard The DBB recommended a “transforma- to the burdens imposed on current or future tional” solution. One where the DOD takes taxpayers. The costly Medicare prescription a “Tabula Rasa” approach to privatizing drug bill of 2003 and the recent explosion the collection, processing and distribution in “pork” spending illustrate how a lack of of mail. They noted that in order to fully structural controls leads to an undisciplined capture private sector best practices, the scramble to increase spending despite rising most efficient business model and the latest levels of red ink. technology, DOD should privatize to the Part of the solution to the overspending maximum extent possible. This was made problem is to bind Congress with tighter in light of piecemeal privatization or tweak- budget rules, like the rules in place in many ing the existing system to improve perfor- states. All the states except Vermont have mance. Ultimately the DBB recommended statutory or constitutional requirements to that DOD immediately issue an open-ended balance their budgets. In addition, more RFP in order to leave flexibility for the than 20 states have some form of overall private sector to be innovative. It further limitation on taxes or spending. Colorado’s suggested that the RFP include all processes constitution caps state revenue growth at and not a piecemeal solution. the sum of population growth plus infla- DOD is beginning to move forward on tion. Revenues above the cap are refunded the recommendations—including the draft- to taxpayers. This sort of cap on the overall ing of an implementation memo that is budget is sorely needed in Washington to waiting for approval. If it moves forward ensure that tough spending tradeoffs are not it would be one of the federal government’s avoided. largest privatization projects in recent years.

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1. Past Efforts to Control Spending 2. Capping Total Federal Spending Congress has occasionally bound itself Today, reformers are focusing on statu- to limits on the overall budget in the rec- tory rather than constitutional efforts to ognition that the self-interested actions of control the budget. And unlike GRH and legislators can otherwise lead to an uncon- the BBA, today’s efforts are focused on trolled spending splurge and soaring deficits. spending control, not deficit reduction, One reform effort was the 1985 Gramm- because of the recognition that deficits are Rudman-Hollings Act. It established a series simply a byproduct of the more fundamental of declining deficit targets over five years, overspending problem. which if not met resulted in an automatic A number of House members, includ- cut, or sequester, to a broad range of pro- ing John Campbell (R-CA) and Todd Akin grams. Congress replaced GRH in 1990 (R-MO), are introducing bills to place a with the Budget Enforcement Act. The BEA statutory cap on the annual growth in total imposed annual dollar caps on discretion- federal outlays. There are a number of de- ary (annually appropriated) spending and sign features that Congress should consider “pay-as-you-go” rules on entitlement pro- if it imposes such a cap: grams that required the cost of any program What to Cap expansion to be offset elsewhere in the budget. Those rules contributed to restraint, The BEA imposed multi-year caps on but they have since expired. discretionary spending, but so-called en- Bolder efforts to control spending and titlement spending was not capped. Entitle- deficits have been debated in Congress but ments, such as Medicare, have been allowed have narrowly failed to pass. A balanced to grow rapidly on automatic pilot, which is budget amendment (BBA) to the Constitu- pushing the government toward a financial tion was proposed in Congress as far back crisis. as 1936. Entitlements account for more than half In 1982 the Senate passed a BBA by a of the budget and should be included un- vote of 69-31. In addition to requiring a der any cap. A cap should be placed on the , the amendment would growth in total federal outlays. have limited the annual growth in federal Base of a Cap revenues to the growth in national income. Unfortunately, the BBA failed to gain the A simple way to structure a cap is to needed two-thirds approval in the House. At limit annual spending growth to the growth the time, a parallel effort resulted in resolu- in an economic indicator such as gross tions being passed in 31 states calling for a domestic product or personal income. An- constitutional convention to approve a BBA, other possible cap is the sum of population but that effort came up three states short of growth plus inflation. In that case, if popula- the required number. tion grew at 1 percent and inflation was 3 In 1995 Congress again voted on a BBA, percent, then federal spending could grow at and it again failed. The BBA passed the most by 4 percent. Most people would agree House by a 300-132 , but fell one with the principle underlying all of these vote short of passage in the Senate. caps—the government should live within

52 Reason Foundation • www.reason.org Annual Privatization Report 2006

constraints, as average families do, and it Congress acted to make the spending cuts should not consume an increasing share of needed to halt the ongoing explosion of the nation’s income or output. federal debt. The House Republican conser- Figure 1 shows actual federal spending vative plan in Figure 2 illustrates the spend- growth since 1990 compared to possible ing path needed to bring a halt to the debt caps. The GDP and income caps would explosion. be looser than a cap based on population Cap Procedures growth plus inflation. Whichever indicator is used should be smoothed by averaging it The Office of Management and Budget over about five years. would provide regular updates regarding Figure 2 shows that any of the caps whether spending is likely to breach the legal would constrain spending compared to a cap, thus allowing Congress time to take business-as-usual scenario. But the lower corrective actions. If a fiscal year ended and population plus inflation cap would be a OMB determined that outlays were above much safer approach in case politicians the cap, the president would be required to treated a cap as a floor for spending in- cut spending across-the-board by the per- creases and ignored the need to proactively centage needed to meet the cap. GRH and cut wasteful programs. All of the caps would the BEA included sequester mechanisms provide protection against a nightmare that covered various portions of the de- scenario of continued Bush-sized spending fense, nondefense, and entitlement budgets. increases, but none would guarantee that A better approach is to cap all spending

Transforming Government Through Privatization 53 Annual Privatization Report 2006

Figure 2: Four Scenarios for Federal Spending

$4.6 Business as Usual Spending $4.4 GDP Cap $4.2 Population + Inflation Cap s $4.0 House GOP Conservative Plan $3.8 $3.6 $3.4

Trillions of Dollar $3.2 $3.0 $2.8 $2.6 2009 2010 2011 2012 2013 2016 2014 2006 2007 2008 2015

Note: The two cap lines assume that spending would rise each year by the maximum amount allowed.

and subject all departments to a sequester in the enforcement of a cap. should Congress fail to restrain spending Policymakers need more than a cap to sufficiently. avert a coming fiscal crisis—they need to scour the budget for programs and agencies 3. Conclusion to eliminate. But a cap on spending growth One shortcoming of a statutory spending would begin to get the budget under con- cap is that Congress could rewrite the law if trol and provide taxpayer insurance against it didn’t want to comply with it. However, another federal spending orgy. with a cap in place reformers would have This article is adapted from Cato Insti- a high-profile symbol of fiscal restraint to tute’s March 2006 Tax & Budget Bulletin No. around and defend. Over time, public 32. awareness and budgetary tradition would

54 Reason Foundation • www.reason.org Annual Privatization Report 2006

Local and State Update

Contents A. Local Privatization Update B. State Privatization Update C. State Bureaucracy Update D. State Revenue Boom Paves Way for Tax Cuts E. Surveying the Battleground on Tax and Expenditure Limits (TELs) F. TABOR at the Ballot Box G. Trends in Government Offshoring

A. Local Privatiza- bos, a PhD economist and leader of the 30- tion Update year fight said: We have harnessed the energy of the pri- 1. Sandy Springs: A vate sector to organize the major functions Model “Private” City of city government instead of assembling our At 12:01 am on own bureaucracy. This we have done be- December 1st, a vision cause we are convinced that the competitive took reality for a large group of citizens in model is what has made America so success- Sandy Springs, Georgia. After fighting Ful- ful. And we are here to demonstrate that ton County for over 30 years, their dream this same competitive model will lead to an became a reality and Sandy Springs was efficient and effective local government. officially an incorporated city—the first new Once they wrestled control away, the city in Georgia in 50 years. new city had a unique opportunity to rede- Fed up with high taxes and poor ser- fine how their municipal government should vice delivery, residents of Georgia’s Fulton look, function, and interact with citizens. County voted in 2005 to incorporate the city City leaders started with a blank slate, of Sandy Springs, earning 94.6 percent of the enabling them to ask the fundamental ques- vote. What makes Sandy Springs interesting tions about what role government should however, is that instead of creating a new mu- play. nicipal bureaucracy, the city opted to contract Taking a page from management guru out nearly all government services. Peter Drucker, every “traditional” service or Indeed, moments after taking the oath of function needed to prove its worthiness and office for the first time Mayor Eva Galam- proper role and place within government.

Transforming Government Through Privatization 55 Annual Privatization Report 2006

2. The Sandy Springs Effect Sandy Springs was the first domino to fall, and is quickly becoming a model city for both cost and quality of services. In a February 13, 2006 editorial in the Atlanta Journal-Constitution, Mark Burkhalter, speaker pro tem of the Georgia State House, emphasizes that new cities like Sandy Springs are more responsive to the needs of constituents. Absent any program history, bias or general Seeing the wave, Burkhalter sponsored government inertia, city officials were able legislation this year that would allow a to apply Drucker’s test for business, “if we referendum to incorporate Johns Creek in weren’t doing this yesterday, would we do Fulton County. Additional legislation was it today,” to the operation of municipal passed for the creation of Milton, Chatta- government. hoochee Hill County and South Fulton as Ultimately officials had to decide wheth- well. Two additional proposals, for the new er to “make or buy” public services. Ulti- cities of Dunwoody and Sea Island, failed to mately they decided to “buy” most services garner legislative support this year. from the private sector. A contract was Residents of Johns Creek and Milton signed with CH2M-Hill to oversee and man- will vote on cityhood in July, and would age the day-to-day operations of the city. hold first elections in November. Refer- The contract, worth $32 million, was nearly endums on the two cities proposed in the half what the city traditionally was charged south, will be on the ballot in summer 2007. in taxes by Fulton County (approximately Mike Bodker, the chairman of the $60 million). Oliver Porter, the chairman of Northeast Fulton County Study Commis- the commission set up to establish the city sion heading up the effort for the new city said “that’s more service for less cost than of Johns Creek, suggests that the new city anything we could have hoped for.” will likely follow Sandy Springs’ model and With a focus on efficiency, but more “use privatization and partnering to use tax importantly effectiveness of public service, dollars more effectively.” The commission Sandy Springs has embraced the power of wants to identify and use innovative and competition to determine how services will competitive solutions, while making its gov- be provided. ernment more responsible, transparent, and The city does plan to establish its own accountable to taxpayers. police force and possibly a fire department In addition to these named cities several (although they currently contract with the other communities are reviewing their op- county); even with these additional costs tions. The Carl Vinson Institute of Govern- Sandy Springs is saving its citizens millions ment at the University of Georgia is cur- of dollars, upwards of 30 percent in the first rently undertaking feasibility studies for a year alone. number of incorporation candidates includ- ing Kennesaw, Peachtree City, and Duluth.

56 Reason Foundation • www.reason.org Annual Privatization Report 2006

All of this activity is very reminiscent 5. Assist the county in evaluating bid of the city of Lakewood, California and responses. what became known as the “Lakewood 6. Set specific cost-savings goals and Plan.” Incorporated 51 years ago, the city of monitor the results. Lakewood used an innovative and cost-ef- The scope has been expanded a bit to fective strategy to contract for city services. include all efficiency efforts. The City Council set local policy, performed The third task was proving to be most community planning tasks and set the an- difficult. Task force members had a good nual budget. However, the services were idea of services that could be subjected to provided through a contractual arrangement competition and they certainly knew that with private companies and neighboring savings could be found, however, there was communities. A similar approach is used in not any policy or guidelines for undertaking Sandy Springs and elsewhere. an initiative like this. As with Sandy Springs in Georgia, CEC chair, Tony Condia, called in Rea- Lakewood’s incorporation sprung a wave son Foundation staff to assist in the develop- that led to the creation of some three dozen ment of their overarching policy and process “contract cities” in California. that would be used to manage initiatives. 3. Hamilton County Initiates Managed Com- Over several months of collaboration, the petition Agenda CEC agreed on a modified version of the Faced with declining revenues and ever Florida GATE Management Process (see increasing costs, the Hamilton County discussion in last year’s APR: www.reason. (Ohio) Board of County Commissioners org/apr2005/state_update.pdf). It was adopted a resolution establishing a citi- chosen because it was considered cutting zen-led task force charged with developing edge with an eye toward transparency and recommendations on cost-saving initiatives accountability of an initiative. The perfor- through managed competition. mance-based model was first adopted by the The task force, called the Hamilton Governor’s Center for Efficient Government County Competition and Efficiency Com- in Florida. It has served as the starting point mittee (CEC) was charged with six initial for several competition efforts throughout tasks: the country. Hamilton County has not formally 1. Recommend cost-saving initiatives adopted the guidelines as policy, but rather, though managed competition, will use them administratively in order service consolidations and program to amend on the fly and make changes as eliminations. it learns from experience. The CEC will 2. Review county services with an eye continue to oversee the development of new toward cost savings through managed guidelines and make any amendments or competition. changes to the policy. 3. Work with the county administration to With an initial goal of finding $25 mil- develop a fair competition process. lion in immediate savings, the CEC is under- 4. Assist the county administration in taking several initiatives: developing bid specifications. Fire hydrant repair and maintenance—

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Lessons in Reform: Hamilton County Competition and Efficiency Committee (CEC) Specifically, the CEC liked the Florida model yet held accountable for the performance and re- because it created the need for a business case— sults they deliver, the CEC established guidelines a critical step for the evaluation of alternatives for the management of in-house bids. In addi- and for consideration of why an organization tion, they considered policies for how employee operates the way it does. The policy includes the groups that win a competition will be held to the following components: standards of their bid.

1. Development of a Business Case 4. Policy Guidelines for Initiative Management The CEC felt that this was a critical step, With a recognition that success is often thus they developed guidelines for the prepara- driven by simple management of a sound pro- tion of a business case. The purpose of creating cess, the CEC established guidelines for doing a sound business case is to: so. Perhaps most critical was their consideration • clearly demonstrate the value to the Board of of employee relations and communications with County Commissioners; the general public.

• convey one consistent message to all 5. Hamilton County RFP Development and Pro- stakeholders; and curement Policies • provide a roadmap for how the project The CEC documented that the existing state should be developed, procured, implemented of Ohio and Hamilton County purchasing code and managed. shall be in effect for the development, accep- tance, and evaluation of Requests for Proposal. 2. Policy for Cost Comparison Guidance Law and code will be followed for contract One of the most overlooked and difficult award, negotiation, evaluation and monitor- pieces of managed competition is a cost com- ing as well. The CEC did offer some additional parison between public and private alternatives. guidance for: Knowing this the CEC established a structured • RFP content and development; approach for making comparisons. The ap- • Proposal review; and proach is based on: • public financial management thinking; • Contract monitoring and administration. • the best identified practices of federal, state, 6. Managed Competition Initiative Worksheet and local governments; and The CEC created a simple “worksheet” that • a desire to keep the process as simple as will follow each initiative. The worksheet will possible while ensuring a high degree of help ensure greater transparency and chart prog- validity. ress of an initiative.

3. In-House Regulations Guiding Bids, Perfor- 7. Managed Competition Flow Chart mance, and Costs Similar to the worksheet, the CEC created a In an effort to level the playing field and simple decision flow chart or matrix. ensure that public employees were treated fairly,

58 Reason Foundation • www.reason.org Annual Privatization Report 2006

Simply by undertaking the review the county 4. San Diego Managed Competition Ballot realized that they were paying higher per Initiative unit prices for new hydrants than neighbor- The city of San Diego has placed a ballot ing communities. By simply purchasing initiative on the November general election from their contract the county will save that would introduce managed competition. thousands of dollars a year. The CEC is also On March 27th the City Council voted 7-1 reviewing the actual operational costs and to allow the measure onto the ballot. The expects to find savings there as well. council also agreed to place a ballot measure Fleet maintenance—The county spends that would require voter approval for future millions a year performing routine mainte- pension benefit increases. nance, including oil changes, on its fleet of Faced with a ballooning $1.39 billion vehicles. Experience from other jurisdictions pension deficit and a razor-thin city budget that has undergone recent cuts, the mayor has proven very successful with significant included managed competition as a major savings opportunities. piece of his fiscal recovery plan. As part of Facilities—The CEC is reviewing the his State of the City address, Mayor Jerry county’s facilities on a dual track. The first Sanders announced his plans to focus on track is somewhat of a space utilization core services and reengineer city govern- review where it will consider possible con- ment. “I’m going to reduce waste, dupli- solidation and divestiture of unneeded or cation and bureaucracy; and I’m going underused tracts of land or buildings. This to search for more cost-effective ways to will bring an immediate infusion of cash provide quality services.” Sanders has sug- but also lead to long-term savings as the gested that the process will be transparent cost of maintenance is taken off the books. and contain safeguards to prevent abuse, yet The second track focuses on the actual demonstrate results and cost savings. “The operations and maintenance functions in- goal in this process will be a smaller, more cluding janitorial services. These functions responsive and more cost efficient city gov- will be put through a managed competition ernment,” said Sanders. This is welcome news to many San initiative. Diegoans who have watched their city go Information Technology Review—The through much turmoil in recent years. Just county’s IT infrastructure is fractured and five months into his second term, former contains many duplications. The review is Mayor Dick Murphy announced his resigna- focused on reducing duplication to generate tion after a “perfect fiscal storm” erupted in savings. In addition, the CEC is looking at large part to the deepening pension crisis. ways to improve security. Sanders’ fiscal plan mirrors many rec- Utilities and Telecommunications Re- ommendations laid out by a coalition of view—The CEC is conducting two sepa- groups, including Reason, led by the Perfor- rate reviews to find efficiencies in how the mance Institute [www.sandiegobudget.org], county buys and uses utilities and telecom- as outlined in the San Diego Citizens’ Bud- munications. get [http://www.reason.org/sdcbplan.pdf].

Transforming Government Through Privatization 59 Annual Privatization Report 2006

B. State Privatization Update the growth of government so that it doesn’t For three consecutive years the Con- grow faster than the private sector. In his necticut legislature has passed government last biennial budget, state funds increased by contracting reform, and each time Gov. 4.4 and 6.8 percent respectively, compared Jodi Rell has vetoed the bill. This year the to an estimated personal income growth of vehicle was HB5684, which was written in 6.8 percent. Much of this success can be response to former Governor Rowland’s attributed to a focus on performance and corruption scandal. The legislation would results. The Bush administration has used have placed overly burdensome restrictions competition and privatization as a corner- and regulations on contracting. Despite stone of its management philosophy. support for a more transparent process, the As previously reported in APR, Bush proposed legislation had overstepped its had initiated a review of the state’s privati- bounds and tried to establish outright pro- zation process, with an eye toward establish- hibitions on contracting out and public-pri- ing firm guidelines that would create more vate partnerships, forcing Gov. Rell to issue transparency, consistency in contracting, and a third consecutive successful veto. high performance. The end result was the During Governor Bush’s tenure the state creation of the GATE management process, of Florida has saved taxpayers nearly $600 as established by the Governor’s Center for million through public-private partnerships. Efficient Government. Indeed, at the beginning of his second term In June 2006, Bush signed SB2518— Bush talked about privatizing government known as the “Florida Efficient Government functions so that “these buildings around us Act” — into law, which codified the GATE [are] empty of workers; silent monuments to process. In adopting the process, the legisla- the time when government played a larger tion requires that a business case be devel- role than it deserved or could adequately oped for each initiative. It must then be fill.” His administration has established a evaluated for feasibility, cost-effectiveness, remarkable track record and progress to- and efficiency before an agency can sign a ward achieving these goals. contract. Further, the legislation establishes Since Bush took office the size of state a Council for Efficient Government that will government has shrunk, with the number of play an advisory role and provide additional state jobs falling from 127,363 to 113,202. oversight of privatization initiatives. Many This impressive feat would have been much aspects of this bill are identical to the origi- larger if not for gains in education and nal proposal from the Center for Efficient public safety. Further, appropriated dollars Government and were discussed in last for salaries and benefits has dropped from year’s APR. $6.8 billion to $6.4 billion—even with rising Besides codifying the GATE process into costs and inflation. law, the bill also provides some guidance In addition, Bush has offered another for privatization policy in general. It estab- $1.5 billion in tax cuts this year, bringing his lishes legislative intent to direct state agen- eight-year total to $20.3 billion in state and cies to focus only on their core mission and local tax relief since taking office. In addi- to deliver services efficiently and effectively, tion, the governor has been able to rein in and requires them to leverage the private

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sector whenever they can reduce the costs of of bureaucratic hurdles that state agencies government. would have to jump through before privatiz- Georgia had an active year. Recogniz- ing functions. The legislation was an at- ing the value of competition the Senate tempt to stall, restrict, and limit the power offered SR469, a resolution creating the of the executive from privatization. Perhaps Senate Environmental Program Privatiza- most troubling would have been the creation tion Study Committee. The committee will of an additional layer of legislative oversight study where it is “advantageous to identify and review. If these bills would have passed, disincentives toward efficiency and cost ef- any privatization plan would be subject to fectiveness in government enforcement and hearings from the budget committee just 30 implementation of environmental and days before project implementation. The regulations and how the introduction of committee would also submit a recommen- private sector competition or incentives may dation to the governor, highly politicizing a result in higher quality performance and pure management decision. more effective implementation of such poli- Companion bills, HB1006 and SB323, cies and programs.” The overriding purpose allowed explicit authority for school districts is to give regulating agencies as much flex- to engage in shared services contracts (see ibility as possible in running their organiza- discussion of the benefits of shared services tions and effectively enforcing environmen- in the Education chapter). In an effort to tal regulations. find efficiencies and drive more money into In addition, the Georgia legislature con- classrooms, this common-sense legislation sidered SB602. The bill was unsuccessful, was signed into law. however it would have called for the priva- Gov. Mitch Daniels, known as “the tization or contracting out of at least one knife” during his days at the federal Office mental health facility. of Management and Budget, has employed Efforts to place restrictions on privati- his strategies for cost savings and efficiency zation in Hawaii went nowhere and were inside Indiana’s government. In just two carried over to the next legislative session. years in office Daniels has cut 3,000 state Amending Act 90 that passed a couple of jobs and eliminated seven departments. years ago, SB942 would have placed restric- The governor has also launched an ag- tions to “enhance government accountabil- gressive review of the size, scope, functions, ity.” Prior to Act 90’s passage, privatization and budget of each agency. The review was effectively outlawed in the Aloha State. dubbed PROBE—Program Results: an Out- Perhaps one of the most privatization- come Based Evaluation (see text box)—is active states this past year was Indiana. The similar to the federal PART analysis that legislature heard several bills—some that was established under Daniels’ leadership as allowed more privatization, and some that federal OMB director. would have restricted privatization. The PROBE process will identify pro- Several bills were introduced under the grams that should have their budgets re- moniker of transparency that would have duced or eliminated—again similar to the established cumbersome guidelines for priva- federal PART. Reports will include recom- tization that were nothing more than a set mendations for better linking of perfor-

Transforming Government Through Privatization 61 Annual Privatization Report 2006

mance to priorities, as well as be used to duplication, cost-reduction opportunities coordinate statewide initiatives like strategic and enhanced cross-agency cooperation will sourcing to tackle program overlap. be developed to help foster additional op- PROBE seeks long-term savings—not portunities. just one-time efficiencies. In order to help Indiana’s department of corrections fully with this goal the evaluations will be on- embraced privatization, launching three going and used in future budget cycles to major initiatives last year. First, the depart- determine funding levels for programs and ment signed a deal with to priva- activities. Further, an inventory of program tize food service in the state’s prisons. The deal will save the state $12 million a year. Second, the DOC renegotiated a contract Under the PROBE review each pro- for medical services for additional savings, gram will be asked to justify its work but more importantly higher performance and also demostrate that it is making levels. Finally, the corrections department an impact. Each program is systemati- put an entire facility out to bid and ulti- cally reviewed according to key charac- mately privatized the operations of the New teristics: Castle Correctional Facility. All three deals Program Measurement combined with save the state $67.8 million over four years according to Commissioner Of the programs evaluated only 38 David Donahue. percent have performance measures in The Family and Social Services Admin- place. “Because most programs lack istration also launched a major initiative to long-term, results-based performance look into the administration of state welfare measures, these programs are unable to programs and health care services. Several demonstrate adequate progress.” proposals have been submitted for what Program Overlap and Duplication could be a 10-year contract worth more Evaluations have found many areas than $1 billion. where services can be “shared” rather As reported in APR last year and in this than “owned”—print, copy, and mail year’s transportation section, Indiana passed services are prime examples. HB1008 giving the governor authority to enter into a concession agreement for the Relevance 157-mile Indianas Toll Road. Other part- If nothing else, this hopes to elimi- nerships are to be examined as part of the nate traditional government inertia governor’s transportation plan unfolds. and resistance to change. “The way The only major bill introduced in Loui- we’ve always done it” will not pass this siana was HB632. The bill would have review. Programs will have to demon- required that the state department of correc- strate a clear need for them to exist. tions privatize all adult correctional facilities by 2016. It is currently in committee and Financial waiting to be heard. Over time government financial Massachusetts heard a bill, H1333, that management has failed. would have prevented local governments

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from privatizing water or sewer services. However, one must wonder what’s wrong Fortunately it was killed in committee. with moderate cost savings? Other legislation included S1742, which Further, before privatization can take would have required any privatized work effect, it must be demonstrated that state be completed inside the United States. After performance of the function is “contrary to an initial hearing, the bill was reported out the public interest.” It gives public employ- of committee favorably, however, it has not ees right of first refusal for any jobs under been acted on since. contract and the contractor must “provide Missouri introduced SB958, the “Public fringe benefit coverage and a rate of pay and Service Accountability Act.” It stated that pay progression to its employees performing before a state agency could privatize a ser- work under the contract not less than what vice, it must prepare a cost-benefit analysis, is provided to state employees.” then prepare a written statement about the North Carolina included a study of findings and its proposed actions. This bill ABC store privatization in a comprehensive would further have required cost savings of legislative study bill this year. The study at least 10 percent (so 9.5 percent savings will consider full and partial privatization of would be turned down?) and limited con- alcohol beverage control board liquor stores. tract duration to no more than five years. It will determine feasibility and the effects Fortunately no action was taken. on price, revenue, safety and enforcement, New Jersey’s legislature has provided a among other things. mixed bag of privatization activities. Several The biggest news in Pennsylvania is privatization-related bills have been intro- HB2572, the “Free Enterprise and Taxpayer duced and are awaiting debate. Following Protection Act.” It effectively prohibits gov- the wave of concessions bills and transporta- ernment competition with the private sector tion leases, S1777 was introduced, allowing for goods and services. The legislation refers up to 49 percent of the New Jersey turnpike to all government agencies, universities, and to be “corporatized.” The legislation calls schools as well as any public authority. The for proceeds to be directed to outstanding bill has been assigned to committee but has state pension obligations. Governor Corzine not been heard. is intrigued by the concept, however, has not Texas announced the completion of a actively supported the measure yet. deal with IBM to manage email services and Unfortunately other legislative initiatives systems for at least 13 state agencies. The are geared to prevent future privatization contract is worth tens of millions of dollars, efforts. Companion bills were introduced in but is expected to reduce email manage- both the Assembly and the Senate (A2210/ ment costs by 45 percent through the five- to S1600) that would establish new guide- seven-year deal. The contract will transfer lines and requirements for privatization. If about 65,000 inboxes to management by enacted there would be a chilling effect on IBM. privatization opportunities in the state. Agencies will be able to customize their The bill requires that savings from priva- individual deals. Under the contract agen- tization be “substantial” yet fails to provide cies will pay between $1.99 and $5.52 a guideline, opening the door to litigation. a month for management of each inbox

Transforming Government Through Privatization 63 Annual Privatization Report 2006

depending on the options the agencies select privatization initiatives to demonstrate sav- for their employees. The contract is expand- ings of at least 10 percent before acceptance. able and soon other publicly funded organi- The Commonwealth of Virginia consid- zations including city and county organiza- ered several privatization-related bills this tions as well as school districts will be able past legislative session as well. In an effort to participate in the contract. to clarify existing state code, the General Utah considered several privatization- Assembly passed SB666 to further enable related bills this year with limited suc- the state to enter into concession agreements cess. Perhaps most intriguing was SB 74, for private toll operations. It was widely be- sponsored by Senator Howard Stephenson. lieved that the state already had the author- This bill would have created a privatization ity; however, there was little guidance on the task force to identify functions suitable for matter. public-private competition and privatiza- HB667 also passed with calls for more tion. The task force would have established highway maintenance privatization. Virgin- restrictions on government competition with ia already has two very successful contracts private business. Similar committees have for various stretches of highway. Largely been established in many states; however, because of this success the legislature di- Utah will have to wait to join the list. The rected the department of transportation to bill failed in the Senate and no action was identify additional opportunities. taken in the House. For the third consecutive year, Delegate Another bill sponsored by Stephenson Cline offered HB1122, known as the “Free- saw the same fate. SB 175 would have called dom from Government Competition Act.” for the department of corrections to issue an Virginia, which does conduct an activities RFP for the new prison that the state needs inventory (defines activities as either com- to relieve prison overcrowding, or allow the mercial or inherently governmental), would private sector to offer proposals at any time. have required agencies to produce written The bill was killed in committee. justification for keeping a commercial activ- The single shining star was the success- ity in-house, in other words, forcing the ful passing of SB 80, enabling “concession” state to justify why they haven’t privatized a model deals for Utah’s highways. The pas- function. Unfortunately, this bill was left in sage makes Utah the 23rd state with specific committee…again. enabling legislation. There is already discus- Virginia also debated a bill on putting sion of using the concession model for the more prison food service out to bid. It faced development and building of two new roads the same fate as the Cline bill and was left in in and around Salt Lake. committee with no action taken. Vermont is considering S34 that would apply new stricter standards to privatiza- C. State Bureaucracy Update tion contracts. In addition, it grants a right by Chris Edwards, Director of Tax Policy Stud- of action to the Vermont State Employees’ ies, Cato Institute Association to seek redress for any alleged The nation’s 16 million state and local violation of the standards. The bill has government workers form a large, grow- passed the Senate. Vermont already requires ing, and well-compensated class in society.

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State and local workers earned $36 per hour local workers by budget area. The largest in wages and benefits in 2005, on average, area is kindergarten to grade 12 schools. compared to $24 per hour for U.S. private- The number of school teachers and ad- sector workers. Another distinction is that ministrators increased 22 percent between 42 percent of state and local workers are 1994 and 2004. By contrast, the number of represented by unions, compared to just 9 children in the public schools increased just percent in the private sector. 9 percent during the period. Another fast-growing area is public 1. Trends in State and Local Employment safety. Police, fire, corrections, and legal Table 3 shows the number of state and staffs have grown an average 21 percent in

Table 3: State and Local Government Employment 1994 2004 Change U.S. Total 13,912,227 15,788,784 13% Education 7,098,807 8,538,180 20% K-12 Schools 5,310,339 6,473,425 22% Higher education 1,586,663 1,848,997 17% Other 201,805 215,758 7% Safety 1,925,986 2,323,323 21% Police 749,308 892,426 19% Corrections 584,387 701,905 20% Judicial and legal 321,168 409,944 28% Fire 271,123 319,048 18% Welfare 2,123,500 2,038,584 -4% Hospitals 1,053,356 912,496 -13% Public welfare 492,387 498,092 1% Health 360,694 424,158 18% Housing & development 123,173 114,281 -7% Social insurance admin. 93,890 89,577 -5% Services 1,701,548 1,766,101 4% Highways 544,233 542,642 0% Parks and recreation 239,605 262,815 10% Transit 205,994 231,897 13% Natural resources 187,432 186,006 -1% 153,143 162,251 6% Sewerage 121,594 126,136 4% Solid waste 110,391 108,882 -1% Other 139,156 145,472 5% Other 1,062,386 1,122,596 6% Source: U.S. Bureau of the Census. Full-time equivalents.

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Table 4: State and Local Government Employment in 2004 as a Share of Total Employment in State Total Education Safety Welfare Services Other All states 11.3% 6.1% 1.7% 1.5% 1.3% 0.8% Alaska 16.6% 8.3% 1.8% 1.6% 2.7% 2.2% D.C. 16.2% 4.5% 3.3% 2.3% 4.6% 1.6% Wyoming 16.1% 8.2% 1.7% 2.9% 2.0% 1.3% Mississippi 15.0% 8.1% 1.7% 3.0% 1.4% 0.8% Louisiana 14.6% 7.5% 2.2% 2.4% 1.6% 0.9% New Mexico 14.5% 8.0% 2.0% 2.0% 1.5% 1.1% New York 13.4% 6.2% 2.3% 2.3% 1.8% 0.9% Alabama 13.2% 6.7% 1.5% 2.6% 1.5% 0.8% West Virginia 13.0% 7.1% 1.4% 1.4% 1.9% 1.2% Kansas 12.8% 7.6% 1.5% 1.3% 1.4% 1.0% Kentucky 12.7% 7.6% 1.5% 1.5% 1.3% 0.8% South Carolina 12.6% 6.7% 1.7% 2.2% 1.3% 0.7% Arkansas 12.3% 7.2% 1.6% 1.4% 1.4% 0.8% Oklahoma 12.3% 7.0% 1.6% 1.7% 1.3% 0.8% Texas 12.3% 7.4% 1.7% 1.4% 1.2% 0.6% Nebraska 12.0% 6.3% 1.2% 1.6% 2.1% 0.8% Hawaii 12.0% 6.1% 1.8% 1.4% 1.4% 1.3% Iowa 11.9% 7.1% 1.1% 1.7% 1.3% 0.8% Georgia 11.9% 6.8% 1.8% 1.5% 1.2% 0.7% New Jersey 11.9% 6.5% 2.0% 1.2% 1.3% 0.9% North Dakota 11.8% 6.6% 1.0% 1.4% 1.7% 1.0% Montana 11.7% 6.6% 1.3% 1.2% 1.6% 1.0% Delaware 11.7% 6.1% 1.7% 1.5% 1.3% 1.0% Idaho 11.7% 6.4% 1.4% 1.7% 1.3% 0.9% Maine 11.6% 6.9% 1.3% 1.0% 1.3% 1.1% Tennessee 11.6% 6.0% 1.6% 1.8% 1.5% 0.7% Virginia 11.4% 6.6% 1.6% 1.1% 1.1% 0.9% North Carolina 11.3% 5.8% 1.5% 2.1% 1.1% 0.8% Ohio 11.3% 6.2% 1.7% 1.4% 1.1% 0.7% Vermont 11.2% 7.2% 1.0% 0.8% 1.2% 1.1% Utah 11.2% 6.5% 1.3% 1.3% 1.3% 0.8% Indiana 11.0% 6.5% 1.5% 1.5% 1.0% 0.6% Missouri 10.9% 5.9% 1.7% 1.5% 1.2% 0.7% California 10.8% 5.4% 1.6% 1.6% 1.2% 0.9% Connecticut 10.7% 6.2% 1.6% 1.3% 0.8% 0.8%

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Table 4: State and Local Government Employment in 2004 as a Share of Total Employment in State Total Education Safety Welfare Services Other Washington 10.6% 5.0% 1.4% 1.6% 1.8% 0.9% 10.6% 6.0% 1.7% 1.0% 1.3% 0.6% Michigan 10.6% 6.6% 1.4% 1.0% 0.8% 0.7% Oregon 10.5% 5.3% 1.5% 1.4% 1.3% 1.0% South Dakota 10.5% 6.2% 1.0% 1.0% 1.3% 1.0% Colorado 10.4% 5.8% 1.4% 1.1% 1.3% 0.7% Florida 10.3% 4.9% 2.0% 1.2% 1.3% 0.8% Arizona 10.3% 5.6% 1.9% 0.7% 1.2% 0.9% Maryland 10.2% 5.6% 1.6% 1.1% 1.1% 0.8% Massachusetts 10.0% 5.7% 1.7% 1.0% 0.9% 0.7% Wisconsin 9.8% 5.7% 1.4% 1.0% 0.9% 0.8% Minnesota 9.8% 5.7% 1.0% 1.3% 1.1% 0.8% New Hampshire 9.8% 5.9% 1.2% 0.9% 0.9% 0.9% Pennsylvania 9.6% 5.3% 1.4% 1.1% 1.1% 0.7% Rhode Island 9.5% 5.2% 1.5% 1.0% 0.9% 0.8% Nevada 8.6% 4.1% 1.6% 1.0% 1.1% 0.8% Source: Author’s calculations based on U.S. Bureau of the Census data. See Table 3 for items included in each budget area.

the past decade. One contributing factor has a result of federal and state welfare reforms been the jump in state prison populations in during the 1990s. recent years. 2. State Comparisons State and local health bureaucracies have also grown as Medicaid spending has The size of state and local bureaucracies exploded. In health and other areas, the varies widely by state. Table 4 shows the growth in bureaucracy has been fueled by number of government workers in each state growing regulatory paperwork that has as a share of employment in the state. Along accompanied expanded federal funding of with the District of Columbia, the largest state and local activities. bureaucracies are in Alaska and Wyoming— Some areas of the state and local bureau- states that have an image of rugged indi- cracy, such as hospitals, have not grown. vidualism. Some of the other states with big That may be due variously to budget re- bureaucracies also lean conservative in their forms, a shift of work to the private sector, politics, including Mississippi and Alabama. or other changes. In the case of public wel- Nevada has the smallest bureaucracy, with fare, the number of state and local adminis- a state and local workforce only about half trators has remained steady at about half a the relative size of Alaska’s. million. Meanwhile, the number of welfare Numerous factors affect the size of recipients has fallen 66 percent since 1994 as bureaucracies in the states including de- mographics, crime levels, and the differing

Transforming Government Through Privatization 67 Annual Privatization Report 2006

Table 5: State and Local Government Employment in 2004 as a Share of Total Employment in State Biggest Bureaucracies Education Safety Welfare Services Other AK 8.3% DC 3.3% MS 3.0% DC 4.6% AK 2.2% WY 8.2% NY 2.3% WY 2.9% AK 2.7% DC 1.6% MS 8.1% LA 2.2% AL 2.6% NE 2.1% HI 1.3% NM 8.0% FL 2.0% LA 2.4% WY 2.0% WY 1.3% KS 7.6% NJ 2.0% DC 2.3% WV 1.9% WV 1.2% Smallest Bureaucracies Education Safety Welfare Services Other RI 5.2% IA 1.1% IL 1.0% MA 0.9% MO 0.7% WA 5.0% SD 1.0% SD 1.0% WI 0.9% GA 0.7% FL 4.9% ND 1.0% NH 0.9% NH 0.9% IN 0.6% DC 4.5% VT 1.0% VT 0.8% MI 0.8% IL 0.6% NV 4.1% MN 1.0% AZ 0.8% CT 0.8% TX 0.6% Source: Author’s calculations based on U.S. Bureau of the Census data.

propensity of states to contract out or priva- One conclusion is that there seems to be tize services such as prisons and solid waste substantial room for increased government collection. efficiency in many states. Although this re- Differences between states also reflect port provides only a brief look at differences bureaucratic efficiencies. For example, while in state bureaucracy, the data indicate that D.C. and Louisiana have deep-seated prob- some states deliver government services with lems of waste and corruption, New Hamp- many fewer workers than do other jurisdic- shire is known for its more effective govern- tions. ment. Some states, such as Alaska and New Mexico, have high levels of bureaucracy D. State Revenue Boom Paves Way across many budget areas. Other states, such for Tax Cuts as Pennsylvania and Rhode Island, have by Chris Edwards, Director of Tax Policy Stud- consistently lower levels of bureaucracy. ies, Cato Institute Table 5 shows the states with the biggest The nation’s strong is and smallest bureaucracies in each budget creating a revenue boom for state and local area. The top states have two or more times governments. Figure 3 shows that state and the relative number of government work- local tax revenues soared 8.1 percent in 2004 ers as the bottom states. It is not clear that and an estimated 7.6 percent in 2005, based the top states get any benefit from bigger on data for the first three quarters of the year. government. As one example, my statistical Both state and local governments are en- analysis showed that there is no correlation joying the surge in revenues. Table 6 shows between K-12 employment and SAT scores that state taxes increased 8.7 percent in by state. 2004 and an estimated 8.0 percent in 2005.

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Table 6: State and Local Tax Revenue Growth 2000 2001 2002 2003 2004 2005 State 8.8% 0.9% -3.2% 4.2% 8.7% 8.0% Local 5.9% 4.4% 8.0% 4.8% 7.3% 7.1% State and local 7.7% 2.2% 1.1% 4.4% 8.1% 7.6% Source: U.S. Bureau of the Census. Calendar years. 2005 is estimated.

Figure 3: State and Local Tax Revenue Growth

9% 8.1% 7.7% 8% 7.6% 7.2% 7.5% 7% 5.5% 6% 5.4% 5.2% 5.4% 5.0% 5% 4.4% 4.5% 4.3% 3.7% 4%

3% 2.2% 2% 1.1% 1%

0% 1 3 4 1995 1997 1996 1998 1999 2000 2001 2002 2003 1990 1992 199 199 199 2004 2005

Source: U.S. Bureau of the Census. Calendar years. 2005 is estimated.

Local taxes increased 7.3 percent in 2004 than 7 percent annually since 2000. and an estimated 7.1 percent in 2005. With today’s rising revenues, states that At the local level, taxes have been rising had increased taxes to fill budget gaps—such rapidly for years. As property values have as Virginia—can return the money to tax- soared, cities and counties have received a payers now that budgets are in surplus. The windfall because they derive about three-quar- 50 states enacted net tax increases of $24 ters of their tax revenues from property taxes. billion during the past five years, but now At the state level, the economic down- they can reverse course and provide major turn earlier this decade caused revenue tax relief in 2006. growth to slow and briefly turn negative. Unfortunately, some states are using But the revenue “crisis” that states com- the revenue boom to expand their budgets plained about was exaggerated, and it is beyond sustainable levels, as many states did now long gone. By 2005, tax revenues for during the 1990s. In California, Gov. Ar- the 50 states were up 18 percent over the nold Schwarzenegger has proposed a general pre- peak of 2001. Also note that fund budget increase for fiscal 2007 of 8.4 federal aid to the states has grown at more percent, which follows a 9.7 percent in-

Transforming Government Through Privatization 69 Annual Privatization Report 2006

crease for 2006. In Maryland, Gov. Robert Jersey, Nebraska, Vermont, and D.C. ranked Ehrlich has proposed a general fund (apart high on all four tax measures. All those from reserve fund) increase for fiscal 2007 jurisdictions are ripe candidates for tax relief of 11.4 percent, which follows a 7.6 percent in 2006. increase for 2006. The most important goal of tax reform is to cut top income tax rates. In today’s Which States Are Most in Need of Tax Cuts? competitive economy, capital, skilled labor, Rather than expand their budgets, states and retirees are increasingly mobile and will should use current surpluses to reform their gravitate to lower-tax jurisdictions. With the tax codes in order to boost long-run eco- coming retirement of the large baby-boom nomic growth. Most states have the budget generation, high-tax states such as New room to make substantial tax cuts and tax York will shoot themselves in the foot if reforms—three-quarters of the states had their tax policies prompt retirees to pull up tax revenue growth of 6 percent or more in stakes and head to sunny and low-tax loca- 2005. tions such as Florida. Table 7 identifies states that are most in High corporate income taxes are similar- need of tax relief. Those are states that have ly counter-productive. State corporate taxes rapid revenue growth, a high overall tax have a high ratio of compliance costs to rev- burden, and high income tax rates. States enue collected, and they induce businesses that measure above average on those criteria to shift real investments and paper profits to are highlighted. low-tax states and foreign countries. The first column in Table 7 shows In sum, rather than expand their bud- increases in state tax revenues between gets and force another budget crunch, states 2002 and 2005. Total tax revenue for the should use today’s surpluses to make last- 50 states and the District of Columbia ing reforms to their tax systems. After all, increased 22 percent. The fastest growth competition for jobs and investment will was in Alaska, Wyoming, Nevada, Florida, only increase in the years ahead. By restrain- South Carolina, Vermont, and D.C. ing spending and pursuing tax reforms, The second column shows the overall states will be better prepared for the next burdens of state and local taxes as a percent- downturn and better able to sustain long- age of personal income. For 2004, the U.S. run growth. average was 10.5 percent. The other col- umns show the top state income tax rates. E. Surveying the Battleground on Tax For 2005, the average top individual and and Expenditure Limits (TELs) corporate rates were 5.5 and 6.9 percent, by Barry W. Poulson, Americans for Prosper- respectively. ity, Distinguished Scholar States that combine high income tax rates with high overall tax burdens include 1. Introduction California, Louisiana, Maine, Minnesota, When Gov. Ronald Reagan endorsed Nebraska, New Jersey, New Mexico, New Prop One, the nation’s first tax and expen- York, Ohio, Rhode Island, Vermont, West diture limit, he launched the tax revolt. Virginia, and Wisconsin. New York, New In 1971 Gov. Ronald Reagan and Milton

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Table 7: States Most in Need of Tax Cuts State Tax Revenue State and Local Top Individual Top Corporate Tax Increase, 2002-2005 Tax Burden, % of Tax Rate 2005 Rate 2005 Income 2004 All states 22% 10.5% 5.5% 6.9% Alabama 25% 8.5% 5.0% 6.5% Alaska 115% 11.3% 0.0% 9.4% Arizona 22% 9.8% 5.0% 7.0% Arkansas 29% 10.4% 7.0% 6.5% California 16% 10.9% 9.3% 8.8% Colorado 16% 8.9% 4.6% 4.6% Connecticut 30% 10.8% 5.0% 7.5% D.C. 39% 13.6% 9.0% 10.0% Delaware 33% 10.5% 6.0% 8.7% Florida 49% 9.8% 0.0% 5.5% Georgia 20% 9.9% 6.0% 6.0% Hawaii 33% 12.1% 8.3% 6.4% Idaho 6% 10.0% 7.8% 7.6% Illinois 30% 10.2% 3.0% 7.3% Indiana 26% 10.5% 3.4% 8.5% Iowa 6% 9.8% 9.0% 12.0% Kansas 10% 10.3% 6.5% 4.0% Kentucky 12% 10.0% 6.0% 8.3% Louisiana 4% 10.6% 6.0% 8.0% Maine 20% 12.8% 8.5% 8.9% Maryland 31% 10.5% 4.8% 7.0% Massachusetts 22% 10.0% 5.3% 9.5% Michigan -3% 9.6% 3.9% 0.0% Minnesota 21% 11.3% 7.9% 9.8% Mississippi 12% 10.2% 5.0% 5.0% Missouri 10% 9.2% 6.0% 6.3% Montana 24% 9.3% 6.9% 6.8% Nebraska 24% 11.3% 6.8% 7.8% Nevada 56% 9.4% 0.0% 0.0% New Hampshire 8% 8.3% 0.0% 8.5% New Jersey 26% 11.0% 9.0% 9.0% New Mexico 8% 10.6% 6.0% 7.6%

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Table 7: States Most in Need of Tax Cuts State Tax Revenue State and Local Top Individual Top Corporate Tax Increase, 2002-2005 Tax Burden, % of Tax Rate 2005 Rate 2005 Income 2004 New York 33% 13.4% 12.2% 17.6% North Carolina 23% 10.0% 8.3% 6.9% North Dakota 31% 10.6% 5.5% 7.0% Ohio 12% 11.5% 7.5% 8.5% Oklahoma 22% 9.7% 6.7% 6.0% Oregon 25% 9.4% 9.0% 6.6% Pennsylvania 23% 10.4% 3.1% 10.0% Rhode Island 22% 11.2% 8.8% 9.0% South Carolina 41% 9.7% 7.0% 5.0% South Dakota 16% 8.9% 0.0% 0.0% Tennessee 26% 8.8% 0.0% 6.5% Texas 18% 9.4% 0.0% 0.0% Utah 27% 10.4% 7.0% 5.0% Vermont 39% 11.4% 9.5% 9.8% Virginia 26% 9.4% 5.8% 6.0% Washington 18% 10.1% 0.0% 0.0% West Virginia 18% 10.7% 6.5% 9.0% Wisconsin 17% 11.4% 6.8% 7.9% Wyoming 74% 13.7% 0.0% 0.0% Source: The first two columns are calendar year estimates based on data from the U.S. Bureau of the Census. The second two columns are from the Federation of Tax Administrators. New York income tax rates include New York City taxes. Above-average data items are highlighted.

Friedman traveled the state of California is imposed, such as being commensurate supporting enactment of this initiative. with inflation and population growth, then While Prop One failed narrowly at the polls, government will grow less rapidly than the it set the precedent for tax and spending lim- private sector. If voter approval is required its (TELs) at both the state and local level. for increased taxes, debt or expenditure of Since then 28 states have passed some form surplus revenue, then government may grow of TEL, and numerous local communities more rapidly than this limit, but government have also enacted this legislation. officials must first seek voter approval. For much of the post-World War II We have learned a lot about TELs over era, government at all levels has increased the past three decades, and this information more rapidly than the private sector. A TEL can inform us regarding the future trends is a fiscal tool designed to constrain this in this movement. The best way to under- growth in government. If a stringent limit stand TELs is with reference to the ‘Battle

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of the Rent Seekers’ (the term “rent seekers” Bill of Rights Amendment (TABOR), the refers to individuals who are able to capture American Legislative Exchange Council a subsidy, privilege, or other benefit from (ALEC) used that Amendment in designing government). On one side of the budget are model TEL legislation. However, in response the special interests, bureaucrats, and others to the criticism leveled against TABOR dur- who benefit when government grows more ing the recent recession, ALEC introduced rapidly than the private sector. On the other an important refinement in this model legis- side of the budget are private citizens who lation. bear the burden of increased taxes when The new ALEC model links the stringent government grows more rapidly than the limits of inflation and population growth to private sector. Legislators are in the middle an emergency and rainy day fund. In periods of this rent-seeking battle. If TELs are effec- of economic growth, when revenue exceeds tive in constraining the growth of govern- the limit, some surplus revenue is allocated ment, they can protect citizens from burden- to the emergency and rainy day fund. When some taxation. Whether or not TELs do the cap is reached on those funds, additional in fact protect citizens from unconstrained surplus revenue is returned to taxpayers. In growth in government depends upon how well they are designed and implemented. periods of recession the rainy day fund can The reality is that most of the TELs be used to offset at least part of the revenue enacted at both the state and local level have shortfall. The limit is held constant until proven largely ineffective in protecting citi- revenue recovers to the pre-recession level. zens from burdensome taxation. In a recent The reason that this refinement in the study for the Americans for Prosperity Foun- new TEL model is important is that it can dation, the author graded the effectiveness end the “ratchet-up effect” of higher levels of each state TEL. Only 10 of these states of taxation and spending over the business received a grade of C or above. Most states cycle. In periods of growth government rev- either have no TEL or an ineffective TEL. enue tends to increase more rapidly than the The study highlights the need for states to growth in personal income; this is particu- enact effective TELs that can constrain the larly true in states that rely on income tax. growth of government. Government spending is increased to match Fortunately, 22 states have introduced the higher levels of revenue. Then when the new TELs, many of which are better de- economy enters a recession, there is pres- signed than existing TELs. Some of these sure to raise taxes and issue debt to offset new TELs are based on a model TEL ad- revenue shortfalls. There is also pressure to opted by the American Legislative Exchange suspend or repeal TELs that constrain gov- Council, which will be referred to as the ernment taxation and spending. The result ALEC model. Exploring the battleground is a ratcheting up of taxation and spending on TELs, including assessing TELs that have from one to the next. This been enacted, helps define the prospects for “ratchet-up effect” also explains why many new state and local TELs. TELs are evaded or gutted during periods of 2. Designing an Effective TEL recession. When Colorado enacted the Taxpayer The new ALEC model can both con-

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strain the growth of government and stabi- the legislative process. This is certainly true lize the budget over the business cycle. There of TELs that have already been enacted, is obviously a tradeoff in determining how such as Colorado’s Taxpayer Bill of Rights much surplus revenue should be allocated to (TABOR) Amendment, California’s (GANN) the emergency and rainy day fund and how Amendment, Washington’s (I601) Amend- much is returned to taxpayers. But, with a ment, and Missouri’s (Hancock) Amend- modest limit on the emergency and rainy ment. day fund, this model TEL can achieve both In each case, however, these stringent of these objectives. Of course stringent pro- limits have been weakened over time. When visions must be included in the emergency these states experienced a revenue shortfall, and rainy day fund to be sure that they do the response was to weaken their stringent not become simply a slush fund to finance limit. The most recent example of this weak- higher levels of spending. ening is Referendum C, that has weakened The ALEC model has been used as the Colorado’s TABOR Amendment. basis for new TEL legislation introduced in Colorado’s Taxpayer Bill of Rights (TABOR) 22 states over the past few years, and for Amendment TEL legislation at the local level as well. In nine of these states and in a number of The most effective TEL enacted in the local jurisdictions the TEL legislation has states thus far is Colorado’s Taxpayer Bill of been introduced through citizen initiative. In Rights or TABOR Amendment. TABOR was other state and local jurisdictions the TELs designed by a taxpayer organization and have been introduced through the legisla- introduced through the initiative process, tive process. Whether the TEL is designed first at the local level in Colorado Springs in and implemented through citizen initiative 1991, and then at the state level in 1992. or through the legislative process is often Several provisions of the TABOR crucial in determining how effective the TEL Amendment have proven to be crucial in is in constraining the growth of government constraining the growth of government and stabilizing the budget over the business at both the local and state level. TABOR cycle. While the TEL experience is unique in is a constitutional measure that limits the each state, there are common patterns in the growth of revenue and spending to the design and implementation of this legislation rate of population growth and inflation. across the states. The best way to under- That limit is applied to a broad measure of stand the TEL battles is through a survey of revenue and spending with few exceptions. case studies. Surplus revenue above that limit must be returned to taxpayers. Citizens must ap- 3. The TEL Battleground prove any increase in taxes, debt, or fees. If governments want to spend surplus revenue a. Enacting TELs through the Initiative Pro- they must first seek voter approval. cess From the outset TABOR has proven ef- TELs originating through the initiative fective in constraining the growth of gov- process are ordinarily designed by taxpayer ernment at both the state and local level. organizations, and therefore tend to be Because TABOR has effectively constrained more stringent than those enacted through

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the growth of government, Colorado has recession and revenue shortfall is observed been able to avoid the fiscal problems en- in many states with effective TELs. countered in other states, such as California, Ohio’s (Blackwell) Initiative that lack an effective TEL. As a result, when Colorado experienced a revenue shortfall Nine states have introduced new state during the recent recession, the state was TELs through the initiative process in recent able to balance the budget with modest cuts years. These new state TELs are based on in some state programs. However, Colorado the ALEC model, combining a stringent does not have a budget stabilization or rainy limit with an emergency and rainy day fund. day fund, so it was not in a position to offset Thus, they are likely to be more effective much of the revenue shortfall. than existing TELs in both constraining the Colorado has experienced one of the growth of government and in stabilizing the highest rates of economic growth in the budget over the business cycle. They are also country. However, Colorado also experi- less likely to be weakened during periods of enced a sharp recession accompanied by a recession and revenue shortfall. One of the revenue shortfall. This past year the Colo- battleground states for these new state TEL rado economy recovered and is again grow- initiatives is Ohio. ing more rapidly than other states. As the While the Ohio TEL was designed by economy recovered, revenues again exceeded taxpayer organizations, it very quickly the TABOR limit, requiring tax rebates. became identified with the gubernatorial Last year the Colorado legislature intro- campaign of Secretary of State Ken Black- duced two ballot measures, Referendums C well. Supporters of “the Blackwell Initia- and D. Referendum C, permitting the state tive” garnered sufficient signatures to place to spend surplus revenue for the next five the TEL on the ballot in 2005. However, years, passed. Referendum D, permitting Ken Blackwell chose to hold the initiative off the state to issue new debt, did not pass. the ballot until 2006 in order to coordinate Many ballot measures have been presented the TEL initiative with his gubernatorial to Colorado voters since TABOR was en- campaign. acted. These ballot measures tend to pass at It is not hard to understand why the a high rate at the local level, but most ballot Blackwell Initiative has received broad sup- measures to raise taxes or spend surplus port in Ohio. Each year the Tax Foundation revenue at the state level have been rejected measures the tax burdens imposed by state by Colorado voters. and local governments. This year Ohio has Critics argue that Colorado has aban- the third highest tax burden in the country. doned the TABOR Amendment. That is At this rate, within a few years, Ohio will nonsense; TABOR provides that state and have the heaviest tax burden in the country. local governments can spend surplus rev- Three decades ago Ohio had one of enue and issue new debt, but first they must the lowest tax burdens in the country. The secure voter approval. Referendum C did increased tax burden reflects higher taxes weaken the TABOR limit by modifying the across the board; income taxes, sales taxes, revenue base used to calculate the limit. This property taxes, and excise taxes are all pattern of weakening TELs in periods of above the national average. However, the

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Table 8: State Business Tax Climate Index, North Dakota 4.99 31 2005 Ohio 4.11 47 State Score Rank Oklahoma 5.48 17 U.S. 5.000 - Oregon 6.08 10 Alabama 5.78 14 Pennsylvania 5.49 16 Alaska 6.99 3 Rhode Island 4.11 48 Arizona 5.14 25 South Carolina 5.03 30 Arkansas 4.64 41 South Dakota 7.38 2 California 4.67 40 Tennessee 5.60 15 Colorado 5.85 12 Texas 6.56 7 Connecticut 4.68 39 Utah 5.45 18 Delaware 6.29 8 Vermont 4.34 46 Florida 6.84 4 Virginia 5.45 19 Georgia 5.35 21 Washington 5.84 13 Hawaii 4.87 33 West Virginia 4.77 35 Idaho 5.17 24 Wisconsin 4.92 32 Illinois 5.19 23 Wyoming 7.47 1 Indiana 6.01 11 D.C. 4.41 - Iowa 4.63 42 Note: The index is a measure of how each Kansas 4.84 34 state’s tax laws affect economic performance. Kentucky 4.57 44 The higher the score, the better the business Louisiana 4.76 36 tax climate.

Maine 4.48 45 Source: Tax Foundation, Facts & Figures Maryland 5.22 22 Handbook: How Does Your State Compare?, Massachusetts 5.06 27 March 2006, http://www.taxfoundation.org/ Michigan 5.12 26 publications/show/255.html Minnesota 4.70 38 Mississippi 5.05 29 major culprit is a graduated income tax with Missouri 5.42 20 one of the highest top income tax rates in the Montana 6.14 9 country. Ohio citizens pay a top rate of 7 1/8 percent, and corporations pay 8 1/2 percent. Nebraska 4.58 43 With a graduated income tax, income tax Nevada 6.84 5 revenues increase more rapidly than income New Hampshire 6.58 6 in periods of economic expansion. In this New Jersey 3.96 49 sense the graduated income tax, with high New Mexico 5.06 28 marginal rates, contributes to the ratchet up New York 3.91 50 effect of government from one business cycle North Carolina 4.74 37 to the next. The outcome of this unconstrained

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growth in government is a race to the bot- deduction and personal exemption would tom. Economic growth in Ohio has lagged make income tax more equitable as well as behind that in other states for decades. Ohio more efficient. With this tax reform Ohio simply can’t compete with other states for could create a business tax climate condu- business investment and jobs with this heavy cive to rapid economic growth. The first tax burden. In fact, the Tax Foundation step in getting Ohio back on track is passing shows that Ohio has one of the worst busi- the proposed tax and spending limit. With- ness tax climates in the country (see Table out this legislation, a serious discussion of 8). tax reform and tax relief is unlikely; Ohio The Blackwell Initiative would, for the will continue to have one of the heaviest tax first time, impose an effective tax and spend- burdens in the country. ing limit on state and local government in Having a strong gubernatorial candi- Ohio. Contrary to what the critics are say- date endorse the TEL initiative has certainly ing, this proposed tax and spending limit is increased the probability of enacting this one of the best designed limits in the coun- legislation in Ohio. Blackwell has been able try. It would impose a constitutional limit to generate support from a broad cross-sec- equal to inflation and population growth on tion of citizens who see his endorsement of increases in government spending. Surplus the TEL initiative as a litmus test for fiscal revenue above that limit would be allocated conservatism. This is particularly important first to an emergency and budget reserve in a state such as Ohio where the current fund. When the cap on that fund is reached, administration has pursued imprudent fiscal additional revenue would be returned to policies, blurring the distinction between taxpayers. In periods of recession the bud- Republicans and Democrats on this issue. get reserve fund would be used to offset at The Blackwell campaign also illustrates least part of the revenue shortfall. This tax the nature of the battle when a strong guber- and spending limit will both constrain the natorial candidate endorses an effective TEL growth of government and stabilize the bud- initiative. The well-orchestrated attack on get over the business cycle. TELs at the national level has targeted the For the last three decades government Blackwell Initiative. One form of attack is revenue and spending have been increasing to challenge the initiative on constitutional more rapidly than personal income in Ohio. grounds. The initiative states clearly that With an effective tax and spending limit in approval of increased taxes and expenditure place government revenue and spending will of surplus revenue requires a majority of increase less rapidly than personal income. electors voting in an election. However, the This can set the stage for much-needed tax initiative also refers to voting by electors at reform to provide tax relief to Ohio citizens the local level. Opponents charge that this and corporations. If Ohio wants to compete ambiguity in the language of the initiative with other states for business investment is designed to impose a more stringent limit and jobs it needs to cut income tax rates in on local governments than on the state. half. Broadening the income tax base would While this legal challenge will not likely close many loopholes in income tax. Incor- pass muster in the courts, it almost assures porating the more generous federal standard that the initiative will be challenged in the

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Ohio Supreme Court. TEL initiatives usually zero in this property tax revolt is Texas. survive such legal challenges, but the Ohio For many years Texas citizens have tried initiative demonstrates the importance of unsuccessfully to constrain the growth of carefully designing TELs to avoid such legal government. Texas was one of the first states challenge. to enact a state tax and spending limit, in 1978. That tax and spending limit has rarely Houston’s Prop One Charter Amendment constrained the growth of state revenue and There is an important link between TEL spending, due to flaws in the design of the initiatives to constrain the growth of local limit. government, and TEL initiatives to constrain In 1982 Texas enacted a statutory limit state governments. Prop 13 was the first on property tax revenue increases. That TEL to effectively constrain the growth of limit has been ineffective in constraining the property tax revenues in California in 1978. growth of property taxes. This increase in The state TEL—the GANN Amendment— property tax burdens is at the center of the was enacted in the following year. Mas- debate over tax reform in Texas. Since 1980 sachusetts passed a local TEL, Prop 2-1/2, local property tax revenues increased six drawing upon the local government section fold, from $3.9 billion to $24.5 billion. Ac- of the California model. The first TABOR cording to the Tax Foundation, Texas ranks Amendment was enacted at the local level as the 12th highest in the nation in property in Colorado Springs in 1991. Since then taxes relative to personal income. While Colorado Springs has reduced the mill levy Texas is generally regarded as a low tax (the effective property tax rate) eight times state and has no state income tax, property due to TABOR. In fact, Colorado’s TABOR owners bear a disproportionate share of the Amendment enacted at the state level was tax burden. based on the local TABOR passed in Colo- It is important to understand why the rado Springs the prior year. Texas property tax limits have failed to In recent years many states have experi- constrain the increase in property taxes. enced a property tax revolt, not unlike that Texas imposes a very generous property tax experienced in the 1970s. Many local juris- assessment cap of 10 percent. Several mea- dictions across the country have experienced sures have been introduced in the legislature double-digit growth in property tax rev- to lower that assessment cap. Texas also enues. This reflects both increased appraisal provides for a revenue rollback only after values and increased mill levies. City and property values are reassessed. Each local ju- county governments have responded to the risdiction then calculates a rollback tax rate. windfall of increased property tax revenues That tax rate must provide the same amount with double-digit growth in spending. Exist- of revenue as in the prior year, plus an 8 ing constraints on property taxes have often percent “buffer”. The rollback tax rate must proven ineffective in limiting the increased also provide sufficient funds to pay current property tax burden. As a result citizens in debt. If property tax revenues come in above some local jurisdictions have introduced lo- the limit, citizens can petition for an election cal TEL legislation, and some of these initia- to rollback the increase to 8 percent. tives are based on the ALEC model. Ground There are several reasons why this roll-

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back limit has failed to constrain the growth of spending. In the long run assessment rates of property taxes: and mill levies are often increased, result- 1. The limit provides a generous 8 ing in higher, rather than lower, property percent “buffer.” Legislation has been tax burdens. All one has to do is look at the introduced at both the state and local annual double-digit increases in property tax level to lower that rollback rate. revenues in many local jurisdictions over the 2. The limit is not triggered automatically. past decade. Citizens must first petition to put a The Texas legislature can provide prop- referendum on the ballot, and then erty tax relief, and also satisfy the judicial secure a majority vote to enforce the mandate regarding school funding. How- revenue rollback. ever, Texas must avoid the fatal flaws that have undermined past efforts at property tax 3. Exemptions are provided to some school relief. districts to set rates above the rollback The fatal flaw in past efforts to use limit. This exempts a substantial share state funds to provide property tax relief is of revenue from the limit in those the absence of constraints on the ability of jurisdictions. local jurisdictions to offset that relief with 4. The limit lacks transparency and increased assessments and mill levies. The accountability. Legislation has also solution is to impose an effective tax and been introduced to try to increase spending limit on both state and local gov- transparency, and to make it easier ernment. for citizens to petition for a rollback TELs, based on the ALEC model, have election. been introduced at both the state and local Like many states, Texas must now re- level in Texas. Houston recently enacted spond to a judicial mandate regarding fund- this TEL, Prop Two, in its city charter. The ing for public schools. The Texas Supreme Houston TABOR links a stringent tax and Court has ruled that school districts lack spending limit to an emergency and rainy meaningful discretion in setting property tax day fund. This limit will both constrain the rates. In the Court’s view this constitutes a growth of spending, and stabilize the budget statewide property tax, which is prohibited over the business cycle. by the Texas Constitution. Passage of Prop Two in Houston fol- The myth of local property tax relief lowed a familiar pattern. When Prop Two persists despite the evidence from past state was placed on the ballot through an initia- efforts to provide this relief. The Texas tive, the Houston City Council responded legislature has been largely unsuccessful in with its own watered down TEL, Prop One. using state funds to provide local property The latter was clearly designed to preempt tax relief in the past. The fatal flaw is the the more stringent Prop Two initiative fungible nature of state and local funds, and drafted by a local taxpayer group. When the taxes used to generate those funds. both ballot measures passed, the mayor of When local jurisdictions receive state Houston interpreted the result to mean that funds to provide property tax relief, they the weaker TEL was the binding constraint. often use those funds to sustain higher levels The taxpayer group then successfully chal-

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lenged that interpretation in the courts, so both of these objectives, but they tend to that the more stringent Prop Two is now in place greater emphasis on stabilizing the the city charter. budget than on constraining the growth of Taxpayer Organizations in Texas have government. designed a model TEL based upon Hous- Colorado’s Arveschaug/Bird Amendment ton’s Prop Two, and are gathering signatures in half a dozen cities to impose this effective Colorado’s Arveshaug/Bird Amendment TEL at the local level. The expectation is is a statutory tax and spending limit passed that successful passage of these local TELs in 1992, the same year that TABOR was will provide the impetus for passage of an passed. The legislators who designed and effective state TEL in Texas, as has occurred implemented Arveschaug/Bird were clearly in other states. attempting to preempt the more stringent TABOR Amendment from being enacted. b. Enacting TELs Through the Legislative When TABOR passed it required that exist- Process ing tax and spending limits, including the TELs enacted through the legislative Arveschaug/Bird limit, cannot be weakened process tend to be less stringent than those without a vote of the people. This provision, enacted through citizen initiative. Legislators in effect, made Arveschaug /Bird a constitu- are often influenced by interest groups who tional limit. support higher levels of taxation and spend- Arveschaug/Bird limits the growth of ing, but they must also weigh the political general fund spending to a 6 percent in- costs of imposing a higher tax burden on crease over spending in the previous year. their constituents. Some general fund spending is exempt from When legislatures are dominated by spe- the 6 percent limit. Examples of these ex- cial interests they may design and implement emptions include new programs required by ineffective TELs. This enables these elected federal law or state or federal court order, officials to appear to be fiscally prudent, and Medicaid over-expenditures. Other when in fact they are playing rent-seeking exemptions include appropriations for prop- games benefiting the special interests. In erty tax reappraisals, and for fiscal emergen- some cases these ineffective TELs are de- cies. Voter-approved tax and fee increases signed to preempt more stringent TELs from are also exempt. being enacted through citizen initiative. The TABOR limit and the Arveschaug/ In recent years elected officials have in- Bird limit are interdependent. The TABOR troduced TEL legislation based on the ALEC limit applies to the sum of general fund model. However, even in these cases the de- revenues and selected cash fund revenues. sign and implementation of the TELs tends However, the state has chosen to refund any to be less stringent than those introduced surplus revenues only from the general fund. through citizen initiative. The ALEC model This means that when a TABOR surplus is designed to achieve a tradeoff between must be refunded, and the cash fund grows constraining the growth of government and more rapidly than the general fund, the state balancing the budget over the business cycle. may not be able to increase general fund ap- Legislators have designed TELs to achieve propriations at the maximum 6 percent rate.

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The 6 percent spending limit has been Florida’s Constitutional Revenue Limitation interpreted by the legislature as a floor rather In 1994 a citizen’s group in Florida than the intended ceiling. The reason is that a placed a constitutional amendment on the growth in general fund spending less than the ballot that would have required voter ap- 6 percent would ratchet down the amount of proval for any new tax or tax rate increase. spending permitted in all future years. The The Florida Supreme Court ruled that this legislature makes numerous adjustments to ballot measure did not meet constitutional the base of general fund expenditures to as- requirements for a citizen initiative. Partly sure that the 6 percent limit is reached each in response to this citizen initiative, Florida year. During the recent revenue shortfall legislators designed a TEL that did appear general fund appropriations could not be on the ballot and was approved by voters. increased at the maximum 6 percent rate, The Florida TEL limits revenues, not Several bills have been introduced to lower expenditures. Florida’s revenue limitation the Arveschaug/Bird limit below 6 percent. specifies that the revenue cap increases each It is fair to say that Arveschaug/Bird was year by the average annual growth rate in not meant to constrain the growth of total Florida personal income over the previous state revenue and spending. The major im- five years. The revenue cap applies only to pact of the 6 percent cap has been to change “own source” revenues, and not to revenues the composition of state spending, and sta- received from the federal government. The bilize the budget over the business cycle. As cap exempts revenues necessary to meet the general fund spending converged toward the requirements of state bonds, revenues used 6 percent limit the result was greater stabil- to provide matching funds for Medicaid, ity in general fund spending. On the other revenues used to pay prizes, receipts hand, non-general fund spending, especially of the Hurricane Catastrophe Fund, bal- for capital projects, is not constrained by the ances carried forward from prior years, local 6 percent cap. Over the past decade capital government taxes, fees, and charges, and spending has been very volatile, expanding revenues required to be imposed by constitu- very rapidly during the growth years of the tional amendments after 1994. Any revenues 1990s, and decreasing sharply during the collected in excess of the cap are transferred recent recession. to the Budget Stabilization fund until that One could argue that the 6 percent cap fund reaches 10 percent of the previous did prevent the legislature from building year’s revenues, after which excess revenues general fund spending, i.e. recurring expen- are refunded to taxpayers. The legislature ditures, into the budget. To that extent the can increase revenues beyond the cap by a 6 percent cap made it easier to balance the two-thirds vote of both houses of the legisla- budget when the state experienced a revenue ture in a separate bill that contains no other shortfall in the recent recession. However, subject, and that specifies the dollar amount the binding constraint on the growth of total of the increase. state revenue and spending has been the Florida’s revenue cap has proven to be TABOR Amendment, not the 6 percent cap. ineffective for three main reasons. First, the That was clearly the objective of the legisla- cap uses as its base the previous year’s cap, tors who designed Arveschaug/Bird. even if current revenues are well below the

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cap. Second, the cap covers only slightly the growth of total state revenue. The limit more than three-quarters of net revenues, is defined as a ratio of state revenue to state and the share of revenues covered by the cap personal income. When revenue exceeds that has been falling over the years. Third, the limit by more than 1 percent, the surplus is cap grows along with state income, which rebated to taxpayers. When revenue exceeds provides for greater growth than TELs in the limit by less than 1 percent the surplus other states such as Colorado. is transferred to the general revenue fund. The Florida revenue cap has proven to Voter approval is required for new taxes. be completely ineffective in constraining the For many years the Hancock Amend- growth of government. From the outset the ment proved to be an ineffective constraint revenue cap has exceeded actual revenues. In on the growth of state revenue. The limit fact the revenue cap is so irrelevant the Flor- locked in the ratio of government revenues ida legislature does not even bother to cal- as a share of personal income. Even this culate it in setting current budgets. There is weak limit was evaded and avoided by the only one explanation for Florida legislators legislature. The legislature failed to define designing and implementing an ineffective surplus revenue, and did not enact enabling TEL. They could appear to be fiscally pru- legislation. Large amounts of revenue were dent when in fact they are not constrained declared exempt from the limit, including by the revenue limit. More importantly, they tax revenue earmarked for education. The could preempt a more effective limit from legislature also exempted sales tax revenue being imposed through citizen initiative. and motor fuel tax revenue from the limit. This year a TEL based on the ALEC When these legislative actions were chal- model has been introduced in the Florida lenged in the courts, the courts upheld the legislature. Florida legislators are respond- actions of the legislature. ing to taxpayer organizations that want to In 1996 Missouri citizens enacted an see an effective TEL in the Florida constitu- amendment to Hancock through the ini- tion. They are also responding to a property tiative process. This amendment requires tax revolt in a number of local jurisdictions the state to refund excess revenue when where property tax limits could be enacted growth in state revenue exceeds growth in through the initiative process. personal income by 1 percent or more. It also requires voter approval for new taxes. Missouri’s House Joint Resolution No. 48 This new amendment has proven to be The same patterns observed in Colo- more effective in constraining the growth of rado’s Arveschaug/Bird limit are evident government. In the late 1990s $2.5 billion in in more recent TELs introduced through surplus revenue was offset by tax cuts and the legislative process. A good example is tax rebates. Missouri’s House Joint Resolution No. 48. This year a new amendment to Han- The historical experience with TELs in cock was introduced through the legislative Missouri is very similar to that in Colorado. process. House Joint Resolution No. 48 The Hancock Amendment was one of the is a spending limit designed to supplement early TELs, introduced through initiative in the existing revenue limit. This proposed 1980. Hancock is a constitutional limit on amendment would impose a constitutional

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limit on total appropriations with the get over the business cycle. It incorporates exception of interest and principal on the the important refinements of Colorado’s state debt. The limit is defined as inflation TABOR Amendment discussed earlier in this and population growth plus 1 percent. Like report. It would be the most effective TEL the ALEC model, this limit is linked to an introduced in any state since the TABOR emergency and rainy day fund. These funds amendment. Many have questioned whether are capped at 7 percent of state revenue. such an effective TEL could be introduced Surplus revenue above the cap is allocated to through the legislative process, as opposed these funds, which are then used to restore to the initiative process. At this point the reductions in appropriations made during answer is not yet in. periods of recession. Expenditure of funds It is not hard to understand why Wis- during an emergency requires the governor consin has become a major battleground in to declare an emergency and a the TEL movement. Wisconsin has never vote of the legislature. Money appropriated had a tax and spending limit at either the from these funds during a recession must be state or local level. For most of the post- returned within five years. World War Two period the special interests The major impact of House Joint Reso- have been winning the battle, with govern- lution No. 48 would be to constrain the ment revenue and spending increasing more amount of state spending and stabilize the rapidly than personal income. This has left budget over the business cycle. The pro- Wisconsin with one of the heaviest tax bur- posed legislation would not impose a more dens in the country. stringent limit on the growth of total rev- Wisconsin ranks as the sixth highest tax enue and spending. The binding constraint state in the country. Property tax burdens on total state revenue and spending would rank as the 11th highest in the country. But be the Hancock Amendment as amended in the major culprit is the income tax, which 1996. It is clear in Missouri and many other ranks among the highest in the country. states that the primary concern of legislators Individuals pay a personal income tax rate in enacting TELs is stabilizing the budget of 6.75 percent, and corporations pay 7.9 over the business cycle; constraining the percent. It is not surprising that the Tax growth of government in the long run ap- Foundation ranks Wisconsin as one of the pears to be a secondary consideration. worst business tax climates in the country. Wisconsin has been an underachiever in Wisconsin’s Taxpayer Protection Amendment attracting business investment and jobs, (WTPA) with rates of economic growth far below the The fiercest battle over TELs is currently national average. being waged in Wisconsin. This battle is Special interests understand the sig- significant because it is being waged over a nificance of WPTA for the TEL movement. TEL introduced through the legislative pro- Passage of WPTA would set a precedent for cess, the Taxpayers Protection Amendment enacting stringent TELs through the legisla- (WTPA). This amendment is based on the tive process in other states as well. Special ALEC model and would both constrain the interests have focused both state and na- growth of government and stabilize the bud- tional resources to defeat this measure. A

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version of WPTA was first introduced in the duce effective TELs through both the initia- Wisconsin assembly several years ago. By tive and legislative process. These measures the time the special interests got done water- receive widespread grassroots support, espe- ing down that bill it was opposed by the cially in states such as Ohio and Wisconsin sponsor and defeated in the Assembly. where citizens bear a very heavy tax burden. This year when WPTA was introduced Special interests are often successful it received broad support in the Assembly in attacking TELs as a threat to what they and the Senate. There was strong grassroots perceive as their entitlements to tax dollars. support for enacting WPTA to constrain As a brief survey reveals, they attempt to the growth of government at both the state preempt effective TELs from being intro- and local level. The Americans for Prosper- duced through citizen’s initiative or through ity Foundation, which led this grass roots the legislative process. They introduce weak effort, even enlisted the support of Milton and ineffective TEL initiatives and they at- Friedman to defend WPTA. Polls revealed tempt to water down TELs introduced in the that 70 percent of Wisconsin citizens sup- legislature. Special interests target elected ported WPTA. Despite this broad support, officials who support effective TEL legisla- opponents were again able to block passage tion. Frequently special interests outspend of the legislation. taxpayer organizations who support this Wisconsin citizens have had more suc- legislation by a substantial margin. Perhaps cess in enacting effective TELs at the local the most frustrating thing for taxpayers is level in recent years. Several local jurisdic- that special interests use tax dollars to defeat tions have enacted TELs requiring voter effective TEL measures. approval for new debt issue. As in Texas, The special interests argue that citi- this success in enacting effective TELs at the zens should not be given this voice in fis- local level may provide the impetus needed cal policy, and that we should leave fiscal to enact WPTA at the state level. decisions to elected officials. They maintain that elected officials are better informed 4. Conclusion and better able to pursue the public inter- In the battle for TELs we should expect est. But, what citizens observe is that too a continuation of the patterns observed in often elected officials respond to special the past. TELs emerging from citizen’s initia- interests at the expense of the public inter- tives and driven by grassroots organiza- est, growing government more rapidly than tions are likely to be more stringent both in the private sector. Polls in a number of states constraining the growth of government and reveal that when citizens are asked whether in stabilizing the budget over the business they should be able to vote on tax and debt cycle. TELs emerging from the legislative increases, and whether government should process are likely to focus primarily on bud- be constrained by TELs, the approval rates get stabilization, with weaker constraints are in the 70 percent range. To apply Mark on the growth of government. However, the Twain’s famous phrase, reports of the recent battles, such as the Blackwell Initia- demise of the TEL movement are greatly tive in Ohio and the WPTA in Wisconsin, exaggerated; TELs are alive and well in the demonstrate that elected officials can intro- states.

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F. TABOR at the Ballot Box tions above the growth allowance would be States are continuing to see a lot of mo- diverted to a budget stabilization fund (20 mentum toward enacting tax and expendi- percent), with the remainder (80 percent) re- ture limitations (TELs), despite false claims turned to the taxpayers as either a tax rebate by critics that Colorado has rejected its land- or a reduction in tax rates. mark Taxpayer Bill of Rights (TABOR), sup- After achieving the necessary signatures posedly indicating the failure of the concept. to qualify for the ballot, the referendum was As mentioned in the previous section, claims challenged in court. Its status remained in that Colorado has abandoned TABOR are jeopardy until the Maine Supreme Court misleading. Rather, voters decided to sus- released a unanimous opinion in May 2006 pend TABOR for five years. It is not uncom- overturning a Superior Court ruling that the mon for states to weaken TELs in periods of state was wrong to accept petitions submit- recession and revenue shortfall. ted after a deadline spelled out in state law. Despite critics’ claims, efforts to en- The state Supreme Court decision paved the act state-level TABORs continue apace. way for the TABOR referendum to appear In November 2006, citizens in Maine will on the November 2006 ballot. vote on a citizen’s initiative referendum that A recent analysis by the Maine Heritage would establish the Maine Taxpayer Bill of Policy Center (MHPC) found that Maine’s Rights, a tax and expenditure limitation on ranking of state and local taxes as a percent state and local governments. The referen- of personal income will fall under TABOR dum question that will appear on the ballot to number 19 by FY 2021, down from num- is: “Do you want to limit increases in state ber 2 in FY 2006. In addition, Maine’s state and local government spending to the rate and local tax collections will grow from of inflation plus population growth and to approximately $5.6 billion in FY 2006 to require voter approval for all tax and fee $8.7 billion in FY 2021—an average annual increases?” increase of nearly $207 million (3.5 per- The initiative would restrict growth in cent). According to MHPC President Wil- spending by state government to the combi- liam Becker, “Maine citizens no longer want nation of inflation and population growth. to be at the bottom the economic barrel in The growth of local school district budgets ranking after ranking. Instead, the path to would be limited to the combination of jobs and prosperity can only be found by inflation and the percent change in school taming government growth so that it does enrollment. Municipal and county spending not exceed our ability to pay. The Taxpayer increases would be restricted to the lesser of Bill of Rights provides that direction.” either the percent change in property values In addition, the effort to enact a TABOR or the combined rate of inflation and popu- initiative in Oklahoma continues. State lation change. Exceeding the growth allow- Question 726—known as the Stop Over ance would require a two-thirds majority Spending (SOS) initiative—would amend the vote of the appropriate governing body (e.g. Oklahoma constitution to limit government the state legislature, town council, etc.) and spending increases to the combined percent- a majority vote of the citizens. age of inflation plus population growth. A portion of any surplus tax collec-

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Petitioners collected nearly 300,000 signa- legislators picked up on the public’s job tures in favor of the SOS measure, roughly security fears and got to work crafting anti- 80,000 more signatures than needed to place outsourcing legislation. Most of the bills it on the statewide ballot. The Secretary focused on banning or discouraging offshor- of State has accepted these petitions, but ing in the provision of state contracts and measure opponents have raised a procedural the bill writing actually accelerated after the challenge questioning the validity of roughly election. When the dust settled legislators in 30,000 of the collected signatures. The some 40 states had penned more than 200 Oklahoma Supreme Court has agreed to anti-offshoring bills. Even so, only about hear the legal challenge. a dozen states actually adopted such mea- Measure proponents anticipate that the sures. issue will work through the courts by mid- Since the middle of 2005 state officials’ summer, at which point the initiative will interest in offshoring has waned, but some go to the governor to place on the ballot. have continued to forge ahead. In Michigan Whether State Question 726 will be placed lawmakers have introduced a flurry of anti- on the November 2006 ballot is still to be outsourcing bills and Colorado’s legislature determined. has passed a bill that would give preference If enacted, Oklahoma’s SOS initiative to U.S. service providers. The bill removes would dissolve the state’s existing rainy day state procurement rules from existing inter- fund and create an emergency fund capped national free trade agreements, such as the at 5 percent of the total state budget, which Central American Free Trade Agreement. this year would total $300 million dollars Gov. Bill Owens has hinted that he might according to the taxpayer advocacy group veto it because it could be deemed unconsti- FreedomWorks. It would also create a bud- tutional because agree- get stabilization fund capped at 10 percent ments have traditionally been the domain of of state budget ($600 million dollars this the federal government. year) to be used in case of a budget short Massachusetts lawmakers are consider- fall. If revenues fell below estimates, up to ing Sen. Jack Hart’s bill which would pro- 35 percent of the stabilization fund could be hibit offshoring in state contracts. In 2004, used to fill the budget gaps. Any excess rev- Gov. Mitt Romney vetoed a similar bill, enue would be returned to state taxpayers but some think that Romney’s presidential in the form of a check or income tax refund. aspirations will cause him to reconsider this FreedomWorks estimates that each Oklaho- time. Last year his administration brought ma taxpayer would have received $800 this a food stamp call center contract back from year in tax savings had the measure already India. The contract ended up going to a been in place. Utah-based provider, but that did not please Hart. The Boston Herald reports that Hart G. Trends in Government Offshoring might alter his bill to bar out-of-state out- sourcing as well. Lawmakers in other states Bill writing wanes but offshoring is still rare share Hart’s sentiments as various other bills Offshore outsourcing was a hot topic have aimed to keep government contracts in during the 2004 presidential election. State state.

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Hart’s view reflects the longstanding rift ment offshoring is very rare. between those who regard government—at The report, Offshoring in Six Human least in part—as a provider of jobs and those Services Programs, (gao.gov/new.items/ who think government should provide ser- d06342.pdf), examines four federally funded vices as efficiently as possible. “Why would state-administered programs—Child Sup- we use taxpayer money to fund jobs else- port Enforcement, Food Stamp, Temporary where?” he asks. A Romney administration Assistance for Needy Families (TANF), and official offered one reason: the state saves Insurance—and two federal- $1.6 million each year by outsourcing the ly administered programs that offer student work to a Utah provider. Other states have financial aid—Pell Grant and Federal Family discovered that they can outsource jobs, Education (FFEL). The GAO discov- spend rather lavishly on job retraining for ered that no work was performed offshore for the federally administered programs. For affected workers, and still deliver savings to the state-administered programs, offshor- taxpayers. It is telling that many lawmakers ing occurred in one or more programs in 43 have still decided to stick to their anti-out- states plus the District of Columbia. sourcing ways. There has always been great disparity Other states have discovered that they can between the outrage offshore outsourcing outsource jobs, spend rather lavishly on provokes and how often it actually occurs. job retraining for affected workers, and still Private sector offshoring might be growing deliver savings to taxpayers. in prevalence, but it is still much less com- mon than many panicked media reports would have you believe. Offshoring by gov- ernments is rarer still. Examples of Government In recent years, the federal government Offshoring has increased offshoring somewhat, but as • In South Carolina, the contractor a percentage of total outsourcing it remains hired to update the state’s system for small (about 6 percent). It’s difficult to managing employer taxes is using find precise figures for federal government software programmers in India to offshoring and even more difficult to find develop the new system. figures for state-level offshoring. Still the • In Wisconsin, software programming available evidence suggests that offshoring took place in the United States, but is very uncommon. For example, an analysis the contractor made use of an offshore by the California State auditor concluded help desk for technical assistance. that it appears that “the state is spending • In New Mexico, the contractor little on services performed offshore.” The performed Web development services Center for Efficient Government reports that in India as part of a system that allows no Florida state contracts have gone off- the public to file on-line claims. shore. A March 2006 report from the U.S. Government Accountability Office aimed to • In Washington and Montana, help close the information deficit even more. contractors offshored periodic Once again the message was similar: govern- maintenance for testing of a system.

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Expenditures for the state-administered their analysis revealed wide-ranging but programs amounted to $1.8 billion and often substantial cost savings. of that roughly $339 million—or 18 per- These comparisons showed that their cent—was spent on contracts that involved contracts, with some services performed some offshored services. The GAO notes offshore, would cost from 0.3 to 24 percent that “the magnitude of actual spending on less than if all the services in these contracts offshored services we identified is likely con- were to be performed in the United States. siderably lower than $339 million.” Why? In some cases offshoring helped improve Even if some part of a contract is performed service. For example, contractors might tap overseas, chances are most of it is done on a provider in a different time zone to ensure American soil. One service provider with that Americans can reach a customer service many contracts estimates that offshoring representative or technician 24 hours a day, amounts to less than 3 percent of the total seven days a week. Offshoring also helps services provided through these contracts. contractors during busy periods. A U.S.- Another contractor reported that offshored based call center may call upon an offshore computer software programming accounted operation when call volumes become too for less than 1 percent of the total package great to manage alone. of services provided to states. Moreover, Few state officials identified any prob- the public perception of offshoring—where lems with offshore service providers, but an agency contracts directly with a foreign those who did cited difficulty understanding company—was also rare. In most cases off- the English of software programmers or cus- shoring occurred when a U.S. company used tomer service representatives. Customer ser- subcontractors who performed some work vice and help desk functions were the most overseas. common type of services to be offshored State officials cited cost savings as a key and services that were sometimes offshored benefit of offshoring. Fifteen state program include claims investigations, supplemental directors performed cost comparisons and software programming, and data entry.

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Surface Transportation

Contents A. Why Mobility Matters B. Reason’s Mobility Project C. Surface Transportation Update D. The Many Benefits of Telecommuting E. Coming to America? A Cautionary View on Importing London-Style Congestion Pricing F. Virtual Exclusive Busways: Houston Leads the Way

A. Why Mobility driver spends 93 hours—more than two Matters work weeks—stranded on the roads. Con- gestion smothers well-established areas (it’s Tell someone in up 183 percent in Washington, D.C.) as well our nation’s cities that as upstart ones (up 475 percent in Atlanta). congestion is a problem Congestion has gotten much worse in and you probably won’t even elicit a blink. areas where we expect it to be bad, but it’s Americans know congestion is awful and also making life increasing sluggish across they’re certainly not shy about complain- the nation, from Portland to Austin to ing about it. Any one of us can rattle off the Charlotte. Every major city, as well as many ways congestion frustrates our own lives, that you might not consider “major,” has but we’re less likely to step back, add others’ a growing congestion problem. In 1983, frustrations to our own, and consider the just one urbanized area experienced enough full extent of the problem. Today commut- congestion where the average driver in peak ers, customers and businesses shape more hours spent more than 40 hours stuck in and more of their activities around what traffic. By 2003, 25 urbanized areas reached used to be considered just an everyday ir- this threshold. ritant. We know congestion is awful, but it Naturally businesses want to cater to may be even worse than we realized. their customers, but now all sorts of busi- During the past two decades congestion nesses are forced to cater to congestion first. has shot up over 200 percent nationwide. Blue collar plumbers and repairman try to The average American now spends 47 hours reach as many customers as possible but a year stuck in congestion—more than an congestion stands in their way. White collar entire work week—and it’s much worse in professionals, from salespeople to realtors, our big cities. In , the average

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face similar headaches. Most of us fight that is gradually taken away by congestion. congestion on our way to and from work, When people, products, and ideas cannot but these people do battle with it all day churn freely, an urban area becomes more long. Congestion makes it harder for would- segregated. It behaves less like a dynamic be buyers and sellers to connect and it also metropolis that draws on the talents of all shrinks labor pools. its denizens and more like a collection of Shrinking labor pools often hurt high- isolated hamlets. tech, financial, and other specialized opera- Reason Foundation has responded by tions most. According to a recent survey, initiating the Mobility Project (see www.rea- Silicon Valley financial companies fingered son.org/mobility), a long-term, nationwide congestion as their number-one headache— effort to help stimulate urban economies by even ahead of longstanding business head- improving mobility and cutting back con- aches like taxes, regulations, and health care gestion. The Mobility Project incorporates costs. ideas from a wide range of scholars and Employers who require workers with presents comprehensive policy recommenda- specialized skills want to be able to draw tions that will help our cities realize their from as large a labor pool as possible for, full potential. unlike fast food restaurants and certain Too often lawmakers and voters seem other businesses, they cannot just hire resigned to mounting congestion. Indeed whoever’s nearby. Yet before they hire a few metropolitan areas are actually intent promising applicant, employers must be sure on cutting it back—making a commitment that person can actually get to work reliably. to slow congestion’s growth is usually all Congestion isn’t just frustrating because it they hope to do. Yet congestion isn’t like slows us down. It’s frustrating because from gravity. It’s not an unstoppable force. Across day-to-day we don’t know how much it will the world cities have adopted innova- slow us down. This element of unpredict- tions—some small-scale, some large—that ability wears on commuters and employers. quell congestion. The trick is mustering the When Dell computers cited congestion political momentum necessary to cobble as a major factor in its decision to expand in these innovations together and reinvigorate Nashville instead of Austin, Texas learned urban life. that transportation troubles can also push businesses to other states. “We lost 10,000 B. Reason’s Mobility Project jobs in one day,” recalls Texas State Rep. Reason Foundation is developing practi- Mike Krusee, who has since helped Texas cal, cost-effective solutions to traffic conges- embark upon our nation’s most ambitious tion with the Galvin Mobility Project, a pol- congestion-cutting effort. icy initiative that will significantly increase Dell’s decision shocked Texas into our urban mobility through innovative engi- making a commitment to improving mo- neering, value pricing, public-private part- bility, but most of the rest of the nation nerships, and innovations in performance continues to dawdle. Lawmakers often fail and management. Under the leadership of to appreciate the mobility-congestion give- Reason’s Director of Transportation Studies and-take. Mobility gives economies vitality Robert Poole, Reason’s original research is

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Reason’s Galvin Mobility Project have arteries. You put in more blood vessels and those blood vessels will come in two forms that are not cur- Reason’s Galvin Mobility Project is made possible rently very apparent. One is tunnels and the other is by the generous support of Bob Galvin. Bob Galvin is bridges. the former CEO and Chairman of Motorola, where he Why has our political class been so slow to address led the company through nearly three decades of suc- mobility and congestion? cessful growth and renewal. He was instrumental in Galvin: Most leaders are not good anticipators. I’ve implementing the Six Sigma quality system at Motoro- known lots and lots and lots of leaders and particularly la. In 2005, he was awarded the Vannevar Bush Award those that are allegedly influential in Washington and for “his visionary leadership to enhance U.S. innova- they’re ossified. tion, competitiveness, and excellence at the interface What about the business community? of science and technology with the Nation’s industrial Galvin: They’re oblivious to it. enterprise. In the counsels of government, industry, and Do you think that’s beginning to change? academe, he unselfishly gave the Nation the benefit of Galvin: I think we have a chance to change it, his knowledge, experience and creative wisdom while but on its own it’s not changing. Over the years I’ve leading his company in its great contribution to the watched the ordinary thinking of the people who had computing and telecommunications transformation of titles and they were just doing ordinary things. They society.” were never attempting to anticipate the grand situa- In May 2006, Reason interviewed Mr. Galvin about tion. What we have to have is a passion. This isn’t just urban congestion and the Galvin Mobility Project. another lane on the highway or a little better timing What got you interested in mobility issues? of lights or a picking up of accidents faster. Those are Galvin: I try to think of big subjects at least once what I call the “art of the possible.” And that’s what in a while and I was thinking of the jobs situation in most leaders do; they just deal with the art of the pos- America. And even though there’s pretty good em- sible. ployment now there are challenges to having enough But that’s not real leadership. A leader is someone jobs in America. To me whenever there’s a need you who takes us elsewhere and I think my thesis will take have to have a strategy. A strategy is an application of people elsewhere if they’ll follow it. resources and I thought we need some new strategies Few government officials talk about actually cutting in the United States in order to have employment op- congestion. Most just hope to reduce congestion’s portunities. And two of those things I thought of were rate of growth. Why have Americans accepted this there has to be a reliable energy system and the other surrender? is we have to eliminate congestion. And I was thinking Galvin: I think they’re accepting it unconsciously, of it as a convenience and in the middle of my thinking reluctantly because they assume nothing can be done I said wait a minute—congestion is the same thing as about it. If we awaken the world, if we eliminate the an arterial problem in the body. And if it gets clogged, problem, imagine what we will do to the dynamics of it dies. And all of a sudden I came to a conclusion that the economy. if major cities have not awakened to the fact that they You seem to enjoy taking people farther than they have to eliminate congestion, the cities will die. thought they could take themselves. How will they die? Galvin: That has been the nature of my life. That’s Galvin: Nobody will be able to get around. It’s the what this is all about. If there is a big problem you have same reason the heart dies. The artery gets clogged. to do something about it. That means, for example, you The delivery can’t be made to the stores, to the facto- have to start building tunnels. ries. People can’t get out and around. They can’t get to France, Australia and other nations have embraced work. They haven’t got flexibility. tunneling and other innovative ideas more than we What do you expect the Galvin Mobility Project to have. How will that affect our competitiveness? accomplish? Galvin: I hope it inspires us. The Europeans are Galvin: I expect it to achieve a recognition of the way ahead of us. The awakening has to come from our principle I just described. And then someone asks, group. We are the alarm clock. “Well, what do you do about it?” Well you have to

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building comprehensive policy recommenda- ity as governments find their roadways in tions that enhance mobility and help local desperate need of repair and expansion and officials move beyond business-as-usual their pockets all but empty. Tolling repre- transportation planning. sents the privatization of highway finance, in In addition to a series of policy studies which government agencies and private par- examining issues ranging from how adding ties alike turn to private capital markets to new road capacity impacts the environment raise funds up front, repaying the investors to improving the institutions that oper- over time out of the toll revenues collected. ate and manage road systems, the Galvin Increasingly, new toll road and toll lane Mobility Project will promote solutions projects are being developed and operated that take the principles of privatization into by the private sector, under some form of consideration. The project will explore op- public-private partnership (PPP) agreement. portunities to bring the power of the market Both tolling and PPPs may have reached a to bear on mobility through financing and critical mass of importance for the future of operating innovations such as private invest- U.S. highways in the 21st century. ment, public-private partnerships, as well as In February 2006, transportation ex- the demand-management power of variable pert Kenneth Orski wrote in Innovation pricing. Briefs that “highway tolling has reached the tipping point.” He cited a whole range Dell’s decision shocked Texas into making of recent federal, state, and local govern- a commitment to improving mobility, but, ment decisions in favor of increased tolling, most of the rest of the nation continues to as well as the general buzz of the January dawdle. 2006 Washington, D.C. annual meeting of the Transportation Research Board. At that The project will also develop mobility meeting a special TRB committee on the recommendations for individual U.S. cities, long-term viability of fuel taxes for highway illustrating how solutions can be applied finance released its report, concluding that to city-specific problems. Throughout, the beyond the next 15 years, fuel taxes look project team will be working with national increasingly dubious as the principal high- and local transportation officials to develop way funding source, and recommending support for implementation of the policy accelerated state and federal efforts to gain program. experience with tolling and PPPs to lay the Congestion is not inevitable, and groundwork for a longer-term transition to through the Galvin Mobility Project, Reason direct, electronic charging for highway use is working with top transportation experts per mile driven. to end the gridlock caused by business-as- A recent report for the Federal Highway usual transportation planning. Administration (FHWA) by PB Consult provides a new perspective on the growing C. Surface Transportation Update role of tolling. Though toll roads represent only 4,630 miles of the 162,000-mile Na- 1. Introduction and Overview tional Highway System (2.8 percent), they Recently tolling has gained in popular- generate $6.5 billion per year (4.5 percent

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of total highway expenditures by all levels per year. Toll projects are helping to fill that of government). But that snapshot greatly gap. The second key factor is the very rapid understates the emerging role of toll roads. market penetration of electronic toll collec- The report identifies 147 toll projects that tion. A survey conducted by Tollroadsnews. have been moved into the planning, NEPA com, found that over 59 percent of transac- review, design/finance, construction, or op- tions at the 43 largest U.S. toll road opera- erational stage since 1992, in 22 states and tions were being made by transponder as of one territory. These projects, if they are all the first quarter of 2006. All but two large built, total $76.7 billion in cost and repre- toll agencies (Indiana and Ohio) have imple- sent over 3,400 new centerline miles (13,800 mented electronic tolling. Many of these lane-miles) of capacity. The report concludes agencies are implementing high-speed open- that at this rate, toll roads are responsible road tolling, where toll plazas are removed for 30 to 40 percent of new limited-access and tolling takes place by driving under a road mileage (meaning freeways and long- gantry at normal highway speed; those with- distance highways such as Interstates). out transponders have to exit and make use Two key factors help to explain this of old-fashioned toll booths off to the side. rapid growth in tolling. One is the mis- Nonstop electronic toll collection removes match between highway investment needs one of the major customer problems with and available fuel-tax revenues. The latest tolling—long waits at congested toll plazas. FHWA biennial conditions and performance Finally, while tolling overall has grown report puts the gap between current annual significantly, so has the use of PPP arrange- highway investment and the annual sum ments for toll projects. Table 9 shows the needed to both maintain asset values and toll roads developed during the 1990s in the keep pace with travel demand at $51 billion first wave of PPP toll roads. Though mostly

Table 9: New PPP Toll Roads in Operation State Location Road Cost ($B) PPP Type AL Tuscaloosa Black Warrior Pkwy Br. $0.025 BOO AL Montgomery Emerald Mt. Expwy Br. $0.004 BOO AL Foley Foley Beach Express $0.044 BOO AL Montgomery River Pkwy Bridge $0.012 BOO MO Lake of the Ozarks Lake of the Ozarks Br $0.040 BOT ND Fargo Fargo Bridge $0.002 BOT CA Orange County 91 Express Lanes $0.130 BTO SC Greenville Southern Connector $0.191 DBFO TX Laredo Camino Colombia $0.090 BOT VA Loudon County Dulles Greenway $0.430 BOT VA Richmond Pocahontas Pkwy $0.325 DBFO Total $1.293 BOO = Build-Own-Operate BOT = Build-Operate-Transfer BTO = Build-Transfer-Operate DBFO = Design-Build-Finance-Operate

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Table 10: Privatizations of Existing Toll Facilities State Location Road Cost ($B) Type MI Detroit Detroit-Windsor Tunnel $0.07 IL Chicago Skyway $1.83 99-year lease IN Indiana Indiana Toll Road $3.85 75-year lease VA Loudoun County Dulles Greenway $0.62 Total $6.37

Table 11: Current PPP proposals, March 2006 State Location Route Est total cost, $B Type of Project CA San Diego SR 125 $0.6 new toll road CO Denver C-470 $0.4 add HOT lanes GA Atlanta I-75/575 $1.8 add HOT and toll truck lanes GA Atlanta GA-400 $1.4 add HOT lanes OR Portland 3 new routes $1.0 new toll roads TX San Antonio to TTC-35 $7.2 new toll road Dallas TX Dallas I-635 $3.0 add HOT lanes, rebuild freeway TX Dallas SH 121 $0.3 new toll road TX San Antonio Loop 1604 $0.6 add HOT lanes TX Ft. Worth SH 161 $0.5 new toll road VA TN to WV I-81 $7.0 add toll truck lanes, rebuild highway VA Northern VA I-495 $0.9 add HOT lanes VA Northern VA I-95/395 $1.0 add HOT lanes $25.7 small projects, they total nearly $1.3 billion federal highway, highway safety, transit in new private capital investment. Table 10 and other surface transportation projects shows the results thus far of the privatiza- through 1997), each federal surface trans- tion of existing toll roads, with four such portation reauthorization bill has been more transactions totaling $6.4 billion. And Table favorable to tolling and PPPs. The Safe, Ac- 11 lists PPP projects for new toll roads or countable, Flexible, Efficient Transportation toll lanes that are officially under way in six Equity Act: A Legacy for Users (SAFETEA- states as of early 2006. These projects total LU), enacted late in 2005, was no exception. $25.7 billion. Compared with the pre-ISTEA situation in which tolls were banned from federal-aid 2. SAFETEA-LU Tolling & PPP Provisions highways, as of 2006 there are six tolling Since the passage of the Intermodal Sur- and pricing programs in the federal pro- face Transportation Efficiency Act (ISTEA) gram, as follows: of 1991 (federal legislation authorizing • Value Pricing Pilot Program, under

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which 15 project-partner state DOTs private partnerships sometimes find them- may carry out a variety of pricing selves hamstrung by their own regulations. projects, including on Interstates; Many states have no legislation enabling • Express Lanes Demonstration Program, such projects to even be considered and under which up to 15 projects may must take that legal step first before plan- add express toll lanes to congested ning projects. In 2005 several states worked Interstates; to change their laws to lay the groundwork for tolling and PPPs. • Interstate Reconstruction and Texas made some fine-tuning changes Rehabilitation Pilot Program, under in its landmark 2003 tolling and PPP law which up to three states may rebuild an during 2005. HB 2702, signed by Gov. Rick existing Interstate using toll finance; Perry on June 14, 2005, does a number of • Interstate Construction Toll Pilot things. To defuse a budding controversy Program, under which up to three over the possible conversion of existing free states may use toll finance to build new roads or lanes to tolls, it requires a local ref- Interstates; erendum to approve any such conversions. It • HOV to HOT conversion, under which requires that entire concession or other PPP existing HOV lanes may charge tolls agreements (called Comprehensive Develop- to vehicles that do not meet the high- ment Agreements in Texas) be made public. occupancy requirements; Most concession terms will be limited to 50 • 23 Sec. 129 Tolling Agreements years. Non-compete clauses cannot limit or permit states to replace free bridges on prohibit projects of local governments or the Interstate system with toll bridges. projects that are in the Unified Transporta- FHWA has set up a new Tolling and tion Plan. And state and local authorities Pricing Team to provide one-stop assistance must approve the methodology used to set with any or all of these programs. toll rates in PPP projects. In addition, the an- In addition to these six programs, there nual amount that the state can invest in toll are important financing provisions in SAF- projects that are not self-supporting from ETEA-LU. Federal support for toll toll revenues was increased from $800 mil- projects has been liberalized under the TIFIA lion to $2 billion. program. And for the first time, PPP toll projects under which the private partner has The annual amount that the state can invest a long-term ownership interest in the proj- in toll projects that are not self-supporting ect (e.g., under long-term concessions) can from toll revenues was increased from $800 be financed using tax-exempt (rather than million to $2 billion. taxable) toll revenue bonds. The new law provides for issuance of up to $15 billion of The first quarter of 2006 saw two new such private activity bonds during the life of state enabling measures enacted. Indiana the SAFETEA-LU legislation. passed Gov. Mitch Daniels’ bill to authorize the long-term lease of the Indiana Toll Road 3. State Enabling Legislation and the development of I-69 from India- States looking into tolling and public- napolis to Evansville as a toll road, possibly

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via a PPP arrangement. With relatively few entity to retain ownership of the asset while other PPP toll road prospects, the state did divesting itself of the day-to-day manage- not seek broader tolling/PPP authority. And ment and operation of it. Outright sale gets Utah enacted SB 80, a broad enabling act government out of what is often a money- that permits PPPs for tollways, with projects losing project in desperate need of expensive able to be originated either by the private upgrading while reaping a welcome cash sector (unsolicited proposals) or the state bonus for struggling economies at the same (via RFPs). The new law includes HOT time. lanes as one category of toll/PPP project. Just as the 99-year lease of the Chicago As in Texas, the state may provide partial Skyway for $1.8 billion was the talk of funding support for toll projects that do not appear to have sufficient traffic to be 100 2005, so the 75-year lease of the Indiana percent toll-financed. Concession terms may Toll Road for $3.85 billion has become the be up to 99 years. talk of 2006 in transportation circles. Un- Efforts to pass enabling legislation are like the Chicago transaction, whose pro- continuing for a second year in California ceeds were used to pay off debt and fund and New York. California Gov. Arnold other municipal balance-sheet items, in Schwarzenegger proposed a 10-year Stra- Indiana Gov. Daniels crafted the privatiza- tegic Growth Plan calling for up to $107 tion proposal as the key to fully funding his billion of investment in transportation proposed 10-year highway program. Under infrastructure. The proposed legislation the “Major Moves” program, highways includes the design-build and PPP provisions throughout the state would be upgraded from 2005’s failed AB 850; that measure over the next decade. But the price tag was approved on a bipartisan basis by the was $2.8 billion more than available fund- transportation committees in both houses, ing sources would provide. Thus, the key but never reached the floor in either due to to fully funding Major Moves became the fierce opposition from the Caltrans engi- receipt of up-front lease proceeds from the neers’ union. In New York, Gov. George Toll Road privatization. In the end, the win- Pataki likewise revived his tolling/PPP enabling measure from 2005. In support of ning bid from Cintra/Macquarie was signifi- this effort, the New York State DOT and the cantly higher than expectations, enabling the University Transportation Research Center state to propose setting up a long-term fund held a well-attended day-long workshop on for further transportation investments. “innovative transportation financing and The successful privatization of the Indi- contracting strategies” in Albany on March ana Toll Road encouraged public officials in 8, 2006. Much of the near-term attention other states to consider privatization of their has focused on a possible PPP deal to re- toll roads. The most ambitious effort as of place the aging Tappan Zee Bridge across early 2006 was in Houston, where Harris the Hudson River. County commissioned three linked feasibil- 4. Sale or Lease of Existing Toll Roads ity studies on alternatives for the Harris County Toll Road system. Citigroup’s team Strapped governments can also raise reviewed the best options if the system were cash by selling or leasing their assets, includ- kept within the public sector. J.P. Morgan’s ing existing toll roads. Leasing enables the

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team explored a possible sale and estimated a state legislator introduced a bill to study that the county could have received as the privatization of the Chesapeake Bay much as $20 billion if it sold the system. A Bridge Tunnel. team analyzed a long-term In April 2006 Illinois legislators released concession agreement and concluded that, a request for proposals for a study of the depending on the length, a lease could bring privatization, via long-term lease, of the Il- in $7.5 billion to $13 billion to the county. linois State Toll Highway Authority system Ultimately, the Harris County Commission- of toll roads. That large system is under way ers Court voted unanimously in mid-June on a 10-year, $5.3 billion expansion pro- to continue running the county’s toll road gram. In Ohio, gubernatorial candidate (and system. current Secretary of State) J. Kenneth Black- In Virginia, the existing privately con- well has proposed a long-term lease of the cessioned Dulles Greenway changed hands Ohio Turnpike, but unlike the Indiana lease when Macquarie Infrastructure Group (where the proceeds are all to be invested in bought an 86.7 percent interest from origi- transportation infrastructure), Blackwell’s nal owner TRIP II for $620 million. That plan calls for using the proceeds to create a toll road has 51 years remaining on its con- JOB Fund to put money into a plethora of cession agreement with the state. Virginia non-transportation projects. And in New had received five proposals for a long-term Jersey, although Gov. Jon Corzine initially lease of the adjoining public-sector Dulles ruled out leasing the New Jersey Turnpike to Toll Road in October 2005, ranging up bail out the nearly bankrupt Transportation to $5.7 billion. But early in 2006, a new Trust Fund, speculation continues that the administration decided to do a public-pub- former Goldman Sachs banker will consider lic partnership instead, under which the this option. He was quoted in the Philadel- Metropolitan Washington Airports Author- phia Inquirer in February 2006 saying “It’s ity (which owns the on which not on the table right now. It ought to be the toll road is built) would take over the proven that these things [Chicago and Indi- toll road and use toll revenues to fund $1.7 ana] are successful before we actually think billion of the cost of extending the local seriously about it. There is enough experi- Metrorail heavy rail system to Dulles Air- mentation going on out there. I’d rather wait port. Virginia DOT announced in May 2006 for the evidence.” that it had reached an agreement to lease Privatization of existing toll roads has the financially troubled start-up toll road, also come up in Delaware and Kansas, but the Pocahontas Parkway in Richmond, to at this point no studies are under way in Australia’s Transurban. The company will either of those states. lease the toll road for 99 years, pay off all 5. PPP Toll Roads & Toll Lanes its debt, and build the long-sought 1.6-mile connector to the Richmond Airport. Instead Texas continues to lead the nation in of paying an up-front fee for the money- PPP toll road projects under development. losing toll road, Transurban will share 40 On January 17, 2006 Texas DOT held a percent of gross revenues with the state once workshop on its PPP toll roads initiative, the toll road becomes profitable. Meanwhile, attended by over 400 people. At the work-

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shop, TxDOT made it clear that it prefers State Transportation Board. The first, by a long-term concession agreements, though it Bechtel/Kiewit team, would add HOT lanes is open to all types of PPPs. The agency has (and possibly also toll truck lanes) to I-75 made clear that it plans to pursue its second and I-575 in the northwest corridor sub- major Trans-Texas Corridor, TTC-69, as urbs of Atlanta. The second, by Washington a PPP toll project, like it is doing with the Group International, would add HOT lanes $7.2 billion TTC-35. Among the other proj- on Georgia 400, part of which is already ects that are under way as PPPs are: an Atlanta toll road. And Florida is now • Adding managed lanes, some of them seeking proposals for the first PPP toll road in tunnels, to the LBJ Freeway (I-635) under its revised enabling law. The Tampa- as part of a $3 billion reconstruction of Hillsborough County Expressway Authority that major corridor in Dallas; got a standing room only crowd at its initial • Adding 42 miles of toll lanes on Loop bidder’s conference, in March 2006, for the 1604 and US 281 on the north side of $150 million East-West Road. Although San Antonio; Florida has numerous public-sector toll roads, East-West would be its first PPP con- • Developing SH 121 as a new 24-mile cession project. toll road on the north side of Dallas; In other states: • Developing the proposed $500 million • Oregon selected the winning bidder for SH 161 in Ft. Worth as a toll road. three new toll road projects in the suburbs Virginia is another high-profile practitio- of Portland: a team headed by Macquarie, ner of PPP toll roads. The state’s first HOT proposing a long-term concession approach. lanes project, awaiting final environmental • In Colorado, CDOT has proposed a clearance, is a $900 million Fluor/Trans- network of six express toll lanes plus the urban project that will add two new HOT missing link of its beltway, costing nearly $5 lanes in each direction to the southwest billion. The agency has received unsolicited quadrant of the traffic-choked Washing- PPP proposals for several of these, but ton Beltway (I-495). The same team was exactly how the projects will be developed selected in October 2005 as the preferred and managed remains to be decided. bidder to add HOT lanes on a long stretch • In Pennsylvania, the House Select of I-95 and I-395 approaching Washington, Committee on Toll Roads released the DC, a total length of 56 miles. In February results of a 20-month study in February 2006, VDOT announced that it was seek- 2006. It found that the state can afford ing a PPP deal to develop a new, 55-mile to build little of the estimated $6 billion toll road from Norfolk to the west, as part in needed highway additions and of a revamped US 460. Less further along is recommended increased use of tolling and a possible tolled PPP approach for a Third PPPs. Officials have discussed informally Hampton Roads Crossing, with competing a possible lease of the uncompleted unsolicited proposals from Fluor and Skan- Mon-Fayette Expressway, but thus far ska. Pennsylvania lacks enabling legislation for Georgia’s revised PPP toll roads law has PPP toll roads. led to two proposals being accepted by the • In Missouri, the St. Louis-based

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Regional Business Council released a study HOT lanes are under study in nearby Santa in January 2006 calling for a PPP toll bridge Clara County. The Metropolitan Transpor- as the best alternative for a new I-70 bridge tation Commission, which is the Bay Area’s across the Mississippi River. regional transportation planning agency, • The South Carolina legislature issued an RFP in September 2005 for a re- authorized tolling to finance construction gional HOT Network study. and operation of a new I-73, to link I-95 Minnesota marked the first anniversary with the resort-area Conway Bypass. The of its HOV to HOT conversion on I-394 in state would have to apply for one of the May 2006. Popular support for the value- three slots in the new federal Interstate pilot priced lanes has been high, though toll program. revenue has been less than projected. But the variable pricing mechanism is working well 6. Managed Lanes and has gained acceptance, validating the Separately from the ongoing PPP trends similar success with variable pricing in San discussed above, a number of large urban ar- Diego. eas are studying or implementing “managed lanes” on congested freeways. Generally The first HOV to HOT conversion, on I-15 in these are either HOT lanes (in which high- San Diego, proved to be so popular that the occupancy vehicles travel at no charge and agency in question, SANDAG, is now under others pay a value-priced toll) or express toll way lengthening that project from 8 miles lanes (ETLs) in which all vehicles pay. In ei- to 20 miles, and widening it from two lanes ther case, the policy is generally to allow bus to four. rapid transit (BRT) vehicles to use the lanes without charge. Managed lanes allow gov- Colorado’s long-awaited conversion ernments to improve traffic flow and raise of the HOV lanes on Denver’s I-25N to revenues by restricting access to such lanes HOT lanes took place in June 2006, adding to specific types of vehicles, and generally by another state to the roster of those convert- using some form of pricing as the key traffic ing HOV lanes to priced lanes. Washington management tool. Carpool (high-occupancy State DOT is under way on planning to do vehicle, or HOV) lanes are an early form of likewise for the existing HOV lanes on SR (non-priced) managed lanes. The term also 167 south of Seattle. includes HOT lanes, express toll lanes, and In Utah, the state’s Transportation truck-only toll lanes. Commission voted in April 2006 to convert In California, the first HOV to HOT a 40-mile stretch of HOV lanes on I-15 to conversion, on I-15 in San Diego, proved to HOT lanes. For now, access will be based on be so popular that the agency in question, drivers buying monthly stickers, initially for SANDAG, is now under way lengthening $50/month; this is also how the I-15 HOT that project from 8 miles to 20 miles, and lane project in San Diego began. Utah DOT widening it from two lanes to four. A new plans to convert to electronic toll collection HOT lane project is in the design stage on I- at a later date. 680, a major commuter route from the East A far bigger project is under construc- Bay into Silicon Valley. And several other tion on the Katy Freeway (I-10) in Houston,

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where four variably priced HOT lanes are the Miami-Dade Expressway Authority, being added as part of a major reconstruc- the Florida DOT, and the Florida Turnpike tion and widening of that freeway. There is Enterprise have plans, at various stages currently a single, reversible HOV lane on of development, to add managed lanes to, that freeway that allows HOV-2 vehicles to respectively, the Dolphin Expressway, the purchase access during rush hours, when Homestead Extension of Florida’s Turnpike, only HOV-3s are otherwise allowed. The and I-95. In Tampa, elevated reversible new managed lanes will charge all vehicles express toll lanes are under construction on except buses and HOV-3s. the Crosstown Expressway. The Turnpike Florida is moving forward with several Enterprise had plans to add express toll managed lanes projects, all being carried out lanes to highly congested I-4 in Orlando, by public-sector toll authorities. In Miami, but that project was specifically blocked by

What are Toll Truck Lanes? The concept of toll truck lanes refers to specialized, heavy-duty, truck-only lanes added to existing major highways. These lanes would be barrier-separated from general traffic to form separate truckways, financed by tolls paid by trucking firms. The implementation of toll truck lanes would offer a number of benefits: • It would facilitate the operation of longer combination vehicles (LCVs), an ap- proach used in some western states and in Canada that allows a single driver to carry several times the payload that is permitted in those states in which federal law currently bans LCVs. • By significantly increasing truck payload capacity, toll truck lanes would reduce the cost of shipping most U.S. freight, making better use of the nation’s extensive high- way network. • By separating much heavy truck traffic from automobiles, toll truck lanes would reduce the extent of car-truck collisions, thereby improving highway safety. • By making possible the transportation of more freight in fewer trucks, toll truck lanes would reduce vehicle miles traveled, fuel consumption, and vehicle emissions. • The new, heavy-duty lane capacity would also be valuable for emergency use in time of war, natural disaster, or terrorist attacks. • By making U.S. long-distance truck configurations more compatible with those of Canada and Mexico, toll truck lanes would further the objectives of NAFTA. • By making use of toll financing, this important addition to the highway system could be accomplished at much less cost to highway trust funds than paying for them out of fuel tax revenues. For more information on toll truck lanes, see Reason Foundation’s 2002 study, Toll Truckways: A New Path Toward Safer and More Efficient Freight Transportation, available at www.reason.org/ps294.pdf.

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a provision inserted into SAFETEA-LU by environmental review process. It still faces Rep. John Mica (R, FL), who opposes the stiff opposition from the trucking industry, idea. as well as from various local groups and environmentalists who object to widening 7. Toll Truck Lanes the highway (which is already a major truck One of the most provocative transpor- route). tation planning studies in recent years was The other serious toll truck lane project released in spring 2005 by Georgia’s State is the $14 billion plan by the Southern Cali- Road & Tollway Authority (SRTA). Af- fornia Association of Governments (SCAG) ter modeling the potential of a network of to add truck toll lanes capable of handling HOT lanes on the Atlanta area’s congested double- and triple-trailer rigs to I-710, SR freeways, SRTA asked consultant Parsons 60, and I-15, thereby connecting the ports of Brinckerhoff to look separately at the Long Beach and Los Angeles to the ware- possible benefits of adding truck-only toll houses and distribution centers in what is (TOT) lanes. Atlanta is the trucking cross- known as the Inland Empire in Riverside roads of the Southeast, but because I-75 and and San Bernardino Counties. Support for I-85 merge south of downtown into a hugely the idea within the business community congested downtown connector, heavy increased during 2005, and Gov. Schwar- trucks are required to go around downtown zenegger has endorsed the idea as part of his on what locals refer to as The Perimeter, I- Strategic Growth Plan. SCAG has urged the 285. That freeway is also heavily congested, enactment of enabling legislation for tolls so the combination of a longer route and and PPPs to facilitate this project. congested conditions costs 23,000 truckers each day plenty of wasted time. The study’s 8. Overseas Toll Road Developments most cost-effective alternative proposed add- The long-term concession model, or ing voluntary TOT lanes instead of HOT lease, that has made such a splash in the lanes on about half of I-285 and on I-75 United States in 2005-06 has a long history. and I-85 outside of it. Besides saving truck- It originated in Europe during the 1960s, as ers more than an hour during rush hours, France, Spain, Italy, and later Portugal all and attracting 60 percent of such trucks out faced the need to develop modern, intercity of the regular lanes, this approach would super-highways but lacked the government reduce congestion on the freeways more funding to do so. France’s original conces- than the version of HOT lanes modeled in sion companies were investor-owned, but Parsons Brinckerhoff’s companion study. all except Cofiroute were taken over by the SRTA is now doing to follow-up studies of state following the OPEC oil crises of the additional TOT lane projects, one in Atlanta 1970s, when reduced toll revenues threat- and the other in Savannah. ened their financial viability. But between Elsewhere, the very ambitious $7 bil- 1999 and 2005, nearly all the European toll lion project to add mandatory toll truck road companies were privatized. lanes to the full length of I-81 in Virginia, The most recent, and largest, of these as proposed by winning bidder Star Solu- privatizations took place during the clos- tions, is still wending its way through the ing months of 2005 in France. The govern-

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ment auctioned off its majority ownership add non-tolled highway capacity under de- interests in ASF, APRR, and SANEF, which sign-build-finance-operate (DBFO) schemes. account for over 4,360 miles of motorway. Under such arrangements, the government Final proceeds are expected to be $17.8 competitively selects a private consortium billion. Previous privatizations include Italy under a long-term franchise, promising an- selling off its majority interest in Autostrade nual payments tied to performance. (In some in 1999 for $6.7 billion, Portugal’s sale of other European countries, the main per- BRISA for $2 billion in 1999, and Spain’s formance measure is annual traffic, which sale of ENA for $1.8 billion in 2003. is why those schemes are called “shadow tolls.”) In the U.K. version, the performance The long-term concession model, or lease, measures are things like availability of the that has made such a splash in the United lanes and pavement condition. The largest States in 2005-06 has a long history. It such scheme was announced in 2005: to originated in Europe during the 1960s, as widen about half of the highly congested France, Spain, Italy, and later Portugal all M25 London ring road, at an estimated cost faced the need to develop modern, intercity of $2.6 billion. Five global teams were pre- super-highways but lacked the government qualified in 2005, with the actual bidding funding to do so. process to take place in 2006, selection in 2007, and construction to begin in 2008. These countries continue to use the Canada’s only major private toll road concession model for new toll road projects, project is Toronto’s Highway 407 Express such as the Millau Viaduct and A-86 tun- Toll Route, developed under a design-build nel in France and a new Spanish toll road contract by the Ontario government and between Madrid and Toledo. And increas- privatized via a 99-year lease in 1999. A ingly, Europe’s toll road industry is becom- two-year controversy over the concession ing international. In December 2005, Spain’s company’s right to increase tolls without Cintra won the concession for a $900 asking permission (as provided for in the million toll road in the Lombardy region concession agreement) is finally over, after of northern Italy, while France’s Eiffage has multiple appeals that were all won by the proposed a $540 million northern bypass of company. A unanimous high court ruling on Bologna, Italy. And April 2006 saw the an- November 7, 2005 upheld the company’s nouncement that Spain’s Abertis would buy tolling power and ordered the province to Italy’s Autostrade for $17 billion, creating re-instate license plate denials to repeat toll the world’s largest toll road company. non-payers (as also provided for in the con- For the most part, the United Kingdom cession agreement). The minister, has not adopted the toll road concession while conceding on the toll-raising power, model, with the exception of several toll said the province would continue to litigate bridges and the M6Toll, a bypass route to on the plate-denial issue. But in early April avoid the most congested portion of the M6 2006, the two parties announced a settle- motorway through . Instead, ment, in which the government relinquished under the country’s Private Finance Initiative its claims in exchange for the company (PFI), it has engaged the private sector to providing some new frequent-user discounts

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and agreeing to accelerate its lane-widening fering that raised A$860M. The company program. itself is putting in A$460 million in equity, Elsewhere, Canadian provinces are with the balance funded by bank debt. As of largely following the U.K. Design-Build-Fi- February 2006, construction was ahead of nance-Operate (DBFO) model, tapping into schedule, with the projected November 2008 private-sector finance, construction, and opening very likely to be achieved. operation but without tolling (and hence Sydney’s latest private tollway, the A$2.2 without the net new revenue that tolling billion Westlink M7, opened eight months brings to highway finance). In Alberta, the early in December 2005. It completes the government issued an RFQ in March 2006 city’s beltway on the west side and is the for a missing link in Calgary’s ring road; it city’s first all-electronic toll road, similar to would be the province’s second DBFO high- the Melbourne CityLink. Two other Sydney- way project. British Columbia has two such area toll concession projects are not doing as projects under way. One is the C$1.5 billion well. The Cross-City Tunnel opened in 2005 Sea-to-Sky highway project, to be developed but has attracted less than half the forecast by a Macquarie/Kiewit team that was select- first-year traffic. Still under construction is ed in 2005. The other is the C$600 million the A$1.1 billion Lane Cove tunnel, whose Golden Ears Bridge across the Fraser River excavation suffered an accident that partial- in Vancouver, to be developed by a team ly undermined a nearby apartment building. lead by Bilfinger Berger. Although the bridge Meanwhile, Brisbane is moving forward will charge tolls, they will be collected by with its first toll concession project, a A$1.6 TransLink, the local transportation author- billion North-South Bypass Tunnel beneath ity, which will bear the traffic and revenue the inner city. Two finalist bidders were an- risk. Bilfinger will receive availability pay- nounced in December 2005. ments, as in the U.K. projects. Asia continues to be an important venue for tolling, especially in the three major Asia continues to be an important venue countries: Japan, China, and India. The for tolling, especially in the three major major news from Japan in 2005 was the countries: Japan, China, and India. first step in the long-term privatization of the country’s state-owned toll roads. In a Australia is one of the world leaders plan similar to the privatization of hugely in long-term concession toll roads, with a indebted Japan National Railway 15 years whole network of them in operation in Syd- ago, the four government toll operators ney, the successful CityLink in Melbourne, were replaced on October 1, 2005 by six and a major new toll road, EastLink, under commercial corporations. Japan Highway way in Melbourne’s eastern suburbs. This Public Corporation was broken up into East, A$3 billion toll road will be 24 miles in Central, and West Highway Companies. The length, with six lanes, 17 interchanges, and urban toll road companies in Tokyo and a mile-long tunnel. Once the concession was Osaka/Kobe were converted into commer- awarded to a Macquarie-led consortium cial companies, as was the Honshu-Shikoku called ConnectEast, the company offered Bridge Authority. The huge ($395 billion) shares to the public via an initial public of- debt of these toll roads was transferred to

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a newly created Japan Expressway Holding has been developed, with the government and Debt Repayment Organization, which willing to invest up to 40 percent of the cost also took title to all the actual toll roads, of projects that cannot be fully self-support- which it will lease to the six operating com- ing from toll revenues. In February 2006, panies. They will make lease payments from the National Highways Authority signed their toll revenues; those payments are in- two new concession agreements for a pro- tended to let JEHDRO repay and retire the ject in Tamil Nadu that is part of the North debt over 45 to 50 years. Although the six South Corridor, under NHDP phase 2. new companies are intended to be publicly Latin America has been using the long- traded, initially they are fully government- term concession model for more than a owned. Moreover, the government must decade. ’s is the largest program, approve key management decisions, and it with over 9,000 km. of toll highway run can order them to invest in new, non-viable by the private sector under 36 concession toll road projects (which is what led to the agreements. Early in 2006 the government enormous existing debt burden). How all announced that it would accept bids for 25- this will turn out remains to be seen. year concessions to upgrade and toll another For the past 15 years, China has been 2,600 km. of federal roads on seven routes, creating a National Trunk Highway Sys- requiring an estimated $9 billion. About half tem, which encompassed 21,000 centerline the mileage is in southeastern Brazil, affect- miles as of the end of 2004. China plans to ing Belo Horizonte, Curitiba, Florianapolis, double this number by 2020, to cope with and Sao Paulo. rapid increases in car ownership and truck Chile has used long-term concessions to traffic. A significant fraction of this network upgrade much of the Pan American high- is funded, in part, by tolls, and many of the way, its major north-south route. And its more complex segments are being developed capital city, Santiago, has also become a under long-term concession agreements. The showplace for fully automated toll collec- concession companies, unlike those in the tion. A new 150 km. urban expressway sys- West, are often joint ventures between the tem has been developed over the past several private sector and government agencies. years under four separate concession agree- India is a late-comer to extensive high- ments, but with common electronic tolling way development. World Highways reports standards and full financial interoperability. that only in the last six years has there been The last major segment, the 29 km. Vespu- a policy shift from rail to roads, with the de- cio Norte Express, opened in January 2006, velopment of the National Highways Devel- three months ahead of schedule. The $620 opment Project (NHDP), a $13 billion effort million tollway is a joint venture of Spain’s to four-lane or six-lane about 13,000 km. ACS and Germany’s Hochtief. of inter-city highways. Phase 1, the Golden Mexico continues to use a mix of meth- Quadrilateral, linked the four major cities of ods as its government works toward build- Delhi, Kolkata, Chennai, and Mumbai. Be- ing a nationwide motorway system. In sum- yond that, the government has identified toll mer 2005 it pledged to spend $11 billion road concession opportunities of as much as on its road system over a two-year period, $45 billion. A model concession agreement including an upgrade of Highway 15 from

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Mexico City to the border crossing at No- long been suspicious of telecommuting. gales. It continues to award second-genera- tion concession projects for new toll roads, Telecommuting may be the most cost- such as the $800 million Libramiento Norte effective way to reduce rush-hour traffic. bypass of Mexico City. But it has also begun It helps improve air quality and highway trying the shadow toll (DBFO) model, begin- safety. ning with a $51 million project to upgrade a 74 km. route in Guanajuato. In some cases managers are right to be HOT lanes are also starting to catch on wary of telecommuting. Certain jobs are just overseas. In the United Kingdom, the Trans- not appropriate for telecommuting. Like any port agency is considering a pilot project tool, it is only useful in certain circumstan- to add HOT lanes to the congested M6 ces. Telecommuting will be a sensible choice motorway between Birmingham and Man- for certain organizations at certain times. chester. That 51-mile section carries 140,000 And we must not think of telecommuting vehicles per day and is highly congested. as an all-or-nothing proposition. Some may And in Israel, the Finance Ministry has work from home every day, but others may become the new champion of a controversial telecommute less often. Workers and man- proposal to add HOT lanes on commuter agers must learn how to telecommute and routes into Jerusalem and Tel Aviv (over the part of the process involves discovering the initial ideological objections of the Trans- right balance between working remotely and port Ministry). In March 2006 three bids working in the office. were received for the 30-year concession for Chances are the more our nation’s man- the Tel Aviv HOT lane; the winning bidder agers take a second look at telecommuting will also have the first option to bid on the the more they will come to appreciate its Jerusalem project. bottom-line benefits.

D. The Many Benefits of Telecommuting 1. Some Benefits of Telecommuting The decision to forego the daily com- More Productive Workers mute and work from home might not seem particularly revolutionary. Yet telecommut- Managers often regard telecommuters as ing has a positive impact on a surprisingly low-grade scammers, loafing at home when wide range of issues. they should be working hard at the office. Telecommuting may be the most cost- Yet in many cases telecommuters are actu- effective way to reduce rush-hour traffic. ally more productive than their office-bound It helps improve air quality and highway counterparts. safety. It conserves energy, expands opportu- • According to a March 2006 worldwide nities for the handicapped, and—when used survey by Insight Express and Sonic- as a substitute for offshore outsourcing—it WALL, 76 percent of employees report can help allay fears. It can that telecommuting improves their pro- even make organizations, public and private, ductivity. more productive, which is good news for • Among AT&T telecommuters, 72 per- our nation’s managers, many of whom have cent report that they get more done at

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home than at work. to spend as much time and effort in recruit- • J.D. Edwards found that its telecommut- ment and training. An extensive MONEY ers were 20 to 25 percent more produc- magazine survey uncovered more evidence tive than office workers. that telecommuting is linked with job satis- faction. • A survey of telecom- Satisfied workers had more work-from- muters found that they produced 43 per- home options than other respondents, with cent more business than office workers. only 38 percent saying telecommuting was Improved Recruitment, Lower Turnover never an option. Unhappy workers were least able to telecommute, with 70 percent Offering the option of telecommuting reporting it was not an option. The most is an inexpensive way for companies to stressed workers were also least able to tele- attract and retain good employees. Roughly commute, with only a third saying it was an two thirds of AT&T managers say that option for them at work. telecommuting is an advantage in keeping and attracting good employees. In a survey Lower Costs of 1400 CFOs, a third of respondents said With fewer employees in the office, tele- allowing telecommuting and flexible hours commuting allows companies to save on real was the best way to attract talent (See Table estate costs, and those savings can be sub- 12). An Ohio manager who makes extensive stantial. estimates that telecommut- use of telecommuting notes that junior ing saves $20 million per year in real estate employees work hard to earn the privilege costs. With $25 million worth of foregone of working at home. Those who do work at real estate costs, AT&T saves even more. home realize that they enjoy a sought-after Unisys may represent the best case scenar- perk and work hard to keep it. He credits io—telecommuting allowed the company to telecommuting with helping him maintain cut office space by 90 percent. low employee turnover. Higher job satisfaction and lower Lower Absenteeism (and Presenteeism) Costs turnover mean that companies do not have Managers have begun to take note of

Table 12: Attracting Talent CFOs were asked: “In your opinion, which one of the following incentives is most effective in attracting top candidates?” Offering higher starting salaries than competitors 46% Allowing telecommuting and/or flexible work schedules 33% Offering signing bonuses 5% Offering extra vacation days 3% Benefits/benefit package/insurance 2% Other 3% Don’t know/no answer 8% Source: Robert Half International Inc. January 30, 2003

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costs associated with “presenteeism”—when ing allows them to be as productive as their workers are on the job but, because of ill- condition allows, and staying home will ness or other medical problems, are not fully likely quicken their recovery. For example, functional. Presenteeism costs U.S. compa- it would be better for someone feeling under nies over $150 billion per year, a figure that the weather to skip the morning commute far exceeds absenteeism costs. It’s no sur- and get some extra rest. And, when it comes prise that employees who don’t feel well are to getting well, there is no place like home. not as productive as they could be. At home the sick worker can bundle up in But since illnesses often spread through with blankets, sip soup, and scuttle about companies quickly, employees who come in slippers. In this case, telecommuting also to work sick can also drag down the pro- benefits the company at large because it ductivity of others. Increasingly, the sick quarantines the sick worker, making it less worker who downs gallons of cough syrup likely his or her illness will ravage the entire and heads to work is no longer regarded as staff. a hero, but a liability. (The British call them Improved Business Continuity “mucus troopers.”) More and more man- agers are recognizing this and urging sick In the event of an emergency—be it a workers to stay home. terrorist attack or the more common act Yet there is plenty of gray area between of nature—it pays to have telecommuting sick and well. Someone in the throes of the capabilities. If employees cannot access the flu is clearly sick. But what if that person headquarters of a particular business or just has the sniffles? Here telecommuting government agency, that organization can can help. Although many companies foster continue operations from remote locations. a get-to-work-no-matter-what environment, Rep. Tom Davis, R-Va, chairman of the presenteeism research shows that simply be- House Government Reform Committee, ing on-site does not make a sick worker fully recently highlighted telework’s national se- functional. Those on the verge of sickness curity benefits. “The of fed- would often be better off working from the eral agency functions inherent in a healthy comfort of their own homes. Telecommut- telework strategy can greatly increase the survivability of those agencies in the event of a terrorist attack or other disruptive crisis.” How many telecommuters are there? According to Ellen Galinsky of the Family and Work Institute, it was the less • Roughly 4.5 million Americans centralized companies who recovered from telecommute most work days. the September 11 attacks fastest. The same • Roughly 23 million Americans theme was uncovered in a recent Telework telecommute at least once per month. Coalition survey, as companies with tele- • Nearly 45 million Americans commuting programs found it easier to telecommute at least once per year. regroup after Hurricane Katrina. • Worldwide, roughly 83 million people 2. Telecommuting Trends telecommute at least one day per month. Measuring telecommuting’s growth can

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The How and Why of Telecommuting Some findings from a recent survey of 13 organizations (comprising more than 77,000 telecom- muters) with well-established telecommuting programs show that: • Most programs are driven by a desire to reduce real estate costs, but business continuity is becoming increasingly important. • Recruitment and retention remains a key driver for many organizations, especially since flexibility is in high demand by today’s workforce. • All organizations have “formal” telework programs, but larger organizations stressed the importance of moving the decision to the manager-employee level. • Internal resistance was fairly common at the outset, but once management saw the benefits first-hand, resistance turned to support. • Nearly all telework programs are voluntary. • The training programs vary from none to several weeks of intensive remote training. The trend is toward online training and tools. Source: The Telework Coalition, “Telework Benchmarking Study: Best Practices for Large-Scale Implementation in Public and Private Sector Organizations,” Washington, D.C., 2006.

be somewhat tricky because different orga- month in 2005. That’s up from 12 percent nizations define telecommuting differently. in 2004 and Gartner expects the figure to But regardless of how it’s defined it seems climb to 28 percent by 2008. quite clear that telecommuting is on the rise. Telecommuting has also fared well glob- From 1980 to 2000, the number of ally. Gartner reports that 82.5 million of the telecommuters (defined as those working at world’s workers worked from home at least home at least three days per week) jumped one day per month during 2005, more than to 4.2 million, a 92 percent increase. Dur- double the 2000 figure. Gartner expects the ing that period telecommuting was the world’s telecommuters to reach the 100 mil- only commute mode besides solo driving to lion mark by 2008. increase market share. U.S. Census figures Technological improvement is crucial to reveal that everything else—from transit to the spread of telecommuting. Take broad- carpooling to walking—lost market share. band access. It is no surprise that those with In fact, telecommuters outnumber transit high-speed Internet access are more likely commuters in 27 of our nation’s top 50 to telecommute. High-speed access makes metro areas. conducting business from home faster (50 The Census Bureau notes continued times faster than dial up), which also makes growth since 2000 and other organizations it easier and more convenient. have also found continued growth. Ac- The Internet celebrated its (unofficial) cording to research firm Gartner Inc. more 10th birthday in 2005. In just one decade, it than 23 percent of our nation’s workforce has transformed from a mysterious novelty worked from home at least one day per to a tool that average Americans rely on

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Figure 4: Growth of Households with Broadband Internet

40% 35% 30% 25% 20% 15%

of U.S. Households 10% % % 5% 0% 2000 2001 2002 2003 2004 2005

every day. Americans are not only getting • According to a MONEY magazine/ online in ever-increasing numbers, more and Salary.com survey of 26,000 workers, 16 more of us have access to broadband (Figure percent of respondents said they could 4). Five years ago only 4.4 percent of Ameri- telecommute any time they wanted, 28 can households had broadband. Today most percent could do so with their manager’s of those who use the Internet at home have approval and 55 percent were not it. More than 36 percent of American house- allowed to. holds (42.3 million) have broadband. By There is reason to believe that more 2008, analysts expect broadband to spread workers would telecommute if given the to over 56 percent of households (69.4 mil- opportunity. For example, according to a lion total households). 2005 San Diego Association of Governments Technology can make it easy for work- survey, 80 percent of area commuters would ers to stay home, but getting permission to telecommute if their employers gave them telecommute is a different matter. Analysis permission. This probably overstates poten- from The Family and Work Institute sug- tial growth—since what people say they will gests that in recent years managers have do is often different from what they actually not budged much. In 1998, 33 percent of do—but it still shows widespread interest in employers surveyed allowed at least some of telecommuting. their employees to telecommute on a regular Naturally, organizations that query basis. By 2005, the figure had only reached different groups of employers will report 35 percent. Surveys of employees also find different results. And there are some signs that telecommuting skepticism is still the that our nation’s bosses and managers are norm. rethinking their longstanding suspicion of • 80 percent of those responding to a telecommuting. Southern California Association of • According to a survey of 1,043 large Governments survey said their employers employers by Mercer Human Resources do not allow telecommuting. Consulting, the percentage of U.S.

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telecommuting-friendly companies even skeptics can be won over. A survey jumped from 32 percent in 2001 to 44 found that three-fourths of the 22,000 em- percent in 2005. ployees wanted to be able to telecommute • Salary.com predicts that more businesses more often, but they often encountered re- will expand their telecommuting sistance from managers. But eventually DLA programs and telecommuting took the managers changed their minds and now they number two slot on its “Top 10 Salary even embrace telecommuting as a way to Trends for 2006” list. improve worker satisfaction and productiv- ity and to keep and retain good employees. • A 2005 Robert Half International survey The DLA’s experience fits within a larger notes that 87 percent of executives trend among federal agencies. A recent polled said they plan to increase CDW-G survey of federal IT workers found telecommuting in the coming decade. that 41 percent had worked off site in 2005, • According to Fortune magazine’s 2006 double the figure of the previous year. And ranking of the 100 Best Companies the Office of Personnel Management reports to Work for, 79 percent of the 100 that the number of federal employees who companies allowed employees to telecommute is on the rise, increasing from telecommute at least 20 percent of the 4.2 percent in 2001 to 19 percent in 2004. time. In 1999, only 18 companies on the There are some promising developments list allowed for telecommuting. and it does appear that telecommuting is on JetBlue has embraced telecommuting the rise. Still, given the rapid improvement from its inception. For the past six years, the in telecommuting-enabling technology, over- low-cost carrier has allowed its reservation all telecommuting levels remain lower than agents to work from home and the company we might expect. But change takes time and says the decision has increased productivity it’s likely that more managers and employees and saved money (for example, less office will come to appreciate more of the benefits space). Six years ago JetBlue had 40 agents telecommuting offers. and today it has 1,500, 1,200 of which are telecommuters. E. Coming to America? A Cautionary Public-sector managers have been even View on Importing London-Style Con- less likely than their private-sector coun- gestion Pricing terparts to offer the telecommuting option. Almost as soon as he implemented con- Some agencies have even been threatened gestion pricing, London Mayor Ken Living- with losing funds if they do not make tele- stone began urging other mayors to follow commuting more available to employees. his lead. The Partnership for New York City, But again, there are signs that managers are a business association, investigated the idea, warming to at-home work. but New York Mayor Fairfax County, Virginia made good on recently ended speculation by insisting he a goal set in 2003 of having 20 percent of has no plans to bring congestion pricing the workforce telecommute an average of to the Big Apple. Even so, others, such as one day per week by the end of 2005. And San Francisco Mayor Gavin Newsom, have the Defense Logistics Agency shows that hinted that they might be interested.

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1. Congestion Pricing in London ists drive. Motorists pay the same amount Londoners must pay a toll when they en- whether they drive inside the zone for five ter the “Congestion Zone”—an eight-square minutes or five hours. mile portion of central London. Weekdays And there is the issue of cost. Hundreds between 7 am and 6:30 pm motorists must of cameras take pictures of cars as they enter pay the toll—a whopping $14 dollars per the zone, but each day staffers separate the day. Don’t pay the toll and you face hun- list of those who paid from those who didn’t dreds of dollars in fines. Tolls may be paid by hand. This makes the system enormously online, at certain stores, or by telephone expensive to operate. London is also rare (although several locals reported that paying among the world’s developed urban areas by phone is rather time consuming). Those in that its central business district is actu- who live within the zone enjoy a 90 percent ally growing in influence. It’s unclear what discount. the effect of congestion pricing would be in American cities, where central business One Londoner notes that a cab ride that districts are already losing ground to the used to take 25 minutes now takes only 10. suburbs. Still Americans can import certain as- London’s pricing scheme has reduced pects of London pricing. For example, May- traffic congestion by about a third and or Livingstone recognized that pricing can quickened travel times. One Londoner notes reduce surface street congestion. This allows that a cab ride that used to take 25 minutes for more and better bus service. American now takes only 10. American politicians bus riders would marvel at the frequency of who fret about the political toll of pricing bus service in London. It’s common for 90 are often heartened to discover that Mayor buses to pass through the Islington area in Ken Livingstone won re-election after imple- a single hour. Transit officials in the United menting the congestion charge. Livingstone States often assume that humans are born recently approved a plan to expand the zone with some genetic aversion to bus transit. westward, into Kensington, Chelsea, and They don’t expect anyone but the transit-de- Westminster. The boundaries will expand on pendent to buy bus passes. February 19, 2007. Yet Livingstone is proud of the fact that businesspeople in pinstripes hop on his 2. Should America Import Congestion Pricing? bright red buses. The demographics of bus But while the concept of pricing is prom- and rail patrons are essentially the same and ising, London-style pricing would not be a 80 percent more trips are taken by bus than particularly good fit in America. Flat-rate by Underground (subway). London shows tolling is a rather blunt traffic management that travelers care more about whether their tool, for it ignores the fact that congestion trip is convenient, speedy, and reliable, than is a peaking problem. In London motorists whether they travel by bus or rail. A recent pay the same amount whether they enter the Reason study outlines how transit agencies congestion zone during the morning rush or can use a different kind of pricing to give in the middle of the day. The scheme also transit patrons top-notch bus service. ignores differences in how much motor- American policymakers can also learn

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something about the importance of trust. (e.g., one every minute—60 vehicles per Since the inception of pricing, London’s hour) leaves the vast majority of the capac- leaders have agreed that it’s absolutely es- ity (1,500-2,000 vehicles per hour) unused. sential to use toll revenue only for transpor- Hence, very few such busways have been tation purposes within the city. Anything built in the United States. less would erode the program’s legitimacy. Thus far London’s political class has made Carpool lanes are not sustainable as good on its promise. uncongested guideways, but value-priced Compare that to the American experi- managed lanes can be kept free-flowing on ence, where transportation funds have a a long-term, sustainable basis. way of transforming into general-purpose slush funds. In 2002, frustrated Californians A 2005 Reason Foundation study argues passed Prop 42 with 70 percent of the vote. for developing the virtual equivalent of ex- They thought the new law would prevent clusive busways, by selling the unused space politicians from dipping into transportation to drivers willing to pay a market price to money to fund other programs. And yet bypass congestion. This would generate toll Governors Davis and Schwarzenegger in- revenue to pay for much of the cost of the voked a little-known provision that allowed guideway, without burdening transit agency them to suspend the law in times of “emer- budgets. This policy would be far more cost- gencies.” And so the pilfering continued. beneficial than the current policy of relying The federal government has even bigger on carpool lanes as the guideways for long- trust issues. Each new transportation reau- haul BRT service. Carpool lanes are not thorization is filled with more pork than the sustainable as uncongested guideways, but last. According to Citizens Against Govern- value-priced managed lanes can be kept free- ment Waste, the most recent one is packed flowing on a long-term, sustainable basis. with nearly 6,500 pork-barrel projects, 1. The Potential of Rubber-Tire Transit amounting to $24 billion or nearly 9 per- cent of the bill. Indeed, however they plan Canada and South America have long- to address mounting congestion, lawmakers standing examples of rubber tire transit’s in America often find trust deficits nearly as ability to offer flexible, cost-effective service difficult to contend with as financial deficits. that appeals to large numbers of patrons. The surge in interest in U.S. bus rapid transit F. Virtual Exclusive Busways: Houston (BRT) systems is a recognition of the success Leads the Way other nations have enjoyed. Bus rapid transit (BRT) can deliver Bus transit can operate with headways high-quality service if operated on exclusive as short as five seconds. At 40 to 120 pas- busways, where there is no congestion. But senger spaces per bus (including standees), building such guideways has two major theoretical busway capacity is between drawbacks. First, they are very expensive, 28,800 and 86,400 people/lane/hour—ex- rivaling rail lines in capital costs. Second, ceeding the capacity of light rail and even they are very wasteful of this expensive ca- some heavy rail systems. At its busiest hour pacity, since even high-capacity BRT service the nation’s busiest busway, the Lincoln

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Tunnel Express Bus Lane (XBL), carries over 2. The Virtual Exclusive Busway 30,000 passengers/lane. Ottawa’s busway The demonstrated ability of value pric- system is used by 40 percent of those within ing to manage traffic flow, offering reliable its service area, a much greater proportion high-speed travel during peak periods, sug- than San Francisco’s BART heavy rail system gests that lanes managed with value pricing or the light rail system of Portland, Oregon. could become the second-best alternative to The Government Accountability Office the exclusive busways that transit planners (GAO) examined six cities that operate both would like to have. If priority is given to bus BRT and light rail, and then measured oper- transit usage, a managed lane can become ating costs in three categories: operating cost the virtual equivalent of an exclusive bus- per vehicle hour, per revenue mile, and per way, from the transit agency’s standpoint. passenger mile. For each category, the large Thus, transportation planners studying the majority of cities experienced lower operat- possibility of a whole network of HOT or ing costs with BRT. managed lanes should look upon them not Another advantage of buses operating merely as an alternative for drivers and car- on HOV lanes or exclusive rights of way is poolers. Such a network of managed lanes greater flexibility than rail transit. As Wilbur is also the infrastructure for an area-wide Smith Associates points out in its booklet bus rapid transit system—a virtual exclusive “High Quality Transportation” (on BRT busway (VEB). and managed lanes): To elaborate a bit further, although the The flexibility of BRT allows combina- highway capacity manual may report that a tions of different running ways and operat- lane can handle 2,300 vehicles per hour, to ing conditions. For instance, a BRT service ensure uncongested flow and prevent traf- could begin with a local circulation route fic-flow breakdown into unstable stop-and- in mixed traffic on local streets, proceed on go conditions, a managed lane is generally an exclusive guideway, and then circulate limited to no more than 2,000 vehicles/hour. once again on a transit priority system in the Depending on how much demand for BRT downtown. service exists, some pre-defined amount of Because bus headways can be much this capacity can be reserved on a long-term shorter, frequency of service can be much basis for bus service for each corridor of the greater with a busway system. It is easier for managed lane network. With peak-period buses to overtake one another than for rail bus service at one-minute headways, for cars, and because of their smaller unit size, example, that would be 60 buses/hour, the it is easier to fill a bus with passengers going equivalent of 90 cars/hour. The balance of from a common origin to a common desti- the capacity would be available for other nation. Hence, express bus service is easier vehicles, some operating at no charge (e.g., to organize than express train service. Buses vanpools, and possibly some other HOVs) can deviate from routes to avoid accidents and the rest as paying vehicles. As long as or traffic jams. And rail trains are always overall traffic is kept within these limits, the run by a single monopoly operator, whereas buses can operate at the speed limit, as un- a busway can be open to competing bus and constrained as if they were on an exclusive van operators. busway. Yet because a significant fraction of

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the other vehicles will be paying for access, of the managed lanes. TxDOT will secure a large fraction of the cost of this busway needed federal funds, obtain right of way for infrastructure will be paid for willingly, by the overall freeway expansion and handle those purchasing a premium-service auto construction. And FHWA authorizes tolling trip. of these lanes on the Interstate system under the federal Value Pricing Pilot Program. 3. Houston’s Rebuilt Katy Freeway: the The other agreement is a Memorandum World’s First VEB of Understanding (MOU) between TxDOT, The metro area with the most extensive METRO, and Harris County. This MOU system of express bus operations on HOV sets forth the respective roles of these three lanes has a project under way that amounts parties as to how the managed lanes will be to the country’s first Virtual Exclusive Bus- operated. In general, HCTRA is responsible way. Houston is adding four value-priced for operation and maintenance of the lanes. managed lanes to the median of the Katy METRO is responsible for operating bus Freeway (I-10), as part of a major modern- services on the lanes, with various key protec- ization of that freeway. tions built in. And TxDOT makes sure the The managed lanes approach emerged as managed lanes are properly integrated with the preferred option in a major investment the rest of the freeway and other facilities. study in the 1990s. During the environmen- To sum up, the transit agency is guaran- tal review process, the local toll agency, Har- teed up to 25 percent of the managed lanes’ ris County Toll Road Authority (HCTRA), capacity for transit and HOV uses. And proposed that the managed lanes be tolled. the toll agency guarantees to use its value Toll revenues could pay for their capital pricing authority to limit paying traffic to an cost, and value-priced tolls would man- amount consistent with uncongested traffic age traffic flow. The environmental impact flow. The transit agency gives first priority statement (EIS) was revised to include this to buses, since their passenger capacity is far option, and after further public involvement greater than those of vanpools or carpools. activities, this approach was adopted. Two multi-agency agreements were 4. Implications of Houston’s VEB crucial factors in creating the “public-public A number of the features of the MOU partnership” that made this project possible. that made Houston’s first VEB possible are The Tri-Party Agreement between FHWA, worth discussing in more detail. TxDOT, and Harris County deals with roles and responsibilities in design, funding, and Transit Funding construction of the managed lanes project. As HOT lanes have begun to catch on HCTRA agreed to pay for the construc- among transportation planners, the transit tion cost (up to $250 million), design the community has begun to appreciate their toll-related elements, and carry out any importance as a way of providing infra- additional public-involvement activities structure for express bus or bus rapid transit needed. Toll revenues are specified to be service. In particular, transit organizations used for debt service, a reasonable return on have begun to advocate for using net toll investment, and operation and maintenance revenues from managed lanes for both

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transit-related facilities as part of the project per hour. As of 2003, the Katy HOV lane (e.g., bus stations, park-and-ride lots) and served 40 buses during its busiest AM peak transit operating subsidies anywhere in the hour. (The other freeway HOV peak bus region. Such uses are only possible in situa- levels ranged from 4 to 43.) Thus, the Katy’s tions where there are net toll revenues. That allocation of 65 buses per hour represents is generally the case for projects that convert a 62.5 percent increase over its maximum an existing HOV lane to a HOT lane (as is rush-hour bus service today. There is noth- being done currently in Denver and Min- ing magic about 65 per hour, nor about neapolis). But in cases like the Katy project, 25 percent of total capacity. But given the where significant new lane capacity is being actual level of demand for such bus service added, the likelihood of any “net” revenues today, those numbers appear reasonable. being left over after debt service, return on FTA Approval investment, and operating and maintenance costs are covered is very small. That is why HOV lanes in U.S. metro areas have no such commitments are included in the been developed using federal, state, and lo- Katy MOU. cal funding sources. Federal sources in some But even though METRO is not receiv- cases are exclusively highway (FHWA) funds ing any net toll revenues, it is still getting and in other cases exclusively transit (FTA) a very good deal from this project. On the funds. The Katy HOV lane received some of Katy today it must make do with a single, each; hence, the FTA had to concur in the reversible HOV lane, which it must share decision to change the nature of this facility. with carpools and vanpools. A single-lane In the past, the FTA has had a mixed record facility is far more vulnerable to incident- on HOV to HOT conversions. It approved related congestion (e.g., when a vehicle San Diego’s pioneering project on I-15, but breaks down) than a multi-lane facility initially raised objections to Denver’s plans like the managed lanes that will replace it. for a similar conversion on I-25 North. And a bi-directional facility makes possible But the FTA seems to have come to terms reverse-commute bus service, which will be with HOT lanes, as long as transit service increasingly important as Houston grows is maintained and suffers no degradation in and the central business district accounts for service quality. Managed lanes using value a smaller percentage of all jobs. And espe- pricing to maintain traffic flow meet this cially important, thanks to value pricing, the test. managed lanes will be sustainable long-term HOV Occupancy Changes as a reliable, high-speed facility. The vast majority of U.S. HOV lanes Busway Capacity are operated as HOV-2 facilities. The most Houston has one of the nation’s most successful become congested over time. But extensive systems for express bus service on transportation officials are often reluctant HOV lanes. So the question arises whether to increase the occupancy requirements, for the Katy MOU provides a reasonable level fear of backlash from existing (mostly two- of capacity for METRO, at 25 percent of person) carpoolers. Yet Houston had already total vehicles and a guarantee of 65 buses been willing to bite the bullet on both the

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Katy and Northwest Freeways, increasing DOT—to using pricing in a comparable way peak-period occupancy to HOV-3. This very to maintain uncongested conditions on the likely made it easier to make the across-the- Katy managed lanes. This represents im- board change from HOV-2 to HOV-3 for portant institutional support for long-term the Katy managed lanes project. use of value pricing to manage traffic flow. It should also be noted that although All three agencies have a lot at stake in the federal approval is required for “significant” performance of the managed lanes. In par- changes to HOV lanes that have received ticular, from METRO’s standpoint, they will federal funds, that term appears reserved for only function as a Virtual Exclusive Busway major changes in operating hours and con- if HCTRA increases toll levels when neces- verting from HOV to HOT or to general- sary to maintain the free-flow conditions it purpose lanes. Minor changes in operating needs for reliable, high-speed express bus hours and changing the occupancy require- service. ments do not require federal approval. 5. Network Benefits Pricing Sustainability An interconnected network of uncon- The other key to a VEB’s long-term gested lanes offers obvious benefits, opening sustainability is pricing flexibility. Paying up a much larger radius of job opportuni- customers are the key factor in providing the ties. And a region-wide express bus system funds for building, operating, and maintain- is far more feasible if it can operate on a ing these managed lanes. But allowing too region-wide infrastructure that is the func- many to crowd onto the lanes during rush tional equivalent of a network of exclusive hour would completely defeat their dual busways. purpose of facilitating high-quality tran- Yet such a network would be highly sit and providing a reliable, higher-speed unlikely to come about if it had to be devel- trip for those opting to pay for premium oped with existing federal, state, and local lanes. Therefore, the ability to increase transit system resources. Conceptual designs value-priced toll rates as high as is needed of HOT Networks for Atlanta, Dallas/Ft. to maintain LOS C conditions is essential. Worth, Houston, Seattle, and Washington, But since future toll levels might grow to D.C. consist of about 500 lane-miles apiece. quite high levels, if rush-hour demand in the At today’s urban freeway construction corridor continues to grow, there is always costs, such systems would cost $4-5 billion concern about whether future price increases each. (This would cover the roadway infra- might be politically constrained. Orange structure but not bus-related elements such County, California has adopted a managed as park-and-ride lots or bus stations.) By lanes pricing policy for the 91 Express Lanes contrast, a rail transit system encompass- that is essentially on automatic pilot; when- ing 500 miles (two tracks, 250 miles each) ever incipient congestion appears during a would cost over $30 billion, based on recent 12-week period, a toll increase goes into experience. effect for that hour of the day. Even though the VEB network would The Houston MOU commits the three cost considerably less, neither a 250-mile parties—HCTRA, METRO, and Tx- rail system nor a 500-mile VEB network

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would be affordable out of transit system should be one of the alternatives studied in funding sources. But the VEB network’s such analyses. capital costs would be largely paid for by The third issue concerns New Starts drivers paying to bypass congested freeway funding itself. A VEB is a very cost-effective lanes, so this kind of network would be far fixed guideway for high-volume, high-speed, more affordable, in practice. highly reliable express bus service. As such, it ought to be eligible for New Starts fund- But the VEB network’s capital costs would ing. Since as we have seen, toll revenues can be largely paid for by drivers paying to support a significant fraction of the capital bypass congested freeway lanes, so costs of VEBs and VEB Networks, and local, this kind of network would be far more state, and federal highway funds can be jus- affordable, in practice. tified for the remainder of the basic highway infrastructure portions of such facilities, FTA New Starts funds should be available 6. Needed Federal Policy Changes for the bus-related infrastructure portions, Current FTA policy toward HOT lanes namely: and managed lanes is supportive of con- • Park and ride lots; verting HOV lanes to HOT lanes, so long • Direct-access ramps (from stations and as transit remains an important use of the other high-traffic entry and exit points); facility and transit service quality is not de- graded. Since this condition is easy to satisfy • On-line and/or off-line stations; and by using value pricing, such conversions are • Buses. increasingly being approved. Eligibility for a project to be considered HOV lanes qualify as “guideway” for a VEB for New Starts purposes should be FTA funding, and recent FTA policy on conditioned on a multi-agency agreement HOV to HOT conversions allows the result- such as the MOU in Houston which spells ing HOT lanes to qualify, as well. But there out the amount of capacity dedicated to is no statutory or policy statement on the transit-type uses and the commitment of all status of new HOT lanes that get added to parties to use value pricing and occupancy- a region’s system. While a clarifying policy level adjustments to maintain acceptable statement from FTA would help, transit level of service conditions on a long-term agencies should have the certainty of a statu- basis. tory change to the term “fixed guideway” in Title 49, so as to include value-priced lanes 7. Conclusion operated in partnership with transit agen- It’s time to rethink America’s over-em- cies. phasis on carpooling and revisit the ad- A second issue arises in connection with vantages of busways. Instead of filling up the alternatives analysis that a transit agency the empty space on a busway with “fam- must carry out in applying for capital fund- pools”—carpools of families that would ing under FTA’s New Starts program. Given be riding together regardless—we could fill the great benefits of a Virtual Exclusive Bus- it up with paying customers. And because way for transit, a VEB or a VEB Network those customers would pay value-priced

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tolls, their numbers could be limited to pricing can be used to create the virtual amounts consistent with maintaining uncon- equivalent of an exclusive busway, paid for gested conditions even at the busiest rush largely by drivers. This is too good an op- hours, as proven on the HOT lanes in San portunity for transportation planners to pass Diego and Orange County, California. up. Rubber-tire transit (including express For more on virtual exclusive busways, bus and vanpools) can be highly cost-effec- see Reason’s September 2005 report, Virtual tive, especially when operating on exclusive Exclusive Busways: Improving Urban Transit rights of way. Our experience over the past While Relieving Congestion, online: http:// decade with value pricing shows that such www.reason.org/ps337.pdf

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Air Transportation

Contents A. U.S. Airport Security B. U.S. Airport Privatization C. Global Airport Privatization D. U.S. Air Traffic Control E. Air Traffic Control Commercialization Policy: Has It Been Effective?

A. U.S. Airport ports would be given this choice. The initial Security airports—San Francisco, Kansas City, Roch- ester, Tupelo, and Jackson Hole—have been Two major satisfied with their contractors, and opted to developments in continue with them after November 2004. airport security in Analyses of their experiences found slightly 2005 turned out the better screening performance than at TSA- opposite of what people expected. Despite screened airports, but also pointed out that all airports being freed to opt out of security TSA ran the program in such a centralized screening provided by the Transportation manner that there was little scope for inno- Security Administration, only one small vation or efficiencies by the contractors. airport chose to do so. But the long-discussed Thus, during the nearly 18 months after Registered Traveler program, which nearly the November 2004 window opened for all everyone had assumed would be a TSA pro- airports to opt out, only two small airports gram, will be run on a fee-for-service basis by applied, Elko, NV and Sioux Falls, SD. competing private companies. After the former withdrew, only the latter The post-9/11 Aviation & Transporta- went forward with private screeners. Air- tion Security Act of 2001 “federalized” port directors explained that there seemed passenger and checked-baggage screening to be few benefits from opting out, given at all but a handful of small airports. As that TSA, not the airport, would select and a compromise between House and Senate manage the contractor. Moreover, although versions, it allowed an initial five airports Congress granted liability protection to pro- to go with TSA-certified private security ducers of aviation security equipment and firms instead of TSA screeners, and it further to screening contractors, no such protection provided that after November 2004, all air- was provided for airports that opted out,

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leaving their legal people concerned that the ing the background check but the company airport might get sued if a security problem handling everything else. occurred. Some 70 airports joined a consortium A January 2006 Reason Foundation sponsored by the American Association of report, Airport Security: Time for a New Airport Executives to promote this kind of Model, called for statutory change to take model for RT, and to insist on standards TSA out of the provision of airport screen- for inter-operability among all airports. ing services, arguing that it is a conflict of After some months of smooth operations interest for TSA to be both the aviation by Verified at Orlando, the TSA announced security regulator and a principal service that instead of building upon its own pilot provider. Devolving this function to each programs, it would accept competing pri- airport, under TSA regulatory supervision, vate companies as the operators of Regis- would allow each airport to either hire its tered Traveler services, allowing them to own TSA-approved security staff or a TSA- charge annual membership fees. TSA an- certified screening company. With the fund- nounced a target date of June 20, 2006 for ing TSA now uses to operate that airport’s a nationwide roll-out, and two other firms screening, the airport could make its own announced they had entered the market: trade-offs between labor and equipment, Saflink and Unisys. Verified unveiled part- likely leading to increased airport invest- nerships with General Electric and Lockheed ment in technology such as fast and efficient Martin to develop additional technology in-line baggage screening systems. for its program, and to help it interface The Registered Traveler concept was with airports. By April 2006, Verified had proposed by a number of people in the early 20,000 paid members at Orlando and had days of TSA as a way for volunteers to seek announced tentative deals with Indianapolis, and obtain a kind of mini-security clearance Sacramento, San José, and Toronto airports. plus a biometric identity card proving them In late April TSA surprised the industry to be the person who was cleared. That by announcing that it was postponing the would enable them to bypass the long lines national roll-out until 2007, but expected and at least some of the screening proce- to approve 10 to 20 airports this year, as an dures applied to people who have not been expanded pilot program. Still, the idea that pre-checked. After some internal debate this is a value-added service being offered by about the wisdom of the concept, the TSA private firms to frequent travelers has been created and ran a pilot program at a half- firmly established. dozen airports. While that was going on, entrepreneur Stephen Brill (founder of Court B. U.S. Airport Privatization TV and American Lawyer) came up with the The 1996 federal airport privatization idea of operating such a program as a fee- pilot program still had only one airport for-service business. After extensive discus- participant as of early 2006: Stewart Airport sions with TSA, he launched the company, in Newburgh, New York. The only remain- Verified Identity Pass, in 2004, and signed ing applicant for one of the four remaining up Orlando as its initial airport. It began slots—New Orleans Lakefront Airport—was operations there in July 2005, with TSA do- damaged in Hurricane Katrina and its appli-

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cation to the pilot program is currently “in a ing for the airport, which would begin with holding pattern,” according to the FAA. a single, 10,000 ft. runway and a 12-gate The biggest news in U.S. airport privati- terminal building. zation is the possibility that Midway Airport in Chicago might be leased. Following on C. Global Airport Privatization the successful 99-year lease of the Chicago Despite the relative lack of airport Skyway in January 2005, Mayor Richard privatization activity in the United States, Daley has turned to Midway as a possible it continues to be a robust phenomenon further privatization candidate. The city worldwide. More than 100 large and medi- government has supported legislation in the um-size airports worldwide are either inves- state Senate to exempt from property taxes, tor-owned or operating under some kind of if they were leased, a number of city-owned long-term lease or concession contract. And facilities—including parking lots, waste the global airport industry is undergoing treatment plants—and Midway (but not a shake-out, as companies re-arrange their O’Hare). A similar measure was enacted in portfolios to better focus their interests. 2002 to exempt the Chicago Skyway from Several major industry changes have oc- property taxes. Leasing Midway would curred recently. BAA, the first major airport be allowed under the 1996 federal pilot grouping to be privatized (in 1987) is the program, which still has four slots avail- subject of a battle. This company able. The only significant hurdle such a also operates the Indianapolis International deal would have to surmount would be to Airport, under a 15-year management con- gain the support of representing 60 tract, and runs the concession operations at percent of the annual landed weight at the Pittsburgh and several other U.S. airports. airport. Southwest is currently the largest Spanish toll construction firm and toll road carrier at Midway. owner/operator Ferrovial made an unso- The Chicago metro area is also the licited $15.3 billion bid for BAA in April site of another form of airport privatiza- 2006. Ferrovial has been a minor player tion—developing a new airport as a public- in airports to date, owning 21 percent of private partnership. The proposed Lincoln Sydney Airport and 50 percent of the U.K.’s National Airport would be in Peotone, 40 Airport. BAA rejected the bid, and miles south of downtown Chicago. State did likewise with a subsequent $16.5 billion transportation officials submitted the re- bid from Goldman Sachs. quired “concept alternative analysis” to the In another multi-nation takeover, Span- FAA in April 2005, for what is expected to ish toll road operator Abertis bought British be an 18-month review of the airport’s fea- airport operator TBI for $976 million. TBI sibility. And in December 2005, the Illinois owns London’s Luton Airport and has long- Attorney General signed off on the partner- term lease agreements for the three main ship agreement between the transportation Bolivian airports and Florida’s Orlando- agency and the Abraham Lincoln National Sanford Airport, as well as management Airport Commission, formed by a number contracts at Albany and Burbank Airports in of local governments. Private companies the United States. have pledged some $200 million in fund- BAA itself was the winning bidder in

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a hard-fought competition for a 75-year 14.7 percent stake. The government retains concession to run the Budapest Airport. its 39.2 percent holding, leaving less than BAA’s winning bid was $2.15 billion for the 10 percent still trading on the stock market. fast-growing airport. Several weeks after the Macquarie already owns major stakes in selection, in December 2005, losing bidder Brussels, Rome, Birmingham, and Bristol Hochtief challenged the award, claiming Airports in Europe and Sydney in its home that BAA failed to meet some of the bid country of Australia. requirements. Earlier in 2005, Copenhagen airport’s BAA was also one of four firms (along winning bid for Bulgaria’s two seaport with Babcock & Brown, Goldman Sachs, and airports was overturned by a Bulgarian Hochtief) that had expressed interest in bid- court. The $630 million concession had ding for the 33 percent stake being offered in been signed in June, but was overturned in Italy’s Milan Airport. But in the end, no bids October after protests from losing bidders were submitted, as all four evidently decided Fraport and Vinci. Also in central Europe, that the one-third stake was not worth the short-listed five bidders for major- minimum bid of 600 million . ity stakes in its two largest airports, Bratisla- The German federal government in Oc- va and Kosice. In February 2006 the govern- tober 2005 sold its remaining 18.2 percent ment selected the Vienna Airport team. But stake in Fraport (whose largest airport is in April 2006, the opposition Social Demo- Frankfurt) for $772 million. The state of crats pledged that they will renationalize the Hesse still owns 31.8 percent and the city airports if they win the general election in of Frankfurt owns 20.3 percent. The fed- June. eral government is also looking for a buyer One of the last major European airports for its 26 percent stake in Munich Airport. still in state hands is Amsterdam’s Schiphol Another German airport privatization took Group. The Dutch passed leg- placed when New Zealand’s Infratil pur- islation in June 2005 allowing a minority chased 90 percent of Luebeck Airport from stake to be sold, and the finance minister in the city government. September decided that its preferred method Another major player may soon join the would be a stock market offering of up to set of global companies operating airports. 49 percent of the company. No date for the State-owned Aeroports de Paris, operator of sale has been announced. de Gaulle and Orly Airports, was corporatized Mexico held an initial stock offering in 2005, and the government plans to sell a for the government’s remaining stake in the minority stake by the middle of 2006. The second of three privatized airport companies estimated market value is $5 billion, and the in February 2006. The offering of shares government may sell as much as 49 percent. in Grupo Aeroportuario del Pacifico (GAP) Copenhagen was one of the first - brought in $609 million at the initial offer- pean airports to be privatized (after BAA), ing price of $21 per share; by the end of the but its majority ownership changed hands day, the price had exceeded $28. Colombia in December 2005. Macquarie Airports is offering a 17-year concession to manage bought 52.4 percent of the shares in Decem- and modernize the main facilities at Bogota’s ber 2005, a major increase from its previous Eldorado Airport. The competition began in

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January 2006 when bid specs became avail- the losing bidders, the “most efficient orga- able. The concession excludes the two main nization” team made up of current FSS em- runways, since they are already privately ployees and Harris Corp. After that protest managed under a previous concession agree- failed, the FSS union mobilized its friends in ment. Congress to amend the FAA appropriations Asia has seen two big developments of bill to forbid the agency to spend money late. Hong Kong’s government announced implementing the contract. That measure a four-year delay in the planned privatiza- narrowly passed the House, but a compan- tion of its Airport Authority, during which ion measure in the Senate failed to make it time it will invest about $580 million to add into the appropriations bill (which in any capacity for both passengers and . It event, did not get approved until after the will sell a minority stake, at a date yet to contract had already gone into effect). Thus, be announced. India, meanwhile, finally the FAA (and the taxpayers who provide completed the privatization process for the its budget) are expected to save more than Mumbai and New Delhi airports in early half of the annual cost of the program, with 2006, though not without many ups and the winning bid of $190 million per year, downs. After two rounds of bidding lead- versus in excess of $500 million that the FSS ing to five finalists for the 74 percent stake program had been costing. Lockheed Mar- in each airport (for 30 years), the govern- tin will consolidate from 58 to 20 facilities ment selected Fraport teamed with India’s and will provide them with state-of-the-art GMR Infrastructure for New Delhi and equipment to take full advantage of on-line Airports Co. of South Africa teamed with capabilities. India’s GVK Industries for Mumbai. Some Aside from this outsourcing success, the 22,000 airport workers staged a four-day, FAA has been working hard to make the nationwide strike to protest the deal, but case within the aviation community that called it off when the government promised its aviation tax system is broken and needs not to punish them for the illegal strike. The to be replaced. The largest of these taxes is government is requiring the winning bidders the 7.5 percent tax on airline tickets. Over to retain 60 percent of the existing work- the past decade increased competition has ers; the rest have been promised transfers to driven average fare levels downward, reduc- other Airport Authority airports. ing the revenue below its historic trend line. At the same time, the amount of flight activ- D. U.S. Air Traffic Control ity that the FAA’s air traffic control system The Federal Aviation Administration’s must handle has been growing faster than largest ever outsourcing survived a challenge historical trends, due to the replacement in Congress, allowing the consolidation and of wide-body flights by narrow-body, the modernization of its Flight Service Stations replacement of narrow-bodies by regional to take place, beginning in October 2005. jets, and the shift of some first-class and Lockheed Martin had been announced as business-class fliers to various types of busi- the winning bidder the previous January, but ness jets. The resulting decline in revenue the agency and its contractor faced two hur- combined with increases in cost is unsus- dles. First there was a protest from one of tainable. The FAA Administrator and other

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senior officials have been suggesting that the this ATC commercialization experience. We replacement system needs to be some form are pleased to present this summary by Glen of charge for the ATC services provided, so McDougall, the lead researcher and author that revenues will keep pace with workload, of the study. but as of spring 2006 the specific funding Air transport is a major domestic and proposal had not yet been unveiled. international industry. It serves an important A system of fees and charges could pro- role in facilitating economic network devel- vide the revenue stream to make it possible opments in an increasingly global economy to issue long-term revenue bonds to pay for and in allowing personal movements for so- much-needed modernization of the ATC sys- cial and recreational reasons. The air trans- tem. That, of course, suggests some form of port industry relies heavily on an integrated “commercialization” of the system. And that system of information, monitoring, and will be bitterly opposed by the FAA unions control structures to enable the provision of that have regularly opposed any form of safe and efficient services. Unlike the physi- outsourcing. The current aviation taxes sun- cal infrastructure associated with road and set as of September 30, 2007, so the battle rail transport modes, air transport is pro- over these issues will be joined in 2007. vided along a series of virtual corridors that require users to be informed of traffic and E. Air Traffic Control Commercializa- other local conditions and where manage- tion Policy: Has It Been Effective? ment—air traffic control (ATC)—is deployed Editor’s Note: For more than 20 years, to prevent conflicts and to ensure safety. think tanks and official study commissions With the advent of small business jets, have cited fundamental problems with the low-cost carriers, and unmanned aviation U.S. air traffic control (ATC) system, and vehicles, there is a pressing need for a more suggested that it be converted into some- responsive and capable air traffic service in thing like a commercial entity, paid for the United States. ATC currently represents by fees charged for its services (instead of 5 to l0 percent of airline operating costs, by user taxes), operating like a high-tech however, when the costs of delays, safety service business, and able to finance large issues, and flight efficiencies are factored in, new facilities and technologies by going to the financial implications are far more sig- the bond markets. Although those efforts nificant than may first appear. There are also thus far have not produced such change in questions on how the present system will be the United States, by 2006 some 40 other able to absorb the future air traffic, which is countries had “commercialized” their ATC predicted to double or triple in the next 20 systems along these lines. These air naviga- years. tion service providers (ANSPs) formed a This study suggests there are potential trade association in the mid-1990s called solutions to many of the problems facing the the Commercial Air Navigation Services current provider of ATC, the Federal Avia- Organization (CANSO), which has begun to tion Administration, to be found in study- play a role in global aviation circles. Early ing how commercialized Air Navigation in 2006, mbs ottawa inc. published the Service Providers (ANSPs) of 10 countries results of a detailed international study of have performed: Australia, Canada, France,

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Germany, Ireland, the Netherlands, New For this study, financial autonomy was the Zealand, South Africa, Switzerland, and prerequisite for being considered “com- the United Kingdom. The governments in mercialized.” The study included: a govern- these countries addressed similar problems ment department with user fees and access (such as outdated equipment and escalating to capital markets, a separate government costs) by incorporating various degrees of agency, six variants of government-owned commercialization into the delivery of their corporations, one private-public partnership ANSP services. where 49 percent is owned by government As of 2005, over 40 countries had com- and the balance by private aviation interests mercialized their ANSP functions to vari- and employees, and one fully private, not- ous degrees. The study uses a definition of for-profit corporation with a stakeholder-ap- commercialization that is fairly broad: the pointed board where the federal government introduction of business practices. Under is a member of the corporation. To date this umbrella countries had a range of there is no example of a for-profit, private organizational options available to them. company operating a national ATC system.

Table 13: Characteristics of the Air Navigation Service Providers Country ANSP Name Ownership Economic Regulation# Safety Regulation Australiaa Airservices Australia Government Commission oversight Separate-agency corporation Canadab NAV CANADA Not-for-profit Self-regulating pursuant to Separate-MOT private corporation statutory charging principles Francec (DSNA) Direction des services de la Government Approved by Minister Internal but separate navigation aérienne department Germanyd Deutsche Flugsicherung Government Approved by Minister Internal but will be GmbH (DFS) corporation separate Irelande Irish Aviation Authority (IAA) Government Regulatory Commission Internal but separate corporation Netherlandsf Luchtverkeersleiding Government agency Approved by Minister Separate-MOT Nederland (LVNL) New Zealandg Airways Corporation of New Government Self-regulating Separate-agency Zealand corporation South Africah Air Traffic and Navigation Limited liability MOT Regulatory Committee Separate-agency Services Ltd. (ATNS) Switzerlandi Skyguide Not-for-profit joint- Approved by Minister Separate-agency stock corporation United Kingdomj National Air traffic Services, Public/private Ec Regulator/Price-capping Separate-agency Ltd. (NATS) partnership United Statesk FAA Air Traffic Organization Government NA – tax based Internal but separate (ATO) department Notes c Financial Autonomy granted in 1985; h Corporatized in 1993 # Excluding national, generic anti-trust and Separate organization in department i Incorporated in 2001; predecessor similar regulations; all ANSPS derive revenue established in 2005 established in 1921 primarily from user fees except the FAA which d Established in 1993 and to be a public j Financial Autonomy obtained with Public/ is funded primarily by taxation; all ANSPs have private partnership in 2007 Private Partnership in 2001 access to financial markets except the FAA. e Corporatized in 1993 k Separate Air Traffic Organization established a Established in 1995 f Corporatized in 1993 in 2004 b Established in 1996 g Corporatized in 1987

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The characteristics of the ANSPs in the United States and abroad. To add depth and study are shown in Table 13. insight to the plethora of statistics and legal Within the countries studied in this pro- information gathered by the team, members ject are those that are moving gradually to- conducted a full-circle evaluation seeking ward more commercialization and those that informed opinions from aviation service have taken bold leaps toward total financial providers, regulators, customers, employees, and governance autonomy. As a result this and suppliers from all 11 of the countries study looks at various stages of commercial- studied. ization from embryonic to fully realized. It The team looked at the performance of looks at the impact of governance structure, the 10 commercialized ANSPs from l997 to regulatory framework and institutional au- 2004 in comparison to the FAA. A compari- thorities on the performance of the ANSPs, son is possible as the Chicago Convention in contrast to the performance of the largest of l944 requires common outputs, mak- and most complex ATC system in the world, ing ANSPs an ideal subject for this type of the FAA in the United States, which has policy study. Each country must provide for: remained as a government department. 1. Safe and efficient separation of air The study team sought to represent an traffic; impartial viewpoint, separate from the con- 2. Infrastructure of communication, tentious issues surrounding “privatization” navigation and surveillance facilities; debates in the United States. In most U.S. and debates on ATC reform, “privatization” is 3. Information to pilots. used, but the term really should be “com- mercialization,” given that most options still The study produced three new bodies of involve government ownership but under a work on which to base its expert analysis corporate form. and conclusions: Starting from the belief that good in- 1. Legal descriptions by McGill University formation makes for good policy, the study of the governance structure of each team pursued inclusive policies while setting commercialized ANSP, organized the parameters of the study. Funding for the by topic (e.g. board structure, how project came from a wide base of partici- appointed, etc.); pants representing foundations, academic 2. Two hundred interviews with ANSP interests, service providers, customers, in- management, unions, customers, ternational organizations, and governments. regulators, military, technical The team in turn sought input from three suppliers, and international agencies universities: The School of Public Policy at in cooperation with George Mason George Mason University in Virginia; the University; Maxwell School of Syracuse University, and 3. Normalized trend analyses of key the McGill Institute of Air & Space and Law performance indicators by Syracuse in Montreal. An Advisory Committee was University on safety, modernization, created to review the work and add insight. cost, service quality, public interest, and This prestigious group was made up of avia- financial stability. tion and business executives drawn from the Among the study’s most interesting findings:

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Safety culture was improved Costs were reduced, more strongly dramatically. There was no indication in those models insulated by design and/ that safety was in any way compromised or government restraint from excessive by commercialization. Transparency and micro-management, whether or not voluntary safety reporting were enhanced. the corporation was fully owned by The graph in Figure 5 shows that the general government. Figure 6 below shows the trend in safety incidents is downward. cost record of the 10 commercial ANSPs The FAA did not provide a time series of compared to the FAA. Note that for South safety incident data. However, an audit Africa (ATNS) and Switzerland (Skyguide), report published in 2004 by the Office of their growth in costs is explained by Inspector General at the U.S. Department of rebuilding the ATC system for the rapid Transportation found that incident reporting growth in air traffic since the end of was extremely variable in quality and apartheid in the former case, and building quantity. Consequently, trend comparisons an improved safety function and absorbing with the FAA could be inconsistent because military controllers in the latter case. The of reporting variability. gap in trends between the best-performing User fees brought users to the table to commercial ANSPs and the FAA is about 30 discuss those services they most desired and percent. to help cut those services which were not Service quality improved. Delays crucial to their business success. The emphasis showed some improvement as short- from the ANSP shifted from general policy staffing was corrected and innovative objectives of government to specific needs of technologies introduced. There was a clients. As a result services were streamlined major improvement in responsiveness to and costs were cut. Even in times of fee customer’s needs resulting in significant increases (i.e. post-9/ll) customers strongly gains in flight efficiency. Customers were preferred commercialized ANSP services over strongly supportive of the benefits of those formerly provided by government. commercialization on service quality.

Figure 5: Serious Safety Incidents per IFR Movement ATM-related

200 0

NATS U.K. 150 AirservicesAustralia IAA 100 Airways NZ DSNA 50 DFS LVNL 0 ATNS NAV CANADA Normalized, first year of data = 10 -50 IFR = Instrument Flight Rules 1997 1998 1999 2000 2001 2002 2003 2004 ATM = air traffic management Year

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Figure 6: Total Annual ANSP Costs by IFR movements (2004 Constant National )

150

0 140 SkyGuide NATS U.K. 130 AirservicesAustralia 120 IAA 110 Airways NZ 100 DSNA 90 DFS 80 LVNL 70 ATNS 60 NAV CANADA Normalized, first year of data = 10 = data of year first Normalized, FAA 50 1997 1998 1999 2000 2001 2002 2003 2004 Year

Public interest was clarified. Policy post 9/ll and the SARS outbreak. The objectives of government, such as job most difficult problems were in the United creation and regional development, were Kingdom where the new public-private separated from ANSP-related business goals. partnership suffered from the combination Unions advised there was no negative impact of lower revenues with the traffic downturn, on labor: the ability to negotiate wages and an excessive level of government-imposed benefits was not diminished but employees debt (necessary to accommodate the chosen experienced better technology and working equity partner who was only able to invest environments. Military-civil cooperation one-sixteenth of the agreed sale price improved. General aviation did not suffer; as cash), and regulated price-caps—this any charges to general aviation were modest. situation has since been resolved. Small communities still received services. Stakeholder opinion was unanimously A regulatory framework must be provided pleased with commercialization efforts. Of by government with responsibility for safety the over 200 people interviewed, only one and consumer protection. Regulators labor representative in Europe wished the advise that government should strengthen system would return to its old ways. ANSP safety regulatory capacity before All ANSPs face high labor costs. This commercialization. There were many forms is a result of having a highly skilled and of economic regulation in the various models, limited pool of employees on which to draw. tailored to needs of the aviation community Controllers are well-paid and work low and degree of stakeholder influence. Some hours. Customers are intolerant of labor regulators encourage long-term ANSP- disputes. customer price and service agreements. The profit motive does not factor into Financial stability was good despite the any commercialization model studied. combined forces of the air traffic downturn There are price caps, legislated rates

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of return, excess revenues returned to Services are maximized and costs are customers etc. to prevent profit-taking. minimized. Transparency is demanded by Figure 6: Total Annual ANSP Costs by IFR movements (2004 Constant National Currency) The primary equity partner for the U.K. customers who are few in number and fi- public-private partnership is a consortium nancially articulate. Having close customer 150 of airlines stating it is not investing for involvement in business decisions promotes 0 140 SkyGuide NATS U.K. commercial return. gains in efficiency and minimizes the “gold- 130 AirservicesAustralia plating” (overbuilding and adding unneces- 120 IAA 1. Who Is the Client? 110 sary features) of investments. However, too Airways NZ When moving from government pro- much direct control by customers can result 100 DSNA vider to commercialized service provider, 90 DFS in short-sighted management; it is recom- 80 LVNL the fundamental question arises: Who is the mended that when a government includes 70 ATNS client? Whereas the government service pro- customer presence on the board of directors 60 NAV CANADA vider’s client is the government itself and the of an ANSP, it be by “arm’s length” repre- Normalized, first year of data = 10 = data of year first Normalized, FAA 50 general public, the commercialized ANSP’s sentation. 1997 1998 1999 2000 2001 2002 2003 2004 client is the aviation industry. Providing Year financial autonomy to ANSPs tended to 3. Linking Governance Structure to Perfor- reinforce the aviation community as the pri- mance mary client. Higher performance was noted The study found that ownership was not when the customers had effective influence in itself a critical factor. The most impor- over the ANSP but not control of it. ANSPs tant feature of successful ANSPs was that responded to customer needs best when they managers had control of resources, levels were insulated from political micro-manage- of service, and business decisions and that ment and government direction. those managers were held accountable for Public interest in air navigation ser- their performance. vices is still there but it is not the same as Extensive government micro-manage- government’s socio-economic or political ment, political direction from lobbying, interests. The public interest is redefined as and conflicts between customer service interest in safety, system efficiency (including and government priorities were all seen as delays), access to airspace, consumer protec- contributing to low performance. Some tion, good employer, etc. The government ANSPs have mechanisms to insulate them has many tools with which to protect this from government (New Zealand), eliminate type of public interest, including legislation, or reduce government ownership (Canada, regulation, legal recourse, etc. The study U.K.), or have strong boards coupled with showed that it is not essential that the gov- government restraint (Australia). The FAA ernment own and operate ANSPs in order to was identified as suffering from extensive protect public interest. government intervention with corresponding poor performance. 2. Stakeholder Involvement The study found that the models with When customers pay user fees they the best performance exhibited three major become actively involved in defining which strengths: of the ANSP’s services they want and how 1. Sensitivity to customer needs; much they are willing to pay for them. 2. Agility in reaching a decision; and

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3. Ability to execute the decision. Mr. McDougall is a Senior Research Fel- The report found that some models low at The School of Public Policy, George increase performance more than others. The Mason University and President of mbs ot- best commercialization efforts had the fol- tawa inc. in Canada. He is a former Director lowing features: General and Special Advisor to the Govern- 1. Independent governance structure; ment of Canada, having held senior posi- 2. Effective customer influence; and tions in Transport Canada, Treasury Board of 3. Robust government oversight. Canada, and the Royal Canadian Mounted Police (R.C.M.P.) He was one of the main 4. Conclusions architects of the first fully privatized ANSP Has air traffic control commercialization in the world, NAVCANADA. Ten years old this been effective? This review of 10 commercial year, NAVCANADA is a success story among air navigation service providers indicates commercializations and is often referred to that the answer is yes. It has enabled contin- as “The Maple Leaf Solution.” uous improvement in infrastructure mod- Mr. McDougall’s full report is available ernization, improvements in service quality at [email protected]. Details on pricing through improved flight efficiency and delay and ordering can also be viewed at the www. mitigation and, to varying degrees, cost mbsottawa.com Web site. The report is in reduction compared to the departmental color and is over 100 pages in length. Each benchmark, the FAA. Safety has not been printed report also includes a complimentary compromised where there has been effective CD (comprising an additional 140 pages) government oversight. on the full legal descriptions of each of the In the end, government, customers, em- ANSPs studied (including governance struc- ployees and other stakeholders must decide tures and regulatory frameworks) provided how best to deliver air navigation services by the McGill Institute of Air & Space and in their country. Commercialization is an Law. The report also includes an informative attractive option because it brings business A to Z Guide on what to consider when Air discipline to the provision of services, results Traffic Control commercialization is being in organizations that are more efficient and discussed. It would be an equally important responsive to client needs, and reduces de- read when considering commercialization of pendence on the taxpayer. other government activities. by Glen McDougall

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Education and Child Welfare

Contents A. Charter Schools Lead Grassroots Efforts for Choice B. School Choice Update C. The Case Against Universal Preschool D. Driving More Money into the Classroom: The Benefits of Shared Services E. Child Welfare Update

A. Charter Schools Lead Grassroots of mostly poor South Los Angeles asked the Efforts for Choice Los Angeles Unified School District to relin- quish control of Jefferson High School and Charter schools—publicly funded turn it over to Green Dot Public schools, a schools that have more discretion over group of nonprofit charter schools that has funds and management than tradition successfully raised student achievement in public schools—continue to be the largest low-income LA communities. example of school privatization. According The district rejected that initial request, to the Center for Education Reform, as of but in March 2005 the LAUSD school board October 2005 approximately 3,600 char- granted Green Dot charters for six schools ter schools are operating across the United in the neighborhoods served by Jefferson. States serving more than 1 million chil- As charter schools, the six campuses will be dren. For the 2005-2006 school year, 424 publicly funded and open to all students, but new charter schools opened representing they’ll operate with more autonomy than 13 percent growth from the previous year. the city’s traditional public schools. Charter schools continued to grow in both The Los Angeles-based Wasserman the private and the nonprofit sectors. They Foundation has provided Green Dot with have continued to provide a viable option $6 million to help open the new schools in to parents with children in low-performing time for the 2006-07 school year. According schools that are not meeting the require- to the Los Angeles Times several hundred ments of the No Child Left Behind Act. Los families waited together on May 11, 2005 Angeles provides a case in point. to see if their children would get into one of In November 2005 hundreds of Los the new Green Dot Public Schools charter Angeles families, backed by the signatures of campuses. Green Dot founder Steve Barr 10,000 parents, students and other residents told the Los Angeles Times that he wants to

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highlight the growing influence of charter make information available to parents or schools on public education by enrolling to provide sufficient options. The action hundreds of students who otherwise would demands that the Los Angeles and Compton have attended Jefferson or nearby Santee Unified School Districts immediately provide High School. Both high schools have issues and publicize public school transfer options with severe school violence and poor aca- for children in failing schools as required demic performance. by the law. The No Child Left Behind Act Green Dot held a lottery to determine (NCLBA) requires that school districts offer which of the more than 1,000 applicants to children in schools that have failed to would be part of Green Dot’s 640-member make “adequate yearly progress” for two ninth-grade class. Currently in Los Ange- years under state standards the option to les approximately 5 percent of the city’s transfer to better-performing public schools 625,000 students attend public charter within the district. Lack of capacity is not a schools. Some experts predict that ample basis to fail to provide transfer opportuni- philanthropic support for charter schools in ties under the law. Because NCLBA does not Los Angeles will cause that figure to rise to provide a private right of action, the parents 20 percent within a decade. and their organizational partners must file complaints in the first instance with the Charter schools continued to grow in both school districts, demanding compliance. the private and the nonprofit sector. “The conditions in Los Angeles and Compton are the tip of a national iceberg,” In a second grassroots action in Los Clint Bolick, president and general counsel Angeles, The Alliance for School Choice and for the Phoenix-based Alliance for School the Los Angeles-based Coalition on Urban Choice, stated. “The problem is that the Renewal and Education, filed complaints number of children in failing schools vastly against Los Angeles and Compton school exceeds the number of available slots in bet- districts charging that the two districts failed ter-performing public schools. Public schools to provide meaningful notice or transfer alone cannot solve the crisis of inner-city options for thousands of students in fail- education.” A 2004 report by the General ing public schools. Federal law requires the Accounting Office found that more than 3 school districts to make findings within 60 million schoolchildren—overwhelmingly days, and authorizes the Secretary of Educa- low-income and minority children—were en- tion to cut off federal Title I funds for failure titled to transfer, but only 1 percent of those to provide transfer options. eligible actually transferred. Bolick said that The complaints charge that of at least similar actions could be filed in almost every 250,000 schoolchildren eligible for trans- large district in the United States. “Millions fer in Los Angeles, only 527 (.2 percent) of children are being left behind in failing received transfers to better-performing schools,” Bolick declared. “They deserve im- schools; while in Compton, zero students mediate access to better educational oppor- have received transfers despite appalling ed- tunities, to which federal law clearly entitles ucational conditions. The complaints charge them.” that the districts have failed to adequately The Alliance also called upon U.S.

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Secretary of Education Margaret Spellings income tax for donations to nonprofit to cut off applicable federal funds to the scholarship tuition organizations (STOs). districts until they comply with the law or Likewise, the new corporate scholarship tax make other suitable educational opportuni- credit program provides a dollar-for-dollar ties available to children in failing schools. credit for corporate donations to STOs. The Secretary Spellings has authority to take scholarships are limited to low-income K-12 action to cut off certain federal funds to the children who transfer from public to private districts until they comply. The Los Angeles schools. case will help determine whether children in Under the new law, the cap is set at $10 failing public schools can legally utilize pri- million a year, with vouchers worth up to vate options to offer them more alternatives $4,200 for K-8 students and $5,500 for high to their low-performing public schools. school. The law will include automatic 20 percent annual increases until 2010 when it A 2004 report by the General Accounting will total nearly $21 million and over 6,000 Office found that more than 3 million students. In addition, Arizona’s individual schoolchildren—overwhelmingly low- tax credit program gives 21,000 students income and minority children—were scholarships worth more than $28 million. entitled to transfer, but only 1 percent of Arizona’s legislature also passed school those eligible actually transferred. choice legislation that would expand the state’s education options and allow children in foster care to apply for an education B. School Choice Update grant to attend private schools. “This bill would provide stability for children who 1. School Choice Continues to Expand in the often have little in their lives. No group is States more deserving, or more needy of school According to the Alliance for School choice,” declared Clint Bolick, president and Choice, so far in 2006, 13 legislative houses general counsel of the Phoenix-based Al- in seven states—Arizona, Florida, New liance for School Choice, a national non- Hampshire, Ohio, Utah, Virginia, and partisan policy organization that supports Wisconsin—have passed school choice bills. expanded educational options for disadvan- Four states—Arizona, Ohio, Utah, and taged schoolchildren. The displaced pupils Wisconsin—have passed bills creating or choice grants program provides grants of expanding choice programs. $5,000 or tuition and fees, whichever is less, In 2006 the Arizona legislature en- to the first 500 applicants each year. The acted three new school choice programs. program lasts for five years. Thousands of economically disadvantaged Finally, Arizona also enacted Scholar- families will benefit from a new corporate ships for Pupils with Disabilities Program scholarship tax credit program. The cor- and will provide up to $2.5 million in porate tax credit program builds upon the scholarships for children with special needs success of Arizona’s Individual Scholarship to attend the private school of their parents’ Tax Credit, which became law in 1997 and choice. It will be the nation’s fourth school grants a credit against Arizona’s individual choice program for special needs students,

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following the popular and effective McKay to receive vouchers from approximately program in Florida (now enrolling more 14,500 to 22,500 students. Without an in- than 16,000 students), Utah’s Carson Smith crease in the cap, vouchers would have been program, and scholarships for autistic chil- rationed, potentially forcing some students dren in Ohio. currently using vouchers to lose them.The In Ohio and Utah, lawmakers also bill included new accountability measures gave more students access to school choice. for schools educating voucher students, as Thousands more students in Ohio and Utah well as increased funding for smaller class will be eligible to receive more educational sizes in Wisconsin’s government schools. opportunities through the expansion of the But unfortunately, not all legislation states’ current choice programs. passes. In New Hampshire on January 18th The Ohio legislature passed the expan- by a 14-9 vote, the New Hampshire Sen- sion of the Ohio Edchoice program, which ate approved S.B. 131 to create the 21st increases the number of students eligible for Century Scholars Fund, which will provide the scholarship program from 20,000 to scholarships of up to $3,500 for children in 50,000. The existing program had limited low-income families to attend the public or eligibility to students attending schools that private school of their choice. All 14 mem- have been in “academic emergency,”—the bers voting for the measure were Republi- lowest performance grade—for three consec- cans, and eight of the nine negative votes utive years. Now, students in approximately were cast by Democrats. One senator was 50 schools in “academic watch,”—the absent. Unfortunately, in a close vote in May second-lowest grade—could apply for the 2006, the House defeated this legislation. scholarships. The proposed 21st Century Scholars The Utah legislature passed an expan- Fund was a hybrid between state-funded sion of the Carson Smith Scholarship Pro- vouchers and scholarships supported gram earlier this month, increasing the num- through both corporate and individual tax ber of schools eligible to participate and the credits. If the measure had become law, the number of children likely to benefit. The lan- fund would have begun with $1 million in guage previously requiring private schools to state funding. During the second year, the have “specialized” in serving children with state would have appropriated another $1 special needs was changed to a requirement million only after $500,000 is donated by that the private schools had served students the private sector. with special needs in the past. The bill also Under the program, the state would have requires that parents receive notification of given individuals a credit against what they the availability of the scholarships. owed in taxes on interest and dividends, The May 2006 issue of School Reform equal to the amount of donations they News reports that on March 10, 2006, Wis- made to the scholarship fund. Individuals consin Gov. Jim Doyle (D) signed legislation would have had to apply for the credit, and expanding Milwaukee’s pro- the limit on the total amount of credits to gram. Doyle, a Democrat, reached a com- be granted by the state would have been promise with the state legislature to raise the $100,000. Corporations could have received cap on the total number of students eligible credits against the Business Enterprise Tax

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in the amount of donations to the scholar- school (but not religious schools). Tuition is ship fund, with the total amount of credits reimbursed according to a state-set formula. limited to $400,000. In towns without any schools, parents enroll The 21st Century Scholars Fund was their children in an approved school, and modeled after New Hampshire’s Healthy the school then informs the town clerk, who Kids program, which provides health insur- issues a voucher and reimburses the school ance to low-income children. The Scholars for expenses according to the state formula. Fund would have provided scholarships 3. Significant School Choice Setback in of $3,500 for children in families whose Florida income was at or below 200 percent of the poverty level. The fund also would have Florida’s Opportunity Scholarship provided scholarships of $2,500 for children Program gives any student assigned to a in families with incomes between 201 and public school that has failed two years out 250 percent of the poverty level. of the past four the option of transferring to another public school or using a scholarship 2. Maine Town Opts for Locally Funded to attend a private school. On January 5th School Vouchers the Florida Supreme Court ruled 5-3 that In March 2006, the people of Swans Opportunity Scholarships violate Article IX, Island, Maine, a town without a second- Section 1 of the Florida Constitution, which ary school, voted to pay for their children’s states, “Adequate provision shall be made education with local tax funds at either by law for a uniform, efficient, safe, se- public or private secondary schools, includ- cure, and high-quality system of free public ing religious schools not funded by the local schools.” education authority. The subsidies will be The dissenting opinion, written by paid directly to parents and involve local Justice Kenneth Bell, whom Bush appointed funds, not state monies, thereby avoiding in 2002, found the Article IX mandate does church-state issues, according to the propos- not preclude alternative educational op- al’s sponsors. tions or indicate public schools are the only According to School Reform News, method through which the state can provide the 57-44 vote on the tiny island off the for the education of its children, which the Maine coast—where the economy relies on majority opinion held. The majority pointed lobstering and most children are ferried to to minutes from meetings of the Constitu- school on the mainland—echoed a much tion Revision Committee, which rejected larger national debate over public subsidies attempts to include language both prohibit- to religious schools. Some islanders feel it ing and allowing the state to issue vouchers, may also be the solution to a longstanding before the 1998 election. conundrum over the application of the First By contrast, Bell agreed with a lower Amendment to Maine education law. court, which had found, “[N]othing in Ar- In Maine, a local school district that ticle IX, Section 1 clearly prohibits the Leg- doesn’t operate comparable schools—a high islature from allowing the well-delineated school, for example—is allowed to “con- use of public funds for private school educa- tract” with an approved public or private tion, particularly in circumstances where the

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Legislature finds such use is necessary.” in chronically failing public schools may The legislature granted Governor Bush a transfer to better-performing public schools temporary fix for the Opportunity Scholar- within the district. ship Program for the current school year. Under the proposal, entities eligible to However, the legislature failed to pass a apply for the competitive grants include joint resolution, which must be approved states, local education agencies and non- by three-fifths of the state legislature, to put profit organizations. The Administration a constitutional amendment on the ballot estimates that as many as 2,000 schools will in November 2006 that would protect the be deemed “restructuring” schools in 2007. scholarship programs. The federal government also offered students who were victims of Hurricane Ka- 4. Federal Action on School Choice trina temporary funding to attend the school In 2006, the Bush administration an- of their choice. The Department authorized nounced a new $100 million program to aid payments for 157,743 students, more than children in chronically failing public schools $120 million, for the first quarter of aid by providing scholarships to attend private during the 2005-06 school year. This is the schools or to receive supplemental services largest K-12 school choice program in the in public schools. country,” declared Clint Bolick, president The proposal is part of the Administra- and general counsel of the Phoenix-based tion’s budget, and corrects a flaw in the No Alliance for School Choice. “This program Child Left Behind Act (NCLBA) by provid- demonstrates the efficacy of school choice in ing educational options to children who serving students who were in great need of need them. “This proposal marks a giant educational options.” step forward in making sure that truly no The figures indicate that Katrina stu- child is left behind,” declared Clint Bolick, dents were taken in by schools in the District president and general counsel of the Alliance of Columbia and in every state except Ha- For School Choice, the nation’s leading edu- waii. The states that took in the largest num- cation and advocacy organization support- ber of students were Louisiana (46,672), ing private school options for disadvantaged Texas (46,324) and Mississippi (17,873), schoolchildren. followed by a number of other southern The proposal would create a competitive states. Even Alaska took in 27 displaced grant program that would enable children students. in schools that are “restructuring” under the NCLBA to receive scholarships of up to C. The Case Against Universal Pre- $4,000 for private school tuition or $3,000 school for supplemental services if the children In summer 2005, a national task force remain in public schools. A “restructuring” co-chaired by Arizona Gov. Janet Napoli- school is one that is deemed in need of im- tano called for $8 billion annually in fed- provement under applicable state standards eral support for preschool. Similarly, in his for at least six years. NCLBA currently 2006 response to President Bush’s State of provides for limited supplemental services, the Union Speech, Virginia Gov. Tim Kaine and purports to guarantee that children acknowledged universal preschool as a silver

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bullet to help create a better future for the programs for all children. Evidence from United States. Kaine said, “There’s a better performance on the National Assessment way… Many states are working to make of Education Progress (NAEP), which is high quality Pre-Kindergarten accessible to considered the nation’s report card, argues every family.” against the value of investing in universal States are moving quickly to expand preschool. access to state-run preschool. According Georgia has had universal preschool to Libby Doggett, Pre-K Now’s executive open to all children since 1995, and Okla- director, states cumulatively have committed homa has had a universal program in place more than $14 billion to early education. since 1998. In a recent analysis of the top 10 Arizona, New Mexico, Washington, South best and worst state performers, based on Carolina, Virginia, and West Virginia are the percentage point change in fourth-grade all considering various models of universal reading tests between 1992 and 2005 on the preschool, and Illinois Gov. Rod Blagojevich NAEP, both Georgia and Oklahoma were recently announced plans to make Illinois in the bottom 10 performers. In fact, Okla- the first state in the nation to offer universal homa was the worst performer of all states preschool to both three-and four-year-olds. in terms of gains in fourth-grade reading Nationwide, at least 40 states provide state between 1992 and 2005, actually losing 4 funding for preschool programs, and at least percentage points. 28 considered legislation to expand state- More specifically, in Oklahoma 33 funded preschool programs in 2005. Three percent of fourth graders were below basic states—Georgia, Oklahoma, and Florida— in reading in 1992. By 2005, 40 percent of offer universal preschool. Oklahoma fourth graders were scoring be- In California proposition 82, an ini- low basic. In 1992, 38 percent of Oklahoma tiative for Preschool for All failed to win fourth graders scored basic in reading, but popular support. The Preschool for All Act by 2005 only 35 percent of fourth graders was representative of national efforts for could read at a basic level. Finally, in 1992, universal preschool and would have created 25 percent of Oklahoma fourth graders a de-facto institutionalization of preschool were proficient in reading, but by 2005, only in California by proposing a new govern- 21 percent were. ment-managed, $2.5 billion a year entitle- One would expect that a large, statewide ment program that would have subsidized investment in universal preschool including the preschool choices of middle-class and high-paid, credentialed teachers and high- wealthy families. The proposition was voted quality curriculum would have a positive down in the June 6th primary election 60.9 effect on fourth-grade reading scores. These percent to 39.1 percent. scores declined, despite the fact that all of the children that took the 2005 NAEP read- 1. Government-Run Preschool Programs Fail ing test in Georgia and Oklahoma were eli- to Demonstrate Results gible for universal preschool. In fact, none There is little empirical evidence to dem- of the states in the top 10 best performers onstrate any lasting educational or socioeco- in terms of gains in fourth-grade reading on nomic benefit of government-run preschool the NAEP card between 1992 and 2005 had

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implemented universal preschool. national scale—a decline occurring after Similarly, a February 3, 2006 study by fourth grade. Whatever the cause of that researchers Russell W. Rumberger and Loan decline, it appears to have little or noth- Tran of UC Santa Barbara found no lasting ing to do with a lack of preparation in academic impact from state-run preschool the early years. programs. They found that while children Finally, the most dubious claim of all enrolled in preschool had some moderate is that subsidizing universal preschool will advantages in kindergarten performance, benefit middle-class or wealthy children. the benefit dissipated by third grade. The A Children’s Hospital and Boston College Goldwater Institute’s Darcy Olsen, who has study published in the July 2005 issue of compiled extensive research on early child- Pediatrics found that suburban kids enrolled hood education, provides a useful summary in a high-quality early education program of key findings from preschool studies: differed little from their suburbanite peers • After 10 years, the Georgia preschool who were not enrolled. However, at-risk program has served over 300,000 urban children enrolled in high-quality children at a cost of $1.15 billion and preschool programs did better in school and children’s test scores are unchanged. had better physical and mental health as • Head Start, the nation’s largest preschool adults than their peers who did not attend program for disadvantaged children, has such programs. not measurably improved educational 2. Responsible Alternatives to Universal outcomes. Preschool • Historic trends are unpromising. The America’s healthy preschool market preschool enrollment rate of four-year- provides opportunities for parents to choose olds has climbed from 16 percent to 66 among a wide variety of educational op- percent since 1965. Despite the change tions, but there are improvements to the cur- from home education to formal early rent system that will streamline and diversify education, student achievement has stag- the market. nated since 1970. One-Stop Shop for Preschool • America’s flexible approach to early education gives children a strong foun- Rather than creating new tax-funded dation according to widely used proxy preschool bureaucracies, states should measures of preparedness, concrete skills work toward creating a single, integrated, assessments and reports by kindergarten seamless administrative system that will teachers. We find further evidence of the serve low-income families in each state. The strength of our early education system in different funding streams that support low- international comparisons, which show income families have multiple administrative U.S. fourth graders are “A” students on bureaucracies, paperwork requirements, the international curve, excelling in read- and eligibility requirements. Millions of ing and science and performing above dollars that could go directly to pay for average in math. By twelfth grade, U.S. more low-income preschool slots are students are “D” students on the inter- wasted maintaining duplicative preschool

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programs. States need a one-stop shop with preschool programs. These programs also a centralized eligibility list for low-income make no fiscal sense, and, as with the provi- preschoolers. sion of K-12 education, the costs of publicly run preschools will likely escalate beyond Preschool For All Tax Credit any initiative’s projections. Once any pro- A tax credit approach could help states gram is established and has a large constitu- achieve the policy goal of more quality ency of preschool families, there will be preschool for children with the most calls for more taxpayer support. Universal efficiency for taxpayers and the greatest preschool initiatives are not self-sustaining satisfaction for parents. By supporting and will likely require future support from new preschool slots for low-income and the general fund to truly provide preschool middle-class children, all taxpayers would for all four-year-olds. The current private be able to keep more of their own income preschool market offers an array of choices. to pay for their own preschool choices. A Government preschool is a formulated, $1,000 tax credit to middle-income families one-size-fits-all approach to education that would help them to choose from a wider institutionalizes young children at their most preschool market, and a corporate tax impressionable ages. This is a move back- credit scholarship program could be created wards that should be avoided. to give scholarships that would enable low-income children to attend existing D. Driving More Money into the preschools. Pennsylvania’s example of the Classroom: The Benefits of Shared corporate program shows that companies Services have been responsive to tax incentives. Education spending constitutes up to The state expanded the existing K-12 half of many state’s budgets. Ranging from corporate tax credit program in 2003, giving teachers’ salaries to building costs, these corporations a 100 percent credit for the budget dollars have in the past mostly first $10,000 and up to a 90 percent credit escaped the chopping block of the yearly for remaining contributions up to $100,000. budget-cutting process. In recent years, To date, $5 million a year is used to target however, states and school districts are Pennsylvania’s low-income children with under increasing pressure to reduce educa- preschool scholarships. Families of children tion costs, particularly of non-instructional receiving the scholarships must earn less services. than $50,000 plus a $10,000 allowance for each dependent. In the first year of In most states, anywhere from one-third to the program, 39 preschool scholarship one-half of every dollar spent on education organizations were created. never makes it into a classroom. 4. Conclusion In most states, anywhere from one-third There is little empirical evidence from to one-half of every dollar spent on educa- states’ experiences with universal preschool tion never makes it into a classroom. The to demonstrate any lasting educational or money goes to administration, support socioeconomic benefit of government-run services, and operations. Lacking economies

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of scale—and often sufficient managerial look at education spending. Data from the expertise—many small and medium-sized Texas Education Agency (TEA) show that districts find it extraordinarily expensive to during 2004-2005, Texas school districts provide the full array of support and admin- devoted only 59 cents of every tax dollar istrative services in-house. At the same time, to classroom instruction. The remaining 41 many large districts suffer from duplicative cents went to support functions such as stu- or inefficient administrative systems due to dent transportation, food services, facilities layer upon layer of bureaucracy grown over maintenance and operations, and general time. For example, in many states, teachers administration. Meanwhile, in California, make up a little more than half of all school only 54 percent of per-pupil spending goes district staff. In contrast, teachers account to instruction costs (see Figure 7), while in for between 60 and 80 percent of all school Illinois classroom expenditures represent staffing in Europe. The resulting high per- only 46 percent of the budget. How can student costs in the United States constitute states and school districts respond to these a significant drain on budgets. fiscal pressures without adversely impacting The U.S. Department of Education has educational performance? One promising found that approximately 39 percent of state approach is by reducing non-instructional education budgets are used for non-instruc- spending costs through shared services. tional purposes. More detailed analyses at Whether a district has a surplus or deficit, the state level suggest that the federal statis- a budgetary feast or , arrangements tics may even understate the actual amount with other school districts, within large going to non-instructional costs. The state school districts, or with outside entities to of Texas has one of the most detailed sys- share services such as transportation, food tems of school cost accountability. It offers services, human resources, and an instructive example for taking a closer purchasing can help realize significant cost

Figure 7: The Calfornia Education Dollar: Current Expenditure

Non-instructional Instructional spending spending (food (teacher salaries, service, maintenance, textbooks) 54% administration) 46%

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Where to Share? Human resources presents another good Transportation. Large districts have the opportunity for shared provision of administra- flexibility to incorporate in a number of tive services. In 2004, the Massachusetts Hu- creative ways. The simplest involve internally man Resources Division (HRD) implemented sharing resources, time, or space, such as when shared services to streamline human services for a handful of neighboring schools bands together all state agencies. The HRD allowed govern- to host a recruiting fair. Even more interesting, ment agencies to reduce staffing and save the though, are examples of well-planned, formal, Commonwealth millions of dollars. In the HRD shared services agreements. The two school alone, staffing was reduced by 50 percent while boards in Ontario, Canada have joined together handling more complex responsibilities and of- to share bus transportation services and audio- fering more innovative services to state agencies. visual resources. By creating a single bus system, For example, the state agencies devised a new the two boards will save $8 million in administra- shared recruitment process that reduced the time tive, capital, and fuel costs over three years. The to fill a position from four months to five weeks. boards’ shared AV library serves classrooms in Technology. Districts have vast opportuni- both districts, saving $300,000 annually. ties to share technology, ranging from shared Purchasing. In New Jersey, the Shared systems and applications to shared helpdesk and Services Program is a cooperative effort among onsite IT support. Districts across the country Middlesex County municipalities that supports have found creative ways to develop payroll and the towns by providing a way to reduce daily HR systems with municipalities and neighboring operating expenses through cooperative pur- schools, to share the cost of software licensing chasing. The program began in 1998 by offering and purchasing applications, and even sharing towns aggregate natural gas purchasing, result- CIOs with other districts. Sarasota County, NY ing in a 5 percent savings on electricity for pub- and the local school district created a shared lic buildings during the first year of the program. services partnership for information technology Currently the municipalities share services for that cut personnel and software costs for the water/wastewater programs and the purchasing school district. of natural gas, electricity, equipment, services, Facilities and Real Estate. A new frontier for and supplies. educators is combining forces with the private Administration. Seven districts in Con- sector. Examples of successful pairings abound, necticut have a shared services arrangement for often where the schedule or needs of a school administrative services that includes the super- nicely balanced those of a local business or cor- intendent, director of instruction, federal pro- poration. The Lincoln Unified School District grams, special education directors, and a legal in Stockton, California negotiated with a pri- agent. Meanwhile, in West Texas, Region 17’s vate fitness center operator to build a facility on service center located in Lubbock, which serves site at a newly planned school. The district will an area encompassing about 19,000 square provide the land and the fitness center operator miles (close to the size of Pennsylvania), pro- will pay to build the facility. Once operational, vides payroll and accounting services for a num- private fitness center clients will use the facility ber of rural school districts, saving each over in the morning before school and in the evening, 50 percent a year and some up to 88 percent while students will use it during the school day. annually. The service center has also established This article was excerpted from the Reason an insurance co-op, which allows about 20 rural study, Driving More Money into the Classroom, districts to purchase optional health services by William D. Eggers, Lisa Snell, Robert Wavra, plans, such as dental insurance, at a much lower and Adrian T. Moore. The entire study is available rate with better coverage than they could on online: reason.org/ps339.pdf their own.

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reductions without negatively impacting and Family (DCF) districts. student outcomes. Lead agencies that took over responsi- bilities from DCF over the last four years E. Child Welfare Update are responsible for all social services in their area. They typically contract many of those 1. Child Welfare Privatization Continues to services such as substance abuse, case man- Expand agement and foster care with community In 2005 Florida became the first state providers. to complete the transfer of all foster care, In the five-county Southwest Florida adoption, and child welfare licensing opera- district, for example, case management – the tions across the state to private agencies— tracking of children in the system – is divid- making Florida the first state in the nation ed among Lutheran Services Florida, Ruth to fully privatize its child welfare programs. Cooper Center, and Family Preservation In April 2005, the Florida Department of Services. Others providers offer emergency Children & Families (DCF) signed the final youth shelters, parenting classes, drug treat- $75 million contract to turn over all foster ment and a variety of other services. Flori- care and adoption programs in Miami-Dade da’s Department of Children and Families and Monroe counties to private administra- still does initial child-abuse investigations, tors. The Miami-Dade and Monroe contract adult services, and economic assistance. But is the 23rd community-based care agreement once a child or family needs specific services, between the state and a privately run agency. responsibility falls on the community-based The contract will be in effect for 14 months, lead agency. according to DCF. Currently, the state is providing services to about 5,000 children in Florida’s Department of Children and Miami-Dade and Monroe. If the number of Families’ officials told The News Press (Fort children in care rises by more than 3 per- Myers, Florida) that it’s a free market and cent, the state agrees to pay the lead agency, their primary concern is for children and Our Kids, additional money. families to have quality agencies to serve The 22 other private child welfare them. contracts in the state contain no provision allowing the agencies to receive additional One requirement to be a lead agency is funding if their caseloads unexpectedly rise. to be a nonprofit company. Yet, for-profits The Our Kids contract also is the first in have played an important role in supporting the state to explicitly forbid officials affili- the nonprofit lead agencies. For example, ated with agency vendors from serving on Providence Service Corporation, a publicly the Our Kids board of directors, a measure traded Arizona company, owns or manages designed to prevent conflicts of interest. three companies that have garnered more Bids were collected in 22 areas of Flori- than $120 million in state child welfare con- da—some single counties, others multi-coun- tracts in at least 11 of Florida’s 22 child wel- ty areas—for a “lead agency” that would fare districts. One of its partners, Camelot be responsible for the social work that was Community Care, a nonprofit child social- once handled by 15 Department of Children service provider in Florida and five other

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states, has a nearly $100 million contract to materialize. More Florida children are being provide child welfare in Southwest Florida. adopted, kids are safer, and they’re getting Providence executives sit on Camelot’s more and better services since Florida priva- board of directors and decide about child tized its child welfare system, according to care in Southwest Florida. Its chairman is performance measures tracked by state child Providence President Boyd Dover. Provi- welfare officials. dence follows the model similar to for-profit Nearly one in five children served by companies managing nonprofit hospitals. the Florida Department of Children and Florida’s Department of Children and Families before privatization was abused Families’ officials toldThe News Press or neglected in its care. Today, that figure is (Fort Myers, Florida) that it’s a free market one of every 30 and dropping. The number and their primary concern is for children of foster homes in Florida has nearly dou- and families to have quality agencies to bled since 1999, social workers’ caseloads serve them. “We’re neutral on the issue (of are smaller, and the number of children in for-profit companies gaining child-welfare out-of-home care has also fallen, according business),” said David Fairbanks, a DCF to David Fairbanks, a director at the Florida director in Tallahassee. Providence officials, Department of Children and Families in Tal- said they compete by dramatically reducing lahassee. overhead, not by denying services to chil- dren. Providence keeps overhead low by Nearly one in five children served by renting buildings and keeping a lean crew of the Florida Department of Children and executives who manage the work. The com- Families before privatization was abused or pany earned $15.7 million in pretax income neglected in its care. Today, that figure is in 2005 on $145 million in revenue. one of every 30 and dropping. Providence’s strong fiscal soundness and ability to borrow has helped several According to a March 2006 report by nonprofit lead agencies in Florida. Camelot, Florida Department of Children and Fami- through Providence, obtained for lies to The News Press, none of the lead lead agencies in Hillsborough County and agencies that manage abused and neglected Central Florida near Ocala. It also joined children in Florida’s 22 areas is meeting all together with another nonprofit agency in of its benchmarks. In Southwest Florida, for St. Lucie County on Florida’s east coast to example, Camelot Community Care is meet- provide cash to start up the lead agency ing five of eight contract performance mea- there. After the agency was up and going, sures. That’s one of the best records in the Providence backed out of control and the state.” And we’re cleaning up a mess. We board was placed with community leaders. didn’t start out at ground zero,” said Harry Propper, CEO of Children’s Network. Rich- 2. Florida Performance Measures ard Sapp, who has worked with the child The implementation of child-welfare welfare system for years, uses two words to privatization in Florida has been a learn- describe the differences since privatization: ing process. However, the first positive quick and local. outcomes for children are beginning to “I’m really and truly excited about

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what is happening,” said Sapp, executive 290 cases at any given time and receives $2 director of the Hope House shelter in Fort million a year to recruit and train potential Myers, which contracts with The Children’s adoptive parents has worked to make the Network. “We’re seeing things we’d talked process more efficient and parent-friendly. about for years that had never happened The agency’s overall statistics under- actually becoming reality.” For example, score the improvements. Between July and children who need medical care, counseling December 2005, the agency finalized 128 or therapy now get them—without months adoptions. Of those, the agency completed of waiting. “It has improved 100 percent, 48 percent of adoptions by foster parents; but had the network not been willing to 33 percent of adoptions by recruited fami- invest more resources, this would never have lies, and 22 percent of adoptions by relatives been possible,” Sapp said. Sapp also lauds in less than six months. The agency beat the another innovation: the Protective Investiga- statewide average in all three areas. tion Linkage Program. It lets DCF investiga- tors refer families in crisis—but not in such The agency beat the statewide average in bad shape the court is involved—to services all three areas. such as food, utility payments, or parenting classes. The idea is to help families avoid be- The Johnson’s adoption is one example coming involved with the system. “It quickly of the positive changes to the system. Edna empowers people to fend for themselves us- and Steve Johnson had been fostering ing local resources,” he said. “Now, there’s troubled teens for eight years and were in enough flexibility to tailor services to local the process of preparing 17-year-old John needs—not just state mandates.” for life on his own when Edna had second Nancy Apperson has been a Lee County thoughts. The teen had lived with them foster parent for 18 years, and while she more than four years and was still in high told The News Press that the system still has school. inherent problems such as overloading and “I told my husband, ‘That isn’t a good staff burnout, for example, she has seen defi- idea. He’s going to suffer out there,’” said nite improvements. “There used to be just Edna Johnson, 62. “He wasn’t ready. In my one dentist and a six- to eight-month wait,” heart I couldn’t let him go out there.” So the she said. “Since they went private, they have Johnsons, who have six grown children of several dentists who are donating their time. their own, asked John if he wanted them to Plus, your phone calls get answered prompt- adopt him. The process took three months ly and they have more educational things and was complete around Thanksgiving, just and parties for the kids.” a few months before John reached his 18th birthday. 3. Privatization Improves the Adoption Pro- By comparison, prospective parents try- cess ing to adopt in the past had to wait months One tangible benefit of the privatization to get into the required 10-week parenting process in Florida has been improvement in course and months more for their adoption the adoption process. For example, the Chil- workers to complete criminal background dren’s Home Society, which handles 275 to checks, in-depth studies of their home and

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other paperwork. Foster parents had to fill a firm that operates a similar program for out redundant paperwork to adopt. boys with serious behavioral problems. The Besides procedural changes, Levy said group has also closed 200 foster homes in changes in law and in philosophy at Chil- the county. dren’s Home Society have helped to move The nonprofit has taken a harder line some children into permanent homes faster. than the approach of Child-Net’s predeces- For example, a married person can now sor, the Florida Department of Children and adopt as a single individual. That becomes Families. DCF often re-negotiated troubled particularly important if, for example, a contracts. But, according to the Sun-Senti- grandmother is raising her grandchildren nel that was the promise of “community- but is separated from her spouse. In the based care,” the privatization concept that past, she couldn’t adopt the children unless removed foster-care and other child-welfare the spouse agreed or the couple divorced. services from a ponderous state bureaucracy Also, foster parents now are given first and placed them in the hands of a more consideration if a child who has been in responsive, locally influenced agency. their care for six consecutive months be- Texas will follow Florida’s lead and comes available for adoption. Before, a rela- move toward privatizing most child welfare tive could challenge the foster parents’ right services in the state. San Antonio has been to adopt. selected as the first region to lead the state in And now in Palm Beach County, abused, privatizing child welfare services. The state neglected or abandoned children who are of Texas plans to turn over all foster care not legally available for adoption but are and adoption management to local nonprof- likely to become so soon can be placed with it groups by 2011. foster parents who are interested in adopt- The San Antonio operation, which ing. Currently, about 20 potential adop- would be fully functional by the end of tive families in Palm Beach County fit that 2007, will be the regional center for 27 profile. counties. The San Antonio plan is the first part of a five-year rollout that envisions free- 4. The Ability to Terminate Contracts ing up Child Protective Services to concen- A second benefit of the privatization trate on investigating and repairing domestic effort in Florida is the termination of con- situations before it becomes necessary to tracts with problematic foster care provid- remove children from homes, said Darrell ers. For example, according to a report by Azar, Department of Family and Protective the Sun-Sentinel, the nonprofit agency that Services spokesman. now runs foster care in Broward County, The plan was authorized by the legisla- Child-Net, is getting serious about “ac- ture in Senate Bill 6, passed in 2003, which countability” when it comes to overseeing laid out reforms for the state’s Child and contracts. Child-Net officials have termi- Adult Protective Services programs. An inde- nated a contract with Brown Schools Foun- pendent regional administrator will oversee dation, a firm with a poor track record that a private network to care for children in is now running a group home for girls. They state custody, overseeing their placement in are also reconsidering another contract with foster homes, emergency shelters or treat-

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ment centers. they served them. Now, agencies can have Rep. Carlos Uresti, D-San Antonio, said their contracts severed if they fail to meet that more than 70 percent of foster care in goals. Those that move children into perma- Texas has already been successfully priva- nent homes quickly could gain financially. tized. The reform plan will complete that Under the plan, an agency continues re- transfer and slowly extend it to case man- ceiving payment for a child for the duration agement. “Once the child has been removed of the one-year contract even if the child from the family, then the private provider has already found a permanent home. That will take charge from that point forward,” provision seeks to discourage agencies from Uresti said. keeping kids in foster care solely so they can In 2006, Missouri also moved toward continue receiving a payment. privatized child welfare services. Hundreds Before the new contracts were awarded, of additional foster children in St. Louis and about 10 percent of the state’s 11,000 foster across Missouri will have their cases man- children were under private oversight. Mis- aged by private agencies. souri also uses a model of a lead agency Missouri state officials have created new partnering with local subcontractors. Ac- financial incentives and sanctions that will cording to the St. Louis Post Dispatch, agen- help move children to permanent homes cies receiving new contracts in the St. Louis more quickly. This approach also rewards area are: agencies that are able to reduce the rates of Missouri Alliance for Children & foster children being abused or returned to Families, which will have 525 total cases. state custody. A total of 1,900 new cases Agencies that will provide services under will fall under private oversight, up from this proposal are Missouri Alliance, Boys about 1,300 currently, according to Debo- and Girls Town of Missouri, Edgewood rah Scott, spokeswoman for the Missouri Children’s Center, Missouri Baptist Children Department of Social Services. Of the 1,900 & Family Ministries, Presbyterian Children’s cases, 1,260 are in the St. Louis area, she Services and Evangelical Children’s Home. said. Catholic Charities, Archdiocese St. Sheila Tannehill, of the Missouri Chil- Louis, which will have 210 total cases. dren’s Division, said Missouri modeled its Agencies to provide services under this private contracts after states like Illinois, proposal are Catholic Charities, Catholic where privatization has been credited with Services for Children and Youth, Lutheran helping reduce the number of children in Children and Family Services, Our Little foster care. Tannehill said a key feature of Haven and Bringing Families Together. the new private contracts is that they de- Children’s Permanency Partnership, mand results. The St. Louis contracts, for which will have 525 total cases. Agencies example, require 32 percent of foster chil- under this proposal are the Family dren be moved to permanent homes each Resource Council, Epworth Children and year. In the past, Tannehill said, private Family Services, Youth In Need and Urban contractors were essentially paid only on the Behavioral HealthCare Institute. number of children served, not on how well

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Emerging Issues

Contents A. Rebuilding After a Disaster: Policy Strategies to Speed Recovery B. Foreign Management of U.S. Infrastructure C. The Government Pension Crisis D. The Truth About Occupational Licensing and Free-Market Alternatives

and Rita. There is so much devastation and need that a traditional response will not be adequate. Rather, policymakers will need to employ innovative strategies to encourage A. Rebuilding After a Disaster: Policy public-private partnerships and introduce Strategies to Speed Recovery private capital to get the Gulf Coast up and running again quickly. The extensive devastation wrought by Perhaps one of the best responses to Hurricanes Katrina and Rita in the fall of natural disasters was the response from 2005 will be felt along the Gulf Coast for California Gov. Pete Wilson to the North- years to come. In response to the daunting ridge earthquake in Los Angeles in 1994. challenge of rebuilding hurricane-damaged One of his administrations finest achieve- areas, Reason developed a set of policy ments was the reconstruction of Interstate strategies to assist state and local govern- 10—a project that was estimated to take ments in their disaster recovery efforts. more than two years was completed in two While the recommendations in the following months and two days after Wilson invoked sections were developed specifically for the emergency powers. Gulf Coast, they are broad enough to form a Indeed, in a recent Wall Street Journal useful policy framework that can be applied editorial Gov. Pete Wilson offered some sage in other areas in dealing with future hurri- advice to governors on how to cope with canes and other natural disasters. reconstruction needs. In California, Wilson 1. Introduction used the broad emergency powers conferred to him to dismiss onerous rules and regula- Significant investment and time will be tions, in effect bypassing procedural hurdles needed to rebuild infrastructure and key to get construction up and moving. Second, services in the wake of Hurricanes Katrina

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the governor used incentives to get contrac- look particularly hard at those tradeoffs. tors to accelerate their performance. Con- Regulations that may have been viewed as tractors who submitted bids had to agree desirable or even a necessary evil during nor- not only to the cost, but the completion date mal times may be an undue or unbearable as well. Furthermore, the contract called for burden during recovery and rebuilding. stiff fines for every day the contractor was Regulatory changes for officials to con- late, and equally large bonuses for early de- sider include: livery. As the governor notes, “the winning Develop a Performance-Based Fast Track bidder, C.C. Myers, Inc., put on three shifts Contracting System. This will help state that worked 24/7…Myers made more on and local government get key infrastructure the bonus than they did on the bid.” Wilson rebuilt much more quickly. When the 1994 adds that the additional investment was well Northridge earthquake resulted in the col- worth it given the restoration of critical in- lapse of two bridges on the Santa Monica frastructure years before it otherwise would Freeway, the world’s busiest, it was esti- have been completed. mated that it would take from nine months Throughout history the free market has to two years to open the damaged sections proved itself to be a more vigorous builder of the roadway if the bridge repairs were of economies and infrastructure than gov- to go through the normal bidding process. ernment. Harnessing that vigor can help The estimated cost to the local economy: rebuild the Gulf Coast, and give govern- $1 million to $3 million a day. To speed up ments an opportunity to shed unproductive the process the state transportation agency assets while helping to jumpstart the recov- streamlined procurement requirements and ery process. offered substantial performance incentives and penalties to the contractor: a $200,000- 2. Regulating for Recovery per-day bonus for completing the project Regulations typically arise to deal with ahead of schedule and a $200,000-per-day problems where markets have failed, or penalty for each day the project was behind from political pressure to benefit certain schedule. The financial incentives resulted in parties by reducing competition, or from the overpasses being replaced in a little over attempting to alter people’s behavior. Regu- two months—74 days ahead of the deadline. lation is also popular for imposing an order The $13.8 million the contractor received in and certainty onto free markets that many performance bonuses was more than offset find desirable. by the estimated $74 million in savings to Like all policy instruments, regulations the local economy and $12 million in con- embody tradeoffs. They may effectively tract administration savings thanks to the resolve a problem, but give rise to new shortened schedule. problems or to unintended consequences. To Suspend Licensing Requirements for decide if regulation is the right answer, you Construction . Usually after a disaster must look at the tradeoffs between the solu- there is increased pressure to allow only lo- tion and all of its consequences. cal licensed construction workers to help the During recovery from Hurricane Ka- rebuilding. But this only provides great ben- trina, states and local governments should efits to local licensed construction workers

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and great harm to local residents who want building permit” for structural, electri- to rebuild. Certainly, enforcing rules against cal, heating and cooling, plumbing, and fraud and criminal behavior, and helping wrecking work. residents know what to look for in picking • Allow employees and agents to apply for someone to work on their house or business building permits. becomes much more important when cus- • Allow owners of residential and com- tomers are desperate to rebuild. But restrict- mercial buildings to secure building per- ing the supply of workers is even worse and mits for construction work to be done dooms many to wait. For businesses such by their employees or by subcontractors delays are often fatal. Residents have to be that the owners hire. trusted to look out for their own welfare and make what deals are sensible to them, • Enhance consumer protection by in- with reasonable help, not a heavy regulatory creasing the city’s ability to police illegal hand, from government. contractors and contractors who violate Streamline the Building Permit Process. building code provisions. Building review and permitting processes are • Consolidate development review guide- notoriously slow and cumbersome. Contrac- lines and develop performance goals and tors deal with them all the time and learn measures with a citywide project-track- to live with them, but after a disaster thou- ing database. sands of residents find themselves having • Create a portal for electronic plan sub- to deal with the permitting system and its mission and review. frustrations. There is little evidence that building fees 3. Capitalizing Unused Assets to Pay for and permits have a significant impact on the Recovery quality of work and compliance with local The experience of other governments codes. Direct inspections for code compli- shows that leveraging the value of the ance, with direct punishment for infractions, portfolio of state-owned assets can generate regulate outcomes rather than inputs and significant capital to help with rebuilding are far more effective. Permit requirements efforts. Furthermore, asset sales are also a should be limited to ensuring compliance long-term benefit as well by reducing state with zoning laws and other such broad com- expenditures on maintenance while increas- munity concerns. ing the tax base. Put simply, divesting an To help speed up rebuilding, local of- unneeded asset is attractive for a variety of ficials should modify the permitting system reasons. to: First, asset divestiture typically results • Eliminate the requirement for building in a lump-sum payment of cash, provid- permits for construction activity that ing much-needed resources in this time of creates no significant health or safety cutbacks. risk. Second, divesting state-owned real estate • Simplify issuance of building permits for increases the tax base. State-owned lands do major construction projects by allowing not pay property taxes nor do they typically general contractors to obtain a “master produce sales and income taxes. Moreover,

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in constrained real estate markets with lim- • State-owned parking garages; ited developable land, state-owned property • State-owned transportation right of way; represents a desperately needed source of • Old or obsolete state-owned buildings capital for private economic activity. in high-value urban commercial real Finally, systematically reviewing the estate markets (shifting located services state’s assets portfolio and divesting the state to leased facilities funded through sale of those assets which are not deemed to proceeds); be most efficiently owned by the state will result in lower maintenance and operations • State-owned maintenance yards and costs, and, hence free money for other pri- facilities; orities. Divesting an unneeded property rids • Obsolete or unneeded armories; and the government of an unproductive asset • Developable parcels of state-owned va- that saps resources. Selling this deadwood cant land (does not include conservation streamlines government service. lands, trust lands, etc.). State asset sales and realignment can It is important to note that in most cases take a variety of forms. In some cases, the properties identified for potential dispos- government entities sell out- al in California provided no direct benefit to right, in either an “as is” or “entitled” state the delivery of state programs. For instance, (having secured necessary zoning approval). huge buffers exist around state correctional In other cases, these transactions are estab- facilities and hospitals. Where once these lished (particularly for enterprises like a golf facilities were located in largely remote areas course or other fee-generating facility) as a with low property values, explosive growth long-term franchise agreement or conces- has brought both population and commerce sion. Still in other cases, such as state-owned into these regions and property values have buildings, asset realignment includes sale- skyrocketed. What was once a relatively leasebacks, where the private sector purchas- worthless piece of buffer land has become es the property for a fixed price and agrees high-value developable land in a housing- to lease back the facility to the government starved region. The facilities can continue to entity for an agreed upon period of time. Im- operate with smaller buffers. portantly, the state receives a lump sum cash payment in all three scenarios. In other words, the state generated over A review of assets that could be divested $23 million more than anticipated through in California netted an interesting find the sale of two parcels of state-owned land. including several billion dollars worth of assets. While other states may not generate Other government entities across the the same findings, similar types of proper- United States can confirm the opportuni- ties may offer some potential to Gulf Coast ties derived from state asset sales. In June of states. Those include: 2003, the Arizona Land Department gener- • Unused or underutilized portions of state ated $51.2 million through the sale of two correctional facilities, state universities, parcels of land, even though the properties and state hospitals, particularly in high- appraised for $27.9 million. In other words, growth areas; the state generated over $23 million more

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than anticipated through the sale of two mous school networks. parcels of state-owned land. Public-private partnerships offer a In another illustration, Orange County, proven mechanism to speed up new school California raised more than $300 million projects and manage their costs. During through real asset sales and sale leasebacks recovery from Katrina, PPPs can help get over the course of 18 months to help recover schools back on line. from collapse into bankruptcy in 1995. In According to the Heritage Foundation’s New York, the Empire State Development Ron Utt, Section 422 of the Economic Corporation also generated hundreds of Growth and Tax Relief Reconciliation Act millions of dollars in revenues through sales of 2001, gives local governments across the and leasebacks of state-owned properties in- country “the opportunity to build public cluding the New York Coliseum, state men- school facilities faster, better, and at lower tal health campuses, parking lots, armories, cost by forming public-private partnerships and state-owned golf courses. In one of its with qualified real estate investors and de- first sales, New York divested a state-owned velopers. Under this approach—pioneered in golf course for more than $3 million. England, Scotland, and Nova Scotia, as well In addition, states should be careful not as in the states of Florida and Texas—public to disregard buildings and facilities that are school systems can now form partnerships being used. These assets can also be lever- with private-sector investors who fund the aged through a variety of approaches. For construction of public school buildings and instance, state office buildings, particularly lease the facilities to public school systems older buildings in higher cost regions, can at annual costs that are below the costs that be sold and replaced with build-to-suit lease communities would incur if they built the facilities in other regions where commercial schools on their own.” real estate costs are lower. Additionally, this To the utmost extent schools should be may enable the program to acquire better, built with public-private partnerships. Per- more modern facilities at lower cost. haps one of the best and brightest examples of the potential to be harnessed through 4. Innovations for Public Buildings and private enterprise comes from the District of Schools Columbia Public Schools (DCPS). In De- The Gulf Coast should focus on creating cember 1999, DCPS entered into a unique new schools. Chester Finn from the Ford- partnership with LCOR, a firm specializing ham Foundation has proposed using char- in developing and managing facilities, to tering and contracting to help states quickly rebuild the James F. Oyster School. The new build new schools. Governors could put out school will replace the deteriorating 73-year- a bid for proposals to new school leaders. old school in the Woodley Park neighbor- Over the past decade and a half, the char- hood of Northwest Washington. LCOR will ter school movement has been developing build the new school in exchange for excess expertise in building schools from scratch. land on which a new privately owned 211- Existing school networks—such as KIPP, unit apartment building, named the Henry Aspire Public Schools, Achievement First, Adams House, will be located. Edison, etc. could quickly set up autono- The new school is the first new pub-

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lic school built in the District in 20 years. Bush proposed $1.9 billion in funding for The current school has a leaky roof, does displaced students. According the White not have a cafeteria or gym, and cannot be House fact sheet from the President’s Ka- wired for computers. The new school will be trina Recovery speech, “This funding would twice the size of the old one and will have a be used to reimburse school districts for the gym, kitchen, cafeteria, and common space. unexpected costs associated with educating A creative financing structure, made additional children for the 2005-06 school possible through the partnership, helped year, such as teacher salaries, transportation, make the new school possible while real- materials and equipment, special services izing the value of an undervalued asset, the for children with disabilities, supplemental school’s excess land. The new school is being educational services, and counseling. To financed by an $11 million, 35-year tax-ex- ensure that displaced families have maxi- empt bond issue underwritten by Paine Web- mum flexibility to meet the education needs ber. The bonds will be retired by means of of their children, the President’s proposal PILOT (Payment in Lieu of Taxes) payments would provide compensation to displaced made by the private owners of the Henry families for enrollment in private, including Adams House project. Under the unique parochial, schools.” PILOT program, the apartment building President Bush’s proposal would al- owners will make these payments in place of low the money to follow the child into any real estate taxes. school. This model follows the federal fund- ing model for college students. According The unique financing structure has brought to Clint Bolick, writing in a September 15th these projects to fruition with little or no Washington Times editorial, the 73,000 col- cost to the taxpayers—truly a win-win lege students displaced by the storm can use situation. their federal aid anywhere, at public, private or religious schools. Following President The partnership has brought a much- Bush’s lead and using the college system as needed new school, as well as housing, to a model, the funding for each displaced K- the D.C. area. Most importantly, the unique 12 student in the Gulf Coast should follow financing structure has brought these proj- that child into any public, private or charter ects to fruition with little or no cost to the school. taxpayers—truly a win-win situation. Gulf Coast governors possess broad D.C. school officials started out skeptical emergency powers. State per-pupil funding but eventually got behind the project when was already appropriated for education be- the benefits became obvious. Mary Filardo, fore the hurricane struck. Governors should former head of the Oyster PTA, said after use their emergency authority to ensure that she helped arrange the deal: “It is important the funds will follow the children to whatev- for other communities to do what we have er schools—public, private or charter—that done.” can quickly enroll children. The per-pupil spending average should follow each child 5. School Funding Vouchers or Tax Credits into the school of his or her parents’ choice. On September 15, 2005, President There are three strategies governors could

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employ to offer displaced children more per- In 2006 it is being implemented statewide manent choices and school placements. in Hawaii and pilot programs are underway First, states could move from an enroll- in Boston, Chicago, and New York City. A ment system based on residential address weighted student formula would allow any to a true open-enrollment system with a state school to accept students and to be weighted student formula funding mecha- paid based on the individual characteristics nism. States could adopt the decentralized of students. school management system that was pio- Secondly, states could create a corporate neered in Edmonton, Canada by superinten- tax credit scholarship to offer scholarships dent Mike Strembitsky in 1976. Strembitsky to displaced students who want to attend developed the weighted student formula or remain in a school of their choice. This (WSF), also known as student-based bud- program could be modeled after the Florida geting, in which each student receives an corporate tax credit program. In Florida allocation—weighted according to his or the corporations that donate to Scholarship her specific needs—that follows the student Funding Organizations (SFOs) are entitled to all the way to the school. Families are free a tax credit on the Florida corporate income to choose any public school, and principals tax (Florida has no personal income tax) have a great deal of discretion over their equal to the amount of their donations, up school budget, which is an aggregation of to $5 million per corporation per year. SFOs all the individual student allocations. In the use this money to fund scholarships to allow Seattle system, for example, students are low-income students (those participating in assigned “weights” for supplementary funds the federal free and reduced lunch program) for categories such as poverty, limited Eng- to attend private schools (religious or non-re- lish proficiency, and special education. ligious), or to fund transportation to another public school. The private-school scholar- A crucial component of decentralized ship is equal to $3,500 or the total tuition management is to adopt a user-friendly and fees of the private school, whichever is method of school choice, in which parents less; the funding for transportation to attend may choose to send their child to any another public school is equal to $500. school within the state without seeking The third option is that governors could permission from the central office. create a statewide voucher program modeled after the Ohio statewide voucher program. A crucial component of decentralized Gov. Robert Taft (R) recently signed into management is to adopt a user-friendly law a new program providing scholarships method of school choice, in which parents for students in low-performing schools. may choose to send their child to any school Beginning in fiscal year 2007, up to 14,000 within the state without seeking permis- students will be awarded scholarships rang- sion from the central office. Decentralized ing from $4,250 to $5,000 to attend private management is a growing trend in the schools. Gulf Coast governors could cre- United States. To date the WSF has been ate a similar type of voucher program for implemented in Cincinnati, Houston, St. displaced students, allowing $5,000 to fol- Paul, San Francisco, Seattle and Oakland. low each child into the school of his or her

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parents’ choice. logistics services. The ownership of the ports would have remained in domestic hands. B. Foreign Management of U.S. Infra- In addition, foreign firms are subject to the structure same legal and regulatory security require- ments as any domestic firm or public agency. Numerous U.S. ports, airports, roads, and In the ports deal, the U.S. Coast Guard and water facilities are already run by foreign the U.S. Bureau of Customs and Border businesses Protection—not Dubai—would have had the The Dubai Ports controversy in early primary responsibility for port security. 2006 launched a firestorm over what kinds Setting aside the hyperbole and fears of infrastructure critical to generated during the ports debate, the should be privately operated, particularly by controversy presents an opportunity to foreign firms. A recentUSA Today/CNN/ provide a sense of perspective on the foreign Gallup poll showed that around 66 per- management of domestic infrastructure and cent of Americans opposed the proposed related national security concerns. transfer of six major U.S. port operations to Dubai Ports World, a United Arab Emirates Reality Check: Foreign Firms Already Manage firm, viewing the deal as a national security Critical Infrastructure threat. Many of the critical infrastructure assets It is interesting how foreign involvement that Americans rely on in their everyday in international ocean-borne shipping has lives—including such important assets as generated so much hostility, given that we airports, highways, and water systems —are have long since come to rely on products managed by private, foreign companies. made by foreign companies that much more Consider the example of Indiana, in directly affect our health and daily lives. Ev- America’s heartland. Every day, citizens ery day, Americans drive foreign cars, drink in Indianapolis drink and brush their water distributed by foreign-owned water teeth with tap water provided through the systems, strap their children into foreign- nation’s largest public-private water part- made car seats, and take medicines made by nership with a domestic subsidiary of a companies from around the world. French-owned company, Veolia. Thousands Presumably, most people’s fears regard- of Hoosiers catch flights at Indianapolis ing the port controversy are based on two International Airport, an airport entirely prevalent myths: (1) there is a greater risk of managed by a subsidiary of a British compa- a security breach when American infrastruc- ny, BAA plc. And families traveling through ture assets are owned by foreigners, and (2) northern Indiana may choose to drive on under such a scenario, foreign companies are the Indiana Toll Road, which may soon be responsible for the security of critical assets. leased to a consortium that includes Spanish However, what was often lost in the ports and Australian firms. debate was that the Dubai firm was not Indiana is not unique. Here’s some per- “buying” the port facilities themselves; they spective on the foreign operation of infra- would have simply leased certain terminals structure assets and related security issues at the ports and provided management and throughout the United States:

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Ports Marine Terminal. C. Steinweg (USA) Foreign companies already own most Inc., a division of Dutch company C. of the infrastructure used in the domestic Steinweg Handelsveem B.V., operates the shipping industry, including vessels, contain- Baltimore Metal & Termi- ers, handling equipment, and port facili- nal Inc. Terminal. Wallenius Wilhelmsen ties. Approximately 80 percent of U.S. port Logistics, a company born of a merger terminals are leased and operated by foreign between a Swedish firm and a Norwe- companies, largely because federal law gian firm in 1999, operates the Mid-At- requires U.S.-based shipping companies to lantic Terminal. Finally, Ceres Terminals use American crews, making these firms less Incorporated, of Japanese firm NYK, competitive. currently provides service at cruise ter- minals in Bayonne, NJ, Brooklyn, NY, • For example, 80 percent of the terminals and Baltimore, MD. at the nation’s busiest cargo port, the Port of Los Angeles, are run by foreign • Foreign interests or their subsidiaries op- companies (see below). erate container cargo terminals at seven of the 10 busiest container cargo ports • Six of seven companies that operate in the United States. terminals within the Port of New York- New Jersey are foreign-owned. • Neptune Orient Line, which is 68 percent owned by the Singapore govern- • At the Port of Houston, the British firm ment, bought U.S.-based APL Limited in Peninsular & Oriental Steam Navigation 1997 and now operates terminals in Los Co. (the firm being acquired by Dubai Angeles, Oakland, Seattle, and Alaska. Ports World) handles freight at several public terminals. Inchcape Shipping Ser- • Yang Ming Marine Transport Company, vices, the world’s largest private shipping which is partially owned by the - manager which was recently acquired ese government, operates terminals in by a UAE investment company, also has Los Angeles and Tacoma. had a long-time presence in Houston. • Cosco Container Lines, a division of • At the Port of Boston, P&O Ports, a China Cosco, is owned by the Chinese wholly owned subsidiary of Peninsular government and operates a terminal at and Oriental, and the Massachusetts Long Beach. Port Authority have teamed up to oper- • A.P. Moeller-Maersk, a Danish compa- ate the Black Falcon Cruise Terminal. ny, is the largest terminal operator in the • P&O Ports is also a 50 percent joint United States and owner of the world’s venture partner in Delaware River Steve- largest shipping fleet. It operates termi- dores (DRS), which provides stevedoring nals at the ports of Miami-Dade and and terminal services in Philadelphia, Jacksonville, among others, and owns PA, Camden, NJ, and Wilmington, DE. APM Terminals NA, which is building a $500 million private container terminal • At the Port of Baltimore, APM Ter- in Portsmouth, Virginia, scheduled to minals, a division of the Danish A.P. open next year. Moller-Maersk Group, operates a pri- vate container terminal within Dundalk • At Norfolk, Virginia, Ceres Marine

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Terminals Inc. is one of the major steve- contracts with Pittsburgh International, doring firms and is owned by Japanese Boston Logan International, and shipping firm NYK Line. Norfolk is the Baltimore/Washington International U.S. headquarters of French shipping airports. line CMA-CGM Group and Israeli ship- • International Terminal 4 at New York’s per Zim-American Israeli Shipping Co. John F. Kennedy International Airport is • According to Dennis Rochford, presi- operated under a long-term concession dent of the Maritime Exchange for the deal between the Port Authority of New Delaware River and Bay, of the 2,700 York and New Jersey and a consortium ships that pass through the ports of that includes Amsterdam’s Schiphol Air- Camden (New Jersey), Philadelphia, and port, which is a corporation run by the Wilmington along the Delaware River Dutch government. each year, 2,500 are foreign. • International Concourse E at Atlanta’s It is important to note that the owner- Hartsfield International Airport is man- ship of U.S. ports remains squarely in the aged by a domestic subsidiary of TBI hands of local port authorities, and the plc, a British airport management com- responsibility for security at these ports lies pany. TBI also provides ramp control at not with the private companies that operate four of Hartsfield’s six ramps and man- them, but with American security officials, ages the Airport-wide Flight Information including the U.S. Coast Guard, the U.S. Bu- Display System. reau of Customs and Border Protection, port • TBI also manages both the international police, and local authorities, among others. and domestic terminals, develops ad- In fact, every domestic port and terminal op- ditional air service, and provides ground erator—foreign or domestic—is required to handling and cargo services for Central comply with the 2002 Maritime Transporta- Florida’s Orlando Sanford International tion and Security Act and submit a security Airport. TBI additionally provides total plan to the Coast Guard for approval. airport management services at Bur- Airports bank’s Bob Hope Airport. Of the 517 domestic airports offering • AvPorts, a domestic subsidiary of the commercial passenger flights, 13 have manage- Australian-owned Macquarie Infra- ment contracts with private companies, and structure Company, provides manage- all of these companies have significant foreign ment and operations services at Albany ownership or involvement. For example: International Airport, Atlantic City • Indianapolis International Airport is International Airport, Tweed-New Ha- now the largest privately managed ven Regional Airport, and Westchester airport in the United States and is under County Airport. a long-term management contract with • Stewart International Airport, located BAA Indianapolis LLC, a wholly-owned north of New York City, operates under a subsidiary of BAA plc (the privatized 99-year lease to the U.S. subsidiary of the British Airport Authority). BAA plc also U.K.-based National Express Group, PLC. holds medium-term management Like security at seaports, security at

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airports is controlled by the federal govern- Highways ment. The responsibility for baggage and Though increasingly common in Europe passenger screening at all of these airport and other parts of the world, the phenom- facilities is the responsibility of the Trans- enon of privatized highway infrastructure is portation Security Administration—not relatively new in the United States. But it is the companies that hold the management a rapidly growing trend here, as state and contracts. local governments discover they can provide Water and Wastewater vastly improved services for residents thanks to private capital and private-sector manage- Out of approximately 54,000 publicly owned water and wastewater systems, over ment and operations expertise. While there 2,400 (5 percent) of them contract with pri- are few privately operated highways, many vate firms to provide system operations and of these are managed by foreign-owned maintenance services. Many of these 2,400 companies. For example: contracts are held by domestic firms with a • In 2004, the city of Chicago leased the foreign parent. For example, Veolia Water, 7.8 mile Chicago Skyway to the Aus- the U.S. subsidiary of a French firm, serves tralian-owned Macquarie Infrastructure more than 600 communities and 14 mil- Group and Spanish-owned Cintra Con- lion people through public-private partner- cesiones de Infraestructuras de Trans- ships with local governments, including the porte S.A. for 99 years at a cost of $1.8 nation’s largest water partnership in India- billion. napolis. Of the four largest water companies • The same firms were selected as the pre- that provide operations and maintenance ferred bidder for the 75-year, $3.85 bil- services to publicly owned water and waste- lion lease of the Indiana Toll Road. This water systems in the United States, only deal is pending approval by the Indiana one—OMI—is a domestic company. legislature. In addition, 15 percent of the U.S. popu- lation is served by approximately 20,000 • Cintra is the majority interest in the private, regulated water and wastewater consortium that won the $7.2 billion utilities, including many small systems serv- bid to design, build, and operate the first ing subdivisions or trailer parks. Most of Trans-Texas Corridor (TTC-35). these are owned by domestic subsidiaries of • Macquarie holds long-term concessions foreign firms. to operate the Dulles Greenway toll road Regardless of size or scale, the private in Virginia, the Foley Beach Expressway firms—both foreign and domestic—that pro- in Alabama, and the SR-125 toll road vide water and wastewater services to local under construction in San Diego, among governments and communities are subject to others. Macquarie was also selected by the same environmental and safety regula- the Oregon Department of Transporta- tions as publicly managed utilities, and all tion to build up to three toll roads in the fall under the regulatory supervision of Portland area. federal, state, and local governments. • The Australian firm Transurban is part-

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nering with U.S.-based Fluor on projects through the years. Most have focused on the to add high occupancy toll (HOT) lanes myth that trade impoverishes one party or to the Capital Beltway (I-495) and along the other. Of course, free trade enriches both the I-95/I-395 corridor in Virginia. parties to the transaction, or else we would all grow our own food, build our own cars, Protectionist Legislation Introduced and make our own computers from scratch. Amid the Dubai Ports hysteria, politi- The most recent attack, thrown about in the cians lined up to take advantage of public wake of the Dubai Ports deal, is that it can fears by introducing a flurry of protectionist threaten national security. Desperate cries of bills. The “National Defense Critical In- “national security” have robbed Americans frastructure Protection Act of 2006” (H.R. of many other rights and already. 4881), introduced by Rep. Duncan Hunter Is Free Enterprise Next? (R-CA), chairman of the House Armed Services Committee, is one such piece of The nationalism and at legislation. The bill would prevent non-U.S. the heart of the discontent over the Dubai companies from owning, managing, or oper- Ports deal is the same kind of thinking that ating any system or asset that is included in leads people to conclude that the entire a list of critical infrastructure to be prepared agricultural industry must be home-grown by the Departments of Defense and Home- and that we must harvest our own food for land Security. national security. Despite significant protec- Exceptions may be made if certain offi- tionist barriers in the United States and else- cers and directors are American citizens and where, Americans nonetheless are perfectly have been “approved” by the government, a safe in eating food from all over the world, majority of the company’s shares are owned abundantly available in grocery stores and by Americans, and other requisite hoops restaurants across the nation. have been jumped through. Moreover, the aforementioned critical infrastructure list The nationalism and protectionism at the would include “any system or asset, whether heart of the discontent over the Dubai physical or virtual, that is so vital to the Ports deal is the same kind of thinking that United States that the incapacity or destruc- leads people to conclude that the entire tion of such system or asset would have a agricultural industry must be home-grown debilitating effect on national security, on and that we must harvest our own food for national economic security, on national pub- national security. lic health or safety, or on any combination of those matters.” In other words, the gov- Competition, whether local or interna- ernment would have the power to prohibit tional, leads to a greater variety and quality foreign ownership of pretty much anything of goods and services (thus increasing con- it wants. sumer choice) and lower prices for consum- ers. This competition should be embraced Free Trade, or Protectionism Debunked rather than stifled and micromanaged. There have been a number of attempt- Of course, for politicians and govern- ed justifications for trade protectionism ment bureaucrats, it is not about economic

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efficiency or consumer welfare; it is about gentina, or “War on Terror” partner Paki- control. Politicians have an interest in stan. perpetuating an “us-versus-them” attitude Add to this the fact that, according to because it allows them to advance agendas the State Department, “The U.A.E. has been and score political points. a key partner in the war on terror after Sep- The ubiquitous “them” is ever-chang- tember 11, 2001.” (Tellingly, the U.S. Navy ing, shifting with the fears and politics of the has no qualms about using the U.A.E. port day. During the 1980s, it was the Japanese of Jebel Ali, also operated by Dubai Ports who were “taking over America” as Japa- World, for warships such as the USS John nese companies made significant investments F. Kennedy.) The point is that the U.A.E. is in the United States. In the late 1990s, China a relatively economically liberalized na- Ocean Shipping Co. (COSCO) wanted to tion—and one of the most liberal, pro-West- build a $200 million container terminal at ern states in general in the region—run by the Port of Long Beach until there was a wealthy businessmen not intent on destroy- public outcry and Congress passed a bill ing relations with a significant trading scuttling the plans. After a terminal at the partner. port was later vacated by another tenant, Incentives Matter however, Cosco was able to take it over and operate at Long Beach. More recently, there Even if a foreign company was not from was similar hysteria when China National a nation on such good terms with the United Offshore Oil Corp.’s subsidiary, CNOOC States as the United Arab Emirates, this does Ltd., made a bid to buy Unocal. Now that not mean there should be cause for alarm. Arabs are the political boogeyman of the Businesses exist to make money in exchange moment, the Dubai Ports deal has attracted for the goods and services they provide. the wrath of the powers that be. Allowing terrorists to compromise security and attack your customer base is simply not The Dubai Ports Deal and the United Arab good business practice. If there is a possibil- Emirates ity of such an occurrence, businesses have a Protectionist fears of the Dubai Ports strong incentive to do whatever is necessary World deal are even more ridiculous when to prevent it from happening. one considers the nature of Dubai Ports and This becomes a little more complicated the U.A.E. Fears of Arab terrorists infil- when the business is not entirely private, but trating U.A.E.-owned businesses to launch owned (in part or total) by a government. In attacks on America are unfounded and the case of Dubai Ports World, the company borne out of fear and a lack of knowledge still operates in a very competitive market about the U.A.E. According to the Heritage and its efficiency has led to a history of Foundation’s 2006 Index of Economic Free- growth and success. The successful comple- dom, the U.A.E. rates “mostly free,” plac- tion of the purchase of P&O would have ing slightly below Mexico and Peru; slightly made it the third-largest port operator in the above , Malaysia, and Thailand; and world, with 51 terminals in 30 countries. significantly higher than “mostly unfree” Thus, there should have been little, if any, nations such as Russia, India, Turkey, Ar- cause for concern.

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Conclusion contributions to a retirement fund that is There has been a great deal of paranoia controlled by the employee. This has al- surrounding the Dubai Ports deal. Contrary lowed businesses to reduce retirement costs, to public fears, federal and local government increase the predictability of these costs, agencies would still have been in charge of and/or attract workers who favor the porta- enforcing security measures; the company bility and flexibility of defined-contribution would merely operate certain terminals at plans. The public sector has, unfortunately, the ports, not own the ports themselves; resorted all too often to blaming the stock and the people operating the ports would be market and trying to borrow its way out substantially the same. The vast majority of of debt, which will do nothing to solve the port terminals in America are already oper- underlying funding problems. Increasing life ated by foreign businesses. spans, a trend toward earlier retirement, ris- Private companies, even foreign-owned ing health care costs, and the coming retire- companies, have successfully owned and ment of the Baby Boom generation will only operated numerous “critical infrastruc- exacerbate these problems. ture” systems and assets in the United Government pension plans are swim- States—from airports to highways to water ming in red ink. As of April 28, 2006, the and wastewater plants—for many years. National Association of State Retirement The country has managed to survive, indeed Administrators and National Council on thrive, under these arrangements because Teacher Retirement reported an aggregate these companies have a strong interest in unfunded liability of over $323 billion for keeping their customers healthy and happy the 103 pension systems and 127 total plans and maintaining their business. in its Public Fund Survey. A 2004 analysis by Wilshire Associates pegged the unfunded C. The Government Pension Crisis liability at as high as $366 billion. More- Businesses and governments across the over, new accounting regulations established nation are finally starting to wake up to the by the Government Accounting Standards reality of the coming pension crisis. While Board set to take effect in December 2006 private-sector pension terminations and will require governments to list as liabilities freezes, such as those by high-profile com- the full costs of retiree health care benefits, panies such as United Airlines, US Airways, costs one expert has estimated at $1 trillion IBM, Verizon, and Motorola, are grabbing nationwide. The change will serve as a rude most of the headlines, the situation is every awakening to governments already strug- bit as grave for government pension systems. gling with high pension costs. It is time the government pension crisis gets 1. Case Studies the attention it deserves. Pension funding problems are hitting The steady trend in the private sector state and municipal governments across the over the past 30 years has been a switch country: away from traditional, or “defined-ben- efit,” pension plans in favor of 401(k)-style San Diego “defined-contribution” plans, in which both The city of San Diego is the poster child the employer and employee make annual of pension mismanagement. San Diego is

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now embroiled in its worst system. In 1995, legislators passed a pen- ever with a $1.4 billion pension deficit and sion reform bill featuring a new payment an estimated additional $1 billion liability schedule that would return the pension for retiree health benefits. Pension costs funds to an estimated 90 percent funding threaten to consume as much as one-third ratio by 2045. Since the state was then, as of the city’s day-to-day operating budget for now, experiencing financial straits, the pay- the next fiscal year. ment schedule was backloaded so that the The financial mismanagement ledTIME plan would go into effect gradually. The Magazine to name Mayor Dick Murphy 15-year “phase-in” period expires in 2010, one of the nation’s three worst mayors, and when the state’s commitment will be $3.8 eventually resulted in Murphy’s resignation billion. This is the reason pension costs are less than five months into his second term. expected to explode in the future. By 2045, San Diego is currently the subject of the required payment will balloon to an numerous investigations. The FBI and the astounding $54 billion. U.S. Attorney’s Office (Justice Department) In the meantime, the state is find- are probing city finances and looking into ing it extremely difficult to make even its potential public corruption. The city’s “phase-in” payments. Gov. Blagojevich and failure to properly disclose pension liabili- Democratic legislative leaders have agreed to ties prompted a Securities and Exchange contribute only $1.4 billion of the required Commission investigation and led to the $2.5 billion to the pension system in 2007. suspension of the city’s credit rating. These And what of the difference? In his budget federal probes have been going on for the proposal, Blagojevich has dedicated nearly better part of two years. In addition, City all of the “savings”—nearly $1 billion—to Attorney Michael Aguirre launched his own new social programs. investigation and concluded that benefit West Virginia increases in 1996 and 2002 resulted in the illegal underfunding of the pension system The state of West Virginia faces a $5.5 and violated the state’s conflict-of-interest billion pension deficit and an additional law. So far, eight former pension officials $3.3 billion in unfunded workers’ com- have been charged with criminal corruption pensation liabilities—a deficit nearly three by the U.S. Attorney’s Office and District times the state’s annual $3.1 billion general Attorney’s Office. fund budget. In June 2005, West Virginians wisely rejected a risky $5.5 billion pension Illinois obligation bond proposal. In Illinois, taxpayers face a $39 billion Unfortunately, the politicians did not get pension deficit, earning it the dubious title the message. The West Virginia Teachers of worst pension shortfall in the nation by Retirement System makes up the vast major- sheer dollars. Illinois seems to be illustrat- ity of the pension deficit with an unfunded ing the maxim that history repeats itself. liability of $5 billion and ranks as the During the 1980s, not even strong pension worst-funded public plan in the nation, with returns could make up only enough assets to cover 22.2 percent for consistent underfunding of the pension of expected liabilities. Mounting liabilities

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led to the closing of the teachers’ defined- proposal is still pending. Richman does not benefit plan (and replacement with a de- expect it to make it to the governor’s desk, fined-contribution plan for all new hires) in but has not ruled out turning the proposal 1991. Incredibly, the state has not learned into a 2006 ballot initiative. its lesson. Earlier this year, after enabling 2. The Problem of Political Incentives legislation was passed by the state legislature and signed by Gov. Joe Manchin, the state’s In the public sector, politicians and teachers voted to close the defined-contri- bureaucrats have frequently blamed un- bution plan and return to the same kind of funded actuarial pension liabilities on defined-benefit plan that got West Virginia factors outside their control, such as the into trouble in the first place! stock market downturn that followed the “dot-com” boom of the late 1990s. While California sagging returns certainly did not help pen- In California, the state’s teachers’ retire- sion investment portfolios, they account for ment system (CalSTRS) now faces a short- a fairly small portion of the problem. It is fall of over $24 billion, and the state’s com- the structural problems and set of incen- bined contributions to the public employees’ tives inherent to political management that and teachers’ plans now exceed $3 billion need to be addressed if government pension per year. The state was caught off guard by systems are to be returned to sound financial a rapid rise in its contribution levels. State footing. contributions to the California Public Em- One central problem is that public of- ployees’ Retirement System (CalPERS), the ficials have incentives to put off like state’s largest , rose from $160 retirement benefits because the bills will not million in 2000 to $2.6 billion in 2005. come due until they are long out of office. Gov. Schwarzenegger’s plan to address Fiscal restraint typically does not win elec- such volatile shifts in contribution levels and tions; new government programs and good- rein in pension costs by switching all new ies for the home district do. Business offi- employees to a defined-contribution plan cials have certainly been guilty of putting off was scuttled in 2005 when labor unions their pension debts as well. However, the argued that the language of the proposed problem is not as great in the private sector ballot initiative could be interpreted to deny because it is much more difficult for busi- death and disability benefits to state public nesses to avoid bankruptcy than for gov- safety workers. Assemblyman Keith Rich- ernments, and the vested financial interests man (R-Northridge) introduced a consti- of officers and shareholders provide them tutional amendment, ACA 23, to shift new greater incentives to act to avoid the day of state employees to a defined-contribution fiscal reckoning. plan or a hybrid plan starting in July 2007, When capital gains taxes flooded state but the proposal was amended to maintain coffers during the late 1990s, state and lo- defined-benefit plans, albeit with lower cal governments thought they had hit the benefit formulas, and add an optional de- jackpot. Pension fund investment returns fined-contribution plan that would match were so great that governments didn’t need employee contributions up to 4 percent of to kick in much, if anything, to cover pen- the employee’s salary. As of this writing, the sion costs. During these flush years, many

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governments took “contribution holidays,” in this column. Consider the following meaning they did not contribute at all to the partial list. pension system. • Unrealistic actuarial assumptions, such Some even took advantage of “excess” as anticipated investment returns, can returns by issuing a “13th check” on top of lead to a nasty shock when overly opti- normal monthly benefit distributions, some- mistic assumptions cause governments times in amounts greater than beneficiaries’ to underfund their retirement systems. regular monthly payments (though the sys- • Deferred Retirement Option Programs tems do not ask beneficiaries to contribute a (DROPs), which allow employees near little extra when pension investment returns retirement to collect both a paycheck are lower than average). Unfortunately, and their retirement benefits if they agree governments assumed that these historic and to work a few years longer, have often extraordinary returns would continue indefi- proven to be expensive perks. nitely. When the bubble burst and the stock • Pension obligation bonds, often sold market inevitably corrected, governments to voters as a simple debt refinancing, discovered that they had to make up for all are actually risky gambles, because if the payments they didn’t make and all the investment returns do not exceed the “excess” disbursements they had made in debt service on the bonds, often at least years prior. 6 percent, the government must make The sharp increase in tax revenues additional payments to make up the dif- during the late 1990s had other impacts as ference and ends up even worse off than well. Even after the stock market downturn before. had begun, governments could not resist the urge to spend the extra money that had • Some government pension managers accrued. Public employee unions, who have made investment decisions based often play a major role in politicians’ elec- on political ideology, rather than trying tion campaigns, wanted their piece of the to maximize returns. This raises fiducia- pie, too. In California, the state and many ry duty and conflict of interest concerns. municipal governments raised public safety 3. The Decline of Defined-Benefit Plans workers’ pensions from a “2 percent at 50” plan (whereby an employee with 30 years Over the past quarter-century or so, the of experience could retire at age 50 with 60 private sector has moved steadily away from percent of his final salary) to a “3 percent defined-benefit pension plans. The number at 50” plan (allowing the same worker to re- of defined-benefit plans has fallen signifi- tire with 90 percent of his final salary)—an cantly from 103,000 in 1975 to 56,000 in increase of 50 percent! Other government 1998. Over the same period, the number employees also saw significant benefit of private-sector defined-contribution plans increases. This at a time when workers in has exploded, from approximately 208,000 the private sector were seeing their benefits in 1975 to 674,000 in 1998. According to being scaled back. the Pension Benefit Guarantee Corporation Public pension systems have faced other (PBGC), the quasi-governmental insurer-of- problems too numerous to discuss in detail last-resort for private-sector defined-benefit

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pension plans, the number of private-sec- One of the major problems with the tor defined-benefit plans today has declined PBGC is that it has not been able to ad- even further to roughly 31,000. Virtually no equately address the inherent insurance defined-benefit plans have been established risks. The premiums it charges participating in the private sector in the past decade. employers is set by law and is significantly Defined-benefit plans are not faring any below the rates one would expect in a free better in the private sector than they are in market. In addition, while underfunded the public sector, causing big problems for plans are supposed to pay higher premiums the PBGC. The PBGC reports that the total as a penalty for underfunding, the PBGC unfunded liability of private pension plans collects only a small percentage of these is over $450 billion, $108 billion of which variable rate premiums due to loopholes is in plans sponsored by below-investment- and congressional bailouts offered to vari- grade rated companies. While the U.S. ous industries, such as the steel and airline government is not required to insure the industries. The Bush administration and solvency of the PBGC, which currently has Congress have made (private-sector) pension a $23 billion deficit in its single-employer reform addressing these and other issues a pension insurance program, the expecta- priority this year, but, as of this writing, the tion is that Congress would not allow tens House and Senate are struggling to resolve of millions of voting Americans to be left differences in competing bills. without their promised retirement benefits. Even if premium levels are tweaked a The result would likely be a bailout at least bit, though, the fact that they are dictated as great as that of the savings-and-loan crisis by political, not economic, forces dooms of the 1980s. the PBGC to ultimate failure. Privatizing the PBGC would allow private companies Virtually no defined-benefit plans have with strong financial incentives to establish been established in the private sector in pension insurance premiums that would the past decade. more accurately reflect the level of risk, as evidenced by the health of the pension plan The PBGC was borne of the Employee to be insured. The private sector success- Retirement Income Security Act of 1974 fully provides all sorts of insurance: auto, (ERISA), the same legislation that established health, life, renters/homeowners, etc. Why the tax-deductible Individual Retirement not private pension insurance as well? By Account (IRA). It was established largely contrast, the government has demonstrated in response to high-profile business failures that insurance is one of its many weak spots, such as the Studebaker Corporation in the as evidenced by the PBGC, the savings-and- early 1960s. Unfortunately, it has done little loan crisis, and the flood insurance debacle but taken the isolated tragedies of business (Hurricane Katrina and others). failures and socialized them by placing the 4. Defined-Contribution Plans in the Public burden of paying retirement benefits from Sector these failed companies on all taxpayers. As is often the case with government action, the In response to many of the aforemen- cure is worse than the disease. tioned government pension funding prob-

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lems, some governments are following the centage of payroll) and don’t change much example of the private sector and switching from year to year. This is a sharp contrast to defined-contribution retirement plans. to the in contribution levels experi- Now numerous states—including Colo- enced under defined-benefit plans. rado, Florida, Louisiana, Maine, Michigan, For governments, this is particularly Montana, Ohio, Oregon, South Carolina, helpful in the budgeting process, as legisla- Vermont, Virginia, and Washington—offer tors—and the taxpayers on the hook for any defined-contribution plans to at least some funding shortfalls—do not have to worry of their state employees. about being surprised by greater-than-ex- Some states, like Florida, offer defined- pected contribution requirements when the contribution plans only as an option in addi- stock market sours and the pension fund’s tion to traditional, defined-benefit plans, not investment returns plummet. This added as a replacement. Government employees predictability of government finances elimi- in Oregon participate in both a defined- nates the risk of unfunded liabilities and benefit plan and a defined-contribution thus ensures full funding of the system. plan. Michigan switched over to a defined- Note that governments can still offer attrac- contribution plan back in 1997. And just tive compensation packages by increasing last year, Alaska passed a measure to close salaries or the level of the government’s con- its defined-benefit plan to new employees tribution, but they must ensure that these and switch to a defined-contribution plan, compensation increases are paid for. although the Alaska House voted in April Defined-contribution plans offer a num- 2006 to delay the implementation of the ber of benefits to workers as well. They are new retirement plan for one year. (As of this portable, that is, they can be “rolled over” writing, the state Senate has yet to act on the from one employer to the next when an postponement legislation.) employee changes jobs. This is particularly attractive to younger workers, especially Privatizing the PBGC would allow private given that, according to the Bureau of Labor companies with strong financial incentives Statistics, the median job tenure in 2000 was to establish pension insurance premiums 4.7 years, and only 2.6 years for employees that would more accurately reflect the level aged 24 to 34. of risk, as evidenced by the health of the Finally, defined-contribution plans of- pension plan to be insured. fer individuals the freedom to invest their money as they see fit. Moreover, risk levels and investment strategies change with age. 5. The Advantages of Defined-Contribution Defined-contribution plans thus offer the Plans freedom and flexibility that one-size-fits-all Defined-contribution plans offer a num- government-managed pension plans cannot. ber of advantages over defined-benefit plans. The chief benefit to the employer is that 6. Another Solution: Voter Approval Require- their predictable costs allow for greater sta- ments bility and accountability. Costs are known There is another crucial reform gov- in advance (since they are simply a set per- ernments can implement to stem the tide

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of ever-rising pension costs that deserves ployees’ retirement costs are covered with- mention. In addition to switching from out soaking taxpayers in the process. defined-benefit plans to more predictable and fiscally responsible defined-contribu- D. The Truth About Occupational Li- tion plans, governments can restrain pension censing and Free-Market Alternatives costs by enacting constitutional or charter If you want to work, more and more amendments requiring voter approval of all often you have to seek permission from the increases in government employee benefits. government, pass arbitrary requirements, This allows the taxpayers, who are ultimate- and pay fees to the state. Once upon a time, ly responsible for paying state employees’ “all” you needed to do to go into business salaries and benefits, to act as a final check and make a living for yourself was obtain against unreasonable benefit increases. the know-how, equipment, and/or business This strategy has helped “liberal” San acumen necessary to keep your business Francisco keep retirement costs in check afloat. Today, professions from doctor and while “conservative” areas like the city of lawyer to lightning rod installer, - San Diego and Orange County, California, eer, and chimney sweep require a license or have been brought to the brink of financial other form of government consent. ruin by their pension systems. Did you know that you need the 7. Conclusions government’s permission to work as a While the conversion of government rainmaker in Arizona, a fortune teller in defined-benefit plans to defined-contribu- Maryland, or a florist in Louisiana? tion plans and the implementation of voter approval requirements may help to reduce Occupational licensing laws are often retirement costs, they certainly are not cure- sold as a way to protect consumers by estab- alls. At best, these solutions will only stop lishing minimum standards of competence the bleeding. Persistent pension underfund- and safety, but this is dubious at best and of- ing, sometimes over the course of decades, tentimes outright deceptive. All that is truly has led to debts that will have to be paid one needed to protect consumers are normal way or another. Governments may mini- business incentives to attract customers and mize the resulting cuts to important govern- make a profit, coupled with a legal system ment services by adopting strategies such as that defends property rights and ensures that privatizing or outsourcing certain govern- justice is served in the event consumers are ment functions, selling unused or underuti- harmed. Far from being a beneficent at- lized assets, consolidating similar govern- tempt to protect consumers, licensing regu- ment agencies and functions, implementing lations are typically lobbied for by business performance reviews to identify waste and interests in order to suppress competition poor-performing programs, and eliminating and enhance their own bottom lines. lower-priority programs. These cuts may be Higher prices and reduced consumer painful in the short run, but they are neces- choice notwithstanding, the real tragedy sary if governments are to return to solid of occupational licensing is that it prevents fiscal position and ensure that public em- many people from working their chosen

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professions. Burdensome regulatory barriers These requirements are arbitrary and may are especially harmful to the poor, who have vary widely from one jurisdiction to anoth- the greatest need to improve their economic er—even for the same occupation. standing and should be encouraged to pur- As with other governmental regulation, sue entrepreneurial ventures, not stifled. the trend in occupational licensing is contin- While the use of occupational licensing ued growth. Governmental and bureaucrat- across the country is universal, not all regu- ic inertia leads to more laws and regulations, lation is created equal. Some states make but rarely are these laws and regulations prospective employees and entrepreneurs ever re-evaluated to see if they are having jump through more regulatory hoops than the effects they were intended to, are overly others, and some licensing laws seem just burdensome, or still necessary (if they ever plain silly. For instance, California requires were). Though technology and practices are licenses for roughly twice as many occupa- continually changing, licensing requirements tions as Ohio, Louisiana, and Virginia. And are seldom given a second look. Thus, the did you know that you need the govern- number of licensed occupations continually ment’s permission to work as a rainmaker in increases. Arizona, a fortune teller in Maryland, or a The percentage of the workforce that florist in Louisiana? must obtain a license to work has grown from just over 4 percent in 1900 to more 1. Background than 18 percent today. Hence, occupa- Occupational licensing in the United tional licensing laws directly affect a larger States is pervasive. More than 1,000 occu- segment of the population than other sig- pations are currently regulated by the states, nificant barriers to work, including labor not to mention municipal requirements. unions (less than 15 percent) and minimum Kids even need the government’s permission wage laws (less than 10 percent). Despite its to run makeshift lemonade stands dur- impact, occupational licensing receives only ing their summer vacations. Occupational a small fraction of the attention enjoyed by regulation can take the form of a license, labor unions and the minimum wage. certification, or registration requirement (not to mention numerous other types of 2. Occupational Licensing Survey of the regulations, such as business permits, that States mandate how and where business is to be In an effort to get a rough measure of conducted). Prospective employees and occupational licensing regulation among entrepreneurs may be forced to pay fees the states, Reason Foundation conducted (application fees, license fees, examination a survey using data from the Department fees, renewal fees) to the government, take of Labor and the 50 states. Of particular educational or training courses or obtain a help was the CareerOneStop.org Web site, full degree in a particular field from certain a cooperative effort between the DOL and accredited schools, undergo an apprentice- the states that includes a job bank, informa- ship or gain experience as a “lower-level” tion on wage and occupational trends, a employee in the field, and/or pass an exami- searchable database of government agencies nation. There may also be minimum age, providing employment-related services, and residency, and citizenship requirements. a database of occupational licensing require-

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ments by job or state. in which occupations are licensed and how According to the survey, the most regu- burdensome the licensing regulations are lated state in the nation is California, which from one state to the next. For example, requires licenses for 177 job categories, there were several cases in which neighbor- nearly double the average (92), followed by ing states had significant differences in the Connecticut, Maine, New Hampshire, and number of licensed job categories: California Arkansas (see Table 14). Seventeen states (177) and Arizona (72), Arkansas (128) and license more than 100 job categories. Only both Missouri (41) and Mississippi (68), Missouri (41) licenses fewer than 50. Figure New Jersey (114) and Pennsylvania (62), 8 below illustrates the number of licensed North Carolina (107) and South Carolina occupations by state. Note that with the (60), Tennessee (110) and Alabama (70), striking exception of California, Western and Florida (104) and Alabama (70). This states tend to be less regulated than Mid- begs the question: If some places work just western and Eastern states. fine with minimal or no regulations, why Occupational licensing laws are also must others be plagued with restrictive laws? very arbitrary, as evidenced by the disparity Are things so drastically different just across

Table 14: Most and Least Licensed States Rank State Licensed Occupations 1 California 177 2 Connecticut 155 3 Maine 134 4 New Hampshire 130 5 Arkansas 128 6 Michigan 116 6 Rhode Island 116 8 New Jersey 114 9 Wisconsin 111 10 Tennessee 110 Rank State Licensed Occupations 41 Colorado 69 41 North Dakota 69 43 Mississippi 68 44 Hawaii 64 45 Pennsylvania 62 46 Idaho 61 47 South Carolina 60 48 Kansas 56 49 Washington 53 50 Missouri 41

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Figure 8: Occupational Licensing Requirements by State

Legend

110-177 Licensed Occupations (Most regulated) 95-109

85-94Legend 70-84

<70 (Least regulated)

state lines that this disparity could be justi- are simply a means of utilizing government fied? Not likely. regulation to serve narrow economic inter- Some licensing laws are seemingly ests. Such special-interest legislation is de- senseless and others are just plain bizarre. signed not to protect consumers, but rather For an illustration of these kinds of licens- to protect existing business interests from ing requirements, consider the following: competition. This suppression of competi- auctioneer (several), beekeeper (Maine), tion damages the business climate, reduces chimney sweep (Vermont), elevator operator consumer choice, and allows licensees to (Massachusetts), florist (Louisiana), fortune charge higher prices than they would be able teller (Maryland), interior designer (several), to in a truly free market. These artificially lightning rod installer (Vermont), mussel high prices harm consumers. dealer (Illinois), rainmaker (Arizona), reptile catcher (Michigan), sheep dealer (Iowa), Numerous studies have revealed little, if turtle farmer (Louisiana), and whitewater any, improvement in service quality from rafting guide (Maryland). compulsory licensing.

3. The Economics of Occupational Licensing: Numerous studies have revealed little, Serving Public Interests or Special Interests? if any, improvement in service quality from While occupational licensing laws are compulsory licensing. Oftentimes, licensing billed as a means of protecting the public laws actually reduce service quality and pub- from negligent, unqualified, or otherwise lic safety. There are a number of reasons substandard practitioners, in reality, they

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why product or service quality and health licity and, like a union whistleblower, and safety may actually be diminished by oc- is often seen as a form of treason by cupational licensing: the whistleblower’s licensed colleagues. 1. Less Pressure to Compete Thus, not only are unscrupulous or Since it is more difficult to work if one incompetent licensees not punished, they has to obtain a license, fewer people are allowed to continue their work and will enter a given licensed profession the public is left in the dark about the than would exist in a license-free case. hazards of doing business with them. Less competition for licensees means 4. False Sense of Security less pressure to offer higher quality or Because of the reluctance of licensing lower prices to attract business. Thus, boards to discipline negligent licensees licensed businesses will be more inclined for their transgressions and the risk that to pocket more of their profits and invest licensing exams test the wrong skills or less in developing higher-quality goods prove only that one is trained to pass the and services. test, the government’s seal of approval 2. Improper Training Requirements gives consumers a false sense of security Established standards may sound all about the competence of licensees. This well and good, but what if you estab- false sense of security causes people to lish the wrong standards? Conditions be less critical, and possibly less de- and required knowledge may vary from manding, of those with whom they do place to place, but with a single rigid set business than they otherwise would be. of standards, licensed workers may be 5. Do-It-Yourself Jobs and Reduction in forced to spend time and money learning Repeat Medical Visits useless, or even incorrect, things. More- Consumers unwilling or unable to pay over, high-quality workers must perform the artificially high prices caused by routine tasks that could be done by less- licensing may resort to dangerous do- qualified workers, leaving them with less it-yourself jobs or skip needed medical time to devote to honing high-quality, visits. It should come as little surprise, specialized skills. Licensing, therefore, then, that electrocution rates are higher discourage specialization and makes in areas with strict electrical licensing licensees less effective and less able to requirements, as more consumers risk serve their customers. performing their own electrical work. 3. Licensing’s “Club Mentality” Similarly, states with stricter dental While licensing boards ardently pros- licensing laws also have the highest inci- ecute unlicensed workers (regardless of dence of poor dental hygiene, and states whether or not there is reason to believe with tougher optometry licensing laws a health or safety issue is involved), report higher rates of blindness. they are typically much more hesitant 6. Creation to discipline “one of their own.” Mak- Some workers and consumers may ing public the indiscretions of a licensed simply choose to ignore government worker brings unwanted negative pub- licensing standards and operate outside

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the law. These transactions are typically themselves. Not only is this false, it is con- not enforceable and consumers are more descending and paternalistic. Apparently, likely to become the victims of charla- by this “logic,” we consumers are too stupid tans and scam artists. and incompetent to make our own decisions about whom we do business with. 4. Licensing Violates the Freedom to Work As much as occupational licensing 5. The Alternative: Self-Regulation and Mar- ket Forces makes consumers worse off, perhaps the greatest tragedy of licensing regulations is The belief that consumers are left un- that they stifle the freedom to work in one’s protected if the government does not step in chosen occupation. Fees, needless education to regulate it is a common misconception. or irrelevant experience requirements, and In fact, the private sector does at least as other regulatory hurdles serve as a barrier good a job as the government in protecting that prevents many people from making an consumers. Those that lack faith in the free honest living. market neglect two crucial elements that Such cost barriers disproportionately af- serve to protect consumers and encourage fect the poorest members of society, who are the delivery of high-quality products: busi- in the greatest need of occupational freedom ness reputation and the legal system. to improve their living standards. Occupa- The significance of a business’s or work- tions with relatively low start-up costs such er’s reputation cannot be understated. What as taxi driving, hairbraiding, child care, and would happen for example, if certain state numerous home-based businesses that the governments stopped licensing exterminators, poor might otherwise take advantage of are chiropractors, and barbers? Would people be unattainable because the costs of obtaining living in bug-infested dwellings and running a license are too high—and usually unnec- around with bad backs and bad haircuts? essary. The poor are thus doubly hurt by Of course not. When looking for a place to licensing laws because their smaller dispos- get your hair cut, you probably just ask your able incomes are less able to absorb the re- friends for a good referral. If you happen sulting price increases, and they have fewer to get a bad anyway, you simply go job opportunities because jobs they could somewhere else next time. Herein lies the have performed in the absence of licensing beauty of the free market: businesses have an are made prohibitively costly by unnecessary incentive to provide the goods and services regulations. customers want at the best possible price and As if restricting entry to numerous jobs quality. Bad service is just as much a killer and denying an individual the right to freely for business as high prices. earn a living were not enough, the govern- Word of mouth is not the only means ment adds insult to injury by claiming that of assessing a business’s reputation, how- it is doing so in the best interests of the ever. Private certification organizations public. By imposing rigid, one-size-fits-all also provide consumers with information licensing laws, the government claims to about the product and service quality they “protect” members of the public not only can expect from certain sellers. There are a from incompetent workers, but also from couple of different ways to provide such an

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evaluation. One model is to simply use the heavily regulated across the nation. Some reputation of a certifying organization, such states have more work to do than others to as Consumer Reports, Good Housekeep- restore economic liberty to those wishing to ing, or CNET, to determine whether or not engage in the occupation of their choice and a product is “good.” Competition among improve their standard of living. various rating agencies will lead them to try In light of the destructive effects of oc- to outdo each other by providing the most cupational licensing laws on consumers, accurate information and establishing higher aspiring workers and business owners, and standards for certification. individual liberty in general, occupational A second certification model allows for licensing laws should be abolished. Pri- different levels of quality. A certification vate-sector alternatives such as voluntary organization may issue practitioners a test certification encourage and or subject them to inspection and grade allow consumers to obtain valuable informa- them according to their performance. A tion about product and service quality while business certified as high-performing could leaving them free to choose to do business then advertise itself to consumers as “Grade with practitioners that best meet their needs. A.” Unlike the single standard—predeter- The powerful free-market incentive to mined by the government—of occupational maintain a solid business reputation and the licensing, these multiple standards provide existence of the legal system to address neg- a greater array of information to consum- ligence or wrongdoing are all that is needed ers and allow them to make better decisions to “protect the consumer.” based on their individual quality, price, and Although abolition of occupational risk preferences. licensing regulations and other laws that Unfortunately, there will always be cases restrict economic liberty, such as minimum of worker negligence. When consumers are wage and zoning laws, should be the ulti- harmed by poor workmanship, faulty prod- mate goal, we must recognize that this is ucts, or dishonest businessmen, the courts probably not feasible in the near term. In serve as a final resort to ensure that the con- recognition of this, here are a couple of “sec- sumer is compensated for the harm done. If ond-best” options that may have a better all else fails, the legal system provides an chance of making a more immediate impact: additional incentive for businesses to provide 1. Conduct Periodic Occupational Licens- high-quality goods and services. If you are ing Reviews injured by a defective product, you can sue Occupational licensing boards and laws the manufacturer for negligence and perhaps should be continually evaluated for their fraud. If the stigma of being tried and con- relevance and perceived need. These victed for selling faulty products is not enough reviews should, first and foremost, to deter shady business practices, the economic evaluate whether licensing laws pass the effects of a guilty verdict certainly are. “laugh test” (fortune tellers and rain- 6. Recommendations and Conclusions makers?). They should also ensure that regulations are narrowly tailored, and As the state-by-state occupational licens- that they are providing at least some ing survey illustrates, the right to work is measure of public benefit, not merely a

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gravy train for special interests and bu- tion to expire after a certain period of reaucrats. Reviews should, furthermore, time unless they are specifically renewed analyze licensing board performance by by legislators. Enacting such provisions evaluating enforcement actions against in occupational licensing laws would licensees. improve accountability by forcing occu- In addition to abolishing occupational pational licensing boards to periodically regulations in obvious cases of political justify their existence. Rather than al- favor, licensing laws should be subject lowing more and more confusing licens- to removal if: (a) few other jurisdic- ing codes to pile up and be forgotten, as tions (say, fewer than 40 percent) have they have a tendency to do, legislators seen the need to license the occupation, would have to take a more active in- (b) too few practitioners are licensed to terest in the scope and effectiveness of financially justify the existence of the licensing laws. licensing board, or (c) there is a history While the above oversight measures are of little or no enforcement activity, sug- not perfect solutions, their implementation gesting that either the licensing board is would help to increase the accountability of not doing its job or there is no cause for occupational licensing boards and restore action. some semblance of common sense to licens- 2. Enact “Sunset” Provisions in Occupa- ing laws. They would also restore a mea- tional Licensing Laws sure of economic freedom, resulting in more jobs, more competition, and more consumer Sunset provisions cause the law in ques- choice.

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Environmental Services and Issues

Contents A. Water Privatization Update B. Supreme Court Issues Murky Decision in Wetlands Case

utility—a 10 percent increase over 2004. The industry’s contract renewal rate remained high—averaging 96 percent over the past four years (see Table 15). PWF also reports that municipalities have taken water A. Water Privatization Update utilities back in only 2 percent of contracts that came up for renewal in 2005. 1. Public Works Financing Issues 10th Annual Water Privatization Report 2. World Water Forum and Privatization Water and wastewater services con- tinued on their path of expansion, reports This year the global water community the 10th annual water report from Public met in Mexico City for the 4th World Water Works Financing. The survey is based on Forum sponsored by the to ad- a review of the eight largest water utility dress global water and sanitation issues fac- operators. ing the world. Currently 1.1 billion people The market has grown steadily by 7 to live without access to safe water, while 12 percent a year in total contract dollar 600 million lack basic sanitation. Nearly value since 2000. A total of 1,337 munici- two million deaths worldwide, every year, pal, state or federal government agencies are attributable to unsafe water and poor contract out at least one part of their water sanitation. The World Water Forum is an

Table 15: Water/Wastewater PPP Contract Renewal Rate 1999 2000 2001 2002 2003 2004 2005 Industry Renewal Rate (%) 88 95 87 97 96 97 93 Renewed by Incumbent (%) 83 91 81 94 94 95 92 Reverted to Competitor (%) 4 4 7 3 2 2 1 Reverted to Muni (%) 11 5 13 3 4 3 7 Source: Public Works Financing

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opportunity for the larger global community sector management and investment in water to discuss efforts to increase access to safe systems have actually been very successful, water. increasing access to water, cutting disease by This effort began several years ago with introducing sewerage systems, and reducing the United Nation’s Millennium Develop- prices for ordinary people. And that too ment Goals, which among other things, often opponents of privatization focus on proposes to reduce by half the proportion ideology and not facts. of people without sustainable access to safe The study notes that in the “vast majori- drinking water by 2015. The World Bank ty of cases, where the private sector has been has been supportive of these goals and has called upon, it has delivered the goods— initiated more than 2,500 public-private even in cases decried by critics as ‘failures.’” partnerships or privatization initiatives Balen argues that the most effective and throughout the world to accomplish these efficient way to increase water access to goals. countries in the developing world is utilize Despite resounding success—only 7 the resources the private sector has—its in- percent of initiatives between 1990 and novation, capital, expertise, and efficiency. 2004 were deemed failures by the World For example, Balen describes how vital Bank—the forum was met with a small but contracts are because they improve the vocal group of protestors. These groups overall transparency and accountability of took to the streets based on an ideology an initiative and the operators. Targets and that the private sector should have no role goals are documented and payment should in addressing these challenges. However, as be based on achieving those outcomes. Fredrik Segerfeldt points out, currently 97 percent of water distribution in developing Mischa Balen, a Labour Party activist and countries is in the hands of government, and the study’s author, points out that private look at what their management has been sector management and investment in water able to accomplish: not much. systems have actually been very successful, Private investment in developing coun- increasing access to water, cutting disease tries is back on the rise, by more than a third by introducing sewerage systems, and over the previous year. It is clear that the reducing prices for ordinary people. private sector not only should continue but will continue to play a role in the delivery Incentives also play an important role— of water and sanitation systems around the one that opponents do not understand. Yes, world. private companies have a profit motive. It’s that motive that leads them “to act in the 3. New Study from the Globalization Institute interests of the consumers.” The repercus- The Globalization Institute, a London sions of bad customer service are all too real , issued a new report on global for the private sector, which can easily be water privatization, “Water for Life,” that replaced. Governments face no such threat takes attacks on privatization head on. and have no incentive to deliver. Incen- Mischa Balen, a Labour Party activist and tives can also be written into contracts for the study’s author, points out that private achieving greater water quality or improving

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access in rural areas with bonuses or other as well—and in many cases—better than financial rewards. In fact, many global con- publicly owned systems. In fact, privately tracts are already written that way and there owned systems outperformed public sys- has been tremendous success. For example, tems, on average, in every category except in access in Tunja, Columbia has improved very large (100,001 + customers) systems. by more than 10 percent. has seen While private systems were somewhat a 15 percent increase. Chile is perhaps the more likely to violate monitoring and re- greatest example, where 99 percent of urban porting regulations, the authors note that citizens and 94 percent of rural citizens now other forms of private “management” may have access to clean, safe water. Balen also produce different results, especially in this notes that incentives can work the other way arena. Contract operations typically have too. Financial penalties can be worked into more stringent reporting requirements and contracts to penalize poor performance. additional levels of scrutiny that can be en- These ideas also dovetail into a discus- forced with the contract. These additional sion of “efficiency vs. wastage.” One of the levels are an added benefit. biggest problems facing most water delivery Perhaps most powerful was the find- systems is water loss or wastage. Simply, ing that “household expenditures on water this is water “lost” somewhere in the sys- at the county level decrease slightly as the tem once it leaves a treatment plant. Pri- share of private ownership increases, contra- vate companies have all the incentive in the dicting fears that private ownership brings world to prevent wastage and water loss as higher prices.” Given that private water it negatively impacts their bottom line. utilities are regulated utilities and typically At the end of the day, Balen argues that are limited in what they can charge, this is the private sector is an essential player in especially powerful. In fact, rates are gener- the delivery of water services globally. The ally set by a Public Utilities Commission or report deals a crushing blow to activists who an equivalent agency, limiting profits and have chosen ideology over reality. forcing private utilities to keep costs down. Overall, the report concludes that, 4. Brookings-AEI: “Water Provided by Pri- absent competition, water systems typically vately Owned Systems is Not Less Healthy or More Expensive” don’t differ much regardless of ownership or operation. Ownership type does not suggest A joint study from the American En- ultimate superiority—either way—dispelling terprise Institute and Brookings Institu- many of the fears that privatization will lead tion looked at the effects of ownership on to poor quality water and high rates. water system regulatory compliance and The reviewed consisted of every commu- household cost. After controlling for local nity water system in the United States from conditions and some additional factors, the 1997-2003 but is limited to privately owned authors concluded that “there is little differ- systems. It does not conduct a comparison ence between public and private systems.” of other private sector participation, includ- Public systems were more likely to ing contracts for management and operation violate the maximum levels of health-based and other public-private partnerships. contaminants allowed under the Safe Drink- ing Water Act. Private systems performed 5. Survey of Public-Private Partnerships Dem-

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onstrates Success Here in United States municipality back into regulatory compli- A new Water Partnership Council survey ance. In fact, 74 percent of the public of- of representatives from 31 communities ficials rate regulatory compliance as better engaged in a public-private partnership for under the partnership than before it. Fur- the day-to-day management, operation, and thermore, in many cases the private partner maintenance of facilities shows high rates of performs at a higher standard than what success and satisfaction. regulations require.

Partnership Satisfaction Impact on Customers, Municipalities, and Employees Half of the respondents rated their Thirty-seven percent of respondents overall satisfaction as “extremely satisfied,” noted that customer complaints decreased the highest ranking (a corresponding value under the partnership. However, in most of 5). No one ranked his partnership below cases the number of customer complaints “satisfied” (a corresponding value of 3) and remained the same. the average score was 4.5. When asked While water and sewer rates are not about whether they would continue with the controlled by the private provider, the rela- partnership model once the contract expired, tive cost of providing a service does directly 76 percent of the respondents said “likely,” impact the rates. In some cases, the mu- a score of 5. Only one respondent noted nicipality can keep the rates down because he would not continue with the partnership of cost savings when compared to previous model and the average score was 4.6. In addition, the incumbent provider was Table 16: Current Regulatory Compliance as retained outright (without a competition) 62 Compared to Before Partnership percent of the time once a contract expired. Better 74% Incumbents won an additional 24 percent of Equal 22% competitions while the remaining 14 percent Worse 4% were won by other firms. This data mirrors survey results from Source: Water Partnership Council Public Works Financing, which show mu- Table 17: Current Frequency of Complaints nicipalities as very satisfied with both part- Compared to Before Partnership nerships and their private partners. More Better 7% than 92 percent of contracts that were up Equal 56% for renewal in 2004 were again outsourced, Worse 37% either to the incumbent or to another private Source: Water Partnership Council provider. Less than 6 percent of systems up for renewal reverted back to the municipali- Table 18: How Rate Change Compares to ty, and less than 2 percent were not renewed Pre-partnership Projections for other reasons. Better 6% Equal 76% Environmental Impact Worse 18% Many of the respondents reported that Source: Water Partnership Council the partnership was central in bringing the

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operations. Most respondents, however, advancement opportunities, had increased thought their partnerships did not have an under private operations. impact on rates. Seventy-six percent of re- 6. Water Activist “Runs Tap” Against Privatization spondents reported that rate increases would be the same regardless of public or private In what can only be called bizarre, operation. Just under a fifth said that poten- performance artist and anti-privatization tial rate increases would be smaller under a activist Mark McGowan, is leaving six taps partnership arrangement. running for a year in protest against water Unfortunately only just under half of the privatization in the United Kingdom. respondents actually documented projected This will be done in secret London ad- cost savings—shrinking the small sample dresses so as to prevent disruption of his size even more. Of those, however, 92 plan. It’s estimated that the stunt will lead percent reported that those projections were to more than 100 million liters going down achieved. The remaining 8 percent noted the drain. that it was too early in the contract to deter- McGowan acknowledges that London mine. Savings ranged from 5 to 25 percent. is facing drought conditions, yet claims In terms of employees, respondents noted that he’s not “wasting water for nothing,” that employees are generally very satisfied suggesting that the private water companies with their partnerships. In nearly a third of waste billions of gallons of water a year partnerships, the municipality required the through under-investment. private partner to increase or maintain salary and benefit levels contractually. Sixty-four B. Supreme Court Issues Murky Deci- percent of respondents noted that employee sion in Wetlands Case grievances were below pre-partnership levels. Property Owners Need Protection from Wet- In addition, 93 percent of respondents report- land Bureaucrats ed that education and training opportuni- Those hoping that the U.S. Supreme ties, as well as professional development and Court would limit the scope of federal wet- land jurisdiction were deeply disappointed Table 19: Current Employee Financial in its June 2006 ruling in Rapanos vs. the Compensation as Compared to Before United States. Widely regarded as one of Partnership the most important property rights cases Better 53% in recent years. it challenged an expansive Equal 34% interpretation of the 1970 Clean Water Worse 13% Act through which the federal government Source: Water Partnership Council sought to extend its reach to literally every Table 20: Current Employee Benefits as little backyard pond or puddle. Compared to Before Partnerships While the court ruled 5-4 that federal authorities had overstepped their bounds in Better 20% this case, it failed to provide a clear test to Equal 40% distinguish the waters that fell under federal Worse 40% jurisdiction from those that fell under state Source: Water Partnership Council jurisdiction. In short, the court failed to

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capitalize on a golden opportunity to clearly lands, the federal government has no juris- define the scope of—and provide a check diction over them because the Constitution’s on—the federal government’s authority to Commerce Clause limits the Clean Water regulate private property. Act’s jurisdiction to navigable waters—and The Rapanos case involved a Michigan the nearest such waters are 20 miles away developer whom the federal government from his property. If the Act indeed allows has been hounding for close to two decades the federal government this kind of reach, now. Rapanos’ crime? He shifted sand from then it itself is unconstitutional, he insisted. one part of his property to another without The EPA, however, argued that it has the a federal wetland permit, allegedly a felony right to regulate any property with a “hy- under the Clean Water Act. drological connection” to navigable waters. Rapanos was convicted in 1997 on crim- But given that evaporation and rain make inal charges and paid hundreds of thousands all waters, in the end, part of one big hy- in fines, served 200 hours of community ser- drological cycle, the government’s position vice and three years of probation. The only literally aims to assert its authority over all reason Rapanos escaped a prison sentence is U.S. waters. that the judge who oversaw his trial was so This is a position that runs counter to disgusted with the inflammatory legal tactics the Supreme Court’s ruling in the 2001 employed by the government prosecutors SWANCC (Solid Waste Agency of Northern that he rejected their sentence request. For Cook County) vs. the U.S. Army Corps of instance, the prosecutors likened Rapanos to Engineers. In that case, the court threw out a devil and compared his “treeless property” the government’s “migratory bird rule” that to the “Warsaw ghetto without Jews.” sought to protect isolated wetlands under The Supreme Court previously refused the Clean Water Act on grounds that ducks to review Rapanos’ criminal conviction. and geese crossed state lines and used them But after John Roberts was appointed to as resting places. Yet the government is now the court last year, it agreed to take up the in effect asserting the “migratory molecule” civil case that the Environmental Protection version of the “migratory bird” rule. Agency launched—and won in lower courts The government did not arrive at such —against him. Rapanos, defended by the an expansive understanding of the Clean California-based Pacific Legal Foundation, Water Act all at once. This interpretation argued that if he needs a federal wetland has evolved incrementally over a period of permit (that, on average, costs $300,000) 25 years. According to an amicus brief filed then potentially every property owner with by the National Association of Home Build- the smallest pond or puddle would need ers in the Rapanos case, the Army Corps of one as well. Rapanos’ property is bone-dry, Engineers until the mid-‘70s believed that its thanks to its sandy soil and the drainage regulatory authority extended only to navi- ditches that the county government built gable waters. In 1975, the Corps asserted around it at the turn of the century—except jurisdiction over navigable waters and their for two wet spots which he was not plan- non-navigable tributaries up to their head- ning to touch. Furthermore, he maintained, waters. Then it became navigable waters and even if the wet spots could be deemed wet- waters adjacent to them.

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But all along the Corps disavowed any by the Act. intention of ever regulating any “manmade Justices Stevens, Souter, Ginsburg, and non-tidal drainage and excavation ditches Breyer dissented, upholding the govern- on dry land.” Yet that is precisely the scope ment’s expansive view of regulation—that of regulation the government sought to vali- it could literally regulate any land that held date in Rapanos. water at some point and could potentially Four justices—Scalia, Thomas, Alito, flow into a ditch, creek, stream, or river. and Roberts—clearly felt that the govern- Justice Kennedy became the tie-breaker ment has overstepped its reach in wetlands in a 4-4 split. Kennedy—whose opinion will regulation. According to Scalia’s plurality guide the lower courts in future wetlands opinion, wetlands regulation should only ex- cases—issued a separate opinion that was tend to bodies of water with a surface con- technically a concurrence with the plurality, nection to a permanent navigable waterway: though it rejected the interpretation of the The extensive federal jurisdiction urged scope of appropriate wetlands regulation by the Government would authorize the offered by Justice Scalia. Corps to function as a de facto regulator According to Kennedy, wetlands fall of immense stretches of intrastate land–an under federal control only when there exists authority the agency has shown its willing- a “significant nexus” between wetlands and ness to exercise with the scope of discretion navigable waters. But he did not say pre- that would befit a local zoning board. We cisely what this “nexus” would consist of. ordinarily expect a “clear and manifest” Such a vague criterion for intervention will statement from Congress to authorize an effectively invite federal regulators to fill in unprecedented intrusion into traditional the ambiguity as they see fit on a case-by- state authority. The phrase “the waters of case basis. This is especially the case given the United States” hardly qualifies. that federal courts often defer to the Corps’ […] In sum, on its only plausible in- scientific expertise in such matters. It is terpretation, the phrase “the waters of the unclear at this point how much effect, if any, United States” includes only those relatively the Rapanos ruling will have in reining in permanent, standing or continuously flow- the government’s broad exercise of wetland ing bodies of water “forming geographic regulation. features” that are described in ordinary As for Rapanos himself, the status of parlance as “streams[,] … oceans, rivers, his legal battle remains uncertain, as the [and] lakes.” The phrase does not include Supreme Court’s ruling sent his case back to channels through which water flows inter- lower courts for further examination. mittently or ephemerally, or channels that Existing federal wetland regulations that periodically provide drainage for rainfall. don’t employ an expansive interpretation […]Therefore, only those wetlands with of the Clean Water Act already cover 111.5 a continuous surface connection to bodies million acres of land—an area that is bigger that are “waters of the United States” in than the size of California. According to the their own right, so that there is no clear de- United States Department of Agriculture, if marcation between “waters” and wetlands, the government were to compensate land- are “adjacent to” such waters and covered owners—which it doesn’t—for the develop-

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ment potential they have lost on just this luted run-offs and keep our lakes and rivers land, it would have to cough up $162.6 clean. “But restricting development,” notes billion. This is equal to the combined 2005 Harvard University economist Edward Glae- profits of the top 15 Fortune 500 companies. ser, “is the most expensive filtering system Making this amount of land off-limits devised by man.” to development, among other things, raises There are far cheaper ways to cleanse real estate values, forcing home buyers to run-offs and maintain water quality. One pay higher prices. Businesses, however, are possibility would be to grow fields with es- affected too as higher home prices mean that pecially absorbent vegetation. In its Rapanos they have to pay higher wages. decision, the Supreme Court missed an op- But the real question is: do wetland portunity to prod the federal government to regulations deliver environmental gains com- look for more cost-effective ways to protect mensurate to the damage to the economy? the environment that don’t trample on the Environmentalists argue that wetlands offer rights of property owners. a natural filtering mechanism to purify pol-

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Telecommunications

Contents A. Governments Getting into the Telecom Business B. The Rise and Fall and Rise of Municipal Broadband C. Network Neutrality Update D. Video Franchise Reform Update

A. Why Governments Should Stay Philadelphia, San Francisco, Houston and Out of the Telecom Business other cities have drawn a lot of attention. Yet, it is unclear what problem these An increasing local governments are trying solve. Over number of local gov- a third of all American households already ernments are propos- have broadband Internet service—over half ing either to build of the households that use the Internet. and operate broad- Considering that mass use of the Internet is band networks for only about a decade old, this displays amaz- residential and business use, or to develop ing market penetration. And prices have broadband infrastructure for wholesale lease been falling steadily. to commercial service providers, or other- Many argue that government deploy- wise take action to accelerate the availability ment of broadband will spur economic of broadband Internet access throughout development, attracting high-tech jobs and downtown areas. technologies business investment. But government-subsi- have lowered costs, making such schemes dized broadband services actually discour- seem feasible. age private investment, leaving less opportu- A 2004 survey found that 621 public nity and incentive for private firms to enter power systems supply broadband services. the market. Townships, cities, counties and About 23 municipalities offer fiber optic ser- even states getting into the telecom busi- vice to the public. News reports claim that ness to directly compete against the private “hundreds of cities” are considering some sector undermine technological progress and type of municipal Wi-Fi. And San Francisco violate fundamental principles of American Mayor Gavin Newsome even declared free free enterprise. Most existing government or low-cost wireless Internet access a “fun- broadband systems compete with private damental right.” High-profile proposals in firms, or enjoy local monopolies, to the

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detriment of broadband consumers. Just as regulations that delay, raise the cost, or bad, a great many government broadband even effectively ban the construction of systems lose money and drain local budgets new network facilities. while falling behind new technologies, and 2. Municipalities and other local units of thus their service quality declines. government should be prohibited from Many of the proposed city-wide wire- investing in, managing or operating less systems are less problematic. Cities like broadband infrastructure and services. Anaheim, Houston, and even San Francisco 3. Congress should restrict the authority are now looking at proposals whereby a of states to regulate and tax broadband winning bidder will get access to city light infrastructure and services in the interest poles and properties to install wireless of preserving interstate commerce. antennas and other equipment in exchange for broad availability or low cost services. 4. Telecom taxes and cable franchise fees Other companies can install competing sys- should be eliminated to encourage in- tems if they so desire. vestment in broadband services. But organized activist groups are dili- The Municipal Broadband Compact, gently working to make sure that broadband the Questions Public Officials Should Ask services are provided by government agen- about Government Broadband Services, and cies or regulated monopolies with taxpayer Reason’s other research and commentary subsidies. They abhor market competition on these issues are available online at http:// in broadband services and are aghast at pro- www.reason.org/wifibroadband/. posals from Google and others to provide free wireless broadband services and make B. The Rise and Fall and Rise of Mu- their revenue off of ads. nicipal Broadband A large group of policy analysts have Cities choose public-private partnerships as signed the Municipal Broadband Compact better model to establish principles for efforts to create As scores of U.S. cities and towns are city-wide broadband access. The principles exploring “municipal broadband,” whereby seek to maximize competitive private pro- cities provide broadband Internet service, vision of broadband services and avoid some city officials around the United States monopolies and subsidies. Reason has are rejecting the assumption that local published a list of over 50 Questions Public governments and municipal utilities need to Officials Should Ask about Government finance, build, own and operate retail tele- Broadband Services that will help officials communications networks. evaluate the technical, economic, political, In many ways, the “municipal telecom” and legal aspects of municipal broadband movement represents the antithesis of the proposals. privatization trend. Even as cities and towns The Compact recommends keeping these begin to divest ownership of sanitation issues in mind when optimizing broadband services, water and sewer, public transit and deployment: toll roads, the notion that the local govern- 1. Access to broadband can often be ment needs to take a direct role in the provi- expanded by eliminating unnecessary sion of cable television, telephone high-speed

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Internet services has been compelling to city These include Los Angeles, Daytona Beach, councils throughout the country, at least Fl., and Baton Rouge, La. Another 35 cities until recently. use WiFi for municipal and public safety A turning point came in August 2005, only. Finally, 69 more cities are in deploy- when the city of Philadelphia, which in late ment or have issued requests for proposals 2004 had proposed a plan to build and (RFPs). A total of 194 cities have reached operate a wholesale broadband backbone the RFP phase or gone beyond it, compared network to support a citywide network of to 41 in January. wireless hotspots, instead, turned the proj- At the time it proposed the project in ect over to EarthLink Inc. after a round of the fall of 2004, Philadelphia was the larg- competitive bidding. Under the terms of the est city to take up municipal broadband. agreement, EarthLink, not the city of Phila- The plan brought national attention to the delphia, will own and manage the network, municipal broadband trend, which until set prices, provide services to the city, and then had largely been confined to small and work in partnership with a city-affiliated mid-sized communities. Philadelphia ampli- non-profit organization—Wireless Phila- fied the debate about state involvement in delphia—to meet the city’s social goals for broadband that had already been brewing inexpensive citywide broadband access. As in telecom policy circles: Whether municipal of late April, the contract was awaiting final systems could ever be self-sufficient, whether approval from the city council, which is ex- these systems represented sound use of tax- pected before the end of the spring session. payer funds or city borrowing power, and More municipal wireless projects have whether it was appropriate at all that the been proposed since Philadelphia launched local government compete with commercial its initiative. Major cities that have awarded providers it has the power to regulate and contracts include San Francisco, Anaheim tax. The debate reached its peak when the and Portland, Oregon. Other projects are up Pennsylvania legislature, responding to both for bid in Chicago, Minneapolis and Phoe- the Philadelphia wireless project and the nix. Yet none of them calls for funding by troubled municipal wireline broadband proj- the city or through municipal bonds. ect in the small community of Kutztown, The last several months have seen a passed a law prohibiting local government burst of activity from cities looking to get sub-divisions from funding or owning com- on the wireless bandwagon. As of mid-April petitive telecom networks. 2006, 58 regional or citywide municipal 1. The Early Years WiFi systems were in operation, according to Esme Vos, a municipal wireless consultant The municipal broadband movement and editor of the Muniwireless.com Web had its roots in municipal cable TV deploy- site. This list did not include Anaheim, the ments more than 15 years ago. In 1989, only major city to launch municipal wireless , Kentucky launched what is be- service. The California city went on-line the lieved to be the first municipal cable TV third week of April. operation after growing frustrations with In addition, Vos reports that 32 cities service from Charter Communications, the have deployed hot spots on a limited basis. local cable franchisee. Over the next few

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years, municipal cable operations sprang up term bonds to fund broadband networks, in other small towns, such as Paragould, Ar., and repay those bonds with future revenues. Negaunee, Mi., and Cedar Falls, Iowa. Critics warned, however, that unlike classic At the time, the Internet was a low-speed utility models, broadband service was not public data network used primarily for com- perceived as the necessity that electricity and mercial email and file transfer. The explosion water were. Broadband economics, critics of consumer Internet applications, which warned, also depended on a value proposi- would fuel demand for service integration tion: the broadband connection to the home and broadband speeds, did not begin until brought no immediate tangible benefit in 1996, when the World Wide Web emerged. and of itself; consumers needed to appreciate The Web gave city officials a new civic the value of the diverse applications broad- imperative—broadband. A city with wide band could support. Municipalities, crit- availability of broadband, they reasoned, ics warned, would be faced with the same would be more competitive in attract- marketing problem that was in part stalling ing tech-savvy professionals, business and commercial build-out: Consumers needed investment (a cause-effect relationship more reasons to buy service. research has never shown). Municipal cable In addition, critics said cities spending gave way to municipal broadband. Cities millions of dollars on fiber optic systems like Tacoma, Wa., Ashland, Or., Lebanon, were too quick to dismiss the potential of Ohio and tiny Kutztown in Pennsylvania other broadband technologies, including began multi-million dollar projects to de- new generations of digital subscriber line liver retail cable, telephone and high-speed (DSL), which boosted the capacity of pre- Internet services to residents, often in direct existing copper lines, and of wireless service. competition with local incumbents. Cities installing broadband citywide risked These communities believed that broad- finding their system obsolete in the fast- band, like conventional dial-tone telephone changing arena of Internet technology. or electricity, fit the monopoly utility model. 2. Municipal Broadband Falls Short Infrastructure requirements were so expen- sive that the free market would never be Most of the early municipal cable and able to provide ubiquitous service. Munici- Internet projects limped along. None truly pal broadband proponents ratcheted up the obtained self-sufficiency. As early as 1998, “market-failure” argument as cable and studies such as Costs, Benefits and Long- telephone companies were slow to invest Term Sustainability of Municipal Cable Tele- in fiber-to-the-home technology, a robust, vision Overbuilds by University of Denver but high-cost broadband access platform. professors Ronald J. Rizzuto and Michael If sparsely populated areas or low-income O. Wirth, were examining municipal cable households could not generate the revenues balance sheets and pointing to their consis- to achieve payback on broadband invest- tent dependency on cross-subsidies, interest- ment, governments, they reasoned, could free loans and special taxes. bridge the gap. Proponents of municipal broadband Much like they did in the 1930s and dismissed these reports as flawed, errone- 1940s, they felt that cities could issue long- ous or pure misinformation, as they would

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Municipal Developments Technology and Market Developments

� Glasgow, Ken., after frustrations with incumbent cable TV 1989 provider Charter Communications, becomes one of the first municipalities to launch a competitive cable TV system.

� Marietta, Ga., begins construction of municipal fiber 1996 � Asymmetric Digital Subscriber Lines (ADSL) standardized, backbone. delivering data transfer rate of 8 Megabits/second over 1.5 mile loops.

� Tacoma (Wash.) Click! Network goes online, offering cable 1997 � Data Over Cable Service Interface Specification (DOCSIS) TV, Internet, and phone service. 1.0 standardizes cable modems.

� Ashland (Ore.) Fiber Network goes online.

1998

1999 � Institute of Electrical and Electronics Engineers (IEEE) specification 802.11b standardizes 2.4 GHz wireless networks (known as “WiFi”).

� DOCSIS 1.1 is issued, fine tuning 1.0

2000

� Tacoma Power halts construction on Click! Network as 2001 � Vonage founded and quickly becomes the leading spike in wholesale electric prices depletes Tacoma Power’s national provider of Voice over Internet Protocol (VoIP) reserve fund, which has also been funding Click!. Construc- telephone service (January). tion later resumed.

2002 � Bristol Virginia Utilities fiber optic network goes online. � Boingo Wireless launches nationwide network of 400 WiFi hotspots (January). � Using private funding, NYCwireless, a New York non-profit, � DOCSIS 2.0 is issued, supporting 30 Mb/s symmetrical, VoIP, places free wireless hot spot in Manhattan’s Bryant Park. and enhanced quality of service (January). Google takes branded sponsorship in 2005. � T-Mobile and Starbucks announce WiFi deploy- ment in 1,200 locations.

� Referendum to establish a municipal fiber system in 2003 � Intel unveils Centrino chip enhancing mobile communica- Batavia, Geneva and St. Charles, Ill. (Tri- Cities) defeated. tions technology for laptop PCs (March). (April). � ADSL 2+ standardizes delivering 20 to 25 Mb/s over 1 mile loops. � Kutztown, Pa., municipal fiber system goes online � IEEE 802.11g specification is introduced, allowing higher (August). data transfer rates than 802.11b. � Skype founded, offering VoIP service based on a propri- etary protocol.

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Municipal Developments Technology and Market Developments

� Chaska, Minn., municipal wireless system goes online. 2004 � Consumer wireless spending overtakes wireline spending. � UTOPIA, Utah’s 14-city wholesale fiber optic network, � Broadband use overtakes dial-up for consumer Internet goes online. After promising local governments an “ (August). access” network, UTOPIA awards AT&T exclusive retail rights � Early demonstrations of Worldwide Interoperability for for one year. After protests from Utah ISPs, UTOPIA changes Microwave Access (WiMax), offering high-throughput terms of the A&T deal and signs second retail deal with broadband over long distances. MSTAR, a Provo ISP. � Provo, Utah, iProvo fiber backbone goes online (July). � Marietta, Ga., sells uncompleted fiber system for $11 million after investing $35 million (July). � Second Tri-Cities, Ill. muni broadband referendum defeated (Nov). � Philadelphia outlines municipal wireless plan (November). � Pennsylvania enacts law severely limiting municipal entry into competitive telecommunications (November). Similar legislation is considered, sometimes adopted, in other states throughout 2005.

� Philadelphia issues RFP for municipal wireless, setting out 2005 � AT&T WiFi network reaches 10,000 hot spots internationally a “cooperative wholesale” plan whereby the city will own the � Number of broadband lines in the U.S. reaches 38 million, network and regulate wholesale rates. (April). according to FCC. (June). � After running out of money, Grant County (Wash.) Public � Verizon begins FiOS fiber-to-the-home trials in Keller, TX Utility District elects to halt municipal fiber construction and (June). “stand pat” with incomplete system (April). � � Ashland, Ore., facing $15.5 million debt load, halts AT&T begins Internet Protocol Television (IPTV) rollout construction and sets plans to sell Fiber Network (May). (September). � Fiber To The Home Council lists 16 municipal FTTH � Cingular completes upgrade to Universal Mobile Telecom- systems in operation (May). munications System (UMTS), a third generation mobile phone � JupiterResearch predicts half of municipal wireless technology in 18 major U.S. markets (December). systems will fail; recommends cities pursue public-private � Number of U.S. broadband users reaches 47 million, partnerships (June). according to Computer Industry Almanac. (December). � Referendum approving municipal fiber system in Lafay- ette, La., passes (July). � San Francisco outlines TechConnect municipal wireless project (September). � Google suggests free wireless service in San Francisco to be supported by (September). � Wireless Philadelphia selects EarthLink, but abandons “cooperative wholesale” plan. EarthLink is given ownership of the network and allowed to set wholesale rates (October). � San Francisco Mayor Gavin Newsom declares broadband Internet access to be a basic human right (October). � Chaska, Minn., discloses it spent $300,000 above its original $600,000 budget to optimizeg its municipal network (November).

� San Francisco TechConnect issues RFP (February). 2006 � Verizon Wireless introduces VCAST service, providing audio � Provo’s Energy Department requests $1 million transfer and video downloads for cell phones (January). from electricity reserve fund to cover revenue shortfalls for � Verizon begins national FiOS rollout (January). the iProvo fiber system. (February). � Number of WiFi hotspots worldwide hits 100,000, with 37,000 in the U.S., according to Jiwire. (January). � Boingo Wireless network reaches 26,000 hot spots interna- tionally (February). � T-Mobile network reaches 6,000 locations in U.S. (February). � Nokia and T-Mobile introduce dual WiFi/cellular phones and service. (February).

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continue to do with follow-up reports from November 2004. the Beacon Hill Institute, the Progress & In 2004 Provo, Utah launched iProvo, a Freedom Foundation and The Heartland In- $39.5 million fiber optic backbone—relying stitute, which reached the same conclusions. on one local retailer to handle retail broad- Yet the pattern of poor performance band sales. The system failed to cover its became harder to refute as municipal costs for 2005 and the retailer went out of broadband operations across the country business. In March 2006, iProvo requested continued to fall behind. In the meantime, a transfer of $980 million from Provo’s city broadband proponents had trouble pointing electric utility to pay for shortfalls in 2006. to any outright success in which a munici- The operation has advised the city it may pal broadband operation achieved positive need $2 million more in transfers in the next cash flow, low prices, and a sizable enough two years. market share to not need subsidies. In Lafayette, La., a $125-million fiber- • Marietta Ga., after investing $35 million optic initiative passed in a July 2005 refer- in a system, sold its system for $11 mil- endum. Construction has not started, in part lion. because Lafayette’s financing plan has been • Grant County, Wa., Dis- tied up in courts. BellSouth and Cox Com- trict, halted construction in April 2005, munications, the two area incumbents, have electing to “stand pat” with only a por- claimed the plan violates Louisiana law be- tion of the residential areas covered. cause it calls for electric revenues to be used to pay off loans if the telecom side cannot • Also last spring, Ashland, Or., after meet its debt obligation. lengthy debate, opted to put its uncom- pleted system up for sale rather than 3. The Rapid Rise of Municipal Wireless continue funding it. Lafayette may have proved a pyrrhic • Balance sheets for systems in Lebanon, victory for municipal fiber optic, as no other Ohio; Bristol, Va., and Cedar Falls, project like it has been announced since. Iowa, continue show rising debt and Cities instead have turned their attention deficits, along with revenue shortfalls to broadband wireless, particularly WiFi, a propped up by subsidies and transfers. standardized format for transmitting high- • Proposals on the table since 2004 and speed data via radio over distances of about earlier—in Truckee-Donner, Ca.; Craw- 100 feet. Originally embraced by businesses fordsville, In., and Palo Alto, Ca., have to extend the reach of local area networks not attracted the low-interest financing around corporate campuses, the easy instal- the business plans require. lation and inexpensive equipment WiFi uses The last three major fiber-optic projects made it popular among consumers for home to have been proposed were in Batavia-St. networks and as an amenity in coffee shops, Charles-Geneva, Il. (the so-called “Tri-Cit- hotel lobbies and airports. ies”), Provo, Utah; and Lafayette, La. In Of the current operational systems, the Tri-Cities a $62-mllion plan for a mu- most have launched in the last few months. nicipal retail fiber-to-the-home plan was Even so, the road has been bumpy. One of voted down twice, first in April 2003 then in the earliest systems, Chaska, Mn., which

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launched in 2005, is often cited as a success- phone and cable companies. They continue ful example of government-run municipal to demand city ownership of the network. wireless. It markets service for $15.95 a The Google plan, they say, forces low-in- month. Although cheaper than other wire- come users to trade privacy for free service. less services, its speed is substantially less To deliver location-based, personalized than competitors. In addition, the city ran advertising, the system would have to track into radio optimization problems and spent the user as he or she moves around the city, $300,000 on top of the initial $600,000 as well as the user’s spending and purchasing investment to improve signal coverage. habits. In addition, they complained (with St. Cloud, Fl., which launched free city- some validity) that the winning proposal wide service in early 2006, is experiencing fell far short of requirements contained in similar problems, according to press reports. TechConnect’s original plan. With national As system use grows, customers who had attention on the San Francisco wireless proj- been getting acceptable connections began ect, many felt that the city expedited the bid having trouble accessing the network. The to engineer a quick win for San Francisco city has advised some residents to purchase Mayor Gavin Newsom, who is said to have a $170 wireless bridge in order to improve presidential aspirations. Newsom himself their connections. has invested political capital in the success of TechConnect. At the time the proposal was 4. Backlash Against Partnerships announced, Newsom declared free broad- Government-run wireless operations band was a “civil right.” tend to be limited to small towns and, Opposition to public-private partner- either way, are fast becoming the exception. ships is not limited to San Francisco. In Min- Rather, the trend is toward public-private neapolis, the Institute for Self-Reliance has partnerships in municipal wireless. Aside attacked the city’s plan to award a contract from Philadelphia, the other closely watched to a private partner. As its counterparts wireless effort the past year has been in San argue in San Francisco, the Institute for Francisco. Self-Reliance has argued that citizens will be In April, San Francisco TechConnect better served if the city government owned awarded its municipal network bid to a the network and supplied the service. partnership of EarthLink and Google. When the TechConnect proposal was floated the 5. The Outlook previous fall, Google proposed a free wire- Despite objections from some circles, it less business model using location-based is doubtful that any future large-scale mu- advertising. nicipal broadband projects will be funded Two Bay Area activist groups, Media from government coffers. Since Wireless Alliance and the Community Technology Philadelphia began moving forward, almost Foundation of California, which originally every announcement of a wireless project is supported municipal wireless, have come qualified with the phrase “no taxpayer dol- out against plans to turn operations over lars will be used.” to Google, which they claim is no better a In the end, these decisions are made choice than the incumbent “monopoly” tele- from an extremely practical standpoint—

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most cities simply don’t have the funds to governments about the true costs, capabili- devote to a telecom network. Yet, it is no ties and limits of wireless technology. Mat- less a victory for the free-market approach. ters are coming full circle. For example, Even without using tax dollars, when cities AT&T (formerly SBC), which had aggres- effectively insert a monopoly, especially in sively fought municipal-owned broadband, a fast-changing, high-tech field, consumers is one of 20 bidders for a wireless project in lose the free market advantages of cutting Grand Rapids, Michigan. edge technology and competition-driven Public-private partnerships, however, lower prices. face challenges and, as with any govern- In the end, the arguments put forth by ment project, the risk for abuse remains. those urging caution were validated. The Most agreements give the private partner a emergence of companies such as EarthLink, substantial break on the cost of right-of-way MetroFi and Google showed that the phone and the use of city-owned property. These and cable companies have no monopoly concessions are granted in return for the on broadband innovation. Changes in obligation to meet citywide coverage re- franchise regulations are speeding competi- quirements and price points. The city needs tion in broadband and cable markets, and to have the appropriate accountability safe- prices are dropping as a result. Applica- guards in place to assure its partner follows tions that have emerged since 2000—legal through on its commitments. music downloads, multiplayer gaming and City officials also must avoid getting too most recently, movie downloads, are pro- wrapped up politically in the success of the viding the badly needed value proposition project, a problem that may already exist in broadband has lacked. Broadband use in the San Francisco. Should city-sponsored sys- United States is reaching 60 percent. tems encounter robust competition, or miss Better still, the relationships between their revenue targets, local officials, afraid municipalities and broadband service pro- of being identified with a failure, may be viders are growing less antagonistic. In past tempted to “bend the rules” and inflate city years, municipalities turned to consultants budgets, “loan out” city employees or use who specialized in the legal and financial other means at their disposal to inappropri- mechanisms of public utility operation, and ately sustain the partnership. This, however, who tended to advocate a more confronta- is a danger with any contractor relationship. tional stance toward local incumbents. In their public-private form, municipal For assistance with wireless, cities are wireless systems show every sign of growing instead relying on experts who have expe- in the near-term. How successful they will rience with wireless network design and be in the long term remains to be seen. The operation. While not always philosophically best that can be said is that the public, in aligned with free-marketers on the govern- most cases, is not bearing the risk. ment’s role in broadband, these consultants are attempting to create better lines of com- C. Network Neutrality Update munication and cooperation between mu- While it has fueled heated argument in nicipalities and the wireless industry. Most telecom policy circles, “network neutral- of their efforts are spent on educating city ity” remains a misunderstood principle. The

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network neutrality principle contains three confined to the legislative background. With basic elements: the past few months, however, the issue has • No service provider should be permitted caught the spotlight. In Congress, there are to block access to any Web site or Web- two House bills, a Senate bill and a Senate based application. proposal to legislate network neutrality. • No service provider should prevent any In response to assertions by AT&T, device capable of using the Internet Pro- Verizon and Comcast that carriers had the tocol (IP) from accessing the network. right to seek compensation from providers of bandwidth-intensive content and appli- • Service providers must treat all data that cations for management strain they place moves across their networks the same on the Internet, in April, MoveOn.org, way. the Web-based liberal activist group, took At first glance, it sounds reasonable and a position in favor of network neutrality, fair, given that much of the Internet culture pushing it further into the policy limelight. is tied to equality and ease of access. The In May, Rep. Edward Markey (D., Mass.), Internet’s foundations lie in the spirit of ranking member of the House Telecommuni- open community. No site on the Internet cations Subcommittee, introduced legislation was closed off. Likewise, anyone with a PC that would codify network neutrality into and a phone connection could share his or law. The measure has the backing of House her own data with the on-line world. As the Minority Leader Nancy Pelosi D., Ca.). Internet matures and its commercial aspects Authors of these measures ultimately hope become even more predominant, many to add a network neutrality amendment to believe that to preserve this spirit of commu- the two draft telecom reform bills currently nity and openness, government must enforce moving through the House and Senate. network neutrality. Phone companies, cable companies and The push for network neutrality has ISPs appear ready to endorse the first two come from the liberal side of the spectrum, elements of network neutrality—access to driven mostly by fears that commercial Web sites and IP interconnection—arguing enterprises, especially the large telephone that these aspects of the Internet were never and cable companies that control most of in danger to begin with. No U.S. service pro- the broadband “on ramps” to the Internet vider has ever made it a policy to block ap- and World Wide Web, will begin to exercise plications or Web sites. There has been only greater control over the consumer’s Inter- one instance of application-blocking, when net experience. This could take the form Madison River Communications, a small of favoring applications from content and North Carolina Internet service provider, applications providers who agree to form blocked Vonage’s VoIP application. Using business ties with carriers to outright block- existing enforcement mechanisms, the FCC ing of Web sites and applications, such as ordered Madison River to stop the blocking Voice over Internet Protocol (VoIP) calling, and fined the ISP $15,000. Likewise, no U.S. offered by competitors. service provider has ever attempted to block Until this year, the net neutrality debate connection of an IP device to the network. was fomenting among technology elites, but And since IP is a standardized format, it

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would be difficult to do so. Web to create new revenue streams, because The third element, non-discrimination in it would prohibit the creation of special treatment of Internet traffic, has caused the lanes to handle traffic that requires extra most controversy, however. Simply stated, a care and management. network neutrality policy decrees that car- Right now, there is no shortage of riers cannot selectively improve or guaran- bandwidth, thus it remains fairly inexpen- tee the quality of third-party applications sive. Some engineers argue that advances in and services that cross their networks—let IP technology will always ensure adequate alone charge for it. Conversely, any quality bandwidth. In that case, the network neu- enhancement offered to one, must be of- trality issue is moot. Others say that it is fered to all. It doesn’t matter if you are Sony inevitable that applications will consume Pictures streaming “The Da Vinci Code” the bandwidth available, and that sooner in high-definition and 5.1 Dolby stereo, or or later, carriers will be required to engineer the soccer mom down the street emailing a their networks to manage and optimize high photo of the kids to grandma: your data gets bandwidth services. Since a network neutral- treated the same as everyone else’s. Net- ity law would prevent a carrier from turning work neutrality proponents also argue that to the very parties whose services require improving service for one is equivalent to optimization and quality safeguards, it diminishing service for another. There is no would leave carriers with two lesser options: room for “good, better, best” distinctions. Spread those management costs among all Opponents of enforced neutrality argue users, raising the cost of broadband service this policy would set a significant precedent for everyone no matter what their usage in the economic regulation of the Inter- habits, or continue to attempt to man- net—equivalent to the introduction of price age traffic within the current “best effort” controls. Since network neutrality would framework of IP. prohibit telephone and cable companies Although the network neutrality issue is from allocating the costs of managing large often portrayed as a grassroots effort against amounts Internet traffic to the parties direct- a handful of phone companies, there are ly responsible for that high-traffic volume, it large and diverse interests on both sides. would interfere with the law of supply and Major players in broadband applica- demand. Companies that supply Web-based tions, content and e-commerce who support services like movie downloads and multi- network neutrality include Google, eBay player games that consume large amounts of and Amazon.com. The Financial Ser- bandwidth and require real-time, error-free vices Roundtable, a group representing the delivery will be economically divorced from nation’s largest banks and financial institu- bandwidth they consume or the manage- tions, has also backed legislation. Microsoft ment resources they use. and Yahoo are leaning toward support as This stands to have consequences for well, although they have yet to openly advo- all users of the Internet, opponents argue, cate it. be they simply consumers who like to surf, Meanwhile, in addition to the phone small businesses with low-volume Web sites, and cable companies, numerous manufac- or major corporations who seek to use the turers of Internet infrastructure equipment,

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There are No “Dirt Roads” on the Internet Network Neutrality advocates are trying to scare us into believing that if carriers create a two-tiered management structure for handling Internet traffic, everyday users will be shunted off the information highway onto the backroads. “The top tier would be a “Pay-to-Play” high-speed toll-road restricted to only the largest companies that can afford to pay high fees for preferential access to the Net,” eBay CEO Meg Whitman wrote in a letter to members of the on-line auction giant urg- ing their support for network neutrality. “The bottom tier–the slow lane–would be what is left for everyone else. If the fast lane is the information “super-highway,” the slow lane will operate more like a dirt road.” But Whitman mischaracterizes the issue as a matter of the Internet speed when in reality, it is about the way sophisticated Web-based applications are handled. Network neutrality demands we treat all information the same. But today there are Web applications and content that need to be treated differently in order to work prop- erly for the user. Obvious examples include DVD-quality video, which not only takes up a lot of bandwidth, but calls for low latency (the delay between transmission and reception of data bits) and real-time error correction. Another is VoIP, which also has little tolerance for high latency. A policy of network neutral non-discrimination would diminish the quality of these services out of the box. Consumers are paying for a high-bandwidth connection to their home. They are not paying for the prioritization, quality and management of third-party applications that are delivered over this connection. Furthermore, the service providers, who own this connection, do not believe consumers should have to pay for this additional opti- mization and management. They want to selectively target the large Web content and applications providers, such as eBay, who are responsible for the increased bandwidth management costs–and who profit from the services that need them. Quality of service is not a zero-sum proposition. Improving quality for one does not diminish quality for another. Most data that moves across the Internet will continue to work as well, if not better, in an environment where carriers are allowed to manage and prioritize bandwidth. Overnight package delivery recognizes the mission-critical needs of some shipments. Yet overnight delivery does not diminish standard three-day service. The same shipper, in fact, may use both services, depending on specific requirements. If we were to apply the principle of “neutrality” in package delivery, it wouldn’t change three-day service; all it would do is prohibit anything faster.

ranging from broadband powerhouse Cisco band investment. Systems to Ellacoya Networks, a privately It is difficult to say which way this will held vendor of network management tech- go. Network neutrality proponents are at- nology, have urged caution on the policy, as tempting to make the issue about free speech have a number of investment research and on the Internet and preserving its open analysis firms who fear it will slow broad- nature. Their arguments are flawed but com-

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pelling. The major media companies, which reform of video franchise fees has bubbled also plan to use the Internet for delivery of up as an action item in statehouses and in high-bandwidth services, also have an inter- the U.S. Congress. est in promoting network neutrality. Video franchises are the revenue-sharing On the other side, it is clear that some agreements that cable TV companies sign legislators do grasp the inherent problems with local governments in return for the of a network neutrality rule. During his right to offer video services to customers. As opening statements in a Senate hearing on the country’s largest telephone companies network neutrality May 25, 2006, Sen. begin to deploy broadband networks that John McCain (R, AZ) stated that network can support cable TV and cable TV-like ser- neutrality legislation would not cover the vices, they have been pressing for changes in prioritization of 911 calls made over the the process that would let them apply for a Internet using Voice over Internet Protocol statewide franchise in one fell swoop, elimi- (VoIP). Although he did not say so in so nating the need to go from town to town many words, his comments called attention to negotiate individual agreements, as cable to the fact that one of the government’s few companies were forced to do in the past. regulatory requirements regarding Internet Franchise reform, they say, would allow services—VoIP 911—runs directly counter them to deliver competitive video services to to network neutrality’s principle of non-dis- consumers faster and cheaper. crimination. So far Texas and Indiana have passed Still, despite the new interest in the issue measures that allow statewide franchising. by organizations like MoveOn.org, it has Virginia passed a bill that attempts a de- not hit voter radar the way other telecom gree of reform, but still keeps much of the reform issues such as video franchising, “a franchising authority with cities and towns. la carte” cable pricing, or content regula- There are bills pending in Kansas, Louisi- tion have. Right now, the burden of forc- ana, Missouri, New Jersey and South Caro- ing change is on the activists, as network lina. The Florida state legislature also intro- neutrality is not codified anywhere. As duced a franchise reform bill, but lawmakers the Republican majority in Congress has adjourned before the bill reached the floor. not proved responsive, much depends on National franchising is a provision in how much momentum lawmakers such as an unnumbered draft telecommunications Markey and Pelosi can generate. If telecom reform bill sponsored in the House of Rep- reform is passed this session, a network resentatives by Reps. Joe Barton (D., Tex.) neutrality provision will likely be left out and Bobby Rush (D., Ill.). In the Senate, a or diluted. If reform is shelved until next draft bill sponsored by Sens. Ted Stevens year—and Democrats gain a majority in (R., Alaska) and Daniel Inouye (D., Hawaii) Congress, the issue stands to become more calls on the Federal Communications Com- visible and volatile. mission to standardize the franchise process, but preserves a degree of authority to mu- D. Video Franchise Reform Update nicipalities. As the law is currently drafted, Although just one facet of the policy municipalities would have thirty days to debate on telecommunications deregulation, approve a franchise application from a new

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entrant. If the municipality fails to act, the of straight-up billings for cable TV service, FCC acts as franchising authority by default. towns often demand a portion of revenues Consumers have proved generally sup- from advertising sold by local cable compa- portive of franchise reform, which promises nies and a cut of sales commissions received to deliver a new competitive alternative for from home shopping networks. local cable companies, dominating local Franchise agreements also call for markets, even where direct broadcast satel- companies to set aside channels for public lite (DBS) services are an option. After the access, education and government (PEG). bill failed during the Texas legislature’s regu- Most local franchise agreements carry lar session in the spring of 2005, constituent build-out requirements that ensure the cable pressure put it back on the docket in the spe- company serves the entire community. Fi- cial session that summer, when it passed. nally, local franchising agencies often use the For the telephone companies themselves, process to negotiate specific side deals, such statewide franchises offer expedited market as free service for schools and government entry, faster revenues and a more predictable buildings. These provisions can extend areas procurement and deployment schedule. unrelated to cable or telecom services. A Aside from the cable companies, which study by the Pacific Research Institute found have lobbied heavily against franchise re- that, in addition to other requirements, form, resistance to reform has been strongest Verizon was asked to turn over a parking lot from local franchise agencies, which fear for use as free parking for a library. An- loss of a key revenue stream as well as politi- other city requested free cable television for cal leverage. Estimates from the Mackinac every “house of worship” and a 10 percent Center for Public Policy put total franchise discount for select customers. Yet another payments in the United States at $3 billion a asked a franchisee to fund a new recreation year. center and pool. In some communities, revenues from While state measures tend to keep rev- franchise fees pay for use of city right-of- enue-sharing and aspects of local control in way and compensates the city for costs it place, they do codify them. Texas and Indi- incurs when service providers need to dig ana allow municipalities to collect 5 percent up streets to bury cable. But more often of service revenues, but limit the definition than not, the right-of-way fees are levied on to cable billings only and exclude advertis- top of franchise fees, and franchise fees go ing and commissions from shopping chan- directly into the city’s general revenue pool. nels, not to mention other concessions. The Typically, local franchise agreements call federal measures are similar. PEG channel for cable companies to pay 3 to 6 percent requirements are also retained. of video-related revenues to the franchising Build-out requirements remain a point of authority. Since companies have the right to controversy, however. While telephone com- pass these fees onto customers, they effec- panies state they are committed to providing tively amount to a special tax on consum- video service to all areas, they have generally ers of video service. At the local level, the opposed legislated timetables. Opponents “video-related” revenues subject to fees of franchise reform have seized on this are negotiable. In addition to percentages resistance, accusing the phone companies of

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targeting only high-income neighborhoods TV”) with products that support delivery and “red-lining” less affluent areas. of video content using both copper-outside- Although telephone companies have plant and fiber-to-the-premises networks.” shown an inclination to begin deployment Motorola reports that in 2005, 5 per- in higher-end communities, there is no cent of the Connected Home Solutions evidence that they plan to limit upgrades to Segment’s $2.8 billion in revenue, or about those areas only. Indeed, their early pricing $140 million, came from telephone carri- strategy attempts to undercut cable packages ers. To enhance its competitiveness in this and offer less expensive options in an effort area, in February the company completed to capture consumer segments where cable the acquisition of Kreatel Communications, penetration is poor. Verizon, for example, which it described as a “leading” developer offered a 35-channel plan for $12.95 a of IP-based set top boxes. month, in its north Texas markets, undercut- Motorola’s chief competitor in set-top ting all competing low-rate packages. In Ft. boxes, Scientific-Atlanta, was acquired by Wayne, Indiana, the company began its roll Cisco Systems, the leading manufacturer of out of video services in the lower-income IP routers for $7 billion. Cisco has said it neighborhoods first. aims to wed its Internet and IP know-how Meanwhile, Edward Whitacre, chair- with Scientific-Atlanta set-top box technol- man and CEO of AT&T, told the Detroit ogy to develop video networking solutions Economic Club in early May that the com- for the major phone companies. pany intends to make its Project Lightspeed Given the size of the investments on the Internet Protocol (IP) video services avail- part of vendors—and the payoff they are able to more than 5.5 million low-income already beginning to see—it is hard to con- households as part of its initial build in 41 clude that they expect their phone company target markets. video services to be a niche market offered While the inclination is to take such to a tiny percentage of wealthy U.S. house- statements at face value, evidence of these holds. Policymakers should be wary as well. commitments appears in the balance sheets But it could be consumer pocketbook of manufacturers from which telephone issues that trump all others. When competi- companies buy network equipment. Vendors tion appears, prices go down. For example, that have in the past sold to cable compa- when Verizon unveiled its FiOS fiber-optic nies are telling shareowners that telephone video service in Keller, Plano and Lewisville, company sales will be a key contributor to three communities near Dallas at $43.95 a future growth. In its 2005 Annual Report on month for 180 video and music channels, 10-K (a corporate report submitted annually the local cable provider, Charter Commu- to the Securities and Exchange Commis- nications, immediately dropped its prices, sion), Motorola Inc. noted that its Connect- offering a bundle of 240 channels and fast ed Home Solutions Segment, a leading U.S. Internet service for $50 a month. It had been supplier of set-top boxes and cable modems, charging $68.99 for the TV package alone. “is capitalizing upon the introduction of The consumer experience in Texas fol- video services by telecommunications opera- lowed the trend in other markets where ca- tors to their subscribers (“Telco TV” or “IP ble competition has been introduced. Wher-

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ever there is video competition, consumers telephone companies from upgrading their see a break. In Florida, for the first time in networks—even if it means delaying citizens a decade, Comcast is not raising rates in a competitive choice for cable TV—until Manatee and Sarasota counties, according to exact franchise rules can be determined. a report last week in the Miami Herald. The Bottom line, telephone companies seem reason: Verizon—working within the current willing to accept retention of a revenue- franchise process—already has introduced sharing arrangement, PEG obligations and cable services in Manatee and is close to a loosely constructed build-out requirements. franchise agreement in Sarasota. Cable companies seem to want the ability to In a new report, Yale M. Braunstein, upgrade to a state franchise when a competi- a professor at the School of Information tor enters, or at the very least, be subject to at the University of California at Berkeley, the same rules. Their early opposition to any cites FCC measurements of competitive and franchise reform has given way to efforts to non-competitive cable markets that found assure they get a fair deal. subscription rates for basic and expanded Few companies or lawmakers have basic services were on average 16 percent called for the outright elimination of fran- lower in the competitive group. Using the chise fees, even though competition subverts data as a baseline, Braunstein predicts cable the very definition of “franchise,” which im- competition franchise reform will save Cali- plies a degree of geographic exclusivity. Yet fornia consumers between $690 million to changes in technology, particularly the way $1 billion. the Internet can be used to deliver video, In another recent study, Thomas W. may challenge the entire franchise structure. Hazlett, professor of Law and Economics at In recent weeks, some local officials have George Mason University, explains “Were begun to acknowledge this. head-to-head wireline video now In Oklahoma, Attorney General Drew offered to just under five percent of U.S. Edmondson issued an official opinion stat- households, to extend nationwide, annual ing that a telephone company with existing benefits to consumers are estimated to ap- statewide authority to place its phone lines proximate $9 billion, with overall economic in the public rights-of-way does not need welfare increasing about $3 billion per to obtain separate municipal franchises if it year.” plans to provide additional services—includ- The likely outcome is that the push for ing video—over its phone lines. franchise reform will continue. Even if ef- “A ‘telephone line’ does not cease to be forts fail in Congress, reform will continue a telephone line because it is used for trans- in the states. That’s not to say debate won’t mitting video service in addition to voice ser- be contentious. Officials in Roselle, Illinois vice,” Edmondson wrote in his opinion. “Al- ordered AT&T to halt a network upgrade though we can find no Oklahoma cases on for 180 days so the town could make a this point, cases in other jurisdictions that decision on the video franchise implications. grant telephone companies statewide access The Roselle delay is part of a coordinated to rights-of-way have decided this issue.” effort by at least 11 other local communi- In another development, the Connecticut ties in suburban DuPage County to stop Department of Utility Control tentatively

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ruled that telephone companies that use IP “The current franchise system inhibits video platforms are not subject to franchise additional companies who might be subject fees. to it from entering the marketplace and Internet-protocol television is “merely investing in infrastructure when they are another form of data stream,” the DPUC challenged by the expense and difficulty of ruled, according to Multichannel News. attaining enough market share to recoup Already users can download video costs,” Pringle told the Federal Communica- programming from Web sites. iTunes and tions Commission in April. “Franchise fees Vongo are only two examples. In mid-May, and many elements within franchise agree- Fox announced plans to make episodes of its ments, therefore, are merely an artificial hit series “24” available on Myspace.com. intrusion by government into the consumer The revenue from these downloads is not marketplace. Attempts to apply franchise subject to franchise fees. It begs the question fees and agreements to some providers, as to how local agencies might react if cable while exempting others, effectively eschew and phone companies were to set up their the market. own Web-based content aggregation units “Therefore, eliminating these fees and and shift collection of video revenues to impediments…will allow equitable compe- those operations. tition amongst the variety of video service Curt Pringle, mayor of Anaheim, is the providers. In this way, and without local only elected official in a major metropolitan government interference, the various systems area to suggest local municipalities wean compete in price, quality and quantity and themselves from franchise fees because they consumers decide which service provider hinder broadband deployment. they prefer.”

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Growth and Land Use

Contents A. Eminent Domain Update B. Protecting Landowners From Regulatory Takings C. Do School Impact Fees Make Sense? D. Denver Launches Permit Reform Effort E. Privatizing the Inner City? Urban Homestead Zones Can Help Revitalize City Centers

severe. This may seem like a bold, perhaps even ideological, conclusion. But this progres- sive-era thinking is evident in how the U.S. Supreme Court justified the condemnation and seizure of private property for purposes in Kelo vs. City of New London. The Court, in a 5-4 deci- sion, upheld New London’s efforts to clear A. Eminent Domain Update the Fort Trumbull neighborhood of New London for redevelopment even though the Politically, the high water mark of the only legal justification was economic de- American socialist movement was 1912 velopment and increasing the tax base and when Eugene Debs captured 6 percent the primary beneficiaries would be private of the presidential ballot and more than developers. Virtually any project that could 1,200 socialists were elected to public office show a net improvement in the tax base over throughout the nation. The movement went current uses could be considered a justifica- into decline after that, focusing more on the tion for condemning private property under hearts and minds of America’s intellectu- the “public use” provisions of the Fifth als and labor leaders. In law, some of those Amendment. ideas hung around and apparently found a home within the minds of America’s lead- 1. Kelo Undermines Property Rights ing legal scholars, and the implications for The legal and ultimately economic markets and private sector development are principle at stake was whether individuals

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had a fundamental right to private property the majority of your local city council, coun- that could prevent the democratic majority ty commission, or state legislature doesn’t from taking their homes or businesses. Our approve of who is living in your home, how Founding Fathers believed private prop- your home was made, or what your home erty rights were fundamental for securing is used for, and the city has a better idea for liberty: embracing James Otis’s phrase “A how it could be used, the government can man’s house is his castle” wasn’t a flippant take it and give it to someone else. Majority deference to ego. The castle was a protec- rules. tive fortress from covetous and arbitrary In economic development parlance, the actions by government and your neighbors. majority decision demonstrates that a com- “One of the essential branches of English munity benefit is created from the seizure of liberties is the freedom of one’s house,” Otis private property, justifying its condemna- said. James Madison, for example, wrote tion and transfer to another property owner. in his Essay on Property that “Government Property ownership becomes subject to a is instituted to protect property of every cost-benefit rule and is no longer a matter sort; as well that which lies in the various of civil liberties. The key question before the rights of individuals, as that which the term courts is whether the government followed particularly expresses. This being the end the proper procedures—had the right num- of government, that alone is a just govern- ber of hearings, made an official declaration ment which impartially secures to every man of public purpose, followed the correct state whatever he owns.” statute, or properly conformed to the intent In Kelo, however, the Supreme Court of state law. said the government could seize the property 2. How Kelo Alters Redevelopment Policy of private homes and businesses and hand them over to private developers, even if the Of course, Kelo was focused narrowly only motive was to raise new tax revenue on property rights. Other basic rights such from economic development. One of the as free speech, religious practice, trial by concurring justices, Anthony Kennedy, was jury, protection from unreasonable searches even more direct. He believed the property and seizures still exist and are constitution- could be taken because the city had a well- ally protected. For now. But, the idea that considered development plan to justify the one’s home is her castle went out the win- redevelopment. dow. For all intents and purposes, property ownership has lost its status as a “right” In Kelo, however, the Supreme Court said and its place as a substantive check on gov- the government could seize the property ernment power, although the government of private homes and businesses and hand still has to compensate property owners for them over to private developers, even if the their property once it’s seized. Of course, only motive was to raise new tax revenue that’s little consolation to families and small from economic development. businesses thrown out because your lo- cal government and well-heeled property Thus, in effect, the U.S. Supreme Court developers have better ideas about how said your home is no longer your castle. If it should be used (and who should live or

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work there). perspectives of five Supreme Court justices. The urban landscape has been funda- The idea that they were encouraging the mentally altered. Why should a company overthrow of capitalism was probably not privately negotiate with property owners obvious when the Supreme Court justices when it can go to the government and have sided with the city of New London. But officials take it for them? The government that’s the effect. can do it cheaper, and it often sells the 3. Political Backlash property at a subsidized price. (Otherwise the private company would buy it itself to The Kelo decision generated a tremen- control the conditions of sale). dous amount of media coverage and pro- Conservatives supporting the Kelo deci- voked a sense of outrage across wide swaths sion believe that it strengthens the private of the American populace. For example, a sector’s role in economic development and Quinnipiac University poll taken in Con- redevelopment. Jeff Finkle, the president of necticut found that 89 percent of respon- the International Economic Development dents opposed the taking of private property Council, a trade association representing for private uses, even if it promotes the economic development professionals and “.” Similarly, a Wall Street Jour- agencies, notes that without eminent domain nal/NBC News poll taken just weeks after for economic development purposes and the Kelo decision found that survey respon- the ability to transfer property to another dents cited “private-property rights” as the private party, cities might become land current legal issue they care most about. developers themselves. “Communities will Fortunately, the U.S. Supreme Court left just use alternative means for achieving eco- an opening for the states. While federal law nomic development ends,” Finkle said in an and the courts would not protect private interview for Reason magazine in 2003. property owners from eminent domain, The private sector has not technically states could. Since the Kelo decision, 47 been excluded from developing property. states have begun reviewing their eminent The politics and dynamics of redevelop- domain laws. Nineteen states have either ment, however, make this result inevitable, signed or passed laws further restricting even if unintended. And the effects are real. the use of eminent domain according to the Take the opening line from an article by Castle Coalition, a grassroots organization Joshua Ackers in the Albuquerque Journal: in Washington, D.C. tracking state eminent “There is a lot of money to be made in Rio domain legislation. Rancho’s Unit 10, and Rio Rancho’s City Some states have adopted strong laws. Council soon might put itself in the position Florida, for example, prohibits land seized of deciding who is going to make it.” The by eminent domain to be transferred to city is going to condemn two square miles of another private landowner for 10 years. the city and offer it to private developers for Indiana excluded economic development as redevelopment. the sole reason for using eminent domain These kinds of actions now have carte and is considering tightening up its criteria blanche in America’s cities thanks to Kelo v. for determining blight. Alabama was one New London, and the pragmatic progressive of the first states to restrict eminent domain

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significantly by adopting a blanket prohibi- Urban Development Appropriations bill tion on using eminent domain for economic that would deny federal funds to any state development purposes. or local project involving the use of eminent State courts have also begun to rein in domain on economic development grounds. eminent domain. The Michigan Supreme Several Senate bills covering eminent do- Court ruled in Hathcock v. County of main reform have also been introduced, Wayne (2004) that economic development though no bills have passed to date. was not a legitimate public purpose. The 4. Conclusion decision was significant because it reversed the Michigan Supreme Court case Poletown Though the Kelo decision cast a dark v. City of Detroit that began the wave of cloud over the landscape by exposing how condemnations for economic development frail the protection of private property rights purposes 20 years earlier. More recently, the has become, the silver lining is that popular Oklahoma Supreme Court rejected the rea- support for private property rights protec- soning of Kelo. In Board of County Com- tion has surged since the Kelo ruling, with missioners of Muskogee County v. Lowery, efforts at all levels of government to restrict the Court ruled that economic development the power of eminent domain to a more was not a legitimate public use under the limited set of uses. Prior to Kelo, there was Oklahoma Constitution. little recognition among average citizens of The federal government has also re- the power of government to take land from sponded to the Kelo decision. On June 23, one owner and give it to another. Perhaps 2006—the first anniversary of the Kelo deci- the biggest irony of Kelo is that, despite sion—President Bush issued an executive or- the Court’s ruling, it has led to a greater der preventing federal agencies and depart- awareness of eminent domain abuse and a ments from exercising the power of eminent strengthening of private property protec- domain for primarily economic development tions across the country. purposes or to benefit private parties, limit- ing the allowable use of eminent domain B. Protecting Landowners From Reg- to the taking of private property for pub- ulatory Takings lic projects such as government buidings, Oregon’s Measure 37 a Model of Reform for hospitals, or roads. Further, the U.S. House Other States of Representatives passed the Private Prop- In response to decades of increasingly erty Rights Protection Act of 2005 (H.R. burdensome state and local land use regula- 4128) in late 2005, which would prevent tion, a majority of Oregon voters took a state and local governments from exercising decisive stand in favor of property rights in the power of eminent domain for economic November 2004. They passed Measure 37, development purposes if they receive fed- a ballot initiative designed to provide relief eral funding, as well as prohibit the federal to landowners whose properties have been government from condemning property for devalued by three decades of regulation and economic development. Also, the House to protect Oregon’s property owners from approved H.R. 3058, an amendment to a economic hardship that may result from Treasury, Transportation, and Housing and future regulations.

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Measure 37 requires that local govern- Property owners found to have successful ments either: (1) compensate landowners Measure 37 claims are entitled to reimburse- when land use restrictions reduce the value ment for attorney fees, expenses, and other of their property (so-called “regulatory tak- costs associated with filing their claims. ings”), or (2) waive the restrictions and rein- Finally, Measure 37 offers much discre- state the rights that property owners had at tion to state and local governments in creat- the time they bought their land. Proponents ing their processes for handling compensa- argue that Measure 37 restores to landown- tion claims, while simultaneously protecting ers property rights that have been taken property owners from any onerous admin- away from them by land use regulations. In istrative burdens (such as exorbitant claim this view, the regulation of private property processing fees or excessive documentation for the public benefit should be paid by all requirements) that governments may choose taxpayers instead of by individual landown- to impose upon Measure 37 claimants. ers. Measure 37 also provides a check on 1. Debunking Prevalent Measure 37 Myths government power by ensuring that state and local governments adequately weigh the Myth: Measure 37 Decimates Land costs and benefits of public action. Use Regulation: Perhaps the most com- Measure 37 specifically exempts several monly voiced arguments against Measure types of land use regulations from compen- 37 among opponents are that its real aim is sation claims, including historically recog- to subvert Oregon’s land use laws and that nized public nuisances, public health and it will result in endless sprawl and land use safety regulations (such as building codes, conflicts. However, Measure 37 does not health and sanitation regulations, and pollu- apply to all land use regulations, and it does tion controls), regulations enacted to comply not prohibit state and/or local governments with federal law, and regulations restricting from adopting laws that regulate public or prohibiting pornography sales or nude health and safety. dancing. Myth: Measure 37 is Costly and Com- plex: Opponents have complained that Measure 37 also provides a check on Measure 37 will be costly and complex to government power by ensuring that state administer and that compensation claims and local governments adequately weigh could total untold billions of dollars, for the costs and benefits of public action. which Measure 37 provides no funding mechanism. In practice, however, state and Measure 37 gives local governments local governments have favored waiving 180 days from the date the owner submits a regulations rather than compensating suc- written request for compensation to process cessful claimants, limiting the cost burden the claim and make a decision on a remedy they bear under Measure 37. if it finds that compensation is due. If the Myth: The Measure 37 Claims Process government has not resolved a Measure is Arbitrary: Opponents complain that 37 claim after 180 days, then the owner the Measure 37 claims process is arbitrary may file a lawsuit in the circuit court in the since it provides no standards for how county in which the property is located. government decides who gets paid and who

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doesn’t. However, Measure 37 can be seen to amend the state constitution or, alter- as an effort to correct for the unfairness that natively, state statutes. Depending on state results from traditional zoning, where some law, constitutional amendments or statutory property owners are limited and others are changes may be achieved either through citi- not. Measure 37 proponents also counter zen initiative or state legislative action. that the measure gives every property owner Combining eminent domain and regula- exactly the same right: the right that they tory takings reform: In the wake of the U.S. had to develop their property at the time Supreme Court’s Kelo vs. New London deci- they bought it. sion, dozens of states have taken steps to- Myth: Measure 37 Will Harm Agri- ward restricting the use of eminent domain culture: Though most of Oregon’s County to a narrower set of justifiable circumstanc- Farm Bureaus supported Measure 37, some es. At the same time, legislators and activ- opposed it on the basis that it would hurt ists in several states have indicated interest farmers by leading to increased taxes and in “Kelo-Plus” measures that combine, in rolling back safeguards that protect Oregon one comprehensive set of statutory changes, farmland from over-development. Concerns increased protections against physical tak- about Measure 37’s potential impact on ings via eminent domain with increased farmland conversion exemplify the perceived protections against regulatory takings along conventional wisdom about farmland, open the lines of Measure 37. The advantages of space, and the pace of urbanization in the pursuing a “Kelo-Plus” measure are several. United States that is at odds with actual land First, it offers a single vehicle to address use and agricultural productivity trends. both physical and regulatory takings at the Only around 6 percent of the nation is same time, effectively “killing two birds urbanized, and most states have more than with one stone.” It also capitalizes on the three-quarters of their land devoted to rural, tremendous public and political momentum agricultural, and open space uses. There is generated in the aftermath of the Kelo ruling little evidence to suggest that the nation or to enhance the protection of private prop- individual states face a farmland shortage or erty rights. crisis. Retroactive or Prospective 2. Exporting Measure 37 to Other States Measure 37 was designed to cover both Measure 37, and the lessons learned new regulations adopted by state and local from both the campaign behind it and its governments as well as those that are al- implementation since its adoption by vot- ready on the books, given Oregon’s unique ers, offers a template for property rights situation of having in place a far-reaching, advocates to follow in their efforts to enact decades-old land use regulation system. meaningful regulatory takings reform in However, most states have been far less ag- other states. Some of the issues other states gressive in extending their regulatory reach will need to consider are listed below: through land use controls, so it may make more sense for proponents to design regu- Choice of Vehicle latory takings measures on a prospective Drafters will need to decide if they want basis, unless there is a particularly egregious

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regulatory situation in their state that they to them that their own property rights are seek to address. The concept underlying not immune from regulatory takings; and a prospective-based measure is clear and (2) it conveys a legitimate message about easy to understand: if government wants to the importance of protecting the minority adopt a regulation that reduces the value of against the abuse of the majority—a well-es- privately owned land, then it will need to tablished concept in the national conscious- compensate landowners for that impact. ness.

Choice of Remedy 3. States Take Action on Regulatory Takings From a financial perspective, allowing Property rights activists and legislators both compensation and waivers as rem- in several states are already taking steps to edies gives the most flexibility to govern- enact regulatory takings reform, capital- ment in how it addresses valid regulatory izing on the momentum generated by the takings claims. Under Measure 37, cash- successful passage of Measure 37 in Oregon strapped cities and counties have chosen to in 2004 and the state Supreme Court ruling issue waivers to settle most of the claims upholding Measure 37’s constitutionality in processed to date, ensuring that property February 2006. Several of these states are owners are granted the rights they received also combining regulatory takings reform when they originally bought their property, with curbs on the use of eminent domain in while simultaneously giving government an what have come to be known as “Kelo-Plus” option to avoid monetary liability. However, measures. For example: measure proponents in some states may find Arizona deregulation to be the preferred option as a means to effectuate a regulatory pullback, The citizen-led Homeowners Protection rather than offering a compensation rem- Effort (HOPE) is gathering petitions to place edy that would keep the existing regulatory a property rights protection initiative on the regime in place. November 2006 ballot. The initiative would stop local governments from using eminent Identifying Victims of Regulatory Takings: domain to take private property for private In terms of messaging and making an development in order to generate more tax impression on voters, one of the central revenue. It would also give property owners lessons learned from the Measure 37 cam- an opportunity to seek compensation when paign was that it is essential to find a human government adopts land use regulations that face—or series of faces—to associate with a decrease their property’s fair market value. regulatory takings measure. Instead of ex- California plaining the concept of regulatory takings to voters in the abstract, being able to highlight Property rights activists in California a visible “victim” whose property rights gathered roughly one million signatures have been taken from him via regulation to place the “Protect Our Homes Act” on offers two strategic benefits: (1) it can help the November 2006 ballot. If passed, this measure proponents craft a powerful mes- initiative would amend the state Constitu- sage that resonates with voters, as it conveys tion to tighten the rules on the use of emi- nent domain and ensure just compensation

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to landowners whose properties have been Montana devalued through government regulatory Citizens are currently collecting signa- actions. tures to place Initiative 154 (I-154) on the Georgia November ballot. I-154 would require state and local governments to compensate prop- Senate Resolution 1040 (S.R. 1040) erty owners for diminished value resulting passed the Senate Judiciary Committee on from a regulation enacted after the acquisi- March 3, 2006. S.R. 1040 would create a tion of their property, unless the government constitutional amendment authorizing the repeals the regulation or waives its applica- General Assembly to pass a bill in 2007 tion to the affected property. I-154 would requiring local governments to pay compen- also prohibit the government condemnation sation to property owners for the imposition of private property if it intends to transfer of “unreasonably burdensome governmen- an interest in the condemned property to a tal actions,” including land use and zoning different private party. regulations. South Carolina Idaho On March 15, 2006, the state House Citizens in Idaho gathered over 49,000 approved two bills that limit governments’ signatures to place the Idaho Private Prop- ability to take property. By an overwhelming erty Rights Protection Initiative on the vote, the House approved H.B. 4503, which November 2006 ballot. Similar to Measure tightens state statutes governing the exercise 37, the Initiative would provide just com- of the eminent domain power and includes a pensation when a government entity reduces provision that requires local governments to one’s home or property values through zon- compensate landowners if new regulations ing and other land use regulations. It would decrease private property values. The regula- also limit governments’ ability to take one’s tory takings provision was stripped from a property and give it to another private party companion bill, H.B. 4502, that would place or person. a constitutional amendment on the ballot in Missouri November. The supporters of two competing citi- Washington zen initiatives aimed at curbing eminent In February 2006, the Washington Farm domain abuse face a May 9, 2006 deadline Bureau filed final language with the Secre- for collecting the signatures necessary to get tary of State’s Office for Initiative 933 (the these initiatives placed on the November “Property Fairness Act”) that would require ballot. One of these initiatives, a constitu- state and local government to compensate tional amendment proposed by the group landowners when regulations “damage the Missourians in Charge, would restrict the use or value” of private property. While use of eminent domain while also providing it bears some similarity with Measure 37, compensation to landowners whose prop- Initiative 933 would go further by requir- erty values decline because of government ing agencies and local governments to detail regulations enacted after October 7, 2006. any “actual harm or public nuisance” that

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proposed regulations are designed to stop For those in the urban planning profession, or prevent, the extent to which they affect the main lesson to be learned from Oregon’s private property owners, and whether the experience with Measure 37 is that property goals of the proposed regulations could be rights will be increasingly critical to success- achieved by less restrictive means, such as ful planning efforts in the United States. voluntary programs with willing property Inspired by Oregon’s experience with owners. Measure 37, citizens, activists, and elected Under the initiative, property owners officials across the nation are accelerating would be entitled to waivers or compensa- their efforts to develop statewide regulatory tion for restrictions imposed any time after takings measures aimed at protecting private January 1, 2006. In July, Initiative 933 property rights from the expanding reach supporters submitted 315,000 signatures of government and preventing landowners supporting the measure to the Secretary of from being forced to bear the hidden costs State’s office, which if verified will qualify associated with government regulation. As the measure for the November 2006 ballot. the advancing efforts to replicate Measure 37 in other states suggest, the message that Wisconsin the regulation of private property for the In March 2006, the Wisconsin Assembly public benefit should be paid by all taxpay- passed AB 675 by a vote of 56-40, creat- ers—not just individual landowners—is ing a process for a property owner to seek clearly resonating with the public. compensation from a municipality when the Portions of this article first appeared value of his property is reduced due to the on Planetizen at www.planetizen.com. For imposition of land use regulations. The bill, more information on Measure 37 and design introduced by Rep. Sheryl Albers (R-Reeds- considerations for measure proponents in burg), is modeled after Oregon’s Measure other states, see Reason Foundation’s April 37. It has been sent to the Senate and re- 2006 study, Statewide Regulatory Takings ferred to the Senate Committee on Housing Reform: Exporting Oregon’s Measure 37 to and Financial Institutions. Other States: reason.org/ps343.pdf

Property rights will be increasingly critical C. Do School Impact Fees Make to successful planning efforts in the United Sense? States. School districts across nation and local governments are scrambling for new ways to 4. Conclusion generate revenue for local public services. In recent years, school impact fees have become Measure 37 represents the boldest re- prominent in local headlines. sponse yet to the use of regulation to pro- The legal and political foundation for vide public benefits at private expense, and impact fees for core public infrastructure its passage in a state with a long tradition and services is reasonably well established. of (and public support for) growth manage- Thousands of municipalities across the na- ment suggests that urban planning may not tion have levied fees for water, sewer, fire, be sustainable unless it incorporates prop- police, roads, parks and other services. erty rights into the regulatory framework.

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In some cases, when they are properly certainly benefit from public schools, they calculated and levied, impact fees can be already pay property taxes that contribute an effective way for local governments to to public education, regardless of whether finance enhancements to their local network they have children who attend school or not. of core infrastructure. Tap-in fees for water With an impact fee, they pay again. systems, for example, serve the same pur- On an even more basic level: Why pose as a connection fee for cable or tele- should new families have to pay extra for phone services. Ongoing maintenance costs, new facilities while established residents service upgrades, debt service, and operating benefit from facilities paid for by the entire costs are paid for through the monthly fee. community, new and old? Unfortunately, impact fees are the wrong 2. Practical Limits to School Impact Fees tool for the wrong job when it comes to funding public education. At best, they are Even if these questions are resolved satis- just stop-gap funding that doesn’t address factorily, practical limits prevent impact fees long-term capital needs. More often, they from being applied equitably and rationally. are smoke screens for groups that are less in- Effective and properly applied impact fees terested in addressing the real capital needs have the several key characteristics, includ- of schools than in making growth less likely ing by raising the costs of new housing. • Transparency, by tying funds raised in the targeted areas directly to the ben- 1. Are Impact Fees Fair? eficiaries of the service provided. Water Impact fees are a blunt and confusing users, for example, will be paying for the tool for meeting school facilities shortfalls. cost of the water system. Houses don’t send children to school, fami- • Independent accounts, so that revenues lies do. As a result, no school official can are deposited in dedicated funds to fa- predict how many children, if any, will be cilitate auditing and accounting trans- sent to a local school district from any one parency. subdivision. New homes can be bought by • Professional standards and scientific many people who do not add to the school methods for calculating and measuring population: homeschoolers, empty nest- the size of the impact fee. The fees are ers, families who move within the school tied directly to the start-up capital costs district, families who send their children to of the project using estimates that bear a private schools, and childless households. reasonably and professionally accurate Even counting bedrooms isn’t a reliable way relationship to the service provided. to measure the demand for school buildings. Families will often put multiple children in • Identifiable service areas. An impact fee bunk beds, or convert extra bedrooms to a to pay for new roads, for example, is home office. levied within a transportation improve- Impact fees also raise questions of fair- ment district that is directly related to ness and equity: is it fair to ask residents the homes or businesses that will use the who don’t use these school facilities to pay service. for them? While childless homeowners • Appeal procedures, so that fees can be

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challenged and evaluated using an inde- theoretical and practical relevance of using pendent body such as the courts or an impact fees to fund school facilities. In order appeal board. to boost school spending across the board, • Rebate provisions, so that residents and public school advocates have challenged businesses within the impact fee district state funding formulas in the courts. will not be overcharged for the services Forty-five states have been involved in provided. This also minimizes the likeli- some form of school finance litigation, notes hood the fee can used as a way to raise Michael Griffith in a policy brief for the revenues for other services, or to subsi- Education Commission of the States. Thirty dize future or existing users. two of these cases have centered on whether Most school districts don’t systemati- states fund public education at an “ade- cally collect data on what neighborhoods or quate” level. While only fourteen states have subdivisions their students come from. They lost on adequacy grounds so far, Griffith can’t tie specific facilities to the families who notes that the pace of courts ruling against will benefit the most. state government is picking up. Half of the Take the city of Pickerington. The city is successful cases were resolved within the last in a fast-growth county outside of Colum- three years. bus in central Ohio. The local school district At the core of these lawsuits is whether determined it needed a new elementary and state governments have a constitutional middle school to meet growing demand. The duty to fund public education in a fair and city wanted to help fund the new facilities, equitable manner. Most of these lawsuits so it tried to levy a fee on new homes. are aimed directly at minimizing the role of Yet, data gathered from the school property tax, centralizing school finance at district showed that most of the students in the state level, and equalizing funding across the new buildings would likely come from at the state. least six separate cities, villages, and town- Shifting the burden of financing new ships. Neither the school district nor the facilities to new residents, even though they city had determined how many students in will have broad-based community benefits, the facilities paid for by new Pickerington may compromise this statewide duty. More- residents would actually come from the new over, impact fees, by definition, will be levy- subdivisions. This raises the possibility that ing in growing areas of a state. High-growth the new residents would be subsidizing dis- areas also tend to be high-income areas. So, trict-wide facilities. impact fees may contribute to a more inequi- In short, school impact fees lack many table distribution of funds for school facili- key components of an effective, efficient, ties within a state. and viable financing tool. 4. Conclusion 3. Courts Muddy the School Finance Waters Properly designed and implemented Beyond these practical considerations, impact fees have the potential to streamline however, school impact fees face an even public service delivery by aligning benefits bigger problem. Recent school funding liti- with revenues and costs. School impact gation has significantly undermined both the fees simply don’t measure up to the task of

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meeting local school facility needs without housing production, and limits the market’s creating inequitable and unfair financial bur- ability to provide affordable housing. dens for community newcomers—a select, To address this issue, the Council’s re- targeted minority. They don’t meet the basic port outlines a series of reforms intended to criteria necessary for ensuring impact fees streamline the development review process are transparent and accountable. Their role and create a more certain regulatory cli- in school funding is also significantly mud- mate for developers to operate within. For died given recent trends toward centraliza- example, the Council found that there are tion of school finances. currently no city-wide performance goals or This article is based in part on testimony standards for how long development review delivered by Reason Foundation’s Samuel should take. Not only would such standards R. Staley, Ph.D. to the Local and Municipal be created in the reform effort, but the Government and Urban Revitalization Com- Council also recommended creating a city- mittee of the Ohio House of Representatives wide project tracking system and project on behalf of The Buckeye Institute for Public management database that would allow city Policy Solutions in Columbus, Ohio. staff, elected officials, developers, and other stakeholders to see exactly where a project D. Denver Launches Permit Reform stands under the new development review Effort scheme. Bureaucracy is driving up the costs of The experience of Clark County, Wash- development in Denver, according to the ington may be useful as Denver embarks city’s multi-agency Development Council. on its permitting reform, particularly with The Council, established by Mayor John regard to measuring performance and ensur- Hickenlooper to revamp the city’s slow ing that reforms are actually working. In and burdensome development review and 2000, Clark County’s Community Develop- permitting process, released a report in July ment Department undertook a similar re- 2005 that found that delays in the process form effort as part of a wide-ranging perfor- increase the cost of development in Denver mance audit. By comparing actual outcomes by approximately 3 to 5 percent. The Coun- to performance measures and goals over the cil likens these delays to a tax that drives next several years, Clark County was able to developers to Aurora, Lakewood, Douglas identify significant variances from its per- County, and other jurisdictions that compete formance goals and analyze why they were with Denver for development investment. occurring. For example, despite reforms the With over $1.4 billion worth of permits county was still missing its time goals for issued in 2004, the Council estimates that approving certain single-family building per- Denver’s “bureaucracy tax” totaled roughly mits by over 200 percent. This led to subse- $40 to $60 million of added costs for devel- quent reviews to determine further areas for opers in that year alone. And this is no small improvement. concern. Regulatory delays and uncertainty Performance reviews also helped track increase the costs of development in com- improvements. Between 2000 and 2002, the munities nationwide, which in turn places county reduced the average time to deem upward pressure on housing prices, reduces development applications “fully complete”

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(containing all required information for harm. But we have to show them that doing review) from 60 days to 50 days. Though the process well doesn’t necessarily translate still a long way from meeting their goal of into doing a good job.” 30 days, the share of applications deemed The Council’s draft report is available complete within 30 days increased from 22 online: http://www.denvergov.org/admin/ percent to 33 percent during that time. news/newsforms/Development%20Review% 20Draft%20Report.pdf Regulatory delays and uncertainty increase the costs of development in communities E. Privatizing the Inner City? nationwide, which in turn places upward pressure on housing prices, reduces Urban Homestead Zones Can Help Revitalize housing production, and limits the market’s City Centers ability to provide affordable housing. The decline of the nation’s central cities is well documented as are the struggles to Denver’s Development Council has revitalize them. Success has been sporadic, begun to seek public input on its draft at best, and highly targeted. What revitaliza- report, and a 12-member advisory board tion that is occurring tends to be focused will be appointed to guide further reforms. and localized—block by block or neighbor- But the city has already started taking steps hood by neighborhood. Redevelopment is to streamline its permitting and approval most often seen in “hip”, artsy, or historic processes. neighborhoods and downtowns, not the An appeals board comprised of city more expansive parts of the cities with department heads has been established to working class, industrial, or commercial resolve disputes holding up projects in the legacies. development pipeline. And the city’s Com- This pattern of redevelopment is in munity Planning and Development Depart- contrast to the kind of growth occurring in ment has teamed with the city attorney’s suburban areas. Most suburban cities tend office and the Public Works and Parks and to be smaller, more fragmented, and mir- Recreation departments to start streamlin- ror neighborhood development. They also ing the permit approval process to reduce tend to be private. University of Maryland delays. Professor Robert H. Nelson observes that Still, city leaders are not underestimating less than 1 percent of all Americans lived in the difficulty of the task ahead, particularly private community associations in 1965 (the affecting change in city employees steeped beginning of the modern suburban housing in an entrenched bureaucratic culture. Ac- boom). By 2005, 18 percent do, accounting cording to Public Works Director Bill Vidal, for 55 million people. More importantly, “Transforming them is at the root of the half of all new U.S. housing has been built process...[t]hey have to stop being merely within private community associations, con- regulators and work more on being facilita- dominiums, or . tors. It’s not easy, but it’s working. Many of Perhaps the lesson for central cities is these people felt they were the unsung he- that they need to emulate the neighborhood roes of the city, saving the city from possible style governance of suburbs as a way to

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promote reinvestment and redevelopment. Local Government Committee, introduced This may mean breaking up parts of the cen- the concept of Urban Homestead Zones as tral city rather than annexing suburbs into a product of an 18-month investigation into one big regional government. In Ohio, one land use and growth management prac- state legislator is suggesting cities do this by tices in Ohio. A critical part of stemming taking a few bold steps on two important the flow of families out to the suburbs and issues: education and public safety. urban hinterland, he concluded, was creat- ing more vibrant and livable central cities. 1. The Missing Middle Class That couldn’t be achieved if families were For urban neighborhoods and their too scared to walk around the neighborhood central cities, economic stabilization and and couldn’t send their kids to good schools. redevelopment will depend crucially on at- The homestead zones would address tracting and retaining a middle class. Older these deficiencies at the neighborhood level central cities suffer from a number of daunt- by shifting budgetary authority and deci- ing challenges, not the least of which is a sionmaking from the city council to the crumbling infrastructure, high tax rates, and neighborhood level. The zones would be obsolete housing stock, but their inability voluntarily established by local residents, to maintain a broad middle class undercuts cover at least 10 but not more than 150 efforts to promote sustainable development. acres, and be “blighted” in order to take The middle class brings wealth, consumer advantage of the legislation. Unlike most demand, and a family-oriented sensibility blight designations used for eminent domain to neighborhoods and city governance, and purposes, these criteria for blight are nar- these elements are sorely missing in many rower, more specific, and easier to measure. central cities. Broad-based economic devel- An area within the inner city would be con- opment cannot be achieved when cities lack sidered blighted if, over the last 50 years, the economic and tax base capable of sus- • The area had experienced a 50 percent taining the middle managers, entrepreneurs, decline in population; and professional families that have now • Violent crime had increased at least 30 become the economic anchor of the broader percent; and economy. Two concerns stand out above all others • Poverty had increased 50 percent. as impediments to reinvestment in central Once established, the homestead zones cities by middle class families: personal safe- would be given the authority (and funding) ty and quality education. Ohio State Repre- to implement two programs that would en- sentative Larry Wolpert is tackling personal courage neighborhood stability and revital- safety and quality education in older cities ization: head on in part by challenging the conven- • Establish a private security force, fi- tional notion of who makes the core deci- nanced by a special assessment on prop- sions about governing the neighborhood. erties within the zone; and

2. Urban Homestead Zones • Establish a legal right to an educational voucher for households that invested in Rep. Wolpert, chair of the Ohio House residential renovation (a minimum of

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$120,000 under current legislation) that tions, are revitalized by large-scale redevel- could be used to offset tuition at private opment of entire blocks (commercial or resi- schools. dential). Urban Homestead Zones recognizes The cities covered by the program are this process of revitalizing a neighborhood Ohio’s “Big 8” and includes Akron, Canton, parcel by parcel, rather than block by block, Cincinnati, Cleveland, Columbus, Dayton, and provides a mechanism for reinforcing Toledo, and Youngstown. this dynamic.

3. Fresh Thinking About Revitalization 4. Concerns About Current Legislation Rep. Wolpert’s vision is fresh think- Despite Rep. Wolpert’s forward-thinking ing about urban revitalization and has the vision, the current legislation in Ohio suffers potential to give new, important tools to from some significant drawbacks. Legisla- citizens and public officials in our traditional tors and citizens thinking about emulating central cities. The concept of an Urban or adopting the program should pay careful Homestead Zone also reflects a shift in attention to the following factors. thinking about public policy’s role in revital- Don’t set the local investment threshold izing inner-city neighborhoods. Rather than too high. Incomes vary by region and city, use a more traditional approach emphasiz- but pay careful attention to the middle class ing large-scale projects like sports stadiums, income range. Homes targeted toward the citywide administered community programs, middle class in inner cities often sell for well more visible marketing, or simply transfer- below similar homes in suburban areas and ring more resources to existing city govern- investment thresholds needed to trigger the ments, the Urban Homestead Zone focuses program’s benefits can be set so high the directly on the needs, aspirations and expec- middle class can’t meet them. tations of citizens and residents (both exist- The Ohio legislation, for example, ing and future). would mean a family moving into a city (or At its core, it moves decisionmaking buying another home in the city) would have down to the street level. It encourages per- to shoulder the burden of the mortgage on sonal and physical investments on the parcel the building plus invest $120,000. For a new level, providing a foundation for long-term, family, this could mean financing $200,000 sustainable redevelopment. Central cities or more (since homes in older central city already have distinctive neighborhood quali- neighborhoods often sell for $80,000 or ties, and the homestead zones provide a way more). A $200,000 investment could be a for these neighborhoods to further tailor similar size house, a bigger yard, and access public services to their specific needs. to better public schools in the suburbs of al- The homestead zone concept recognizes most all Ohio’s major cities. Investments on the incremental and organic nature of urban the scale of the current bill, then, really end revitalization, a process that often occurs up targeting high-income households. through the ongoing, small scale and in- The benefits of the zone designation terconnected decisions of individuals and could be expanded dramatically by lower- households. Few inner city neighborhoods, ing the threshold. Bringing the reinvestment despite the press garnered by a few excep- financial threshold to $50,000 or $75,000

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(exclusive of the initial mortgage) would fact the legislature might limit the number of allow for significant remodeling and invest- vouchers will likely dilute the incentives to ment well within a middle-income family’s form a zone (and reinvest in the neighbor- budget while bringing many homes in these hood) because politics may limit the number neighborhoods to contemporary standards. of vouchers available in the future. For the Avoid setting the thresholds that qualify program to be effective, the program must an area for zone designation too high. have as much certainty as possible linking While the Ohio legislation defines blight benefits to neighborhood revitalization. using specific, measurable criteria, the cur- Avoid further regulation of private rent criteria are sufficiently narrow that few schools in inner cities under the guise of “ac- neighborhoods would likely qualify. More- countability.” If the concern is that private over, the criteria are keyed into historical schools do not perform as well as public trends. The concern should be less on how schools, that issue should be addressed in long it took for a neighborhood to decline education reform legislation, not economic and more on revitalizing already depressed revitalization legislation. Little or no evi- inner city areas. dence exists showing that private schools Benchmarks such as a percentage of perform more poorly than competing public crime, home values, or poverty above or be- schools. Yet, state testing mandates add a low the city average would be more accurate significant resource and cost burden onto and consistent with achieving the goals of private schools that participate in the vouch- revitalization. Regional benchmarks can also er program, reducing their incentives to ac- be used because central cities compete with cept children from these zones and diluting suburbs for homes and families. The appro- the expected benefit from investing in the priate competitive comparison is probably zone by individual households. not other neighborhoods within the city, but 5. Conclusion nearby suburban cities and locations. A shorter time period for monitoring Cities concerned about revitalizing their trends, perhaps 20 years, would be more inner city neighborhoods and encouraging reasonable. Most Ohio cities, for example, broad-based reinvestment beyond boutique began losing population in significant num- neighborhoods and downtowns should bers around 1970. consider programs that move decision-mak- School voucher programs should be ing down to the neighborhood level. In managed and coordinated locally if they are part, this process emulates some of the most funded locally. The current Ohio legisla- attractive features of new suburban develop- tion allows the state legislature to establish ment—governance on a neighborhood scale the total number of school vouchers avail- and efficient provision of core public ser- able. But at least part of the funding for the vices. On a more pragmatic level, programs Urban Homestead Zone program will come such as Rep. Wolpert’s Urban Homestead from a Tax Increment Financing program Zones provide a way for cities to directly designed to fund the vouchers (an Education address poorly provided services that are TIF). The legislature should not be able to critical to retaining and attracting middle limit the number of vouchers provide in a class families back into the city. zone if the TIF fully funds them. Indeed, the

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Public Health and Safety

Contents A. Privatizing Public Hospitals: A Win-Win for Taxpayers and the Poor B. New Prison Cost Comparison Study in Arizona Flawed C. Federal Privatization Study Demonstrates Privatization Success D. Texas Axes Criminal Justice Policy Council, Comparison Continues E. Book Review: Merchandising Prisoners – Who Really Pays for Prison Privatization?

nearly 50 percent, compared to only 20 per- cent at private, for-profit hospitals. By 2001 the $7,400 cost of a stay at a public hospital was 24 percent greater than at a private for- profit ($5,972). Why are costs rising so rapidly? In the case of public hospitals, a conflicting mix of social, political, and business objectives results in weak incentives to control costs. Cost burdens come from inefficient accounting, restrictive government personnel and procurement regu- lations, a tangled web of bureaucracy, and a general lack of accountability. Most public hospitals lack the strategic A. Privatizing Public Hospitals: A advantages enjoyed by private hospitals Win-Win for Taxpayers and the Poor including: a marketing orientation, volume purchasing systems, state-of-the-art informa- Hospital expenditures accounted for tion systems, standardization of supplies, almost a third of the $1.6 trillion the United outcome management systems, computer- States spent on health care last year. Accord- ized case management systems with cost- ing to the U.S. Department of Health and per-procedure variables among physicians Human Services, over the 10-year period performing the same procedures, physician from 1990 to 2000 the average cost of an practice management, and technologically inpatient stay at a public hospital increased advanced patient care. These innovations

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boost productivity and cut costs. Private, the nation’s hospitals use computerized for-profit hospitals blazing technological order-entry systems; a mere 13 percent have trails exert a “peer effect” when their public adopted electronic patient records. and not-for-profit counterparts mimic their In general, private hospitals face stron- behavior. Studies have shown that for-profit ger incentives to adopt IT than do public hospitals offer lower levels of hospital ex- hospitals. Blazing the trail is one of the penditures, higher quality care, and virtu- nation’s most innovative private nonprofit ally the same patient health care outcomes health care providers, Kaiser Permanente. relative to their public and nonprofit coun- Since its 3.2 million members in Northern terparts. California pre-pay, Kaiser has an incentive Many attractive alternatives exist that to keep costs down and keep its custom- benefit both taxpayers and the poor. Munici- ers healthy. Each patient/member has an palities throughout the country and around electronic medical record that includes lab the world have demonstrated they can serve and test results, radiology images, hospi- indigents more efficiently and effectively by talization records, diagnoses, prescriptions, selling public hospital assets and turning to allergies and other data, all accessible from the private sector. the desks of 5,000 Kaiser doctors or any of 12,000 of the company’s examining rooms. 1. Red Tape Can Kill…Information Technology Doctors can quickly access medical histories is the Antidote and test results, while computerized expert Bureaucracy, red tape and outdated systems alert them to potentially harmful medical reporting and accounting systems interactions in the event of multiple pre- not only inflate costs but can also jeopar- scriptions. dize lives. By one estimate, shoddy quality Another example of major IT invest- control costs Americans $500 billion per ments is St. Vincent’s Hospital in Birming- year in avoidable medical costs, or roughly ham, Alabama, a showcase for the nation’s 30 percent of all health care spending. Of largest private nonprofit health care system, course lives lost are more important than Ascension Health. Doctors can instantly money lost. Medical errors claim anywhere download lab results, X-rays, and CAT from 44,000 to 98,000 American lives every scans from the hospital’s wireless (Wi-Fi) year, roughly 15 to 30 times the death toll network. Robot arms perform precise sur- suffered from the terrorist attacks on Sep- gery, machines measure medicines, surgical tember 11, 2001. tools have bar codes so they can be tracked Most experts agree that increasing and don’t end up in patients, and nurses nurse-to-patient ratios is at best a short-term can scan bar codes on patients to check that response to the deadly epidemic of medi- medicines are given as doctors prescribe. cal errors. The long-term prescription is for Expert computer systems automatically hospitals to invest in digitized patient files, check for problems such as drug interactions computerized prescriptions, telemedicine, and allergies and can even guide doctors in and other IT investments. The returns on choosing treatments. Investments in new these investments can lower costs and make diagnostic devices save lives. The private hospitals safer. Today, only 17 percent of hospital chain HCA (Hospital Corporation

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of America) is implementing a computerized ment at an Intensive Care Unit (ICU) at order-entry system for medicines at many of Hopkins’ sister hospital across town. They its 190 hospitals. An order instantly goes to sent the video feeds, along with real-time pa- nurses and to the pharmacy. Once approved tient vital sign data, to computers in the doc- by a pharmacist, a drawer at the patient tors’ homes. For four months, the doctors ward clicks open and the nurse can pull out took turns watching patients from home on the appropriate pills. The drawer automati- 24-hour shifts. The results were astonishing: cally tracks inventory and nurses use scan- Deaths declined by 50 percent. According to ners to read the bar code on the pill bottle to one doctor: “Catching a lot of little things confirm it’s the right drug and dosage, and added up.” on the patient to ensure it’s the right patient. The doctors eventually launched a Digitizing has cut HCA’s drug-dispensing company with an eICU that functions like a time in half and weeded out some 20,000 Bloomberg terminal for patient data. It dis- potential errors. plays readings on blood-oxygen levels and Recently, IBM joined forces with the other data, and with the click of a mouse renowned Mayo Clinic, a private nonprofit. can switch from one patient to another. Their objective is to analyze electronic Proprietary software continuously monitors medical records to rapidly assess patients’ vital signs and pops up “smart alerts” when responses to new treatments for cancer and patients deviate beyond established ranges. other diseases. When combined with infor- Instead of simply adding nurses to im- mation emerging from the human genome prove the quality of care, a Norfolk-based project, this collaboration should accelerate private health care system, Sentara Health- doctors’ ability to identify causes and pre- care, invested in eICUs to monitor 55 beds vention of diseases. in three hospitals. In 2002, Sentara reported According to the Institute of Medicine the system saved 90 lives a year, while also the routine use of electronic records should saving millions of dollars by avoiding pricey help reduce tens of thousands of deaths and complications. Although launched with the injuries caused by medical mistakes every best of intentions, nurse ratio mandates such year. A paperless system also cuts adminis- as California’s could have the perverse effect trative costs by eliminating the need to pro- of delaying implementation of potentially duce, maintain and store enormous amounts life-saving IT investments. of paper files. Some 2,000 hospitals have joined an Telemedicine is also poised to save initiative known as the ‘100,000 Live’ cam- lives and cut costs. This involves the use of paign to cut down medical errors. Led by sophisticated remote electronic and video- Harvard’s Dr. Berwick, chief of the nonprofit monitoring systems that let one doctor (or Institute of Healthcare Improvement in nurse) treat several patients simultaneously, Cambridge, Massachusetts., his employees and to remotely consult and provide expert scour the world for simple, proven remedies care. for medicine’s reliability woes, anything As an experiment, a pair of doctors at from better infection control to eliminating the Johns Hopkins University School of drug mix-ups, and standardizing basic pro- Medicine set up videoconferencing equip- cedures. Key initiatives include: measuring

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performance and issuing report cards releas- ated by IT. Also, since public hospitals ing performance results to the public, insti- are largely paid based on volume, IT tuting teamwork training and empowering that eliminates duplication and unneces- nurses to challenge doctors, and pushing for sary tests, shortens hospital stays, and the digitization of medical records so crucial gets patients out of intensive care units test results and other vital records can be faster can cut a public hospital’s rev- tracked and communicated. Innovative hos- enues faster than it cuts costs. This gives pitals are showing they can drastically cut public hospitals even more reason to medication errors and all but eliminate some resist adopting new technology. It also deadly hospital infections. helps explain why the cost per stay has Strategic IT investments lower costs and grown so persistently in public hospitals. make hospitals safer. The challenge facing In sharp contrast, a private medical care many public hospitals today is how to fund system, like Trinity Health in Novi, Michi- investments like the digitization of patient gan, has a better chance to earn a return on information, and the computerization of its IT investments. With 44,000 full-time prescriptions, billing, and other administra- employees, Trinity Health has implemented tive tasks. Public hospitals face three main an automation project worth more than obstacles: $200 million that includes 23 hospitals and • First, IT requires large, up-front invest- hundreds of outpatient facilities. Its invest- ments in training people and in special- ment in an expert system that alerts doctors ized equipment. Since public hospitals to harmful drug side effects caused doctors cannot access equity markets, this limits to revise their orders some 25,000 times their funding choices. Their options over three years. This saved scores of pa- include navigating the bureaucratic deci- tients from potential complications. Another sion-making process to generate internal critical IT investment, creating electronic funding, raising money from the com- records, means patients now get faster treat- munity (through nonprofit foundations ment. for example), or requesting additional 2. What are the Options? tax dollars from the federal government or from state and local governments (is- Local governments are increasingly quit- suing bonds or passing tax increases). ting the hospital business. In 1980, there were some 1,800 public hospitals. By 2003, • Another reason public hospitals are slow after a wave of closures, consolidations and to adopt IT is a fear of job losses. Some privatizations, the number had dropped controlling stakeholders (unions, etc.) almost 40 percent to 1,121. automatically object to labor-saving Health care is more than just hospital investments. care. When a public hospital becomes too • Finally, public hospitals face perverse expensive to own and operate, multiple op- incentives. Excessively dependent on tions exist for states, cities and counties to public insurance, large, powerful mon- cut costs and continue to serve their com- opsonistic buyers like Medicare (for munities’ health care needs. These include: seniors) and Medicaid (for the poor), selective outsourcing, public-private part- stand to reap most of the savings gener-

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nerships (via joint operating agreements, public hospital assets for cash, retaining joint ventures, and lease agreements), or the power to appoint board members of the new outright sale of the hospital. entity. For example, in 1997 California’s Sequoia Healthcare District netted $30 Outsourcing million in cash from its joint venture with Think of a hospital as a collection of the private nonprofit Catholic Healthcare small to medium businesses operating under West (CHW). The newly created Sequoia one organizational roof. This can include Health Services is governed by a 10-member anything from laundry and maintenance board (equally split between the hospital services to laboratory and clinical services. district and CHW). CHW was granted a Selective outsourcing first entails the con- 30-year contract to operate the hospital. ceptual transformation of a hospital into a Another public-private partnership option holding company that owns and operates is to lease the hospital, clinics, and equip- a host of profit centers (kitchen, laundry, ment to a management firm. For example in maintenance, information systems, medical New Mexico, a private company, Province legal services, laboratory test facilities, clini- Healthcare, has agreed to lease the county’s cal services, etc). It is useful to distinguish Memorial Medical Center for 40 years between “core” and “non-core” functions agreeing to a pre-paid rent of $150 million. and activities. Core functions define the Several safeguards—covering such areas as hospital’s competitive advantage. Non- the type and levels of services offered, access core functions are standard services widely for indigent and uninsured patients, and available in the marketplace and are prime patient, physician, and employee satisfaction candidates for outsourcing. Once identified, levels—were explicitly built into the con- non-core profit centers can calculate their tract. costs, and reconfigure themselves to compete against outside contractors that offer simi- Sale lar services. Outsourcing opportunities can A sale produces a cash payment that include anything from non-clinical support can be used to retire debts and establish a services (cleaning, catering, building mainte- trust fund for community health care. For nance), to clinical support services (labora- example, after retiring public bond debt tory services) or specialized clinical services from the sale of Conroe Regional Medical (such as radiology or lithotripsy) and routine Center in Texas, the county used the residual procedures (such as cataract removal). “profit” from its privatization to launch a nonprofit foundation to meet ongoing Public-Private Partnerships community health needs. The community In a joint public-private operating also collected new property taxes and other agreement, the government can turn over payments from the now-private for-profit management of the public hospital to the hospital. Indigents fared best of all. Here private sector and still retain some control privatization raised cash, reduced debt, and by appointing part of the board overseeing created a better system for serving the poor the agreement. Under a joint public-private and uninsured. Closing a public hospital venture, governments can sell a portion of does not mean the government can walk

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away from its responsibility for indigent had used to pay for indigent care at Doyne, care. After shedding their public hospital(s), the county placed the money in a program many governments switch from the role of they call the General Assistance Medical producers to that of providers or purchasers, Program (GAMP). Much like Medicaid, contracting with local hospitals and clinics GAMP pays private hospitals and clinics a to purchase only the bed days they need for fee for seeing its patients. indigent care. For example, Orange County, Milwaukee residents who might other- California, no longer owns and operates any wise have gone to Doyne can now visit any hospitals. Instead, the Health Care Agency of dozens of hospitals and clinics. All 10 pri- administers indigent care through multiple vate hospitals and 15 neighborhood clinics (HMO) contracts with local hospitals and signed contracts with the county to treat the clinics. medically indigent. Milwaukee’s experience suggests a community can live without a 3. Where’s the Safety Net? public hospital and still provide a safety net. Many local governments have shifted An assessment made five years after the from running hospitals to becoming selective hospital closed indicated the county’s indi- purchasers of health care. Instead of owning gent population had roughly the same access and operating a public hospital and produc- to medical care as before. However, patients ing health care for indigents, governments today have more choices in terms of how are increasingly contracting with private to access that care. In fact, fewer use emer- providers to treat indigents. Consider the gency rooms, and more visit clinics where case of Milwaukee’s public hospital—first early diagnosis and treatment prevents more known as County General and later as costly interventions later. Prescriptions are Doyne Hospital. filled at local pharmacies instead of the pub- By the 1980s Doyne’s managers were lic hospital, and many now get their health making regular visits to the county board of care right in their own neighborhoods at supervisors to report budget shortfalls. An- local clinics or private hospitals. Meanwhile, nual bailouts ran as high as $15 million per all of this is costing taxpayers less money year. Moreover, deferred maintenance and than before. an inability to raise sufficient funds to invest While from the county’s perspective, in new facilities, equipment, and technology running GAMP is not cheap, it’s a bargain began to impact performance. By 1995 the compared with the constant drain of run- drain on public resources combined with ning a public hospital. It also offers a more a threat to the county’s bond rating forced predictable budget for health care than did county supervisors to shut down the public the public hospital. hospital. Interestingly, in shutting down the The county instantly transformed itself public hospital, the county also did away from a producer of health care through its with many of the competing stakeholders public hospital, to a purchaser of health care (special interest groups) that indirectly sup- through private for-profit and nonprofit hos- ported health care for the poor. In the past, pitals and clinics. Taking the $37 million a squeezing money out of indigent care meant year in local, state and federal money that it cutting the public hospital and a likely battle

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with 2,000 unionized employees. Now the the uninsured. county buys its indigent care like a commod- Public hospitals exist to provide medi- ity, and it represents little more than a line cal services directly to the uninsured, but item in the budget. A risk is that since the there are several alternatives. One option is health care budget has lost some of its stake- to subsidize private providers by providing holders, and now competes directly with direct subsidies for uncompensated care or other line items like roads, parks and police, reimbursement through public health insur- politicians may be more tempted to cut the ance (like GAMP or Medicaid). Fees are health care budget to fund other priorities. paid to private hospitals or HMOs for each The new safety net also has some other indigent served. Another option is to pur- gaps. Federal law requires emergency rooms chase private insurance for indigents (like to take all comers, regardless of ability to Blue Cross/Shield). pay. Some state and federal laws also require Finally, state and local governments hospitals to provide charity care. In Milwau- could be pioneers in the new frontier of kee, private hospitals and clinics have had to and offer indigents medical step in to cover more uncompensated care. savings account vouchers (MSAVs) com- In some cases matching funds are available bined with catastrophic health care cover- to pay a share of the care provided to Med- age. icaid patients and the uninsured. Public health care dollars could be However, many specialists have grown placed in accounts individually owned and frustrated with the paperwork involved with controlled by indigents and the uninsured. GAMP and have dropped out of the pro- Patients would pay with MSAVs for most gram. Yet, even if private hospitals and clin- medical services from those accounts. Pri- ics lose money on GAMP, they do not lose vate hospitals and clinics would compete on as much as they would without it, so they the basis of value for money. The govern- rank among its biggest supporters. Finally, ment would make regular deposits to the GAMP only covers 20,000 of Milwaukee’s MSAVs of patients with chronic conditions, estimated 120,000 uninsured. The lesson leaving them free to choose among compet- is that responsibility for indigent care does ing “focused factories” (specialized hospitals not disappear with the public hospital. A and clinics) for ongoing treatment. safety net for indigent care still needs to be A major problem is that providing free in place. hospital care or free insurance results in a substitution away from private health care. 4. Reengineering the Safety Net People are less likely to purchase private The aim of most public health care insurance and more likely to choose jobs programs in the United States is to improve with higher salaries and no health benefits. access to medical care mostly by filling the In 1999 the Andril Fireplace Motel in Pacific gaps in the private health insurance market. Grove, California offered its service workers These public programs typically include di- a health care plan that included a small co- rect subsidies to health care providers (pub- payment. The workers refused the employer- lic or private hospitals) to provide health provided health insurance, instead choosing care, or the provision of some insurance to to accept more money, because they said

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they could get free health care at the emer- establish trust funds for community health gency room at Monterey County’s public care. Since 1994, over 100 charities have hospital, Natividad. emerged from hospital sales that control a Roughly a third of the uninsured live combined total of nearly five billion dollars. in households with incomes greater than Even strong advocates of $50,000 per year, apparently choosing not now acknowledge that the growing scrutiny to purchase health insurance even though of public hospitals has “raised the level of they can afford it. Of those who become un- the discussion…[and increased] focus on the insured at any point in time, Census Bureau need for care by uninsured citizens…on the Data show that roughly 75 percent obtain services required, and on how to finance and insurance within one year, while only 2.5 deliver those services.” percent remain uninsured more than three As Nobel Prize winner Milton Friedman years. stated with regard to the high cost of health An unintended consequence of govern- care, “a cure requires reversing course, re- ments trying to help the uninsured is they privatizing medical care by eliminating most inadvertently create more of them. Accord- third-party payment, and restoring the role ing to one critic, “California’s public hos- of insurance to providing protection against pitals…confront a severe crisis…a steadily major medical catastrophe.” He sees medi- growing demand by uninsured and vulner- cal savings accounts as one way to resolve able patients…matched against a shrinking the growing financial and administrative pool of funds available to pay for care.” burden of Medicare and Medicaid: “a medi- Today, California’s public hospitals are all cal savings account enables individuals to paying close attention to a federal decision deposit tax-free funds in an account usable to freeze Medicaid (Medi-Cal) payments and only for medical expenses, provided they shift over half a million enrolled patients have a high-deductible insurance policy that into HMOs (similar to what Orange County limits their expenses.” In effect, “it would be has done). Directing Medicaid money to a way to voucherize Medicare and Medic- HMOs instead of safety net hospitals and aid. It would enable participants to spend shifting more of the burden from the state their own money on themselves for routine to counties is expected to present even more medical care,” rather than having to rely challenges for the state’s public hospitals. on public hospitals or on HMOs, while still insuring indigents against medical catastro- 5. Conclusion phes. Benevolent citizens have learned the Besides crowding out private insur- hard way that running a public hospital is ance, when well-meaning state and local a tough business. Municipalities through- governments run public hospitals and pass out the country and around the world have well-intentioned regulations and mandates, demonstrated they can serve indigents more evidence suggests they inadvertently raise efficiently and effectively by selling public health care costs and lower performance. It hospital assets and turning to the private is time to reengineer our safety nets. Care- sector. In the United States, communities of- fully crafted deregulation and privatization, ten receive a cash payment to retire debt and combined with subsidized medical savings

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account vouchers (MSAVs) and high-deduct- of success throughout the country, the latest ible insurance for indigents, can bring us the ADC review suggests that private prison best of all worlds: lower taxes and better costs were 8.5 and 13.5 percent higher than services. state costs. This article is an excerpt from Reason It’s easy to see why the quick turn- Foundation’s 2005 policy brief by Dr. Francois around—the methodology used for the Melese, Privatizing Public Hospitals: A Win- comparison changed. In doing so it lowered Win for Taxpayers and the Poor, available on- the costs of ADC facilities and hiked the line at: http://www.reason.org/pb41_priva- costs of private facilities. After several years tizing_hospitals.pdf of study and a widely accepted methodology that consistently produced results that dem- B. New Prison Cost Comparison onstrated the success of private prisons, the Study in Arizona Flawed ADC chose to change the rules. Put simply, The Arizona Department of Corrections the new cost analysis ultimately removes or (ADC) released its latest cost comparison deducts costs traditionally attributed to the study between the ADC-operated facilities ADC from their bottom line, while adding and private facilities operated for the state additional costs to the private facilities. (available online at www.azcorrections. First, the formula used to generate the gov/reports/completemaximusreportdocu- average daily cost is inconsistent and the ments.pdf). State law requires that occa- authors fail to give a justification. The sional reviews be conducted and the first state’s own Per Capita Cost Documentation two studies found that the private facilities reports that private prisons managed 1,678 operated with significantly fewer tax dollars inmates in 2003 and 1,685 in 2004—this than their public counterparts, achieving includes temporary and emergency beds that cost savings of 17, 13.6 and 10.8 percent in the private facilities operated inside existing 1997, 1998, and 1999 respectively. Despite facilities. However, the analysis uses only history in Arizona and a clear track record 1,250 as the bed count for private facilities. This inflates the true per bed/inmate cost by

Figure 9: ADC Average Costs and Savings: The First 2 Studies 50 40 30 20 10 0 1997 1998 1999

Average Government Cost ($) Average Private Cost ($) Savings (%)

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several dollars a day. ties achieve a higher level of oversight given Second, the analysis leaves out any the extra cost to administrate and monitor construction and start-up costs. Private those facilities. Given that actual contract facilities factor these costs into their contract administration represents a tiny fraction of price upfront and recover those costs over the cost added to private facilities, it can be the life of the contract. However, the state inferred that ADC facilities do not have the separates capital and operational expendi- same level of oversight or else they would tures and does not account for these costs in have been applied the same costs. The extra their per bed/per day cost. These costs, con- cost should be considered an extra benefit. servatively add between $3 and $5 per bed. The comparison also assumes away This cost should be added to the in-house some costs for the ADC facilities. It pre- cost of the state estimates. tends that money was not spent by the state. Third, while the analysis attempts to For example, it removes $1.09 from the capture only those costs borne by both daily cost of ADC beds for the work incen- facilities it fails to subtract out special treat- tive plan because this cost is “entirely borne ment costs that each private facility provides by the state.” Given that this is a state under contract, not provided by the state. program this is not a surprise. However, While there is no way to account for these costs cannot be ignored or assumed away costs given the available data, it certainly just because of management. If the ADC does skew the results. Private facilities’ were operating the private facilities this prices would drop by at least a $1 if these program would remain in place—and those services were removed from the evaluation. costs would continue to be borne by the To be fair, not all of the changes are state. Thus, they should be included in any necessarily wrong or unfair. For example, consideration and review of the true costs of costs for contract administration and over- operating a facility. sight are added to the average daily cost of The study authors suggest that these private facilities—adding roughly $2 to the changes should be made because “histori- bottom line cost. This is a common and cal” data can only tell you so much. And widely accepted practice. Indeed, it was that ADC may develop a better design and undertaken in the previous two reviews as generate savings in future projects. While well. this may be true, historical data is also However, this raises a question. One important. It provides a baseline and an argument often made against private facili- expectation. For example, since the first ties is that they’re not accountable and that introduction of private prisons in Arizona oversight is lacking. However, the private the real (average) cost per inmate per day prisons are charged an additional oversight has declined from $47.27 a day in 1995 to fee, which begs the question: who is more $44.77 in 2004. During the same time, pub- accountable—public or private facilities? In lic facilities have seen a double-digit percent- this review, no additional oversight costs age increase ($43.79 to $53.63). are charged to ADC facilities. It seems as If the data were assessed before adjust- if public and private facilities are held to ments (additions and subtractions) the different standards—and the private facili- private facilities would continue to fare

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very well. Consider this, the average cost comparison. It’s worth noting that the model of ADC facilities in 2003 and 2004, $46.90 used to determine what the cost of public and $47.30, are both HIGHER than the av- operation would be represents a ‘best-case’ erage private cost ($43 and $46.57). That’s or ‘low-cost’ scenario compared to actual even after adding additional oversight to the data for other facilities. bottom line. The researchers also compared the cost Another key consideration is that private of operating TCI to that of other existing facilities can only control their costs. They low-security federal prisons. TCI was evalu- have no impact over state administrative or ated on the basis of the quality of its perfor- oversight costs. The data suggests that they mance during its first six and one-half years have superior ability to control their costs of operation as compared to publicly oper- and prevent escalation. The average daily ated federal prisons over the same period. rates over the course of the three studies is The findings: evidence enough—where they’ve had direct control over their costs, they’ve gone down. The private facility SAVED taxpayer money. ADC’s went up in every category. Beyond this, the new study format also The contract at TCI cost the government fails to consider the relative quality between $142.1 million, while the estimated cost of public and private prisons, a true disser- government operation was between $151.6 vice. While costs are important, quality and and $158.6 million. Thus, the private facil- performance are just as, if not more, impor- ity saved between 6 and 10 percent or $9.6 tant factors that should be included in any and $16.5 million. During all five years of consideration. the analysis, the net cost of contracting was less than the lowest estimate of direct public C. Federal Privatization Study Dem- operation. onstrates Privatization Success In the hypothetical model for public This month, the Justice Department’s operation of the Taft facility, the research- National Institute of Justice released a study, ers assumed that staffing levels would be Contracting for Imprisonment in the Fed- the same as the privately operated facility eral Prison System: Cost and Performance and that pay is at the ‘mid-grade’ level. In of the Privately Operated Taft Correctional actuality, the private provider employed Institution (available online at www.ncjrs. more employees, but offered a less expensive gov/pdffiles1/nij/grants/211990.pdf ) package of employee benefits. In addition, The researchers set out to determine labor costs (wage and salary) for the private whether the low-security private prison facil- facility were higher than many other public ity located in Taft, California performs as facilities it was compared against. Had the well as publicly operated facilities do within private facility been located in another part the federal prison system. They compared of the country with lower prevailing wages, the cost of contracting the operation of Taft the difference between public and private Correctional Institution (TCI) to what the labor costs would have been much greater. federal government would have spent if it For example, if the facility had been located had run the facility. This is a hypothetical in Yazoo City, Mississippi (the site of one of

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Table 21: Per-Diem Rates and Cost Savings: TCI vs. Federal Prisons 1998 1999 2000 2001 2002 Taft (Private) 52.43 33.82 33.25 36.88 38.37 FCI Elkton 46.59 39.72 39.77 44.75 46.38 FCI Forrest City 44.2 39.46 39.84 41.65 43.61 FCI Yazoo City 44.15 41.46 40.05 43.65 42.15 FCI Ashland 69.96 62.75 63.47 64.12 63.38 FCI Bastrop 56.75 53.75 52.67 57.15 52.97 FCI Big Spring 58.8 54.71 51.03 67.99 70.88 FCI Butner 51.78 45.76 47.04 50.93 54.27 FCI Latuna 58.47 56.47 57.36 71.39 60.02 FCI Loretto 62.59 61.42 63.22 49.32 50.86 FCI Milan 73.93 66.77 62.97 62.56 63.23 FCI Petersburg 65.79 61.79 61.79 56.97 60.59 FCI Safford 58.65 56.51 58.57 58.51 58.69 FCI Seagoville 61.48 59.41 61.03 77.4 75.83 FCI Texarkana 49.29 47.52 49.68 53.34 55.55 Low Savings -15.79% 16.68% 19.82% 12.93% 9.85% High Savings 41.01% 97.43% 90.89% 109.87% 97.63% Average Savings 9.32% 57.87% 60.79% 54.89% 48.63% Note: Highest costs per year are shaded red. Lowest costs per year are shaded green.

the similar federal facilities), the contractor’s when compared against the average and the labor costs would have been 24 percent high cost per diem facility. lower, and savings would have increased as The private facility did NOT jeopardize qual- well. ity. A simple review of per diem rates pro- vides even stronger evidence of cost savings While cost is important, the quality from the private facility. Indeed, TCI housed or performance of a prison facility is criti- prisoners at a significantly lower daily per- cal. The review concluded the following prisoner cost than the Bureau of Prisons about the private facility: “very efficient experienced at 14 low-security, federally performance, fully responsive to contract operated prisons. requirements, more than adequate results, The private facility had the lowest per reportable deficiencies but with little identifi- diem rate in every year except its start up able effect on overall performance.” It was year (1998), when costs were higher, as determined that the contractor delivered expected. After 1998, TCI had nearly a what it promised in the contract, and what double-digit advantage in every year over the contracting agency expected. Indeed, the next lowest per diem in the federal sys- the federal Bureau of Prisons exercised its tem. The cost savings is even more dramatic option to renew the contract after the three-

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year base period, and has done so in every contractual requirements. subsequent year since. With results like these, it is understand- In addition, the rates of assault are lower able why the federal Bureau of Prisons at TCI than at the average low-security pub- continues to seek public-private partner- licly operated facility. There have not been ships to manage a growing federal prisoner any homicides at the private facility. While population. This is even more evidence that there was one escape, it was followed by im- private prisons not only work, but that they mediate remediation and policy changes. work well—saving taxpayers money, pro- The type and amount of health care was tecting the public, and securing the rights of found to be the same, although the private inmates. facility used a different staffing model that relied on more doctors and registered nurses. D. Texas Axes Criminal Justice Policy Thus, inmates were more likely to see a Council, Comparison Continues doctor at the private facility than in public The state of Texas eliminated the Texas facilities. Criminal Justice Policy Council and the bi- However, not all findings favored TCI. It annual cost comparison study of public and was found to have higher rates of drug use private prison costs. However, the state’s and a greater number of inmate grievances. Legislative Budget Bureau has taken over the comparison enabling the longest running The private facility performed ABOVE mini- public vs. private operational cost compari- mum compliance and contractual require- ments. son to continue. This review provides the best historical and trend data of the costs be- On the most comprehensive and in- tween public and private facilities as well as depth measure of performance—the ex- the impact private facilities and competition tent to which the private operator met its can have on a prison system. The average performance obligations established in the daily cost of operation in a government-run contract—the firm performed at levels above facility was $41.64 and $40.06 in 2003 and and beyond mere compliance with these 2004 respectively. Costs in private facilities

Figure 10: Cost Comparison Data: Texas Private v. Government Prison Provision 50 40 30 20 10 0

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Government Average Cost ($) Contract Average Cost ($) Cost Savings (%)

Transforming Government Through Privatization 227 Annual Privatization Report 2006

under contract in Texas were only $35.47 mised of government employees, and they and $34.43 representing savings of 14.8 and clearly have a vested interest in seeing priva- 14.1 percent. Savings are even more dra- tization fail. The same can be said of the matic when the operational costs of jails are for-profit prison firms; they generate lots of compared. reports that contend that they are superior It is noteworthy that competition has at saving taxpayers money. Only objec- forced a gradual decline in per-inmate in- tive analysis will settle this questions that carceration costs in both public and private plagues policy makers and taxpayers. facilities. Texas spent about the same per Unfortunately, Mr. Price fails to provide inmate, on average, in both public and pri- that much-needed “objective analysis.” In vate facilities in 1989 as it does today some an effort to claim the cover of academic in- sixteen years later despite inflation and es- tegrity, on page after page the author treats calating costs. Furthermore, after a change the reader to a back and forth recitation of a in reporting in 2001, both types of facilities wide variety of assertions, both pro and con, are seeing their costs trend down. Competi- regarding private prisons. The references tion between public and private facilities range from Thoreau’s Social Contract and is having a noticeable effect on the cost of Adam Smith’s, to the incarceration in Texas. Civil War and Jim Crow laws. Nevertheless, the undercurrent of bias E. Book Review: Merchandising Pris- is clearly evident in the discourse conclud- oners—Who Really Pays for Prison ing on the back flap of the book jacket. Privatization? The publisher says, “Ultimately, he (Price) By Paul Doucette, Executive Director, Asso- concludes that the desire to save costs is not ciation of Private Correctional & Treatment the primary reason for state prison privati- Organizations (APCTO) zation. Rather, the more plausible explana- In his new book, Merchandising Prison- tions revolve around political and ideologi- ers—Who Really Pays for Prison Privati- cal factors such as the party of the governor, zation?, Rutgers University professor and and the overall political and ideological Associate Director of the National Center culture of the state. This work sets the re- for Public Productivity Byron Eugene Price cord straight about the decision to privatize sets out to understand the motives behind state prisons, revealing the political bias that decisions by public policy officials to priva- often drives these policy choices.” tize correctional facilities. It is not my purpose here to document The work is well researched and pres- all of the flaws in logic, conclusion and as- ents the arguments both for and against sumption extant with in the book. Rather, I privatization. On page 40, the author calls turn only to the last chapter to deal with the for more analysis: “problems which exist for Prison Privatiza- A note of caution: the excellent data tion.” provided by opponents of privatization, Health Care such as the large unions that generate re- The article correctly points out that ports slamming privatization, can be called prison officials are obligated under the into question. These unions are compro-

228 Reason Foundation • www.reason.org Annual Privatization Report 2006

Eighth Amendment to the Constitution to ons (87); fewer incidents of major miscon- provide prisoners with adequate medical duct (3 incidents versus 7.5 incidents per 10 and mental health care. What follows is a prisoners); fewer incidents of general mis- lengthy discussion of the failure of prison conduct (3 incidents versus 15 incidents per health care in New York. It is not a pleasant 10 prisoners); and, most significantly, fewer picture. Unfortunately, the author missed prisoner deaths due to homicide, suicide, the fact that New York doesn’t have any and accidental causes (7 deaths versus 25 privately operated prisons. deaths per 100,000 prisoners). According The health care discussion continues to the report, there were also fewer prisoner with a tragic story about an eighty-pound assaults committed against staff in private inmate dying of starvation. The author fails prisons.” to note that the location in question is the State Finances Corcoran facility, which is operated by the State of California and staffed by members The book argues that states facing of the most anti-private and politically active budget challenges are beginning to consider corrections union in the country, the Califor- eliminating mandatory sentences and “three nia Correctional Peace Officers Association strikes, you’re out” legislation as a way to (CCPOA). reduce the prison population and that this could hurt private prisons. He indicates that Human Rights the southern part of the country is the least Even more damning is the author’s al- likely to release “their twenty-first century legation that “For-profit prisons have done slaves—prisoners—anytime soon”. Since a poor job of protecting an inmate’s civil Mr. Price holds the industry responsible for and human rights.” Broad generalizations these laws in the first place, his criticism is concerning abuse, violence, inhumane physi- understandable. Again, he fails to point out cal conditions and filth are not documented, that individual companies and APCTO do although the author does cite the cancella- not lobby for stricter or longer sentences. tion of a contract with Esmor Corporation Public employee unions—especially the for problems at the Elizabeth, New Jersey CCPOA—have historically lobbied for those detention center. Interestingly, measures. this is one of the few items in the book not Safety footnoted. Mr. Price himself admits the successes Completely ignoring the statistics he achieved by private prisons. On page 30 of quoted from the Criminal Justice Institute the book, Mr. Price details the results of a study of private prisons showing them far study of private prisons in the United States superior in important performance mea- by the Criminal Justice Institute. According sures, the author argues that the industry to Mr. Price, the study says, “… private pris- pays lower wages than government, has a ons outperform their public counterparts on higher turnover rate than government and many important measures hands down; for does less training than government. There instance, private prisons had fewer escapes are a variety of reasons for the statistics he (70 per 100,000 prisoners) than public pris- cites, but in the end, by his own admission,

Transforming Government Through Privatization 229 Annual Privatization Report 2006

they don’t seem to have an impact on facil- Inter-relationship between Public and ity, offender and employee safety. In fact, Private Prisons—Does the existence of pris- after talking at length about Adam Smith’s ons under private management affect the ex- emphasis on incentives, he fails to note that penditures of state governments on prisons if private providers didn’t provide competi- under public management? Two professors tive wages and benefits, they would have from Vanderbilt University found: few, if any employees at all. • operating costs at private prisons are As I indicated at the outset, the author “on average 5% to 20% lower than and I agree that an objective analysis of pub- public prisons”; and lic-private correctional partnerships would • in states where at least 20 percent of the be advantageous. I would like to suggest prison beds were provided by private three. While none of the studies could be operators, the corrections budgets considered the definitive work on the sub- for operation of the non-private beds ject and both supporters and detractors of increased at a rate 13 percent slower public-private correctional partnerships take than in states which had no private beds. issue with elements of each, the results do These three studies are part of the larger provide several instructive conclusions. body of evidence demonstrating that private Contracting for Private Prisons in the corrections delivers cost savings and high- Federal Prison System: Cost and Perfor- quality services. Reason examined data from mance of Privately Operated Taft Correc- 18 quality comparison studies conducted tional Institute, by Abt Associates of Cam- since 1989 and found that private prisons bridge, Massachusetts. It found: outperformed, or were equal to, their gov- • operating costs 6-10 percent less than ernment counterparts in 16 of 18 studies. the cost of government operation at In studies comparing costs, private prisons comparable facilities; and demonstrated significant savings in 22 of 28 • a highly accountable operator providing studies (reason.org/ps290.pdf). quality service. Lower construction costs, lower operat- Prison Privatization in Pennsylvania: the ing costs, high-quality operations featuring Case of Delaware County, by the Allegheny treatment, education and rehabilitation and Institute of Pittsburgh, Pennsylvania. The increased accountability are real benefits to Allegheny Institute found: be derived from public-private correctional • that the county has saved more than $37 partnerships and APCTO continues to urge million on construction and operations that such partnerships be considered as gov- over the seven years of private ernment looks for solutions to the problem operation; of providing safe and secure care and cus- • assaults by inmates decreased tody to criminal offenders. dramatically; • that the state of Pennsylvania rated the quality of the prison as excellent; and • inmates at the facility said that food quality improved significantly.

230 Reason Foundation • www.reason.org Reason’s archive of privatization and government reform research and commentary is available at www.reason.org/privatization

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