Analysis: The Push Toward Privatizing

John Micek
Allentown Morning Call

When officials in Connecticut needed to renovate 23 highway service plazas, they entered into a 35-year agreement with a private company that will invest $178 million in the repair work in return for a share of state revenues.

In Illinois last year, officials privatized management of the state lottery, agreeing to a 10-year contract that’s expected to generate $4.8 billion a year for the first five years of the deal. And in deficit-choked California, officials agreed to a first-of-its-kind private financing to build a new home for the state courts system.

As he pushes for the privatization of Pennsylvania’s state-owned liquor stores and examines whether to farm out other state services, Gov. Tom Corbett won’t have to look far for inspiration. A February study by the libertarian Reason Foundation offers a laundry list of government privatization efforts nationwide.

From the management of state parks to state college bookstores, governments across the country are bringing in the private sector to take care of services that were once handled by state employees.

According to the study’s authors, there’s a pretty simple reason that state governments are looking for new ways to pay for services: The still-sluggish economy and ballooning budget deficits have put a strain on statehouses across the country.

While many state governments expect to collect more tax revenue in fiscal 2011 than they did in 2010, none expect the good times to return soon — a fact that Corbett has alluded to more than once in speeches to business and government groups in the weeks since his March 8 budget address.

Corbett has called for the creation of a government privatization task force, charged with exploring “what jobs now performed by government can be better performed by the private sector.”

“The task force is not there to eliminate government,” Corbett said during his budget address. “It’s there to eliminate unnecessary government. It’s there to make sure what when government can get out of the way, it does so.”

Corbett’s spokesman, Kevin Harley, said he expects the task force to be named soon.

The push to sell off Pennsylvania’s more than 600 state-owned liquor stores has emerged as the marquee cause of privatization backers, who say the state needs to get out of the retail booze business, arguing that private operators can offer more variety and lower prices.

House Majority Leader Michael Turzai, R-Allegheny, is drafting legislation that would authorize such a sale. During last year’s legislative session, Turzai pegged the proceeds from an auction of state licenses at about $2 billion. Corbett has called for more study of how much the state can expect to glean upfront from privatizing the state stores.

Union leaders representing state store workers, many legislative Democrats and even some socially conservative Republicans say the sales figure is inflated. They also argue that the state will lose money from the sale, even as it opens a Pandora’s box worth of social ills, such as increased underage drinking.

Nathan Benefield, a policy analyst for the Commonwealth Foundation, a Harrisburg think tank that favors privatization, said there’s any number of places state as well as local officials can look if they want to spin off public services.

They include privatizing the management of parking garages and parking authorities, private management of mass-transit systems and, most notably, public infrastructure projects, such as the expansion of highways and bridges.

“Part of it is the fiscal rewards, the upfront money you receive when you’re letting a contract out,” Benefield said of the benefits of privatization.

But according to Leonard Gilroy, a co-author of the study and the Reason Foundation’s director of government reform, states need to think about much more than how much money they can grab from spinning off public services.

While “cost savings are important,” state governments also need to consider whether privatizing a service will improve the way a product, such as alcohol, or a service, like the management of a highway rest stop, will be delivered.

States also need to make sure that they’re protecting the interests of the public when they sign a contract with a private company. Gilroy likened the arrangement to a marriage, where both sides put in an equal amount of effort.

“You have to make sure the expectations are clear and that [the vendor] lives up them,” he said. And if they don’t, there has to be a clear way to sever the relationship.

Gilroy pointed to two states — New Jersey and Virginia — that Pennsylvania state officials should look to as they consider whether to spin off state services.

In New Jersey, Republican Gov. Chris Christie, convened a privatization task force in 2010 that looked at ways the state could generate $50 million in savings. The task force came back with 40 recommendations, ranging from the privatization of the management of state parks to printing services and toll collection on the New Jersey Turnpike.

John Weingart, associate director of the Eagleton Institute of Politics at Rutgers University, said the Garden State’s headline-grabbing governor has a demonstrated enthusiasm for privatization. At the moment, however, efforts to privatize toll-taking on the state’s major highways — the Turnpike and the Garden State Parkway — have been abandoned in favor of getting a pay cut for toll collectors and other employees, according to the Newark Star-Ledger.

“It’s clearly a philosophical and fiscal disposition of his to privatize as many state functions as can be justified,” Weingart said.

In Virginia, state officials are old hands at so-called public-private partnerships, in which a private company is contracted to build a piece of public infrastructure and then get some return on its investment. One of the more prominent examples is the privately run Dulles Greenway, a 14-mile toll road connecting Dulles Airport and Leesburg, Va.

Construction is also under way on a so-called HOT Lane, or High-Occupancy Toll lane, on a stretch of Interstate 495 that’s intended to ease congestion on one of the busiest highways in the mid-Atlantic region. The new lane is slated to be finished next year.

The projects can be a boon for cash-strapped state governments because, as is the case with the HOT Lane on the Capitol Beltway, a private company is picking up the check for massively expensive road and bridge repairs.

On the other hand, motorists are sometimes left feeling the pinch in the form of increased tolls, said Bob Chase, president of the Northern Virginia Transportation Alliance, a transportation advocacy group in McLean, Va.

“Toll roads are a way to get things built fast when state and local governments don’t have the money,” he said. “But long-term, it is less clear on the ultimate value and use the taxpayers are getting in general.”

Steve Herzenberg, director of the Keystone Research Center, said the public doesn’t always get the most bang for its buck out of privatization.

In 1999, Scranton, along with the neighboring borough of Dunmore, decided to privatize a regional sewer authority, he said. The experience turned into a disaster.

American-Anglian, a partnership between British Anglian Water and American Water, the largest water corporation in the United States, won a 20-year, $134 million lease to operate, maintain and run the regional authority. In return, the joint company paid Scranton and Dunmore an $8 million concession fee. Scranton took 80 percent of the fee.

According to a Keystone Research Center study, the partnership quickly ran into trouble. In 2002, the U.S. Environmental Protection Agency ordered the city and the company to undertake repairs. Under the terms of its contract, American Water was supposed to pay for maintenance costs, while the city was supposed to pick up the cost of capital improvements. The two sides disagreed over which projects were which.

In addition, the private operators boosted fees in 2003, with customers paying about $300 a year, an increase of more than 45 percent. In 2004, the company sought a 22 percent increase. As a consequence, officials in Scranton and Dunmore decided to pull the plug on the contract. The decision landed them in arbitration, and the local governments ended up having to pay $6.6 million to refund the balance on that $8 million concession fee.

Scranton officials eventually had to spin off their own storm water system to the regional authority for $7 million and used the proceeds to pay off its debt to American Water.

Privatization “does need to be done right,” the Commonwealth Foundation’s Benefield acknowledged. “They shouldn’t rush just to get the upfront payment.”

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