Tuesday, September 25, 2012

Romney's Plan For Foreign Aid: Shift Towards The Private Sector

With the presidential election just around the corner, candidates Mitt Romney and Barack Obama are making their final campaign pushes. Josh Rogin recently published an interesting article detailing Mitt Romney's proposal for foreign aid.

At the Clinton Global Initiative, Mitt Romney issued his most thorough plan regarding foreign aid. Romney pledged to alter the focus of foreign aid from the public sector to the private sector.

Romney believes this shift will ultimately reduce corruption and promote a more efficient system. "For American foreign aid to become more effective, it must embrace the power of partnerships, access the transformative nature of free enterprise, and leverage the abundant resources that can come from the private sector."

If elected, Romney plans to use "Prosperity Pacts" which would allow the U.S. government and the private sector to work together. In an effort to reduce trade barriers in developing nations, the U.S. would send aid packages that concentrate on "developing the institutions of liberty, the rule of law, and property rights."

Park Privatization Conference Invitation

For those who may be interested, we are having a one-day conference on public-private partnerships for park operations on November 7 in Reno, Nevada.  The US Forest Service and those of us in the business have gotten a lot of inquiries from recreation agencies over the last year or so.  These folks are trying to keep parks open despite declining budgets.

The USFS figured out a way to do this over 30 years ago, and only now are other agencies starting to copy the model  (California State Parks just started using it this year, for example).  The USFS, like most agencies, charges a fee for the public to visit certain parks or to use campgrounds.  They found that they could not cover their high operating costs with just these user fees, and so had to use a lot of general fund money to keep the parks open.  Many complain that public recreation user fees are too high, but typically they cover only about half the agency's costs to run the park.  When general fund money started to go away, the USFS faced park closures, exactly the situation today in many state and local parks agencies.

The USFS found that private operators with a lower cost position and more flexibility could keep these parks open using just the user fees, and in fact actually pay the USFS some rent.  So instead of having to subsidize the park's operation with tax money, the parks began to generate funds for the USFS.

It took decades to get this right.  The USFS made mistakes in how they grouped parks into contracts, how they wrote the contracts, and how they did oversight.  The private companies made operating mistakes and some failed financially at awkward times, since when this program started there did not exist a pool of experienced operators.  But over the years, many of these problems have been worked out, and most privately-run sites operate to a standard at least as high as publicly-run parks.  Here in Arizona, three of the top five highest-rated public campgrounds are operated by private companies in the USFS program.

At this conference, both private operators and agency people experienced with this model will describe how it works as well as years of hard-won lessons learned.

The conference is free to most government agency officials, academics, and media and we have obtained a really inexpensive $49 hotel rate  (since by definition the agencies most interested in the model don't have much money).   The web site that describes the agenda and logistics is here.  Readers of this site who don't fit one of these categories but would still like to attend can email me at the link in the above site and I will get you in.

Saturday, September 22, 2012

Louisiana Privatization of Health Insurance Hits A Snag

Louisiana Attorney General, James "Buddy" Caldwell

Jessica M. Karmasek posted an interesting article on LegalNewsline, describing the latest developments impacting Louisiana's proposal to privatize its state employee health insurance.

In August, Louisiana's State Civil Commission backed by Governor Bobby Jindal, approved a plan to privatize the state's Office of Group Benefits. The Office of Group Benefits is a state employee health insurance plan that currently offers reasonably priced health insurance to a quarter of a million Louisiana citizens. The Civil Service Commission consists of seven members responsible for overseeing the administration of the state's civil service system.

Democratic State Representative, Katrina R. Jackson, challenged the Civil Service Commission's decision to privatize without seeking legislative approval. She sought out Louisiana's Attorney General, James "Buddy" Caldwell, to issue an opinion regarding the matter. Caldwell agreed with Jackson and ruled the contract must be approved by state lawmakers before a final decision may be reached. Jackson worries that the new plan will leave many Louisiana citizens jobless but remains optimistic that legislators will deny the proposal. "It is my pray[er] that all of my fellow members will join with me and others in not approving this proposal," she said. No timetable has been set for when a decision will be reached.

Sunday, September 16, 2012

Profiting from Public Dollars: How ALEC and Its Members Promote Privatization of Government Services and Assets

In its report, Profiting from Public Dollars: How ALEC and Its Members Promote Privatization of Government Services and Assets, In the Public Interest exposes how The American Legislative Exchange Council (ALEC) profits by dismantling public services and encouraging privatization. ALEC accomplishes its agenda by providing corporations with unfettered access to state legislators. Specifically, ALEC works with its members to draft model bills—bills that create incentives to privatize serves and call for the increased use of private financing and control—that state legislators can promote. ALEC’s success is undeniable, as 20% of ALEC”s proposed legislation becomes law.

According to the article, corporations pay thousands of dollars for membership, while legislators only $50 per year to become members of ALEC. The membership fees assist in funding ALEC meetings and subsidizing legislators’ expenses.

ALEC provides a system that advances the privatization of a wide range of government functions, while increasing corporate influence over public policy decisions and ultimately increasing corporations’ bottom lines. As the article points out, “ALEC is more than just an organization that convenes meetings and develops model legislation. It is a major player in a long and steady movement toward private control of public structures.”

The article explores notable ALEC model bills and offers a look into how private prison corporations, online education companies, health care corporations and major industry players utilize ALEC’s services for their benefit. 

The report seeks to expose ALEC’s privatization agenda and its significant corporate backing, and to warn citizens of supporting ALEC model legislation due to ALEC’s seemingly corrupt practice.

Outsourcing the prosecutorial discretion and diversion functions in check "fraud" cases

Today's New York Times contains an article on the apparent outsourcing, from district attorneys to debt collection companies, of the prosecutorial discretion and diversion functions in bounced check cases.  

According to the article (which is located here):   

[L]etters are sent by the thousands to people across the country who have written bad checks, threatening them with jail if they do not pay up.
They bear the seal and signature of the local district attorney’s office. But there is a catch: the letters are from debt-collection companies, which the prosecutors allow to use their letterhead. In return, the companies try to collect not only the unpaid check, but also high fees from debtors for a class on budgeting and financial responsibility, some of which goes back to the district attorneys’ offices. 
The practice . . . has spread to more than 300 district attorneys’ offices in recent years. . .
. . . . What makes this approach unusual is that the ultimatum comes with the imprimatur of law enforcement itself — though it is made before any prosecutor has determined a crime has been committed.
Why are district attorneys involved in debt collection for bad checks?, you might ask.  Is this not a simple matter of a breach of contract claim between the check writer and the check casher?  

As I understand it, bouncing a check is not a crime.  But fraud is.  So bounced checks become a matter for the district attorney when there is probable cause to believe that the check was bounced due to fraud.  Bouncing a check when you intend to pay it (even if you know you do not have the money in your account to cover it today because, for example, you are getting paid tomorrow) is not a crime.  Nor is bouncing a check and then later not having enough money to pay it due to unanticipated financial difficulties.  Fraud requires intentional deceit -- i.e., intending to write a worthless check that you will never pay.  

So as this article explains is that, traditionally:
[M]erchants who received a bad check typically tried to retrieve the money themselves or through a private collection company. . . . Those merchants who suspected fraud could send along the checks to their local district attorneys.
What's happening now, according to this article (at least with respect to the contracts reviewed by the author of the Times article), is that, at least sometimes, bad checks are "sent directly from the merchant to the debt-collection company, without any prosecutor reviewing the facts to determine whether [the check writer]  had actually committed a crime.  Instead, under the contracts between the district attorneys and the debt collection companies, merchangs can "refer checks directly to the company, circumventing the prosecutors’ offices," so long as merchants have "attempt[ed] to contact the check writer" and the check writer has not responded within a specified period, "typically within 10 days."

To my mind, failing to respond to a debt collector within 10 days (or any period, for that matter) is not evidence sufficient to make out a prima facie case of bad check fraud.  It could mean many, many other things -- e.g., that the check writer either did not receive the letter, that the check writer does not recall the check, that the check writer thought the check was paid no longer has the money to pay the check.

And it's not only prosecutorial discretion that has been outsourced.  The prosecutors' diversion function has also been outsourced.  According to the article, in addition to writing to demand collection of a debt on district attorney letterhead, the debt collectors are demanding in those same letters that the writer of a bad check attend a "financial accountability" class in order to avoid prosecution -- despite that, in most instances, no prosecutor has passed on the facts of that particular case.  In fact, the article explains, "few" bad check writers are ever prosecuted because of the difficulty of providing a case of fraud.  But that does not stop them from demanding that bad check writers take the class or face prosecution.

As the article explains:
Because the cases are not fully investigated, there is no way of knowing whether the bad checks were the result of innocent mistakes or intentional fraud. The so-called bad check diversion programs start from the position that a crime has been committed.
This, to me, is an outrage.  I seriously doubt that, back before these type of arrangements between district attorneys and debt collectors existed, any district attorney would send out a letter like this without first reviewing the facts of the case to determine that there was probable cause to believe that the check writer had committed fraud.  Sending such a letter without even reviewing the facts of the case would constitute an abuse of the prosecutor's discretion and an abuse of the public trust.  

That, it appears, is exactly what has happened with the outsourcing of prosecutorial discretion and diversion here.  Does this bother anyone else?  If so, I would be interested to see your comments.

Friday, September 14, 2012

Legal Battle Looms As Florida Moves Forward With Privatization

In his recent article, Dave Heller describes the legal battle raging down in Florida after the state's decision to privatize health services for prison inmates this week.

On Wednesday, the Legislative Budget Commission in Florida signed off on a plan which will allow two private companies to take full control of the health services of prison inmates. This new plan has been met with heavy resistance from local unions. The labor union, the American Federation of State, County, and Municipal Employees (AFSCME), plans to fight this decision by filing a lawsuit. The AFSCME asserts that the Legislative Budget Commission does not have the legal authority to approve this proposal.

The union's spokesman, Doug Martin, expressed outrage with the state's decision to select two companies with negative track records in Florida: "This isn't just a waste of money. It is something that injures and kills people and is a far overstep. So the question has to be asked, if it's not going to save money and it's been a disaster in the past, why are they doing this?"

Wednesday, September 12, 2012

My Response to the Question: Should National Parks be Privatized?

I was asked to write a 400-word essay for an outdoor magazine on "should national parks be privatized".  Here is my response. By the way, I put the stuff about myself and my company in under duress.  It was not in the original draft and he wanted something personal.
Should National Park's be privatized, in the sense that they are turned entirely over to private owners?  No.  Public lands are in public hands for a reason -- the public wants the government, not, say, Ritz-Carlton, to decide the use and character and access to the land.  No one wants a McDonald's in front of Old Faithful, a common fear I hear time and again when privatization is mentioned. 
However, once the agency determines the character of and facilities on the land, should their operation (as opposed to their ownership) be privatized?  Sure.   The NPS faces hundreds of millions of dollars in capital needs and deferred maintenance.  It is crazy to use its limited budget to have Federal civil service employees cleaning bathrooms and manning the gatehouse, when private companies have proven they can do a quality job so much less expensively.  The US Forest Service, for example, has had private operators in over a thousand of its largest parks for nearly thirty years, and unlike state parks agencies or even the NPS, it is not considering park closures or accumulating deferred maintenance, despite having its recreation budget axed.  Why? Because its partnership program with private operators is a fundamentally sounder, lower-cost approach to park operations. 
In fact, such public-private partnerships are nothing new for the NPS.  The NPS was an early innovator in this field, and currently private companies operate many of the visitor services in parks, such as lodges and gift shops.  The US Forest Service innovation, which has been copied by many agencies including most recently California State Parks, has been to turn over operations of the whole park, not just the lodge, to a private company.  These are highly structured contracts, wherein the private company cannot modify the facilities or change fees without agency approval, and must meet a range of detailed performance goals. 
Most critiques of private park operations center around quality and fees.  While there certainly have been some isolated failures, in general the results have been quite good.  In Arizona, a recent poll by CampArizona.com ranked the top 10 public campgrounds in Arizona.  Of these, three of the top five were US Forest Service campgrounds run by a private operator, as was the top Arizona campground in Sunset Magazine's "Best of the West"  (OK, I have to brag, these are all run by my company). As for fee concerns, state-run parks in California charge $30 for a no-hookup camp site.  Privately operated public campgrounds in California forests seldom charge more than $18. 
My company operates over 150 state, county, and federal parks.  I encourage you to take the "Pepsi Challenge" and see some of them for yourself.  They are well-run, generally with more staff than a typical state park, and have no significant deferred maintenance backlog.  Oh, and not a single one has a McDonald's, a billboard, or a neon sign in front of a national monument.
Yes, I know, it is over 400 words.  They cut me slack

Parks and recreation have turned out to be particularly amenable to a privatized operation model, for this reason: While our company has over 30 contracts, not a single one involves the government paying us any money.  We are paid entirely with a share of the fee revenue paid at the gate.  This takes a lot of the legislative shenanigans, lobbying, and cronyism out of the game.  My company has been in business for 25 years privately operating public parks.  Our lifetime lobbying expenditures?  Zero.

This model where we are paid by our customers rather than by the legislature has two other substantial advantages.  First, it better aligns our incentives with those of the public.  We get paid only if people show up.  I hear the concern, "won't private companies make money by not cleaning the bathrooms?"  Sure, just like McDonald's makes money by not cleaning the bathrooms and Marriott makes money by not changing the sheets.  You mean they don't do this?  We do a good job because we need people to have a good experience and come back, particularly in this age of online reviews.

The second advantage of this approach is relevant to a concern often expressed by other writers on this site: How does the public ensure it is really getting cost savings from these private contracts?  In the recreation world, this is easy to demonstrate.  Because the private company takes over all the park operations expense, and because the state doesn't pay the operator any sort of fee, red ink disappears from the government's books.

I have published a lengthy example of real-world economics from two parks here.  Bottom line, though, is that for most parks, state agencies generally spend more money to operate a park than is brought in by user fees at the gate.  This difference must be made up for from general appropriations, and in many cases the difficulty in appropriating these funds has led to park closures and deferred maintenance.  When a private company like ours takes over, the state gives up most of the user fee revenue but it also gives up the substantially higher operating expenses it once had.  In addition, it generally gets a concession fee or rent payment from the private operator, effectively converting a money-losing park to a money-maker.

Monday, September 10, 2012

GEO Privatization: Dangerous Compnay

In her recent article published in the Houston Chronicle,, Maria M. Ramos raises some valid concerns over the consequences of handing a public psychiatric hospital to the private company, GEO Care. Questions have been raised as to why GEO Care, a subsidiary of GEO Group, is the only company to solicit a bid for the hospital up to this point. GEO Group and its subsidiaries do not have a positive track record. The company has had problems in the past with patient care, state fines, and unsanitary and unsafe conditions. Here is an excerpt from the article citing specific violations by the GEO Group.
Last April, GEO contracts at three facilities ended in Mississippi, including at a youth facility that a federal judge described as having "allowed a cesspool of unconstitutional and inhuman acts and conditions to germinate." In July, the Associated Press reported three gruesome deaths, including that of a patient who died in a scalding bathtub, at GEO's South Florida State Hospital. Over the years, GEO has paid millions of dollars to satisfy lawsuits filed after the deaths of prisoners at its many facilities in various states.

Wednesday, September 5, 2012

Another Take on Washington Liquor Privatization

When I read Nick Frame's article yesterday on this site, I had a couple of immediate guesses as to why privatization of alcohol distribution would have failed in Washington.  My first guess was that the state had somehow substituted a state-enforced private monopoly for the public monopoly on liquor stores, thereby missing any opportunity to let market forces reign.  Such a mistake would not be surprising in the liquor business, as even states with supposedly free markets still enforce crony arrangements with large distributors that give them a virtual protected monopoly over wholesaling in the state.

However, when I clicked through to the article that Frame linked, I was surprised to find this:
Even before privatization, Washington had some of the nation's highest liquor taxes and fees, at $26.70 a gallon. The national average is $7.02 a gallon, said the Tax Foundation, a research group. Washington state's levies included government stores' 52% markup, a 21% liquor sales tax and a $3.77-per-liter excise tax. 
And while those sales and excise taxes remain under privatization, new fees further raised prices: Liquor distributors must pay an additional 10% levy, and retailers another 17%. Distributors also are on the hook for any shortfall to the state if they don't generate $150 million from the 10% fee by April.
I understand that many folks are inherently skeptical about privatization, but we need to be a little fair here.  I think editing this out of the excerpt really changes the meaning of the report.

It seems a real stretch to try to blame a 17% rise in liquor prices on "privatization" when at the same time government fees on sellers went up by something like 22% of the final price of the liquor  (17% from the retail levy above plus half of the 10% wholesaler levy, assuming the final wholesale price is about half of retail).   Note that because these are excise taxes, they will affect price statistics and inflation rates (just as cigarette and gasoline taxes do as well).  And why should we be surprised that liquor is cheaper in neighboring states, when the article states pretty clearly that Washington has by far the highest built-in taxes in the country?

Here is what I think the more interesting issue is:  States that control alcohol sales are able to extract substantial monopoly rents from this activity.  The problem for them in privatization is that it may well be impossible to replace these rents going to government in a privatized market.  If I had to guess, Washington is trying to achieve two goals at the same time in its privatization program and it may be that it is impossible to do both simultaneously, a sort of have your cake and eat it too situation:

  • They want to retain the monopoly rents as a revenue source for the state
  • They want to provide consumers more shopping choices, better service, and lower prices through privatization
I think I can see exactly what they tried to do:  They privatized distribution, then slapped heavy taxes on the private companies to create a revenue stream to replace its old monopoly rents.  The result is a mess, because I don't think the state can do both, at least in the short term.  In the long term, the state may be able to reap equivalent revenues with a lower tax percentage of a larger and growing market, but that takes time to evolve.  

Tuesday, September 4, 2012

Privatization of Liquor Sales: Higher Costs for Consumers

In a recent article published in the Wall Street Journal, authors Joe Milliman and Mike Esterl examine the implications of Washington's recent decision to privatize all sales and distribution of liquor.

In November 2011, Washington voters passed a bill to put all sales and distribution of liquor in the hands of the private sector. Washington became the 33rd state to fully privatize the sale of liquor, but the first to do so since the end of Prohibition.

While many mistakenly presume privatization always equals lower costs for consumers, Washington residents are seeing first hand that that is not always the case. According to the state Department of Revenue, the average price of liquor for the month of June rose by a staggering 17% from last year. As a direct result of rising prices, total sales (in terms of volume) have understandably dipped. In June, sales dropped by 9% compared to last year. Due to higher costs, many Washington residents are traveling across state borders to Oregon and Idaho in search of cheaper prices. Oregon's Liquor Control Commission reported that sales in 12 stores located on the state border saw a $1.5 million increase from last year for the months of June and July.

The unfavorable impact on Washington's economy, thus far, has led to speculation that it could push other states away from privatization. Craig Wolf, president of Wine & Spirits Wholesalers of America, expressed this sentiment stating: "It's slowing down the process in others states. It's turning into a negative.'' Admittedly, the change is relatively recent, and more time must pass before a definitive conclusion on its overall impact may be reached. This article illustrates the point that privatization is not always the most desirable solution. In fact, it can be inefficient and more costly to consumers.