Wednesday, June 27, 2012

Sandy Springs, GA

The New York Times has a long article on Sandy Springs, GA, a town that has privatized nearly all of its major operations except police and fire.  There are some interesting ideas in here.  I liked the idea about awarding a backup contract to the second place bidder in case the first place bidder failed.  Too often, I have seen the high cost (and hassle) of re-running a procurement process cause a state agency to accept below-par contractor performance.

I understand that though this is the world I swim in, it may seem bizarre to most. Even Sandy Springs has not given up responsibility for defining services, paying for them, setting service standards, etc.  They just don't pay civil service workers to clean the bathrooms.

Procurement Fraud and Privatization

Rolling Stone Magazine has an good story on the conviction of a number of banks and brokers on charges of bid-rigging, specifically on contracts for short-to-medium term management of municipal cash accounts. Apparently brokers were paid by certain banks to be given a look at all the other bids before they made their final bid. The article focuses mainly on the ability of winning bidders not to bid any higher than necessary, though I would suppose there were also times when, given this peek, the winning bidder actually raised its bid higher than it might have to ace out other bidders.

This is classic government contracting fraud and it's great to see this being rooted out. I am not wildly confident it is going to go away, but any prosecutorial attention is welcome.

But I am left with a few questions:
  • It seems that government contracting is more susceptible to this kind of manipulation. Similar stories have existed for years in state highway contracting, and the municipal bond world has had accusations of kick-backs for years. Is this a correct perception, or is the rate of fraud between public and private contracting the same but we just notice more with the government because the numbers are larger, the press coverage is greater, and the prosecutorial resources are more robust? 
  • If government contracting of this sort is more susceptible to fraud, why, and how do we fix it? 
The latter is not an academic question for me. I run a company that privately operates public recreation areas. I bid on and manage government contracts. Frequently, a major argument used against the expansion of such privatization initiatives is that past government outsourcing and contracting efforts have been characterized by fraud and mismanagement. The argument boils down to "the government has so many management problems that it can't be trusted with contracting for certain services so it needs to operate those services itself."

The only way to reconcile this view is to assume that private actors are more likely to act fraudulently and be dishonest than public employees. If this were true, then the public would be safer if a public management process of questionable ability were applied towards public employees rather than outside private contractors, because those who were being managed would be less likely to take advantage. And certainly there are plenty of folks with deep skepticism of private enterprise that believe this.

However, I would offer that only by adopting an asymmetric view of what constitutes fraud would we get to this conclusion. Clearly, banks colluding to shave a few basis points off municipal asset returns is fraud. As the author of the Rolling Stone piece puts it several times, the crime here is that the public did not get the best market rate. So why is, say, elected officials colluding with public employees unions to artificially raise wages, benefits, and staffing levels above market rates not fraud as well? In both cases insiders are manipulating the government's procurement and political processes to pay more than the market rates for certain services.

This is Bastiat's "seen and unseen" of the privatization debate. Yes, the world is unfortunately littered with examples of government procurement fraud. This is often cited as a reason for maintaining the status quo of continued government management of a diverse range of services. But what we miss, what is unseen, is that these government services are often run with staffing levels, work rules, productivity expectations, and pay rates that would constitute a scandal if uncovered in a division of a corporation, particularly if the workers were spending a lot of money to make sure the manager handing them this largess was able to keep his job.

Yes, the public lost several basis points on its investments when it did not get the market rate of return from cheating bankers. But it loses as much as 50% of every tax dollar sent to many state agencies because it does not get market rates (and practices) for state labor.

Saturday, June 23, 2012

Privatizing New Jersey’s Halfway Houses

The New York Times has published a series of articles by reporter Sam Dolnick entitled "Unlocked: Inside New Jersey’s Halfway Houses."  The series focuses on privatized halfway houses in New Jersey.

It should come as no surprise to readers of this blog that, according to the first article in the series, ("As Escapees Stream Out, a Penal Business Thrives"):  "At the heart of the system is a company [Community Education Centers] with deep connections to politicians of both parties, most notably Gov. Chris Christie."  The second article ("At a Halfway House, Bedlam Reigns") reports on the "drugs, gangs and sexual abuse" that are supposedly rife within the walls of these privately-run halfway houses.  (This, sadly, sounds like many prisons.  Do these abuses also commonly occur at old-fashioned, small-scale halway houses?  I do not know.)  The third article ("A Volatile Mix Fuels a Murder") focuses on the murder of a man who lived at one of these halfway houses.

Like any good New York Times series, "Unlocked" also includes a short video summary from the lead reporter, Sam Dolnick.   Unsurprisingly, this series has also resulted in some interesting Letters to the Editor.  The lead letter is from a former regional vice president for a company that operated halfway houses in the 1990s.  Accoring to this writer, "little has changed" from when his company ran things; during his tenure, due to "contractual agreements," the emphasis at these facilities was on "cost-cutting" not "concern for offenders and ultimate correctional outcome." 

The series has garnered some attention from important New Jersey pundits and politicians.  Today, Times op-ed columnist (and Nobel Prize-winning Princeton econ prof) Paul Krugman devotes his column to the series.  (Gail Collins, who I suspect lives in Washington, DC, also wrote a column about the series.)  Chris Christie also responded to the series by ordering new inspections of the halfway houses.   However, Democrats in the New Jersey legislature apparently were not satisfied by Christie's response, as they have requsted more oversight of the halfway houses.  One Democrat legislator from New Jersey has even called for legislative hearings into this issue.

As might be expected, a VP of Community Education Centers, in a soft-ball interview by a local public television station, says that the New York Times "got it wrong -- dead wrong."  According to this VP, the series is an "editorial" by the times and a political attack on Governor Christie.   (The VP also says that his company "welcomes" more oversight by the State of New Jersey.)  

All in all, fascinating reading!

Thursday, June 7, 2012

Privatization of Park Operation in the US Forest Service

In my first post here, I discussed the reasons why government agencies own parks, and the logic for putting special pieces of land in public vs. private hands.  Today I will begin discussing the logic for putting the operation (rather than the ownership) of some of these lands in private hands by discussing the pioneering efforts of the US Forest Service over the last thirty years.  This will lay the groundwork for future posts where we can get into the more interesting details.  As a reminder to readers, I operate a company in this business so I am an informed but not disinterested reporter on this topic.

Many of you may be familiar with threatened closures of state parks in many states in the country.  Due to budget issues, state parks budgets have been slashed for years, and in many cases state parks are literally falling apart due to deferred maintenance.  Now, faced with further budget cuts, states are in the process of closing many state parks.  Arizona has already announced a closure list, as has California.  States including Washington, Texas, Florida, New York, and New Jersey are all actively discussing park closures.

Far larger than any state parks agency, in fact the largest public recreation agency in world (by total number of sites) is the US Forest Service, which operates campgrounds, picnic areas, hiking trails and boat launches in nearly every nook and cranny of the country.  In President Obama's most recent budget, the President proposed drastically slashing the US Forest Service (USFS) recreation budget.  This is no surprise, as the USFS has had its recreation budget eroded for decades.

But despite these cuts, most USFS recreation sites will remain open.  There is no talk, as in the states, of wholesale closures.  There is, in most USFS recreation sites, no growing accumulation of deferred maintenance.  In fact, even if Congress and the President shut down the government (as happened under Bill Clinton and nearly happened under President Obama), many USFS recreation sites would remain open.

Why?  Because decades ago, the USFS was forced to find and adopt a new model for managing its recreation sites.  To understand this approach, we first need to look at the traditional model for running public parks.

Traditional Model
The traditional model for running public parks and recreation sites has two components:

  • Use of high cost government labor to run park operations
  • Beyond just being high cost (in absolute wages and benefits) this labor is generally not well-matched to the task.  For example, state employees are hired for 12-month-a-year jobs, even when park visitation is highly seasonal.  In addition, college environmental science and parks management grads are employed whose interests are not well-matched to mundane tasks that dominate park operations, such as cleaning bathrooms and picking up trash.  These cost problems are exacerbated (needlessly, as we will see in future posts) by making nearly every field employee a law enforcement officer, allowing them even higher pay and in most cases a much richer pension.
  • Providing free or very low cost access. 
  • Most state parks offer free or below-market public access fees for day use parks or campgrounds.  While it makes sense for agencies to offer free options for the public in their portfolio of parks, offering subsidized pricing at every park creates a huge need for appropriated funds (particularly given their high operating costs).  While this subsidized access seems to be a public benefit, it actually works against the public as general fund appropriations dry up and maintenance has to be deferred and parks have to be closed.
One step several states have taken is to abandon the second part of this model by charging market pricing, and even above-market pricing.  Arizona State Parks generally charges market-level pricing for park entry, but as budgets got tighter they actually doubled entry fees to as much as $20 per car to park at certain popular parks.  California has done the same thing, increasing the price of no-hookup camping as high as $30 a night, when pricing of similar campsites in, say, the USFS in California typically run no higher than $18-$20 a night.  The reason for this is their very high cost operations model, and even these higher fees have not headed off park closures in these states.

A New Model
About 30 years ago, the USFS began experimenting with a new model for running its recreation sites.  I can’t say that the USFS did this willingly, and even today there are many in the agency who long for the day when they can return to the traditional model.  In fact, necessity, in the form of Congressional legislation combined with declining appropriated funds for recreation, really forced the change.  Today, over half of USFS recreation facilities are run under this new model, and if weighted by visitation, the number surely would be over 90%.

The model includes these two key elements:
  • Use of low-cost private labor for operations.
  • Thirty years ago the USFS began using private operators to run campgrounds and busy day use facilities under a concession arrangement, meaning the private operator collected all revenue and paid all expenses for the site, and paid the USFS a fee for the privilege of doing so.  With the stroke of a pen, sites that required appropriated money to operate suddenly were money makers for the USFS.  Private operators achieved savings as high as 50% as compared to the costs under Federal management (though as I wrote before, this is a surprisingly tough comparison to make).  As a further refinement, Congress gave the USFS the authority (and the incentive) to apply the fees they earned from campground and park operators to maintenance and improvement projects in the recreation facilities themselves.
  • Charging market-based use fees.
  • In this program, private operators charge market-based fees (which must be approved by the USFS) that fully cover their costs AND allow for a payment back to the USFS.  Recreation sites in this program no longer require public appropriations at all — they are entirely self-sustaining.  That is why many USFS recreation sites can remain open even if the government shuts down

As both the Forest Service and private operators have gained experience with the program, this model has continued to be improved.  For example, early on the USFS merely offered the largest facilities to private managers.  However, they soon learned that if they continued to do so, they might be worse off budget-wise because they would be left with many small, expensive facilities to manage themselves.  As a result, the USFS has learned to offer private operators packages or bundles of recreation sites that generally include all the sites in one geographic area, big and small.

It is important to understand that this is merely a lease arrangement — this is not a stealth way to dispose of public lands into private hands.  These are highly structured arrangements that require the private operator to conform to numerous restrictions.  In particular, the private operator may not change or add facilities, services, operating hours, or fees without the agency’s written permission.  No one, in other words, is out there building a McDonald’s in front of Old Faithful under this arrangement  (remember, the whole point of public land ownership is for the government, rather than markets, to determine the character of the land use and development).

One added benefit of this arrangement is that, though there are some bad private operators, in general facilities are actually run better under this model.  One reason is that maintenance and operations are fully funded, so no skimping is required.  Another reason is that since they are paid with park revenues (rather than some flat fee), private operators benefit from, and therefore have the incentive to encourage, higher visitation.  Finally, the skills and preferences and background of most private workers are better matched to the routine operating tasks required.  As a result, most privately operated public parks get good reviews for their quality.   As just one example, this independent site ranks public campgrounds in Arizona. Note that three of the top five sites are run by a private concessionaire in the USFS program, while none are operated by our state parks agency.

The Future
As I mentioned earlier, there are many people both inside the USFS and in the general public that long to return the traditional model — Agency leaders would love to have the prestige that would come from larger headcounts and budgets;  public employees unions would generally rather see parks closed than have further precedents for private management established; and certain recreation user groups would prefer that taxpaying non-users pay for their recreation.

But the bankruptcy of the traditional model is likely here to stay.  Current budget problems in state parks is not simply a product of this recession — for example, here in Arizona, park maintenance was under-funded even in the good times.  The reality of government is that non-discretionary expenditures (e.g. health care, entitlement, pensions) are growing far faster than the economy and are soon likely to totally consume government budgets.  Discretionary spending, particularly in the case of things like parks that can support themselves with fees, is going to continue to be crowded out.

Of course, there are many skeptics and critics.  Here is one slightly overwrought excerpt from an article in the San Franscisco Chronicle on the proposal that California keep certain parks open using private operators:
The question is, how will these agreements work over time? If parks remain open using donations, what is the incentive for legislators to put money for parks in the general fund budget? And who is going to stop a rich crook or pot dealer from taking a park off the closure list and using it for fiendish pursuits?
Now that we have gotten the basics out of the way, in future posts we can start addressing such issues, with a particular emphasis on the incentives of both private and public operators and where each can go wrong.  In the next post, I will address Dru Stevenson's frequent concern about privatization initiatives:  How can we be sure the government is really saving money and not just creating another crony handout to a well-connected private firm?