Update: Upcoming Outsourcing Issues. January 13, 2014


1) National: The Obama administration has decided to terminate CGI as the IT contractor for the Affordable Care Act, and instead turn to Accenture to run its online health insurance marketplace. In 2011, Accenture settled a whistleblower lawsuitbrought by the Justice Department for more than $63 million. The DOJ said “that Accenture submitted or caused to be submitted false claims for payment under numerous contracts with agencies of the United States for information technology services. Accenture has agreed to resolve allegations that it received kickbacks for its recommendations of hardware and software to the government, fraudulently inflated prices and rigged bids in connection with federal information technology contracts.” Accenture has also had significant contracting disputes in the past with the states ofTexas and Colorado. The ACA deal is a no-bid, sole source contract.


2) National: Private fundraising for infrastructure finally reaches 2008 levels. “Unlisted infrastructure investment vehicles raised more capital last year than in any year since the beginning of the financial crisis, with $32.6 billion pooled in 2013 by institutional investors seeking exposure to the asset class.” There are reportedly 180 infrastructure funds now in the market, seeking $125 billion in investments.


3) National: Wall Street firms Merrill Lynch and US Trust try to cash in on the prisoner recidivism problem by floating “social impact bonds.” The Christian Science Monitorreports that “the project raised $13.5 million over 60 days from clients of the Bank of America Corp-owned brokerage and wealth management firms. Investors included former US Treasury Secretary Lawrence Summers, Utah philanthropist James Sorenson, hedge fund founder Bill Ackman’s Pershing Square Foundation, and the Laura and John Arnold foundation.” Merrill Lynch’s head of global wealth and retirement solutions, Andy Sieg, reportedly says “investors can realize annual returns of up to 12.5 percent over five-and-a-half years.”


For some critical scrutiny of SIBs see Keohane et al., “Risky Business: Social Impact Bonds and Public Services”; Jon Pratt, “Flaws in the Social Impact Bond/Pay for Success Craze”; and Shifali Baliga, “Shaping the Success of Social Impact Bonds in the United States: Lessons Learned from the Privatization of U.S. Prisons” [Duke Law Journal, Nov. 2013]. Baliga concludes with a discussion of “how elements of SIBs can be incorporated to improve existing privatization models such as private prisons, and how SIBs alter the existing debate about privatization in this country.”


4) National: Public officials in Oregon, North Carolina, Vermont, Minnesota and Massachusetts criticize contractors for failures over the Affordable Healthcare Act rollout. “Just this week, Vermont Gov. Peter Shumlin told state lawmakers that he took responsibility for his state’s poor exchange rollout but shared the blame with the state’s main exchange contractor, CGI. ‘The contractors we hired to build it have underperformed at every turn,’ Shumlin said.” Contractors include CGI, IBM, and Oracle.


5) National: American Water expands its military business with a new 50-year, $288 million contract. The contract with AWW was the second largest awarded by the Pentagon last Thursday. “The Pentagon has been awarding multiple such contracts to private utility companies such as AWW in recent months. For example, in September, Middlesex Water subsidiary Tidewater Utilities was awarded a $32 million contract to assume ownership of, and take responsibility for, operating and maintaining the water distribution system at Dover Air Force Base in Delaware for the next 50 years.”


6) National: Activist investor Sandell Asset Management calls on FirstGroup to spin off its First Student school bus company. “In May the company had to raise 615 million pounds ($1.0 billion) to avoid its credit rating being cut to ‘junk’ and scrapped its final dividend to fund investment.” FirstGroup management rejected the demand.


7) National: Transportation Research Board executive director Bob Skinner previewsthis week’s annual meeting (video).


8) National: Municipal finance analyst Cate Long praises new proposed MSRB rule governing the conduct of municipal finance advisors. “In the past, advisers did not always place the interest of their government clients ahead of all other interests and they had undisclosed conflicts of interest. Basically, local governments could be treated as ‘muppets’ by advisers without any restraint from the law.” [Proposed rule; comments until March 10] Financial advisors often work with public officials on infrastructure and asset privatization deals.


9) National: Rocketship Education, the charter network, hits trouble. “This fall, the network failed to meet enrollment targets for its first school outside California, signing up 307 students in Milwaukee when it had projected 485. Then a federal review found that software the network has used extensively to drill students in math has no discernible effect on math scores.”


10) Alaska: Anchorage architect Mike Mense, writing in the Anchorage Daily News, calls for the termination of the Knik Arm Bridge and Toll Authority. “The governor’s new interest in abandoning the public-private partnership model confirms that the private sector does not see this as a financially viable project, despite huge public subsidies.” Last month Gov. Parnell called for dropping the “public private partnership” plan in favor of full public funding for the proposed new bridge. Revenue Commissioner Angela Rodell said “it will be far cheaper for the bridge to be publicly financed.”


11) Arizona: A nurse working for Corizon, the private prison healthcare contractor, “may have contaminated insulin vials with a needle that she used to test several prisoners’ blood sugar,” potentially exposing them to hepatitis and HIV. “Prison health care is the subject of a lawsuit by inmates who alleged Arizona’s prisons don’t meet the basic requirements for providing adequate care and that corrections officials failed to correct problems after they were brought to their attention. Dan Pochoda, legal director for the American Civil Liberties Union of Arizona, one of the groups representing the prisoners who filed the class-action lawsuit, said Sunday’s breach will be a factor in the lawsuit but that it’s not the worst health care problem in the prisons.”


12) Arizona: As the state prepares to begin housing inmates at a new private prison this month, controversial Maricopa County Sheriff Joe Arpaio says he could house them more cheaply. The Arizona Republic has called Arpaio “America’s Most Expensive Sheriff.” “The bills for the sheriff’s publicity stunts continue to mount. Tent City, pink underwear and green bologna may have made the sheriff popular, but what they did most effectively was distract attention from multimillion settlements with the families of inmates killed or severely injured in Arpaio’s jails.”


13) California: The state’s prison population is expected to grow by 10,000 over the next five years, “complicating Gov. Jerry Brown’s effort to abide by a court order to reduce overcrowding.” A report from the corrections department indicates that “to meet their limits, the state would have to more than double its current spending on beds in privately owned prisons and other alternatives.” Gov. Brown’s budget for the coming fiscal year “includes several proposals to help comply with a federal court order requiring the state to reduce prison overcrowding by mid-April”


14) California: Los Angeles issues a rule that municipal bond underwriters can apply to be financial advisors to the city, but only if they do not engage in “the underwriting or purchasing of bonds of issuers within California during the term of the contract, plus two years after the city contract ends.” The industry grumbles.


15) District of Columbia: The new head of the DC Public Library wants to bring in private investment to renovate the Martin Luther King Jr. Memorial Library, the district’s largest library. “Should a deal with a real-estate developer provide the most viable path to renovation, he will have to sell it to skeptical activists wary of any commingling of public and private interests.”


16) Florida: The Orlando-Orange County Expressway Authority selects Steve Precourt as its new executive director. Precourt is “president of Precourt Solutions LLC, an Orlando-based transportation and infrastructure consulting firm.” [Sub required]


17) Illinois/Indiana: Five bid teams respond to Illinois’ request for qualifications to build its share of the Illiana Expressway, a DBFOM “public private partnership.” “Some of the firms responding are already involved in public-private partnerships in the bi-state region, including the controlling partner and operator of the Indiana Toll Road and Chicago Skyway.” The Illinois Department of Transportation will now come up with a shortlist of bidders to respond to a request for proposals. Illinois is financing $1.1 billion of the project; Indiana $270 million. [Sub required]


18) Iowa: West Des Moines rejects all bids for outsourcing maintenance. The bids “showed private firms cannot compete with the efficiency and cost savings of using city staff for maintenance at city facilities.”


19) Maryland: DOT and MTA select shortlist of potential bidders to design, build, finance, operate and maintain the $2.2 billion Purple Line light rail system. A request for proposals is expected to be out in this spring, with responses due in the fall. No decision has been made yet on whether the public subsidies to be paid to private developers and operators will be supported by taxes. [Sub required]


20) New York: Money owed to New York City from defaulted bonds on private parking facilities on public land at Yankee Stadium will not be paid back for 42 years. In addition, the company will receive $200 million in taxpayer subsidies. “The company was supposed to pay $3.2 million annually in rent for the land, plus pay real estate taxes, under its 2007 agreement for the $237 million in tax-exempt bonds it received to build the garages.” The project was the target of public protests in 2007, led by Good Jobs New York.


21) New York: Gov. Cuomo announces in his State of the State speech that New York will take management responsibility from the troubled Port Authority for construction at JFK and LaGuardia Airports. A stalled “public private partnership” project for construction at LaGuardia has been overseen by the Port Authority. Cuomo says “LaGuardia airport is ranked as the worst airport in America believe it or not. That is a disgrace my friends and it is unacceptable and it is going to change. We need to modernize JFK and LaGuardia; we have talked about it for too long. We will assume management responsibility from the port authority for construction at JFK and LaGuardia airports. We will do what we did with the Tappan Zee Bridge; we are going to step in stop talking about it.”


22) North Carolina: Raleigh News & Observer blasts choice of businessman Dick Lindenmuth to head North Carolina’s soon-to-be-privatized corporate recruiting agency. “It would appear, from the rush applied to this economic development partnership, that neither McCrory nor Decker is interested in listening to questions about the potential downside of this kind of privatization. But let’s hope lawmakers demand more accountability in at least one way: The administration needs to explain to them, and to the people, exactly how this reorganization is going to ‘fix’ something that doesn’t appear to be broken at all.” NC Policy Watch comments “according to Mr. Lindenmuth, he intends to retain his position as a managing partner of Verto Partners even as he serves in his new full-time, publicly-funded job. This is, in a word, ridiculous.” [Good Jobs First Report]


23) North Carolina: State Board of Education gives final approval for 26 new charter schools in fall 2014. “State Treasurer Janet Cowell said they should consider the impact that these schools have on taking funding away from the traditional public schools. Legislators removed last year the provision in state law letting school districts raise concerns about the impact of charters.”


24) Oklahoma: Board of Corrections looks at expanding the use of private prison beds. “As of the end of December, 5,824 Department of Corrections inmates, or more than a fourth of the total prison population, were in private prisons, according to the agency’s latest inmate count. An additional 1,126 inmates were in contracted halfway houses and 518 were being held in contracted county jails.” A request for proposals to use more private prison space will go out within the next 30 days.


25) Oklahoma: Oklahoma City Council approves “public private partnership” to implement its $132 million parks development project.


26) Oklahoma: The Oklahoman reports on difficulties politicians have in pursuing prison reform. “But even if all the [Justice Reinvestment Initiative] initiatives had been fully implemented, the package of reforms was only designed to curb inmate growth, not stop it. Many contend any real progress on inmate growth won’t be achieved without a complete overhaul of the state’s harsh criminal sentencing codes, a major political challenge in a conservative state with a tough-on-crime reputation that predates statehood.” The private prison industry has made significant contributions to political leaders in the state.


27) Oregon: As the state looks to a possible November ballot initiative to privatize liquor sales, The Statesman Journal spells out how much the public sales system contributes to the state’s services. “Liquor sales are the third biggest revenue generator for Oregon, bringing in $396.7 million during the 2011-2013 biennium. That money goes into the state general fund, the general funds of cities and counties as well as mental health and addiction treatment programs. Salem spends its alcohol dollars covering one-fifth of the cost of its police patrols, while Dallas and Woodburn deposit checks directly into their general funds.” OLCC Board Chairman Rob Patridge says “unfortunately, people don’t realize how much money is coming into their city. The money is really critically important to keeping the light on at the local city council and putting officers on the street.”


28) Texas: IRS preliminarily concludes that Burnet County jail bonds are taxable. “The IRS believes the corporation’s bonds are taxable because ‘the federal use of the facility results in a private business use.’ (…) In some audits of jail bonds, the IRS has had concerns about management contracts with private parties.” [Sub required]


29) Texas/National: U.S. Transportation Secretary Anthony Foxx will launch environmental studies for the proposed Houston-to-Dallas high speed passenger rail line. Says he’s “thrilled to see that our grant money is being leveraged by private funding.” [Sub required] Foxx recently attended a forum hosted by the Texas Department of Transportation. Toll road critic Terri Hall wrote last week that TxDOT is “joined at the hip with Reason Foundation and the International Bridge, Tunnel, and Turnpike Association (IBTTA).”


30) West Virginia: In his State of the State speech, Gov. Earl Ray Tomblin says “this Legislature, in a bipartisan fashion, had the wisdom and foresight to enact two pieces of legislation last year that are already paying off for our State Road Fund.  The continuation of Design-Build and Public-Private Partnerships is allowing the Division of Highways to be more innovative in the construction of our roads and bridges.”


33) Revolving Door News: Calvin B. Johnson, the former Secretary of Health of Pennsylvania, is appointed chief medical officer by Corizon, the private prison healthcare contractor.


34) Revolving Door News: Julius Genachowski, former chairman of the FCC, has been named managing director of the Carlyle Group, where he “will focus on investments in global technology, media and telecom, including Internet and mobile.” While at the FCC, Genachowski boasted about having “pushed to privatize communications markets around the world.” Carlyle owns a majority stake in government contractor Booz Allen Hamilton.


35) Revolving Door News: SEC finalizes a revolving door rule.


36) Think Tanks: The Reason Foundation has published a paper on “The Challenge of Comparing Public and Private Correctional Costs,” touting the work of Temple University professors Simon Hakim and Erwin Blackstone. The Temple University study has been heavily criticized for being funded by “members of the private prison industry.”


37) Upcoming Meeting: The anti-privatization Network for Public Education will hold its annual conference on March 1 and 2 at the University of Texas at Austin. Diane Ravitch will be the keynote speaker.


38) Report: The GAO has issued a report on privacy risks in In-Car Location-Based Services, which some have proposed be used to track user mileage for assessing fees for road use.



Legislative Issues:


1) National: A hearing is to be held tomorrow by the House Transportation and Infrastructure Committee on the reauthorization of federal transportation funding. The current funding expires on September 30. Issues at the top of the list are California High Speed Rail and the Highway Trust Fund. [Sub required] Amalgamated Transit Union International President Larry Hanley will be a witness. A vote on a compromise water bill is expected by the end of January. Former transportation secretary Ray LaHood has called for an increase in the gas tax to help fund infrastructure.


2) Colorado: Gov. Hickenlooper urges lawmakers to create a nonprofit enterprise to promote transportation and water “public private partnerships” in the state. “Hickenlooper framed the P3 proposal as part of his ‘lean government’ initiative to stretch the state’s revenue. Colorado operates under a constitutional Taxpayer Bill of Rights (TABOR) that requires state and local governments to return tax revenue to taxpayers if it exceeds a specific ratio.” [Sub required]


3) Georgia: The legislature is pursuing a plan to privatize part of the Division of Family and Children’s Services “as part of an overhaul modeled after Florida’s system.” [Sub required]


4) Indiana: House education committee approves voucher program for pre-kindergarten. “House Bill 1004 is similar to a preschool proposal that faltered last session. But this year the measure has the backing of Gov. Mike Pence.”


5) Pennsylvania: Lawmakers revive plans to privatize wine and liquor sales. House Majority Leader Mike Turzai (R., Allegheny) says “he believes talks are pointing toward a proposal to phase out the State Stores and privatize the wholesale side of the Liquor Control Board’s operations, a sticking point last year. He also said he believed a bill could be on the governor’s desk early in 2014. Some privately said they were uncertain if such an aggressive proposal would pass legislative muster, particularly in an election year. Corbett is seeking a second term, and all 203 House seats and half of the 50 Senate seats are up for election.” Wendell Young, president of United Food and Commercial Workers Union Local 1776, urges Gov. Corbett to avoid the mistake of pursuing privatization, pointing to the costly failure of the governor’s effort to privatize the state lottery.

6) Wisconsin: The State Assembly’s Committee on Urban Education held a contentious, seven-hour debate on charter schools last Thursday. “The bill would eliminate district-staffed charter schools and empower a new slate of independent charter authorizers: all four-year and two-year University of Wisconsin System institutions, as well as all the state’s regional educational service agencies and technical college district boards.” [AB 549]


7) WisconsinQuestions remain over whether charter schools must supply the same data as public schools. “While the governor’s 2013-15 budget makes a reference to including private voucher schools in the data collection system, lawmakers have not specified the information voucher schools would have to supply to the state. Some of that data would be the same information necessary to include voucher schools in the state’s school report card system. The issue is important because while traditional public and charter schools already supply a host of data about student demographics and achievement to the state—albeit through channels that are clunky and outdated, hence the need for a system upgrade—voucher schools do not. And they won’t, until legislation forces them to, DPI officials said Wednesday.”

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