Privatization Update: Recent News from across the Country

As states face mounting deficits, corporate lobbyists have been promoting the idea that privatization of public services and assets is a free lunch -- services can be delivered more cheaply than by public employees and public assets like highways can be sold or leased for a hefty return to the taxpayer.  As PSN has detailed in our December 2007 report Privatizing in the Dark: The Pitfalls of Privatization & Why Budget Disclosure is Needed, the promises of privatization too often yield to a reality of lost money and degraded services, weak oversight and lost expertise, assets sold off for short-term gains but long-term loss, lost democratic accountability, and the corruption of the political process.

While a number of states have rejected large privatization deals in the last year, the past few months have seen some striking developments in privatization efforts throughout the country.  And as economic concerns persist, more state and local governments may be looking to private companies for funding to alleviate short-term budget crises.  To take just one example this past Thursday, Georgia signed an $873 million, 8-year contract with IBM, even though the company has breached a similar contract in Texas, which led to disastrous results for the attorney general's office and various state government agencies.

There is some good news though: surveys show that public opinion is overwhelmingly against short-sighted privatization projects, and some states are taking steps toward reforming their contracting processes.  For example, A transparency bill that would require contractors to disclose information on the number of employees they have working at each site was just voted out of committee in the New Jersey Assembly.

However, there is still much to be done, as this Dispatch will detail. 

To assist states and local governments, Progressive States Network is working in collaboration with a number of our partners, including U.S. PIRG, the Center on Policy Initiatives, Working Partnerships USA, and AFCSME to track privatization deals, develop sound policy recommendations, and provide technical assistance to states in introducing transparency and accountability legislation.

PSN will be issuing regular privatization update e-newsletters, similar to this dispatch, with more information as it becomes available. To receive these updates, sign-up online at

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Table of Contents:

- Texas and Indiana Halt IBM Privatization in Response to Contract Breaches
- Public Opinion Shows Strong Opposition to Road Privatization
- Chicago Expects to Privatize Midway Airport by Yearend
- U.S. Department of Justice Opinion Challenges State Lottery Privatization
- States Take Action to Reform Contracting Process
- Other Privatization News in Brief
- Conclusion

Texas and Indiana Halt IBM Privatization in Response to Contract Breaches and Poor Service

Over the past couple months, disturbing news has come out of Texas and Indiana regarding contracts that the states had entered into with teams led by IBM Corp.  Numerous complaints following poor service in both states, as well as significant contract breaches in Texas, have led state officials to halt the expansion of privatization under these contracts until thorough reviews have occurred and existing problems have been solved.

Data Crash in Texas: A massive computer crash destroyed hundreds of the Texas attorney general's confidential records when a server would not restart this past July.  The files, which apparently were not backed up, included evidence crucial to prosecuting 81 criminal Medicaid fraud cases and consisted of eight months of work.  IBM, the leader of the vendor group that won a 7-year, $863 million outsourcing contract, is still investigating the incident.  State officials and IBM representatives have disputed the scope of the damage.

On Tuesday, October 28th, Governor Rick Perry ordered a halt to any further privatization of data management with IBM until current problems are solved and steps are taken to prevent future incidents.  Governor Perry stated that the contractor "has failed to implement a series of checks and balances that ensures data security, jeopardizing the ability of state agencies to deliver services to their constituencies."  In addition to the crash that destroyed crucial records of the attorney general's office, there have been numerous complaints from at least ten other state agencies about the quality of the contractor's service.  IBM's contract has not been revoked, but it has been fined $900,000 (in addition to previous fines) for failure to backup data in a timely manner, and further privatization will not take place until problems are addressed.

On November 6th, the Dallas News reported that Texas' Department of Information Resources (DIR) had sent a letter to IBM earlier in the week stating that the company had breached its contract and that it had 30 days to fix the problems.  IBM was told it must respond by November 14th with a detailed plan as to how it will address the contractual breaches.  However, DIR has since given IBM an extra week to provide these details.  IBM still must back up all data by the December 4th deadline, which has not been extended.  Overall, IBM has been fined $5.4 million for failing to resolve problems quickly, server outages, data backup breaches, missed mail deadlines, and failing to respond with in fifteen minutes to serious incidents.  The contract allows IBM to recover a portion of these fines by correcting service problems.

Lost Benefits in Indiana: In Indiana, local and state human service leaders criticized the privatization of the delivery of welfare benefits in 59 (of Indiana's 92) counties and called for the return of traditional caseworkers to Indiana's welfare system.  Advocates for elderly, disabled, and low-income individuals claim that difficulty navigating the new welfare system has led to the loss of benefits for many vulnerable citizens.  In 2006, Governor Mitch Daniels' administration awarded a $1.16 billion privatization contract to a team led by IBM to take over the processing of applications for Medicaid, food stamps, and Temporary Assistance for Needy Families.

After listening to months of complaints from constituents and health care providers, two committees of state lawmakers - the Medicaid Oversight Commission and the Health Finance Commission - called for a temporary halt in the privatization of social services until problems are resolved.  Representative Suzanne Crouch and Senator Vaneta Becker (both Republicans) have drafted legislation to be considered by the General Assembly when it meets in January.  The legislation will prevent Indiana's Family and Social Services Administration from extending the welfare privatization into the remaining 33 counties until a complete review of existing services in conducted.

Yet Georgia Moves Ahead:  Despite these large-scale privatization failures in Texas and Indiana, the Georgia Technology Authority just awarded IBM a computer services contract worth $873 million over eight years with two one-year options to renew.  IBM was ultimately the sole-bidder on the contract.  Governor Sonny Perdue claims that this contract, along with a $346 million contract won by AT&T Inc., will save Georgia taxpayers an estimated $180 million.  A spokesperson for Perdue acknowledged that the administration is aware of the recent problems with IBM's computer outsourcing contract in Texas and stated that performance benchmarks will be included to ensure that the company meets the demands of the contract.

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Public Opinion and Public Interest Groups Show Strong Opposition to Road Privatization

Our partners at U.S. PIRG have compiled a wealth of information regarding the pitfalls of road privatization.  This section of our dispatch relies heavily on their research and policy work, and we urge readers interested in transportation privatization to explore the resources available on their website.

In a recent memo, U.S. PIRG summarizes survey results of public opinion on road privatization.  

  • 84% of those polled by the National Association of Realtors and Smart Growth America oppose the privatization of public roads and highways. 
  • Surveys from several states that have approved or proposed public highway lease deals had similarly negative results. 
  • In August 2008, only 29% of Pennsylvanians supported the proposed leasing of the Pennsylvania Turnpike to private investors.
  • Last year, 61% of voters in New Jersey opposed leasing the state turnpike, and that number went up to 85% among voters who self-reported as being well-educated about the details of the proposal. 
  • Information regarding public opinion in Texas, California, and Indiana is also available.

As these public opinion polls suggest, many states are facing obstacles to achieving their short-sighted road privatization plans.  In Florida, a controversial proposal to lease Alligator Alley, a tolled section of Interstate 75, to foreign investors is being challenged by many, including State Senator Dave Aronberg (D-Greenacres).  Aronberg has drafted legislation that calls for a two-year moratorium on road lease agreements with private companies and completely prohibits leasing of toll roads to "foreign-financed companies."  He contends that the Florida Department of Transportation has not conducted sufficient research to determine whether or not the proposed lease is in the best interests of the public.  Florida PIRG's Brad Ashwell expressed similar concerns about the project in a statement he issued in support of the moratorium, "America's roadways should be operated for the long-term public interest not private profit.  The profits for these companies will increase with greater traffic, higher tolls and less investment in the roadway - interests directly at odds with those of the public."

Advocates have also actively opposed private toll roads in Pennsylvania and Georgia.  Pennsylvania Governor Ed Rendell's plan to lease the state Turnpike for $12.8 billion came to a halt when the Albertis-Citigroup team let its offer lapse at the end of September in the face of legislative opposition.  Despite resistance in the legislature, negative public opinion polls, and evidence showing contract flaws and how a contract could fundamentally change the way Pennsylvania's government functions regarding the Turnpike, Rendell hopes to revisit the project next year.  Similarly, US PIRG has emphasized the dangers of privatizing toll roads in Georgia, likening such a proposal to a "70-year no-escape contract with an HMO."

On a broader scale, U.S. PIRG  explains the challenges that states face in overseeing privatization deals and comes to the conclusion that many states do not currently have the capacity to do so effectively.  In a recent report from the group, the following concerns are expressed:

  • States have not developed systematic approaches to identifying and evaluating the public interest
  • Lack of federal involvement considerably reduces consideration of public interests
  • Lack of capacity forces states to rely on private companies and their partners for oversight, creating serious conflicts of interest

In addition to the dangers that privatization deals pose to the public, the financing of private infrastructure projects can be extremely risky for investors, which may indirectly harm the public as well.  Profit-seeking private companies must overcome higher borrowing costs by taking on greater risks, leveraging more long-term debt, and charging higher fees.  According to the chairmen of the U.S. House Transportation and Infrastructure Committee and the Highway Subcommittee, "The dependence of these firms on debt and asset inflation rather than income or cash flows to finance acquisitions and pay dividends to shareholders raises questions concerning the sustainability of this model."  As credit has become even more expensive, private financing has become even more difficult.  Unpredictable traffic levels, front-loaded subsidies, poor economic conditions, and potential public backlash may all also contribute to increasing the risk involved for investors, and thus, for the public.

For more background information on road privatization, U.S. PIRG has released an excellent report detailing trends and offering policy recommendations.

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Airport Privatization Proposals -- Chicago Expects to Privatize Midway Airport by Yearend

There is increased activity on trying to privatize airports around the country, although some governments are rejecting the efforts as dangerous and misguided:

Illinois: On October 8, 2008, the Chicago City Council voted 49-0 to approve a $2.5 billion, 99-year lease of Midway Airport to a private operator, Midway Investment and Development Company LLC.  In exchange for the upfront fee, Midway Investment will collect revenue from parking concessions, landing fees, and passenger facility charges, which brought in over $160 million in 2006.  The city will continue to assume responsibility for the police and fire protection for the airport at a cost of about $10 million annually.  The lease will yield $1 billion for the city after the airport's debt has been paid off.  Mayor Richard Daley's administration has not yet announced how this money will be spent.

Many Aldermen said they support the deal because the city is struggling with a $420 million deficit, and the cash infusion could be used to fund essential projects and services.  Others expressed support because the airport's 160 union employees are guaranteed their jobs (or jobs in another city department) at the same salary and benefits.  In terms of protecting good jobs and working conditions, the Midway deal is notably better than the city's privatization of the Chicago Skyway, where 100 city highway workers nearly lost their jobs.

The Midway privatization agreement - the first of its kind in the United States - still requires Federal approval, but Mayor Daley expects to close the transaction by the end of the year.  The Federal Aviation Administration had already accepted Midway's preliminary application for its pilot privatization program, which was established by the 1996 Reauthorization Act.  A 60-day public comment and review period began on October 21, 2008, and the FAA expects to complete review of Midway's application by the end of December.  D. Kirk Schaffer, associate administrator for airports at the FAA stated that he thinks the deal will likely be approved, though he could not say that conclusively.

Louisiana: The New Orleans Aviation Board voted last week to submit a preliminary application to the Federal Aviation Administration to privatize Louis Armstrong International Airport.  The New Orleans City Council voted on Thursday to endorse the submission.  Although it is likely that any possible privatization deal is nearly two years away, the City Council vote indicates that local lawmakers are giving this proposal serious consideration.  The question is whether Louisiana will even consider the same worker protections that were included in the Chicago Midway contract?

Wisconsin: In October, a Milwaukee County Board committee voted 7-0 against spending $500,000 on consultant studies to examine privatizing Mitchell International Airport.  Milwaukee County Executive Scott Walker has promoted the privatization of Mitchell as a way to alleviate funding problems facing the county transit system.  Supervisor Patricia Jursik, who represents neighborhoods near the airport, expressed concern over Walker's proposal and encouraged him to seek alternative options for dealing with the county's transit funding issues.

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U.S. Department of Justice Opinion Challenges State Lottery Privatization Plans

Dealing a blow to plans to privatize lottery systems around the country, the U.S. Department of Justice Office of Legal Counsel in October issued an opinion stating that federal law severely limits the extent to which states can contract with private companies to operate their lotteries.  Although federal law does not prohibit the use of private management companies to assist in operating lotteries, the states must maintain significant operational control, and private companies can only have a minimal stake in the lottery.  This opinion effectively put a halt to Indiana's plan to privatize its lottery in an effort to raise money for investments in education, roads, bridges, and other infrastructure projects.  However, Illinois intends to pursue a partial privatization plan that it says is within federal guidelines.

Governor Mitch Daniels of Indiana, who wanted to privatize the state lottery to raise $1 billion, has said that although the opinion is not binding, he would pursue other means of raising funds rather than challenging the opinion in court.  Governor Rod Blagojevich of Illinois does not believe that the federal opinion will interfere with his plans for the state lottery.  A spokesperson for Blagojevich stated that the administration believes that his plan to raise $7 billion by partially leasing the lottery is different from Indiana's proposal in ways such that it would not be hindered by the opinion.

In addition to the states already mentioned, California, Colorado, Florida, Michigan, New Jersey, New York, and Texas have all previously considered privatizing their lotteries.  These states and others considering leasing their lotteries must now take into consideration the federal guidelines outlined in this opinion before moving forward.

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States Take Action to Reform Contracting Process

New Jersey and Illinois are two states that have recently taken steps toward improving transparency and ethical practices in the contracting process.

New Jersey Movement on Contractor Accountability: In New Jersey, the committee substitute for A-2359, a bill that "requires contractors to provide Department of the Treasury with employment information about contracts with public bodies," was voted out of the Assembly Labor Committee on November 13th.  The bill also requires the Department of the Treasury to make contractors' reports with the number of full-time equivalent positions publicly available online.  The bill is based on a recommendation adopted unanimously by the Assembly Outsourcing and Off-Shoring Commission, which found that there is a lack of information available to evaluate the employment impacts of State and local contracts.

Stopping "Pay to Play" on Contracting in Illinois: In September, the Illinois Senate approved (55-0) the state's first ban on campaign donations from supporters holding or seeking state contracts worth $500,000 or more.  The new law applies to statewide officeholders, including the governor, lieutenant governor, attorney general, secretary of state, treasurer, and comptroller, but not to lawmakers.  In passing this law, lawmakers focused specifically on Governor Blagojevich who is facing scrutiny by federal investigators for possible connections between his record-setting campaign fundraising and state favors.  Less than 24 hours after approving this ethics legislation, the Senate overwhelmingly approved a package that closed loopholes in the just-approved law and placed the same restrictions on lawmakers, who can be influential in the awarding of such contracts.

Selling Attacks on Unions as "Reform": On the negative side, rightwing activists are using the cover of contracting "reform" language to execute anti-worker initiatives.  In November, Amendment 54 in Colorado narrowly passed, but a legal challenge is expected on the grounds that it violates the First Amendment.  Amendment 54 purported to be an anti-corruption measure to stop political contributions from government contractors, but it defines all public employee unions as contractors, thus denying these employees their right to free speech and barring them from participation in the political process.   A similar initiative, Measure 10 in South Dakota, was rejected with 65% of voters opposed. 

Additional models for transparency and contract accountability worth considering include:

  • Rhode Island's Privatization of State Services law (Chap 42-128), which has been updated in recent years to require clear comparisons of the costs of work performed by contractors and public employees, a prohibition on contracting out unless costs and quality exceed that already achieved “in-house,” and a built-in legal appeal process to block any privatization violating the law.
  • Maryland's  "living wage" law, HB 430, requiring government contractors to pay their employees a decent wage, up to $11.30 an hour in areas of the state with higher costs of living.
  • In Oregon, legislators in the last session debated HB 3366, a transparency measure to require greater disclosure by contractors of wages and other personnel issues and require agencies to generate broader measures of overall success and failure of contracting out decisions.
  • San Diego's City Council approved new reforms to review new contracts and protect work conditions of those doing those contracts.
  • See also AFSCME's Legislative Approaches to Responsible Contracting which details a range of approaches by different states to increasing contracting accoutability.

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Other Privatization News in Brief

  • New York: On September 29th, Governor Paterson announced that he would set up a commission to study possible ways to privatize state assets, including the lottery system and bridges like the Tappan Zee.  The commission will be expected to report to Paterson and to the Legislature in 90 days and issue a final report in 180 days.  New York does not have a good history with privatization efforts in recent years.  Earlier this year, the New York Legislature rejected Governor Spitzer's attempt to privatize the state lottery system.  In January 2007, the Port Authority of New York and New Jersey voted to acquire the remaining 93 years of the lease of Stewart International Airport in Newburgh from a private operator after a short-lived and unsuccessful attempt at privatization.
  • Ohio:  Three Ohio Department of Transportation employees accepted approximately $390,000 in gifts and improper payments from private vendors in exchange for steering contracts worth approximately $11 million to them.  The three District 12 employees circumvented purchasing rules by altering bid documents, obtaining fraudulent bids, and sharing bid information with specific vendors.  According to a report issued by Inspector General Tom Charles, the former facilities manager and equipment superintendent "had criminalized the entire purchasing and procurement apparatus in District 12's facilities and equipment divisions."  The schemes went undetected for over a decade until an anonymous  complaint in early 2007 prompted the inspector general's probe.
  • Tennessee: Tennessee awarded AT&T a 10-year, $600 million contract to upgrade its broadband network for state and local government entities, including educational institutions.  According to the terms of the agreement, AT&T will increase the network's capacity tenfold and add bandwidth for improved Internet connectivity.
  • Wisconsin: Along with its debate on airport privatization (see above), Milwaukee has also seen debates on services and water privatization.  In November the Milwaukee County Board approved veto overrides to block proposals by Milwaukee County Executive Scott Walker in support of various privatization measures.  The Board sustained only one of Walker's privatization measures, which is to outsource the operation of a public assistance call center.  At the city level, Milwaukee City Comptroller W. Martin Morics in October called for the city to consider leasing its Water Works for 75 to 99 years in a deal that could bring in more than $500 million.  In recent years, Milwaukee has faced budget debates over whether to raise taxes or cut services, and Morics views this deal, which could generate $30 million per year if the upfront payment is placed in an endowment, as a good solution.  Privatization of municipal water utilities is a controversial topic, and Mayor Tom Barrett and Common Council leaders are wary about water rate increases that could result from privatization, though they are willing to study the option further.  Atlanta is one city that attempted to privatize its water operations, but it ended a 20-year contract with United Water Services after just four years, citing service problems.
  • Private Prisons: Federal and state government officials are increasingly turning to private companies to build and operate jails and prisons.  In recent months, thousands of inmates have been sent to facilities run by private operators such as Corrections Corp. of America and Geo Group (the largest and second-largest private prison companies respectively), as government facilities have become overcrowded.  Jody Kent, a public-policy coordinator for the ACLU's National Prison Project, told the Wall Street Journal, "We have serious concerns about for-profit prison companies because they are notorious for cutting essential costs that need to be provided to maintain a safe and constitutional environment for prisoners."
  • Costly Privatized Medicare Plans: According to two new studies mentioned in the New York Times, private Medicare plans cost more than traditional Medicare without adding comparable value to patients.  According to Marsha Gold of Mathematica Policy Research, one-third of Medicare beneficiaries with Part D get coverage through Medicare Advantage, which adds to Medicare's complexity and costs but does not result in any noticeable improvement in quality.  In another article, Carlos Zarabozo and Scott Harrison of the Medicare Payment Advisory Commission state that the government pays private companies 13% more on average than what it would spend for the same beneficiaries in traditional Medicare.  Zarabozo and Harrison acknowledge that higher payments finance extra benefits for some enrollees, but these payments create a greater burden on beneficiaries and taxpayers and do not lead to improved quality of services.

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Overall, privatization news in the last few months highlights the growing concern of state and local governments to address budget shortfalls during these difficult economic times, which unfortunately means that many may rush into privatization contracts without fully considering their implications and the long-term interests of the public.  As new legislative sessions approach, there is an increasing need to introduce legislation that promotes responsible contracting, greater transparency in the contracting process, and more government oversight to protect taxpayers.  Progressives States Network looks forward to continuing to work closely with legislators and advocates to achieve these objectives and we urge you to sign up here for our regular Privatization Updates.


Privatization Update: Recent News from across the Country

Progressive States Network, Privatizing in the Dark: The Pitfalls of Privatization & Why Budget Disclosure is Needed
Progressive States Network, Ban Pay to Play Campaign Contributions
Partnership for Working Families, Policies & Tools
Center on Policy Inititiatives, Good Government: Do It Right
U.S. PIRG, Stop Bad Road Privatization
AFSCME, Privatization

Texas and Indiana Halt IBM Privatization in Response to Contract Breaches and Poor Service

Computer crash hinders Texas Attorney General's Medicaid fraud case
Gov. Perry Orders Halt to Privatization of Data Management
Texas gives IBM 30 days to fix computer glitches
Texas gives IBM extra week to say how it will fix computer woes
Welfare privatization criticized by advocates
Lawmakers push to halt welfare modernization
Georgia government to privatize IT services
IBM, AT&T: Two state contracts go to sole bidders

Public Opinion and Public Interest Groups Show Strong Opposition to Road Privatization

U.S. PIRG - Toll Roads, Privatization and Public Opinion
Smart Growth America - Survey shows Americans prefer to spend more on mass transit and highway maintenance, less on new roads
Quinnipiac University - Voters don't think lawmakers will stop corruption, Quinnipiac University Pennsylvania poll finds
Private plan for Alligator Alley is advancing
U.S. PIRG - Leasing the turnpike would be like signing up for an HMO - for 75 years!
U.S. PIRG - Should we privatize toll roads? NO: Loss of planning control, hidden fees would hurt state
U.S. PIRG - The Capacity of States to Oversee Privatization Deals
U.S. PIRG - Uncertainty and Public Interest Problems in Private Infrastructure
U.S. PIRG - Road Privatization Explaining the Trend, Assessing the Facts, and Protecting the Public

Airport Privatization Proposals -- Chicago Expects to Privatize Midway Airport by Yearend

City agrees to lease Midway to private operator
Midway could go private by yearend, FAA official says
New Orleans City Council backs privatization application for Armstrong International airport

U.S. Department of Justice Opinion Challenges State Lottery Privatization Plans

U.S. Department of Justices - Scope of Exemption under Federal Lottery Statutes for Lotteries Conducted by a State Acting under the Authority of State Law
Government tells states not to privatize lotteries

States Take Action to Reform Contracting Process

State of New Jersey 213th Legislature - Assembly Committee Substitute for Assembly, No. 2359
Rhode Island's Privatization of State Services law (Chap 42-128)
Maryland's  "living wage" law HB 430
AFSCME's Legislative Approaches to Responsible Contracting
55-0 Illinois Senate overrides Blagojevich's veto, enacts 'pay-to-play' ethics law
Illinois Senate approves Blagojevich-endorsed package that restricts lawmakers
Amendment 54 versus the First Amendment
Vote NO on Initiative 10
Measure aimed at restricting contracts falls

Other Privatization News in Brief

New State Panel to Study Privatizing Public Assets
Ohio inspector general lays out kickback 'schemes' at ODOT
Tennessee awards AT&T $600 mln network contract
Walker issues vetoes to restore privatization
Board rejects Walker's vetoes
Milwaukee County panel derails airport privatization
Comptroller floats idea of privatizing Milwaukee water utility
Larger Inmate Population is Boon to Private Prisons
Studies Say Private Medicare Plans Have Added Costs, for Little Gain
Mathematica Policy Research - Medicare's Private Plans: A Report Card on Medicare Advantage
Medicare Payment Advisory Commission - Payment Policy and the Growth of Medicare Advantage