Growing-Economy

BY NATHAN NEWMAN

Privatization Update: Schools, Prisons, Mental Health -- and What States are Doing to Hold Contractors Accountable

Given the central role of private contractors in delivering public services, this Dispatch continues our series of Privatization Updates (see November's edition). 

Today we focus on current privatization debates in the education, prison and mental health sectors -- and what states are doing to increase accountability for contractors.

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Education Privatization

Even as the right wing has been losing in the polls on promoting school vouchers, privatization has still been penetrating school systems through charter programs and support services.  However, both teachers and governments have increasingly spotlighted problems and the failed promises of many school privatization contractors.

Rejection of School Vouchers:  When Utah voters didn't support a school voucher ballot initiative in November 2007, it was the eleventh state referendum -- all defeated -- on various proposals for publicly-funded school voucher programs since 1972. After the state legislature approved a voucher program earlier in the year, opponents took the issue to the ballot where it was rejected by more than 60% of the vote.

Based on a few pilot projects, the number of students using vouchers has increased to 61,700 in the current school year, up 9% from last year, and nearly double the level in 2002 when the U.S. Supreme Court upheld the use of vouchers in religious schools.  But the Utah defeat is just one part of broader legislative and administrative changes likely to reverse those trends:

• Congress in March voted to stop funding a voucher program for the District of Columbia. 
• Two other prominent voucher programs -- in Milwaukee and Cleveland -- are facing statehouse efforts to impose rules that could prompt some private schools to stop taking voucher students. In both states, the governors have proposed requiring private schools to administer state achievement tests to all of their student.
• The stimulus bill Obama signed in February bars its funds from being used to provide financial aid to students attending private schools.
• And the Arizona Supreme Court has ruled that two state voucher programs for foster children and disabled students violate Arizona's constitution.

Debate on Charter Schools:  As voucher systems are failing or being scaled back across the nation, charter schools sited within public schools continue to make gains.  On March 10, President Obama called on states to lift charter school caps, a move that could usher in a large number of charter school openings if states follow the President's recommendation.  Currently, 26 states and the District of Columbia now have caps.  States began to respond immediately, as was reflected in a bill filed in the North Carolina House to lift the state's cap of 100 schools. "

Yet even as President Obama called for expanding the number of charter schools, he also recognized the problem of charter schools that are not delivering on their promises of higher student achievement.  In states across the country, from Wisconsin to Texas, failing charter schools have been closed.  On the other hand, in Louisiana, public schools are increasingly being turned over to private groups.  Six of eight identified failing schools in the East Baton Rouge parish will become charter schools.

Increasingly, teachers at the charter schools themselves are identifying serious problems and demanding more of a voice, both in their own treatment and that of the students. The recent unionization of the KIPP AMP school in Brooklyn by the United Federation of Teachers (UFT) is only one example.  Currently, 18 of New York's 115 charter schools have their own unions and similar schools, such as Green Dot in Los Angeles, are also unionized.  Founders of the charter school movement have often been vocal opponents of teachers’ freedom to form unions, underlined by teacher complaints that KIPP administrators were intimidating teachers interested in unionizing.  Teachers of the KIPP AMP School express confidence that unionization will lead to greater teacher retention, benefiting students by maintaining institutional knowledge.  

Failures and Costs of School Support Contracts:  The large, multi-state companies that schools most frequently employ to provide bus, school lunch, and custodial services dominate the market by buying out smaller businesses.  Yet most communities are seeing few economic benefits and often just end up the losing party in bad contracts negotiated by these multi-state players.  

For instance, the acquisition of Laidlaw Education Services by FirstGroup ensured that FirstGroup is now responsible for operating 12% of school buses in the US and Canada.  The anti-trust implications of the FirstGroup takeover were so clear that the company was forced into an anti-trust consent decree in 2007 after lawsuits by eleven states gave states some options to take over leases and separate ownership of bus depots from the bus service contracts.  One particularly questionable trend in school privatization is the responsibility of the state to purchase replacement equipment that, by contract, the contractor will own. Often, after fleets are sold to the contractor, the firm quickly requests new bus purchases, even when the old buses still meet thorough state inspection requirements.  In Oregon, the Lake Oswego district was contractually bound to buy new buses requested by Laidlaw Transit (now FirstGroup), which led to no savings for the state and debts owed to the contractor.  Similarly, a Minnesota report found that school districts pay an average of 10 percent more per student to outsource student transportation — and those higher prices come with higher rates of driver turnover, less experienced drivers, more accidents and a less reliable service.

For food service, Aramark has what is often seen as the worst record in serving public schools. The company provided such poor services in Pennsylvania, Michigan, and Connecticut that all three states canceled their contracts with the corporation. In New Haven, CT Aramark employees alleged dangerous and hostile work environments, poor menus, and Aramark’s purchasing of low quality, even dangerous, equipment.  School officials, students, and parents have agreed with charges of unhealthy and unappetizing food.  One parent commented, "Our kids think the food comes from vending machines, and are calling it green eggs and ham."  Aramark has also received publicized complaints in Illinois, New Jersey, and Maryland.

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Prison Privatization

The national spotlight has focused recently on privatized prisons after two judges in Pennsylvania pled guilty to receiving kickbacks for finding young offenders guilty of minor charges.  They accepted $2.6 million to send an estimated 5,000 juvenile offenders to privately owned prisons. The two judges held high ranking positions in overseeing the juvenile court system, which allowed them to work in tandem to convince the state to send youth to new detention centers owned and operated by the private prison firms PA Child Care and partner Western PA Child Care.  The judges' ill deeds clearly demonstrated that private profits can drive injustice and costly inmate expansions, and how the lack of state oversight allowed the problem to persist for years.

Rising Inmate Populations, Rising Profits: Private prisons hold 7.4% of the country's 1.59 million incarcerated adults.  California has shipped more than 5,100 inmates to private prisons in other states since late 2006.While prison privatization sometimes appears to save states money, there is question as to whether company profits lead to costs down the road.  Judy Greene, policy specialist at Justice Strategies argues, "Profit is still a motive and it's structured into the way these prisons are operated.  Just because the system has expanded doesn't mean there is evidence that conditions have improved." And private prisons are, indeed, making a good deal of profit. Corpwatch reported that in February, GEO Group reported a $20 million quarterly profit with an annual 2008 profit of $61 million, a $23 million increase from 2007.   

Cost Cutting at the Expense of Quality and Inmate Safety: Profits appear to come through cost cutting such as low quality or rotten food.  Similarly, there have also been complaints of poor quality health care at detention centers operated by Corrections Corporation of America (CCA) and GEO Corporation.  In 2008, state officials discovered that a mentally ill CCA inmate had not left his cell for a shower or recreation for nine months.  CCA commented that they did not believe that showers were related to health care.  Later in the year, a man died of pneumonia after receiving inadequate treatment from a CCA doctor he had seen the prior day.  In February, prisoners rioted at a federal prison run by GEO to protest poor health care and an earlier report found that another GEO facility violated international and domestic laws, denying inmates food, due process, and humane treatment.  As Deborah Golden, an attorney with the DC Prisoners Project observes, "When you try to run prisons as money makers what you do is cut back on the most expensive thing you can, which is medication and medical care." 

Leaving States in the Lurch: Private companies operate to make a profit and when they find that they are not meeting projections, they break contracts.  Contractors sometimes end a relationship with a state with little warning, leaving states scrambling to find new providers. In the autumn of 2008, GEO and Aramark broke contracts with prisons in Pennsylvania and Florida respectively.  This was particularly problematic for the Florida system, which had only 120 days to find a new food provider for their 92,000 inmates, the third largest prison population in the nation.  Furthermore, breaking contracts is not usually an option for dissatisfied states.  

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Georgia's Proposed Privatization of Mental Health Services

Georgia's Department of Human Resources (DHR) is considering privatizing much or all of its public mental health hospital network and closing its mental health facilities in cities like Savannah and Augusta.  State officials say that no final decisions have been made, but DHR is considering privatization as a solution to problems that have plagued state-run hospitals and that led to a U.S. Department of Justice investigation of the quality of care provided.  DHR provided advocates and providers with an outline of its plan to consolidate the seven mental health hospitals into two and to rely more heavily on community-based services.

The only concrete step the state has taken toward enacting this plan has been to issue a request for proposals (RFP) to potential contractors to take over a unit at the mental hospital currently located in Savannah.  Dena Smith, a spokesperson for the DHR, said, "If through that RFP process, it's found that it's not the best way to move forward, then it won't happen."  However, the outline of the agency's plan indicates that the state is moving rapidly to close down its institutions and to switch to private providers.  By the end of June 2009, the state intends to issue RFPs for new hospitals in Atlanta and South Georgia, both scheduled to open by the end of 2011, and will close the Savannah hospital.  The mental health hospital in Columbus would close by July 2011, and by the end of the following fiscal year, public facilities in five other cities would likely close down.

Doubts about Cost Savings: Mental health advocates, state legislators, and members of Gov. Sonny Perdue's mental health commission have expressed concerns over the possibility of privatization, emphasizing that there is little evidence that having private companies take over state hospitals will save taxpayers money or improve the quality of patient care.  They believe that more public participation in the DHR's privatization plans is necessary.  Furthermore, they question the viability of turning state mental health hospitals over to for-profit companies.  Most patients who end up in state institutions have exhausted all private insurance coverage, and there is no way to cost-shift the burden of caring for uninsured patients by treating insured patients.  Given these limitations, private companies may resort to reducing staff and services in order to make a profit.

Problems in Other States fromPartial Mental Health Privatization: No other state has privatized its entire psychiatric hospital network, and states that have privatized some of their mental health services have not realized their intended results.  In Florida, private facilities operate at only a slightly less expensive rate than state institutions, and they have not been able to demonstrate improvements in patient outcomes.  In North Carolina, auditors found that the state wasted $400 million by allowing unqualified private companies to provide many mental health services.  In a Texas private mental health clinic, poor staffing led to patients violently assaulting others, inadequate cleaning, and incorrect doses of medicine dispensed to patients.

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Chicago Privatizes Parking Meters

On Thursday, December 4th, the Chicago City Council approved (by a 40-5 vote) Mayor Richard Daley's proposal to privatize Chicago's parking meters for the next 75 years.  The city will receive $1.16 billion upfront from a Morgan-Stanley backed group in exchange for the rights to manage its parking-meter system.  The city plans to use $325 million from the deal to balance the budget through 2012 and to set aside $400 million for the long-term.  $100 million will be spent on social programs, and the rest will be used to stabilize the city's financial situation until the economy improves.

Rates are expected to increase each year over the next five years.  By 2013, it will cost $6.50 an hour to park in the Loop (currently $3.00 an hour), $4.00 to park downtown (currently $1.00 an hour), and $2.00 to park in the neighborhoods outside the downtown area (currently $0.25 to $0.75 an hour).  Many critics worry that the agreement was approved without appropriate transparency and government oversight measures in place, and as a result, taxpayers will not get a fair deal in the long run.  The arrangement may alleviate current budget shortfalls, but at the expense of future revenue that could be used for essential public services. Chicago has a history of privatizing public assets for short-term gains.  The city received nearly $5 billion upfront for leasing the Chicago Skyway, and it is in the process of privatizing Midway Airport.

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Privatization Not Delivering Savings

On Monday, November 24th, the Government Accountability Office released a report which revealed that the Labor Department understated the expense of contracting out its employees' work to private firms in the numbers it has previously provided to Congress.  "DOL's savings reports are not reliable: a sample of three reports contained inaccuracies, and others used projections when actual numbers were available, which sometimes resulted in overstated savings," the GAO report said. "Because of these and other weaknesses, DOL is hindered in its ability to determine if services are being provided more efficiently as a result of competitive sourcing." The full report is available here.

On Monday, December 8th, Virginia's Joint Legislative Audit and Review Commission (JLARC) released a report stating that Virginia's $2 billion transition to privately run information technology services has been slow and difficult and has not yet saved the taxpayers money.  In 2005, Virginia agreed to a 10-year deal with Northrop Grumman to oversee the purchase and upkeep of computers, software, Internet access, and other IT needs.  JLARC and Northrop Grumman dispute the extent to which the private firm has upheld the terms of the contract.  This report comes on the heels of recent the high-profile IT privatization failures in Texas and Indiana that were profiled in our last Privatization Update.

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States Taking Action on Privatization Abuses

States are increasingly getting tough with contractors found to have ripped off the public purse:

• Terminating Contracts:  In 2008, a Texas elder care program under the direction of UnitedHealth Group that served 74,000 senior citizens was fined more than $1 million by the state for delayed or refused medical care. In March 2009 the Texas Health and Human Services Commission terminated the contract, citing late treatment and 1,300 complaints filed against the company in 2008.
• Taking on Private Prisons: Recognizing problems with CCA prison staffing, the Oklahoma Department of Corrections denied $589,000 in payments to CCA until their private prisons were fully staffed, particularly in health services. Officials decided to fine CCA after reading the findings of an audit requested by the state legislature.  However, the auditors noted that oversight is expensive and takes time, saying that "[the process is] somewhat cumbersome in that it requires multiple levels of consideration by executive staffs." This indicates that any purported savings from private prisons may just be disguising the hidden costs of oversight not budgeted in most contracts. 
• Putting Welfare Privatization on Hold:  In Indiana, 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) drafted HB 1691 to 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 is conducted.  The Indiana House in February passed the bill and the Senate is now considering it.

Putting in Place Systemic Contracting Reforms:  Ultimately, these piecemeal approaches to punishing privatization failures after the fact are not enough.  A few states have enacted some individual reforms to better evaluate contracts before they are issued and put in place accountability measures However, a number of national organizations, including Progressive States Network, have highlighted model bills being proposed in Oregon, HB 2037  and HB 2867, which would establish unparalleled transparency and responsible contracting rules for state and local contractors in the state.  Together, the policies in the bills would:

• Require agencies to post information online regarding bidding processes, costs of contracts, amendments, wages paid and the number of jobs created under each contract.
• Create standards of quality expectations for contracts.
• Eliminate the practice of contracting the oversight of primary contractors to other contractors.
• Prevent "revolving-door" conflicts of interest by barring public employees who work with a contracting firm from joining the firm within a year of leaving the public service.
• Mandate a cost analysis of contracts over $25,000 to ascertain whether the same work could not be done as efficiently and effectively in house.
• Expand responsible bidder guidelines to include a bidder's poor performance in prior contracts using such yardsticks as cost overruns and delays.
• Require that agencies review the credentials of contractors on its prequalification list at least every three years.

Progressive States Network's Nathan Newman testified in Oregon earlier this month on behalf of these proposals.  Putting contracting reform in the context of national recovery spending across the country, Newman argued, "Every state needs this data so that they can take money away from contractors who aren’t serving the public interest and give it to programs that are.  It’s the best way to ensure that the recovery funds go into the hands of working families who have been hit the hardest by the recession.” 

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