City and State Officials Are Getting More Skeptical of Privatization

A few years ago, Chicago residents accustomed to parking on the street got a rude shock. Parking-meter rates had suddenly gone up as much as fourfold. Some meters jammed and overflowed when they couldn't hold enough change for the new prices. In other areas, new electronic meters had been installed, but many of them didn't give receipts or failed to work entirely. And free parking on Sundays was a thing of the past.

The new meter regime sparked mass outrage. People held protests and threatened to boycott. But there was little recourse: The city had leased its 36,000 meters to a private Morgan Stanley-led consortium in exchange for $1.2 billion in up-front revenue. The length of the lease: 75 years.

If the meter situation seemed like a bad deal for Chicago's parkers, it would soon become clear that it was an even worse one for the city's taxpayers.

An inspector general's report found that the deal was worth at least $974 million more than the city had gotten for it. Not only would the city never have a chance to recoup that money or reap new meter revenue for three-quarters of a century, clauses buried in the contract required it to reimburse the company for lost meter revenue. The city was billed for allowing construction of new parking garages, for handing out disabled parking placards, for closing the streets for festivals. The current bill stands at $61 million, though Mayor Rahm Emanuel has refused to pay and taken the case to arbitration instead.

How did this happen? The meter deal passed the city council just four days after then-Mayor Richard Daley—desperate to fill a recession-caused budget hole—presented it. There were no public hearings, and the aldermen never saw the bid documents. Afterward, some aldermen who voted for it said they wished they'd known more of the details, but it was too late. "We're stuck with it for the next 71 years," Alderman Roderick Sawyer told me recently.

Sawyer, a South Side Democrat who was not in office when the meter deal passed, is trying to ensure similar proposals will get more scrutiny in the future. He has introduced an ordinance that would require more transparency, including public hearings and a comprehensive economic analysis, for any proposed city partnership with a private entity.

"This is just about the process," Sawyer said. "We're not saying all privatization deals are bad. But if we're going to do this, let's be honest with the public and let them know what's going to occur: It's going to save this much money, it's going to cost this many jobs."

Sawyer is not alone. In states and cities across the country, lawmakers are expressing new skepticism about privatization, imposing new conditions on government contracting, and demanding more oversight. Laws to rein in contractors have been introduced in 18 states this year, and three—Maryland, Oregon, and Nebraska—have passed legislation, according to In the Public Interest, a group that advocates what it calls "responsible contracting."

"We're not against contracting, but it needs to be done right," said the group's executive director, a former AFL-CIO official named Donald Cohen. "It needs to be accountable, transparent, and held to high standards for quality of work and quality of service." Cohen's organization, a national clearinghouse exclusively devoted to privatization issues, is the first advocacy group of its kind.

Doing it right, according to Cohen, means ensuring that contractors are subject to standards of transparency and accountability. Private companies doing government work and their contracts should be subject to open-records laws: In 2011, the city of Truth or Consequences, New Mexico, hired a contractor to videotape city meetings, then claimed the tapes weren't public records. (A state appeals court eventually ruled otherwise.) Companies should be held responsible for cost overruns, and governments should be making sure they're actually saving money: Many private prisons cost more to operate than public ones, the group claims.

"We are definitely seeing a wave of states and some cities passing laws to get control of contracting," Cohen said. "There's still a lot of pressure to outsource, but the trend we see is people trying to fix the process and do it better, because of some of the high-profile failures at the federal and state levels."

The vogue for privatizing government began in the Reagan years, experts say, when an ascendant conservative ideology painted the public sector as a callous and sluggish bureaucracy and the private sector as inherently more innovative and efficient. The trend accelerated in the '90s, and today, Cohen estimates that $1 trillion of America's $6 trillion in annual federal, state, and local government spending goes to private companies.

Yet the public impression of privatization as a panacea for the inherent inefficiency of government has been tarnished in the intervening years. From Halliburton to Healthcare.gov to private prisons and welfare systems, contracting has often proved problematic. Perhaps mindful of these high-profile debacles, lawmakers are now more likely to view privatization and contracting proposals with skepticism. "The ideological fervor for privatization has ebbed," according to John D. Donahue, an expert on privatization at Harvard's Kennedy School of Government.

Donahue, who has studied the issue since 1988, sees privatization as inherently neither good nor bad. Academic studies paint a mixed picture, he said. The private sector can deliver efficiencies when the task being sought is well defined, easy to measure, and subject to competition—mowing public parks, perhaps, or collecting trash.

But when the goals are fuzzier or competition is lacking, the picture gets cloudier. Is the purpose of municipal parking meters to maximize revenue, or is it to provide a low-cost amenity to citizens and the businesses they patronize? How do you value the various objectives of a prison system—justice, rehabilitation, social order—when the financial incentive is to lock more people up? In many cases, Donahue said, privatization and contracting save governments money not through increased efficiency but by undercutting public-sector wages and pensions or, as in the case of the parking meters, by effectively robbing the future to pay for the needs of the present. (By mid-2011, the city had spent all but $125 million of the $1.2 billion parking-meter payment.)

These are the kinds of questions policymakers are demanding answers to as they evaluate government contracts with an eye to getting the most bang for the taxpayer's buck. In Oregon, the legislature this month approved by overwhelming margins a bill tightening oversight of information-technology projects. It was an easy sell in the wake of the failure of the state's healthcare-exchange website, which was such a disaster it made Healthcare.gov look successful by comparison. To this day, Cover Oregon's website cannot accept online applications, forcing Oregonians to use paper applications or go through an insurance agent instead.

The new legislation will require third-party reviews of the quality of IT contractors' work. One of its sponsors, Representative Nancy Nathanson, a Democrat from Eugene, believes such a requirement might have prevented the exchange debacle had it been in place while the site was being developed. "I think it's important when you're spending public money, whoever is doing the work needs to have their books open," she told me. "We need to see how the money is spent. We need to see performance measures to determine whether something is working. We need accountability." In the next legislature, Nathanson plans to continue her push on contracting issues, she said.

Most of the privatization skeptics are Democrats, who tend to be sympathetic to the labor unions fighting to save public-sector jobs. (In the Public Interest is partly funded by unions, though Cohen said it has other funding sources, mainly foundations, and operates independently.) When California Governor Jerry Brown proposed, in his latest budget plan, to "reduce [the state's] reliance on contractors" by bringing formerly outsourced functions back in-house, critics largely saw the move as a sop to labor.

But some Republicans have also turned against privatization out of a desire for fiscal responsibility. In Ohio, Republican Governor John Kasich recentlyabandoned his push to lease the Ohio Turnpike to a private operator, deciding instead to have the state issue bonds backed by future toll revenue. The decision may have been influenced by the experience of nearby Indiana, which leased a 157-mile state road to an Australian-Spanish consortium and drew public criticism when toll rates doubled in five years. As with the Chicago meters, the government quickly spent most of its lump-sum payment and now faces decades bound by a restrictive contract that gives it little control over a major roadway.

"Privatization has potential rewards, but a lot of it is really just about shifting money around for political reasons," said Phineas Baxendall, a senior analyst at the U.S. Public Interest Research Group and author of a report on toll roads called Private Roads, Public Costs. "There are a lot of dangers in terms of loss of control over public policy, not getting enough revenue for these assets, as well as a lack of transparency."

Many of the ideological proponents of privatization are libertarian conservatives who believe tasks like operating roads and schools are better performed by the private sector. But in Texas, one of the most prominent activists against private toll roads is a San Antonio Tea Party activist named Terri Hall. She has started a petition to change the city charter to require that any toll project be put to a vote, and she blogs relentlessly on toll-related issues. "If there's anything Texans hate, it's big government and cronyism, and toll roads deliver both," she wrote recently.

A worry about handing over American public assets to foreign companies also crosses partisan lines. Last month, the Republican-dominated Nebraska legislature passed, and Republican Governor Dave Heineman signed, a bill to increase transparency in state contracting by requiring contractors to report where the money was going—whether the goods and services the state was purchasing were coming from Nebraska, from other states, or from foreign countries.

"We're spending close to $2 billion on contracts out of a roughly $8 billion budget," said Heath Mello, the Democratic state senator who authored the bill. "The public and the legislature need to know where our contracting dollars are going and whether the state of Nebraska is seeing any economic benefit." Nebraska lawmakers may also be warier of privatization since the state's effort to privatize its foster-care system fell apart amid scandal in 2012.

Privatization proponents say contracting horror stories are overblown. Leonard Gilroy, director of government reform for the free-market Reason Foundation and editor of its comprehensive Annual Privatization Report, noted that other cities, such as Indianapolis, followed Chicago's lead by privatizing their parking meters without a problem. (On the other hand, other cities, such as Pittsburgh, shied away from privatizing their meters.) "Is privatization a magic wand? Is it always going to come in and save you money? No," Gilroy said. "You have to do this well. You have to do your due diligence. You have to do a good contract and then you have to monitor and enforce that contract."

In this, Gilroy would seem to be on the same page as advocates of "responsible contracting." But he suspects that the real agenda of In the Public Interest and the recent state legislative initiatives isn't to improve contracting but to make it more difficult by creating bureaucratic obstacles. He pointed to the group's collaboration with unions on a resolution that recently passed the California Assembly. Though nonbinding, the resolution's decree that the body "opposes outsourcing of public services and assets" drew an outcry from businesses and local governments, including the California League of Cities. 

"What seems to be underlying this is an outright hostility to outsourcing," Gilroy said. 

In Chicago, Alderman Sawyer's accountability ordinance has yet to advance out of the Rules Committee. Emanuel criticized the parking-meter deal during his mayoral campaign and promised "an era of reform," but as mayor, with the power to push the bill forward, he has yet to take a position on it. Sawyer says he has had "fruitful conversations" with the mayor's administration and is hopeful Emanuel will back the measure soon. Emanuel's office refused a request for comment on the ordinance.

Even if the ordinance goes nowhere, Sawyer believes Chicago may have learned its lesson about privatization. Prior to the meter deal, the city was one of the country's most enthusiastic proponents of privatization. Daley leased the Chicago Skyway toll road for $1.8 billion and privatized city functions from towing to lawnmowing. But in the five years since the parking fiasco, Chicago policymakers have become more skeptical: A proposal to privatize Midway Airport—which would have made it the first privately run major airport in the country—went down after it was subjected to aggressive scrutiny.

"They analyzed the deal themselves," Sawyer said. "And they determined that it was not worth doing."