Budget & Tax

Amid Budget Woes, Policymakers Turn to Privatization

November 1, 2009

Leonard Gilroy

Governments at all levels are facing severe budget deficits and prolonged fiscal crises amid the national economic recession. With the federal government facing a record $1.4 trillion deficit and at least 44 states facing a cumulative $281 billion in budget deficits through 2011, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates. They will remain so in 2010 as policymakers attempt to reduce the price of government in response to ongoing budget woes.

Now in its 23rd year of publication, Reason Foundation's Annual Privatization Report (reason.org/apr2009) is the world's longest-running and most comprehensive examination of privatization news, developments, and trends. The 2009 report finds politicians looking for solutions to growing deficits. Even seemingly privatization-resistant states like California, New York, Massachusetts, and New Jersey are now turning to the private sector to help solve major fiscal and capital investment challenges.

The report's federal government section forecasts a bleak outlook for privatization and competitive sourcing under the Obama administration because the current Congress, controlled by Democrats, has been openly hostile to many competition-based initiatives. There are some highlights, however, such as NASA's planned partial privatization of the manned space program, which will use private companies to design, build, and launch manned spacecraft while NASA finishes its own fleet to replace the Space Shuttle. Also, the highly successful military housing privatization initiative-which is modernizing and improving the quality of hundreds of thousands of military housing units nationwide-has spawned a new initiative to privatize on-post lodging for soldiers at Army installations, including Fort Sill in Oklahoma.

In the state government section of the Annual Privatization Report, we profile the increasingly dire fiscal conditions in the states and offer a comprehensive review of the latest state privatization action. Due to deficits and falling tax revenues, policymakers' interest in state privatization and government efficiency boards is demonstrably on the rise, and advisory commissions on privately financed infrastructure have been established in several states.

In 2009, for the second year in a row, the Oklahoma House and Senate voted to establish a new, 10-member House-Senate committee and a Legislative Service Bureau office to centralize the development of state privatization and efficiency initiatives (Governor Brad Henry vetoed the bill in 2008). This year Senate President Pro Tem Glenn Coffee was the primary sponsor of the Accountability, Innovation and Privatization Act of 2009 (Senate Bill 646), which would have established a new legislative Joint Committee on Accountability, Innovation, and Privatization to conduct regular agency performance audits, study the feasibility of privatizing state assets and services, review tax-incentive programs, investigate and eliminate waste and corruption in state government, and ensure the efficient and effective use of taxpayer dollars. The new committee would also take over responsibility for designing and implementing a performance-based budgeting program for the state. The bill was assigned to a conference committee to try to resolve differences in the language passed in each legislative chamber, but ultimately did not pass at the end of the legislative session. "We just simply ran out of time," Coffee said.

In addition, the Oklahoma legislature passed several other bills in its 2009 session that may lay the groundwork for increased privatization of state services. One of the most significant reforms signed into law was the Oklahoma Information Services Act (House Bill 1170), which created a state chief information officer to centralize state technology implementation and reduce redundancy and inconsistencies across state government.

The bill also expands the authority of the State Governmental Internet Technology Applications Review Board to include developing performance metrics for (a) quantifying the value of goods or services provided by state agencies and (b) considering whether state agency services could be modernized through the use of new technology to provide higher-quality goods or services and deliver value for money. According to Coffee, "Consolidating all technology and computer responsibilities into one office will bring Oklahoma into the 21st century and save taxpayers millions of dollars. ... This will provide for ease in communicating data and information throughout agencies and better serve all Oklahomans."

Governor Henry also signed House Bill 1963, creating a task force to study the privatization of CompSource Oklahoma, the state workers' compensation insurance monopoly. The bill states the legislature's intent that CompSource be converted into a private insurance company no later than December 31, 2010 and the new task force will develop a privatization plan to meet that goal. The plan will include an assessment of the potential impact of privatization on current CompSource employees and the most appropriate means of addressing it.

Also, the signing of House Bill 1055 created a new State Employee Health Insurance Review Working Group to study the most efficient and cost-effective way to deliver the highest level of health care for state employees at a competitive price. The working group will report on ways to reduce the costs of state employee health care coverage, offer state employees choices in health care plan designs to allow them to determine what coverage best meets their needs, and maximize the state's leverage in buying medical services and supplies. The working group is authorized to retain the services of private-sector consultants with expertise in state plan design and health care purchasing.

The Annual Privatization Report also provides a comprehensive overview of domestic and international developments in air and surface transportation, including a wide-ranging overview of the current state of the infrastructure finance market, a review of the latest in highway and airport privatization, and a review of the latest in air traffic control reform and aviation security.

The report also examines four emerging issues attracting significant attention in policy circles. First, we offer a summary of the federal bailouts and stimulus spending. We also review efforts that expand and modernize port infrastructure through public-private partnerships. The report also reviews the latest developments in the fields of private corrections and mental health services.

In sum, the federal deficit is astronomical, states are swimming in red ink, and local governments are out of cash. Taxpayers have been hit hard by the recession and cannot be expected to bail out big-spending politicians. To deal with today's economic realities, political leaders need to seek out innovative public-private partnerships and tap the efficiencies in the private sector. The Annual Privatization Report details hundreds of ways to move towards better, cheaper government.

Leonard Gilroy (M.A. in urban and regional planning, Virginia Tech) is the director of government reform at Reason Foundation and editor of the Annual Privatization Report.