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Final Pa. Budget Fails to Make Up Lost Ground

12:03 pm in Uncategorized by ThirdandState

By Sharon Ward, Third and State

The Pennsylvania Budget and Policy Center has released a full detailed analysis of the 2013-14 state budget plan spending $28.376 billion, roughly $645 million (or 2.3%) more than in the 2012-13 fiscal year.

Governor Tom Corbett signed the budget into law late in the evening of June 30, 2013. Overall, the plan is $64 million less than the Governor proposed in February, reflecting nearly $113 million in reduced spending for public school pensions and school employees’ Social Security payments along with a shift of $90 million in General Fund spending off budget to other funds.

2012-13 General Fund Summary
(in $ Millions)
2012-13 2013-14
Change f/ 2012-13 %
General Fund $27,731 $28,440 $28,376 +$645 2.3%

The plan includes a small increase to basic education funding, $122.5 million overall, with $30.2 million allocated to 21 school districts through a supplemental allocation, on top of the $90 million increase in the Governor’s proposal.

After many years of cuts, most programs received small increases in the Governor’s proposed budget, which remained in the final plan.

Changes to pension benefits for current employees, the cornerstone of the Governor’s original budget proposal, did not occur. The Legislature does not seem inclined to tamper with benefits for current employees. A proposal to move to a 401(k)-style retirement plan for new employees gained traction later in the session but was not adopted. This proposal may return in the fall.

Also abandoned was an $800 million education initiative to be funded through the sale of state liquor stores. While the privatization vs. modernization debate held center stage until the last week of the session, the school funding component was quickly abandoned and was not part of legislative proposals. Privatization is likely to be considered in the fall, as well.

For the first time in two years, there were no major cuts to services for vulnerable Pennsylvanians; however, a bill that would expand Medicaid coverage in 2014, a state option under the federal Affordable Care Act, was left undone. Legislation including the Medicaid expansion won bipartisan support in the Senate, but the House stripped out the expansion provision from the bill. When the bill returned to the Senate, a last ditch effort to restore the Medicaid expansion provision failed in a dramatic Senate committee vote on July 3.

Finally, a transportation funding package that would repair crumbling infrastructure and give a much needed shot in the arm to Pennsylvania’s flagging job growth failed to pass the House, despite overwhelming support in the Senate.

Get all the details from PBPC’s budget analysis.

In the Bid to Privatize PA’s Lottery, One Is the Loneliest Number

2:23 pm in Uncategorized by ThirdandState

By Stephen Herzenberg, Third and State

Three Dog Night: One

One is the loneliest number that you’ll ever do …

Although I’m dating myself, some of you may recognize the Harry Nilsson song made famous by Three Dog Night. We recommend that Governor Tom Corbett download it to his iPod as he contemplates whether to accept a solitary bid from Camelot Global Services to take over the operation of the Pennsylvania Lottery. Whether privatizing state services or getting a new roof for your house, having a single lonely bidder is a red flag for a fleecing — for overpaying the contractor.

In its bid, Camelot promises 20 to 30 years of lottery profits that barely increase at the rate of inflation — even with the addition of new lottery games such as Keno and online gaming. The deal could produce big-time profits for Camelot with performance no better than the public system could produce. If the company maxes out its incentive-based compensation over the initial 20-year contract, it could receive $1.15 billion in today’s dollars; more when you count annual management fees.

A good deal for Camelot, but not for the Pennsylvania seniors who benefit from lottery proceeds, as the Keystone Research Center finds in a new report. The impact on seniors is critical since the lottery generates $1 billion a year for services that benefit area senior centers, low-cost prescription drugs, transportation for seniors, and property tax and rent rebates.

Experience from other states offers little to recommend this deal. Illinois is the only state to privatize its lottery, and it is now embroiled in litigation about how much the contractor owes the state because of poor performance. Indiana just privatized its lottery, so there’s no information yet on the results. Both states received more than one bid from private companies.

Pennsylvania’s move toward privatization is especially puzzling given the lottery’s good track record and record profits in the last two years. A recent Pennsylvania Treasury analysis found that administrative costs in the Pennsylvania Lottery were the second lowest, as a share of lottery system sales, of the 10 largest lotteries in the United States.

The Keystone report also raises questions about financial ties between Camelot and Greenhill & Co., the private consultant retained by the Corbett administration to manage the bidding process. Greenhill worked on the $576 million sale of Camelot to its current owner, and would receive millions if the privatization deal goes through. 

When you add up all the questions about this deal — starting but not ending with the lack of multiple bidders, the lack of transparency, the low revenue commitments, and an apparent conflict of interest that could motivate Greenhill to push for privatization — it seems like a game of tee-ball for seven-year olds: as in, “eight strikes and you’re out.”

Based on all the questions raised by Keystone and others, at the very minimum the Corbett administration should slow down and undertake in partnership with the Legislature a transparent and comprehensive review of lottery privatization before locking the commonwealth into a bad deal for a generation.


Let the Facts Get in the Way of a Good Story: Private School Bus Services in PA Cost More

4:12 am in Uncategorized by ThirdandState

A blog post by Stephen Herzenberg, originally published at Third and State.

The standard conservative narrative is that private delivery of services and goods trumps government delivery. In Harrisburg, for example, Governor Corbett’s Council on Privatization and Innovation often presents its goal as privatization, taking for granted that this will be more efficient and cost-effective.

In fact, the record on privatization shows that in many cases privatization fails to deliver promised savings and can undercut service quality. That’s part of why Cornell Professor Mildred Warner has found that local governments often bring work back in house.

Runaway Spending: Private Contractors Increase the Cost of School Student Transportation Services in PennsylvaniaEarlier this week we released a report, Runaway Spending, which underscores that you can’t simply assume private is better. The report documents that private school bus transportation services in Pennsylvania cost more than when districts provide their own transportation. Even so, the Pennsylvania trend over time is towards slightly more privatization, from 64% in 1986 to 72% in 2008.

Why? One reason in Pennsylvania is that the state reimburses school transportation services more generously when districts contract than when they self provide. Districts may also be attracted by the upfront fee they receive for selling their bus fleet. The downside of that sale, however, is that contractors have more leverage when negotiating terms for unanticipated additional services (e.g., for school sports teams that make the playoffs) or for a new contract.

The factors that make private services more expensive in the case of school buses are also at play in many other cases of privatization. These factors include limited competition in the private sector, the transition costs associated with any change in contractor or switch back to public provision, higher private-sector manager and executive salaries, the need to charge enough to make a profit, and the costs of monitoring private contractors.

Bottom line: the state and local government — and the Governor’s Privatization and Innovation Council — need to do their homework when considering alternative options for delivering publicly funded services. That’s actually a message that former Indianapolis Mayor Stephen Goldsmith brought to the council when he addressed its first meeting.

We’ll know that the Council has shed its ideological beginnings when it asks Matt Brouillette to give in his resig…I mean, when its recommendations include a balance of recommendations for in-sourcing, for contracting out, and for mixed public-private delivery — recommendations grounded in analysis of data, the dynamics of particular markets, and the value-added contractors provide compared to cost increases. And, oh yes, we do think that the quality of workers’ jobs with public versus private delivery should be a consideration.

We look forward to the Council inviting us to present the findings of our study. We also look forward to being invited to join the Council — even if Matt hasn’t left yet.

PA Must Reads: Predicting School Districts In Distress, Privatization and Hello Düsseldorf!

7:17 am in Uncategorized by ThirdandState

A blog post by Mark Price, originally published at Third and State.

The Harrisburg Patriot-News reports this morning on a new study that predicts fiscal distress in Pennsylvania school districts thanks to state budget cuts.

In a report titled “Sounding the Alarm,” the Pennsylvania State Education Association describes the impact that state funding cuts and policies are having on school districts’ ability to meet the educational needs of students.

In it, the union calls on the Legislature and Gov. Tom Corbett to put more money into public schools and remove the limitations on property tax increases required by the state law known as Act 1.

But the Corbett administration suggests there’s no reason for alarm.

In a cringe-inducing moment from that Patriot-News story, a spokesman for the Corbett administration chose not to read the study before reaching into his trusty public relations rapid-response handbook:

Tim Eller, Department of Education press secretary, said having only one or two districts out of 747 public school entities encountering severe fiscal distress is no reason to sound the alarm.

From the study:

The authors of a study published recently in the refereed Journal of Education Finance conclude that districts that are relatively small, rely heavily on a single source of revenue, have little buffer within their budgets, and have relatively high amounts of debt are more likely than other districts to cut classroom expenditures by at least five percent in a given year (Trussel and Patrick, 2012). The strongest of these indicators of underlying fiscal weakness is heavy reliance on a single source of revenue.

Districts entered 2011-12 in varied financial shapes. Applying the model from the Trussel and Patrick study to Pennsylvania school districts, and combining those results with trend data from districts’ General Fund balances over the last few years, strongly suggests that many districts across the state faced elevated risks for making severe cuts to classroom services, even before the other cost and revenue pressures reviewed below are taken into account. Read the rest of this entry →

Business Subsidies 101: Take The Money and Run

9:48 am in Uncategorized by ThirdandState

A blog post by Mark Price, originally published at Third and State.

The Allentown Morning Call reports that a plant operated by International Battery in the Lehigh Valley has closed its doors. The facility opened in 2008 with $4 million in incentives from the commonwealth.

International Battery, which opened an Upper Macungie plant in 2008 that was expected to create hundreds of jobs, has abruptly closed without explanation, workers said, surprising local officials who worked for years to attract the company to the Valley…

Phone messages left with various company representatives were not immediately returned. A message left with Wexford Capital, a Greenwich, Conn., hedge fund that invested $35 million in International Battery in 2010, was not immediately returned.

International Battery, which makes rechargeable lithium-ion cells and batteries for the military and industrial uses, was seen as a recruiting win in 2008 when it decided to invest millions of dollars in the Lehigh Valley and create manufacturing jobs.

Philadelphia City Paper reviews the effort to sell the Philadelphia Gas Works.

In 2007, the massive Texas utility company TXU was sold to a private-equity firm, on the advice of George Bilicic of mega-firm Lazard. It was the biggest leveraged buyout in history. Lazard made a tidy $13.5 million fee; Bilicic went on to work for the bankers who bought the utility. As for the utility itself? Energy Future Holdings (as TXU is now called) is now spiraling into debt so deep that Warren Buffett recently apologized for investing in it.

Now the same consultant (Bilicic) at the same company (Lazard) is advising Mayor Michael Nutter on a plan for a similar sale, this time of Philadelphia Gas Works (PGW), the city-owned utility. Potential conflicts of interest aside, consumer advocates contend a sale could hurt ratepayers and the 109,000 poor and elderly that rely on subsidized gas heat. But Nutter, citing a report by Lazard, says it could free the city from major financial liabilities, including costly pensions.

Since it is Friday, I will leave you with the Steve Miller Band.

PA Must Reads: It Pays to Be a Privatizer

3:30 pm in Uncategorized by ThirdandState

A blog post by Mark Price, originally published at Third and State.

The Associated Press reports this morning that Gov. Tom Corbett just hired the investment banking firm that employs former Gov. Ed Rendell to assist the current Governor’s privatization council. The firm will receive $150,000 for the first three months plus undetermined payments beyond that.

Too bad we missed the competitive RFP and didn’t get a chance to offer the state a better deal. This $150,000 adds to the $275,000 that Public Finance Management told the state House Liquor Control Committee last Thursday it will receive for its study of wine and spirits store privatization. Anyone keeping a running tab?

While privatization consultants rake in hundreds of thousands, The New York Times this morning reports that the war on public-sector workers in states like Wisconsin and Ohio has helped generate a wave of retirements that threatens the quality and effectiveness of public services. Let’s see, disable state and local government, privatize more services. Anyone seeing a pattern here?

But some experts and workers question the ultimate result of so much leaving, saying it is already leaving some governments short-staffed (and, in some cases, obliged to pay overtime) and at risk of losing institutional knowledge and technical expertise as older workers vanish.

‘What we’re going to see is a lot of young people reinventing the wheel,’ said Karen Gunderson, 56, who retired this year from her information technology job with the State of Wisconsin after 26 years, a few years sooner than she had intended, saying she felt that public workers were being ‘turned into scapegoats’ for a troubled economy.

‘We’re going to waste a lot of tax dollars with young people attempting things that were tried before. You can get people cheaper, but whether you save money, I don’t know.’

PA Must Reads: The Failure of School Choice and the Food Industry Eats Your Tax Dollars

8:12 am in Uncategorized by ThirdandState

Today's typical public school lunch (Photo: .imelda, flickr)

Today's typical public school lunch (Photo: .imelda, flickr)

A blog post by Mark Price, originally published at Third and State.

An op-ed in The New York Times this morning points out that “school choice” has increased educational inequality.

If you want to see the direction that education reform is taking the country, pay a visit to my leafy, majority-black neighborhood in Washington. While we have lived in the same house since our 11-year-old son was born, he’s been assigned to three different elementary schools as one after the other has been shuttered. Now it’s time for middle school, and there’s been no neighborhood option available.

Meanwhile, across Rock Creek Park in a wealthy, majority-white community, there is a sparkling new neighborhood middle school, with rugby, fencing, an international baccalaureate curriculum and all the other amenities that make people pay top dollar to live there.

Such inequities are the perverse result of a ‘reform’ process intended to bring choice and accountability to the school system. Instead, it has destroyed community-based education for working-class families, even as it has funneled resources toward a few better-off, exclusive, institutions.

On Sunday, another op-ed detailed how food manufacturers and food service companies are allegedly fleecing taxpayers while delivering food with little or no nutritional content.

PA Liquor Privatization Findings Too Good to Be True

1:44 pm in Uncategorized by ThirdandState

A blog post by Stephen Herzenberg, originally published at Third and State.

The privatization of Pennsylvania’s wine and spirits shops will not do much for state revenues but will usher in alcohol-related social problems.

Those were the key takeaways offered by researchers working with the Keystone Research Center at hearings of the Pennsylvania House Liquor Control Committee this week in Philadelphia.

University of Michigan researcher Roland Zullo, who has worked with Keystone on privatization issues, presented the results of his analysis of a pro-privatization study commissioned by Governor Tom Corbett’s Budget Office. As Zullo’s written testimony shows, the study, performed by Public Finance Management (PFM), was very open about its assignment: show how privatization will maintain annual wine and spirits revenue for the state, while maximizing upfront fees from privatizing.

As Roland shows, this is an impossible assignment. Consequently, PFM was forced to make implausible and incompatible assumptions. To maintain revenue neutrality, PFM assumed very high taxes on wine and spirits, a high annual fee from franchisees, and low price markups by private wholesalers and retailers.

These same assumptions, however, would make wine and spirits franchises a dud as a business opportunity – companies would make low profits or lose money, and they sure won’t give the state a big upfront check for the right to lose money. As Roland said, “I can’t square this circle.”

Keystone Labor Economist Mark Price reviewed the likely negative social impacts of privatization at the hearings this week.

He also showed that researchers for the Commonwealth Foundation left key variables out of their analysis of state differences in alcohol-related traffic fatalities, which they have used to argue that traffic fatalities are the same or lower in states with privatized alcohol distribution systems.

One of the missing variables was average miles traveled. Surprise! When people drive further they have a greater chance of an accident and a traffic fatality. Put the missing variables into the statistical analysis and you find that alcohol-related traffic fatalities are higher in privatized states than “heavy control” states such as Pennsylvania.

Morning Must Reads: Accountability in the Private and Public Sector or Making Money the Old Fashioned Way

7:27 am in Uncategorized by ThirdandState

It never ends - ILGWU Local 111 picket in Allentown, PA, March 15, 1964. (Photo: Kheel Center, Cornell University, flickr)

It never ends - ILGWU Local 111 picket in Allentown, PA, March 15, 1964. (Photo: Kheel Center, Cornell University, flickr)

A blog post by Mark Price, originally published at Third and State.

While cruising by Allentown on I-78 with Billy Joel’s greatest hits blaring on your stereo, you may have noticed just along the highway a big sign for the camera maker Olympus. Turns out the North American headquarters for the Olympus Corporation of the Americas is located in Allentown. The Allentown Morning Call reported Friday that the CEO of the parent company has been dismissed. Businessweek is reporting this morning there is more to the story:

Fired Olympus Corp. President Michael C. Woodford said he met with the U.K.’s Serious Fraud Office to request an investigation of payments made by the Japanese company to advisers in a 2008 acquisition …

Olympus … paid $687 million to two advisory companies related to its purchase of Gyrus Group Plc in 2008, the PwC report said. The fees were more than a third of the $2 billion purchase price, according to the report. Merger and acquisition advisory fees usually range from 1 percent to 5 percent.

As the Allentown Morning Call reported on Friday, the company had been seeking to aggressively cut costs via an undisclosed number of layoffs in Allentown over the summer.

Two words:

Job creators? Read the rest of this entry →