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The Push to Privatize

Colleen O'Dea | June 9, 2011

In theory, outsourcing public services should save the state millions, but some ill-considered initiatives have ended up costing that much.

Trenton's War Memorial theater is in the process of being privatized.

A year after announcing a major effort to privatize about 40 government services in order to save $210 million, the Christie administration is finishing up details on its two most significant deals to date: the transfer of operations of New Jersey Network (NJN) to outside management and the private leasing of the state’s two racetracks.

Neither deal is final. Negotiations with the track operators are ongoing, and the legislature must sign off on the NJN proposal. But once the details are hammered out, the move could net the state $30 million or more in savings and income.

The move to privatize services has met with mixed response. Democrats have criticized the Christie administration's efforts as based on ideology. Some departments have rejected the idea as impractical. Yet other administration officials have vowed to search for new ways to outsource government operations to the private sector. The state has also not announced any program or entity to monitor the privatized services, as has been strongly recommended.

"Governor Christie is committed to using the vast, largely untapped potential of the private sector in a sensible way to meaningfully reduce the cost of government operations, increase efficiency and achieve real savings for the overburdened taxpayers of New Jersey, wherever appropriate," Kevin Roberts, a Christie spokesman said. "We expect current efforts, as well as future opportunities, to bring real savings."

Roberts called the recommendations of the New Jersey Privatization Task Force, headed by former congressman Dick Zimmer, "a good start" and said several of the proposals, as well as others not in the report, "are being vigorously pursued" and will eventually help balance the state budget.

Still, what was expected to be the most lucrative of the projects -- outsourcing toll collections on the New Jersey Turnpike and Garden State Parkway -- was taken off the table last month after toll collectors agreed to reduce their salaries from about $65,000 to $49,500 over two years. The task force had estimated at least $35 million in savings would result from outsourcing the toll collections.

But the state is moving ahead with two other big-ticket initiatives: The proposed privatization of New Jersey Network and the state’s racetracks.

Changing Channels

On Monday, Christie finally unveiled his administration’s plan to transfer the TV operations of New Jersey Network to another entity -- WNET Channel 13 New York Public Media -- and to sell the assets of its radio network to the New York and Philadelphia public radio affiliates.

Under the proposal, NJN would become NJTV, operated by a new non-profit entity established by WNET called New Jersey Public Media. The five-year deal would guarantee a New Jersey news show similar to NJN’s nightly news would be broadcast four times a day. The state would retain ownership of the licenses but all but six of NJN’s 124 state employees would be laid off. (The six retained employees are needed to operate several TV transmitters and broadcast facilities.)

The TV deal will not garner the state any cash, and New Jersey will give the new station about $4.7 million in subsidies – $2.2 million in Corporation for Public Broadcasting money and the rest in net revenue from the leases of space on the state’s broadcast towers and educational broadband spectrum. That money is to be used to fund Jersey-centric programming, said Andy Pratt, a treasury spokesman.

Still, the net savings to the state is estimated to be at least $11 million, most of which is in salaries.

Five of its nine local radio licenses would be sold to WHYY in Philadelphia for $926,000 in cash and $926,000 in in-kind compensation such as public service announcements and educational resources.

From New York Public Radio (NYPR), which operates WNYC AM and FM and WQXR FM, the state would get a $1 million cash payment and $1.8 million that includes free public service message time over the next five years and New Jersey-focused public radio programming, according to Quinn. Christie said NYPR will open a New Jersey news bureau.

The legislature has two weeks to consider the deal and some lawmakers are already questioning the transfer. The Assembly Budget Committee has scheduled a hearing for today and Senate President Stephen Sweeney (D-Gloucester) has promised a hearing in the upper house, as well.

"Any deal, especially one conceived behind closed doors and formulated in private, deserves a full public airing," said Senate Majority Leader Barbara Buono (D-Middlesex).

A Day at the Races

Further along and less controversial are the lease agreements between the state and two private operators for Monmouth Park and the Meadowlands Racetrack.

John Samerjan, a spokesman for the New Jersey Sports and Exposition Authority (NJSEA), said talks are "ongoing" for both tracks. The state announced agreements last month -- with Jeff Gural for the Meadowlands and Morris Bailey for Monmouth Park -- to allow both tracks to offer spring racing.

The plan is to permit each operator to lease one of the tracks and get NJSEA’s licenses to operate Off Track Wagering facilities, including the approved site in Bayonne for Gural and the already operating Favorites at Woodbridge for Bailey. Gural has reached agreements with a number of unions and announced plans for a new, smaller grandstand at the Meadowlands.

Other details are still being worked out.

"Gov. Christie's stated goal was a 'self-sustaining' horse racing industry without operating loss subsidies or purse enhancements," Samerjan said. "The private operators would be responsible for the finances of the two tracks."

He said each track showed operating losses "in the millions" last year and expected more details would be announced soon.

The Governor’s Advisory Commission on Gaming, Sports and Entertainment estimated the combined losses of the two tracks last year at $18 million.

In the Money?

Whether other privatization efforts will raise much cash remains to be seen. Zimmer conceded that the future of his task force’s privatization recommendations "depends on the motivation and enthusiasm of the respective cabinet officers."

A few projects have gone out to bid. Some departments are working on the paperwork needed to seek proposals from potential private operators. Others are studying the recommendations. Many cabinet officials have rejected the suggested changes. Among these are suggestions that the Motor Vehicle Commission privatize paperwork and inspections. Another proposal that's been rejected is for Treasury to outsource hospital bad debt collection.

The Department of Transportation (DOT) rejected a suggestion to outsource the emergency service patrol after determining it could save $6 million a year and keep it in house.

Jim Simpson, the state transportation commissioner, pointed to that decision, as well as others, as proof that the Christie administration is not seeking to privatize due to ideological concerns. The state transportation department also chose to bring some professional services work back in house because it costs $1.5 million less than contracting out to private firms.

"There is not any ideological bent in this administration to outsource or privatize all costs," added Simpson. "Privatization is not a panacea. It is up to the leader of each agency to decide where it would be beneficial." However, the DOT is planning to embark soon on a pilot effort to privatize maintenance, including pothole repair, mowing, snow plowing and other tasks, on a few sections of state highways to determine how much it might save.

The privatization task force recommended that the DOT and the highway authorities privatize highway maintenance. Although it did not give a dollar estimate, the report suggested the state could save between 6 percent and 20 percent by using private vendors.

"If it's cost effective, we could award a contract, but we are under no obligation to do so," said DOT spokesman Joe Dee, adding there is no timetable for the pilot and the request for proposals has not even been written yet.

The total in savings to the state budget for the task force-recommended programs in process, including the operation of the War Memorial in Trenton and a state-operated golf course in Wall Township, is about $5 million. Because most of those are in the bidding process, that savings would be realized in the new fiscal year starting July 1.

Other initiatives, such as the multistage closure of the Vineland Developmental Center, with clients moved to community facilities, are expected to save substantially more money but at a future date. The ultimate closure of Vineland in June of 2013 should net the state $30 million in savings, said Pam Ronan, a spokeswoman for the Department of Human Services.

Taking Care of Business

Zimmer said privatization will save money when it is appropriate and properly monitored.

"Provided that it is implemented sensibly, privatization offers many benefits to governments and taxpayers, including lower costs of service delivery, improvements in the quality of public services and access to private sector capital and professional expertise," the report stated. It quoted a study by the Reason Foundation, a libertarian-leaning think tank, that found privatization efforts around the country have saved an average of 10 percent to 25 percent. It also pointed to successful privatization programs in several states, including Virginia, Florida and Indiana. And it enumerated more than a dozen state services that already are at least partly outsourced in New Jersey, including the computerized child support tracking system, fingerprinting for background checks, and the service areas on the New Jersey Turnpike and Garden State Parkway.

Detractors, however, keep bringing up several high-profile prior efforts at privatization that went awry.

There was the contract awarded in 1998 to Parsons Infrastructure and Technology Group for the enhanced motor vehicle inspection system. The system broke down within weeks of implementation, and cost overruns and change orders added $200 million to the original $392 million contract. A State Commission of Investigation (SCI) report found the state could have done the same work itself for $250 million less than it paid Parsons.

Similarly, the SCI blasted the state’s E-ZPass installation efforts. MFS Network Technologies led a team that got the contract without going through the normal bidding process. As of the end of 2003, the state had spent $575 million and taken in only $100 million, mostly from the leasing of the fiber optic cables along the toll roads and not, as originally projected, from toll violations.

In discussing E-ZPass and the motor vehicle inspections programs, the SCI blamed the failures in both cases on a "lack of due diligence, flawed contract documents, manipulation of the bid evaluation process and failure to heed reasonable warnings."

There have been other failures, including in school construction, state tax collections and inmate health services.

"Really, almost every privatization effort New Jersey has had on a large scale has been pretty much a disaster," said Hetty Rosenstein, New Jersey director of the Communications Workers of America (CWA). "The idea that we are even arguing about this, given the track record, is ridiculous."

The privatization report said failures can be avoided with the establishment of a "permanent, centralized entity to manage privatization and related policies aimed at increasing government efficiency." It suggested some other rigorous management practices, including a bidding process that includes multiple bidders, rewards and penalties for work and independent, vigilant monitoring of each contract.

Christie did not embrace that recommendation.

"They did not adopt our proposal to have a central clearinghouse and evaluation at the executive branch," Zimmer said.

But he stressed such an oversight body is crucial for success. "It is really important that the process have integrity so it gives taxpayers a good value and doesn’t embarrass the administration," he said.

Assemblywoman Linda Stender (D-Middlesex) and chair of the Assembly State Government Committee, agreed.

"Privatization requires substantial oversight and monitoring, otherwise it can open the door to unscrupulous business operators and lucrative contracts paid for at the taxpayers’ expense," she said.

But Stender also said she is concerned that "privatization is a Trojan Horse being used to union bust, which I oppose."

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