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Partnerships: Illinois in Many Ways Leads the Pack on Public-Private Partnerships

Anyone who logged on to the Illinois Lottery website in September to read the bids from private firms vying to manage the lottery came across pages of blacked-out information. 

All the documents associated with the bid were posted to the site soon after the winner, Northstar Lottery Group, was announced — just as Gov. Pat Quinn and lottery officials had promised. This was the public’s chance to look at the proposals for the first-in-the-nation plan intended to raise money for capital construction projects. However, according to Quinn, large portions of documentation were redacted at the request of the private firms involved. 

As state and local government officials across the country start to see red ink in their budgets, some are looking to private interests to lease assets, provide services typically administered by the government and invest in infrastructure projects that might not be built without private investments. Illinois is in many ways leading the pack on public-private partnerships, but experts say state officials need to work harder to ensure that such agreements are transparent, well-managed and beneficial to the public.

Former Gov. Rod Blagojevich pitched the idea of leasing the lottery to a private company for a large infusion of quick cash. The idea was a no-go because it would, in essence, create a private lottery, which is illegal in the United States. 

Illinois instead tapped Northstar — which represents three vendors currently providing services to the Illinois Lottery, Rhode-Island-based GTECH Corp., New York-based Scientific Games Inc. and Chicago-based Energy BBDO — to manage lottery operations for 10 years. 

Northstar pledged to bring in $1.1 billion more than the state would have made on its own and $500 million more than the competing firm, Camelot Group, said it could increase revenues. If Northstar lives up to that pledge, it will get incentive payments. If the firm cannot reach its own goals, it must pay back half of the difference to the state. If it does not bring in as much as the state estimates it would have made on its own, the firm has to repay the entire shortfall. 

Lottery officials will work alongside Northstar and have veto power over the group’s decisions. Acting Lottery Superintendent Jodie Winnett conceded that a private firm could run the lottery more effectively than the state, saying it is hard to stay on the cutting edge of promotions when dealing with the red tape of government. “To be a nimble responsive marketing organization [as part of a large bureaucracy] is difficult,” she said at a Chicago news conference. 

The bidding process for the lottery contract was roundly criticized for lacking transparency. Camelot filed a complaint alleging that the selection of Northstar was a foregone conclusion from the start. The complaint says Northstar got preferential access to information and officials, and that the heavily redacted online release of the two firms’ bids makes it impossible to determine which one was best. Camelot has asked the Illinois Department of Revenue to put a hold on awarding the contract and reopen the bidding process. Another firm eliminated earlier in the process, Intralot S.A., has also filed a complaint. The Department of Revenue is reviewing both while continuing to take the necessary steps to hand over management to Northstar. 

Jeffrey Cramer, who helped to investigate bidders and the selection process for the state, said the department took great care to ensure Northstar and Camelot got equal access to information, including using an identical script for meetings with each firm, “This process is not going the way of the Illinois’ … well-documented history of corruption,” Cramer, managing director of the Chicago office of Kroll’s Business Intelligence and a former prosecutor, said at Chicago news conference. 

David Merriman, associate director of the University of Illinois’ Institute of Government and Public Affairs, says there is a perception that government cannot be as “market-oriented” as the private sector. But he added there are times when the public does not want government services to be administered by the basic capitalist principle of profit over all other concerns. Merriman says while increasing lottery revenues could be a positive for the state, “we probably don’t want the lottery to sell lots and lots of tickets to poor neighborhoods and sell false hope.”

E. S. Savas, a presidential professor at Baruch College in New York, says contracting private businesses to provide government services, something Illinois does for everything from foster care to providing school lunches, became popular in England and the United States during the 1970s. The concept of public-private partnerships has since expanded to a large variety of models. 

Leasing large revenue-generating assets, such as toll roads, to private investors creates a huge cash infusion without the political hit of a tax increase. Meanwhile, private companies can increase tolls to a level that officials often say would be impossible for them to achieve for fear of alienating voters. 

Perhaps the most infamous example of that is Chicago’s 2009 lease of its 36,000 parking meters to investor group Chicago Parking Meters. The group paid $1.15 billion to lease the meters for 75 years. 

That move came on the heels of the 99-year lease of the Chicago Skyway for $1.8 billion in 2004. According to a report from then-Chicago Inspector General David Hoffman, the Skyway deal was the first of its kind in the country. “While [public-private partnerships] had been used to finance the building of new infrastructure, this was the first major agreement where an existing revenue-generating asset was leased to a private company in exchange for a large upfront payment.” 

Neighboring Indiana followed suit in 2006 with a 75-year-lease of the Indiana Toll Road, which brought that state $3.8 billion. 

“We’re taking steps that no other city or state is taking to cushion our taxpayers from the bad economy and keep our city moving forward. This agreement [to lease the city’s parking meters] is very good news for the taxpayers of Chicago because it will provide more than $1 billion in net proceeds that can be used during this very difficult economy,” Mayor Richard Daley said at a Chicago news conference after announcing the winning bid.

But any triumph officials may have felt over the deal soon faded. As fees went up and many meters malfunctioned, public backlash hit a fever pitch. The Chicago Sun-Times reported a spike in incidents of vandalized meters. 

The deal allows Chicago Parking Meters to increase the number of hours when people are required to feed meters and to double rates by 2013. Merriman, a public finance expert, says if officials are going to let private firms spike tolls on infrastructure, the state should consider ways to help low-income residents afford travel through tax benefits and better public transit. “I don’t think we want the private sector to be doing that kind of social engineering.”

Hoffman’s report accuses city officials of rushing into the agreement and leasing the meters for almost $1 billion less than the city would have made if it had hung onto them.

The report says projected revenue from the lease was included in the city’s proposed 2009 budget before Chicago officials even knew how much it would bring in. Hoffman’s report says the City Council backed itself into a corner with that move before knowing the specifics, such as the amount of the rate increases, because failing to approve the meter lease would mean tossing the budget. 

The council accepted the plan with a 40-to-5 vote just two days after the details of the lease went public. The inspector general also took issue with the rapid timeline in his report: “There is simply no reason for these types of decisions to be rushed through the City’s legislative body, with little time to digest and analyze a complicated transaction, with limited information provided and with little opportunity for public input and reaction. This has the obvious effect of making informed deliberation, consideration of alternatives and potential opposition less likely. “

Last May, Daley took the heat for some of the problems with the parking meter lease. “I’ll take the responsibility. I’ll take it. ... There should have been a transition — a much better transition — and there wasn’t. That’s one thing we learned. There should have been a three-month transition,” Daley told the Sun-Times.

However, he still defended the move, saying it prevented a city budget crisis. 

Merriman says politicians often use the money from such deals “as a crutch to avoid making hard decisions,” such as difficult cuts or a tax increase. He adds, “From an economic point of view, selling off a public revenue source is the same thing as borrowing.”

Despite some of the setbacks in the parking meter deal, Savas, who also served as assistant secretary of the U.S. Department of Housing and Urban Development under former President Ronald Reagan, says public-private partnerships can benefit governments so long as officials take a long view when creating contracts and strive for transparency. 

“The private sector generally survives by providing good service at a price people can afford,” Savas says. 

He says governments must set strict standards for how they want a program to be run or an asset to be maintained and must follow through with oversight and penalties if necessary. He added that Illinois — and especially Chicago — must make strong efforts at transparency to put the public at ease because of a longstanding reputation of corruption. Savas agrees that entering into a partnership with the private sector for quick cash is not ideal, and such arrangements should instead be used to achieve specific goals, such as paying off debt or realizing large transportation projects. 

Illinois is shopping just such a plan. The Illiana expressway, a highway that would connect Chicago’s south suburbs with Indiana, has been proposed for 20 years. Politicians from both states hope pitching the route as a toll road to private investors will jump-start construction, since neither state can afford to build the road now. 

Daley is also seeking private backing for infrastructure projects in the city. He traveled in September to China and Korea, where he said he would seek investors.

The mayor created a panel to look into building a privately funded high-speed rail line to move people quickly between downtown Chicago and O’Hare airport. He said investors from China, Japan and the Middle East have expressed interest.

Proponents of public-private partnerships warn that botched plans — lacking transparency and competent management — make voters less open to public- private endeavors that are well-planned and beneficial. 

The Chicago-based Civic Federation, a research organization that seeks to promote government efficiency, supports the concept of public-private partnerships in principle. But federation president Laurence Msall, who is also a member of Illinois Issues’ advisory board, says both Chicago and the state made some mistakes in their recent endeavors. 

He says the lack of openness could give public-private partnerships a bad name with Illinoisans. “The state of Illinois should do a much better job of providing full disclosure and transparency.”

The federation opposed the city’s use of Skyway and meter lease profits to fund the daily operating budget. The group called on the City Council to create a process to determine whether to use proceeds from a large asset lease to shore up the city’s operating budget in an emergency. Msall says that would require officials to prove that a so-called crisis warrants spending part of a one-time payment.

“If you spend it all in one year, then you have to figure out what you are going to do for the other 98 years,” he says. 

Even though economic times are tough, Msall says the state should proceed with care on any future deals with the private sector and consider the long-term benefits and drawbacks of its investments. “We shouldn’t lose our heads. We should learn from past mistakes.”

 

A shaky partnership

Some public-private partnerships come about as a means of survival for an entity the government deems beneficial to the public. In one such case, however, the state pulled its support during the current budget crisis. 

Wildlife Prairie State Park near Peoria opened in 1978. It was managed, owned and funded by the Forest Park Foundation and was completely independent of the public sector. But after years of operation, “the foundation’s resources were becoming smaller and smaller or at least less liquid,” says James Tomlin, Forest Park Foundation vice president and treasurer.

So, with the help of then-Gov. George Ryan, the park and some surrounding land owned by the foundation became the property of the state of Illinois in 2000. The foundation continued to manage the park and to contribute some funding.

In recent years, money from the state has become spotty. Though funding was appropriated for the park last fiscal year, the foundation received no money. This year the park’s funding has been cut entirely. The foundation supports other projects, and its leaders feared keeping the park afloat would tap out all their resources. 

Half the park staff was eliminated through a voluntary buyout. The group Friends of Wildlife Prairie State Park was created to take over funding and running the park, but the land still belongs to the state. Tomlin says the group may ask the state to give back the land around the park so it can be leased, sold or used in some way to generate revenue.

Even though the end result of partnering with the government is a park that is publicly owned but not publicly supported, Tomlin says he does not regret the choice. “I think it was a positive move. I think that we are farther along now than we would have been had we not been a state park.”

Illinois Issues, November 2010

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