A lot of these kind of deals are not “privatization” kind of things. They are a very weird consequence of tax laws.
State and local governments can’t take depreciation on infrastructure. Private companies can. Solution: make it private.
So a chunk of government property is sold to a private company and then “rented” back to the government. The private company gets a break on depreciation on the property. The deal is complex but in the end, the state/local government ends up with a share of the tax savings the private company gets (just not labeled as such).
So the Feds basically end up paying out money to the company and the locals where before it didn’t. A lot of people at the Fed level would like to stop this as it is becoming increasingly common. If everybody did it for all their bridges and what not it would get incredibly expensive. But how to stop it is difficult.
The typical things put through these deals are buildings and bridges. (Aha!)
None of this has anything remotely to do with salaries, efficiency, competence, etc. It’s all about getting free money from Uncle Sam. (Which isn’t us at all. :dubious:)
I may be misunderstanding you, but I think the way you are saying this is either wrong or misleading.
Local governments recognize depreciation on capital assets in their Statement of Activities. There are optional modified approaches to depreciation as described in GASB 34, however local governments can and do recognize depreciation expense on infrastructure. Here is sample from paragraph 44 of GASB 34:
Furthermore, this really doesn’t have anything to do with tax law as state and local governments wont pay income taxes so there is no tax savings they are trying to capture through the sale/leaseback.
Sure. So can giving food stamps and free housing to elderly people who never had jobs that paid very much. Pensions are usually taxable; SSI isn’t.
Private entities, however, can reap tax benefits from depreciation, and those tax savings are something the state and local governments can sell. They can’t capture any tax benefits themselves, but they can sell them to entities that will, so what the government groups are trying to capture via sale/leaseback is the cash value of the tax benefits.
My experience as a government employee is that contractors do most things cheaper and better. Its incentives. The contractor wants to keep the contract and make money, so they hire those that are just qualified to do the job–If the request for proposal asks for an engineer and doesn’t specify experience level, they will bid the cheapest guy they think can perform the mission. Then, they keep a close eye on the bottom line and, typically, customer satisfaction–they want to win the contract next time around as well.
I remember once having problem with a task lead who just never got anything right. Nice guy, task oriented, but he was a lead–he needed to plan, phase and execute projects, not tasks. His boss came to me and asked If I had lost confidence in his staff and I said yes. That guy was gone in a week. They replaced him with someone who is very good at the job. If the first guy was a government employee, he’d still be working there. They wanted to keep the customer happy. This translates to a benefit to the government in efficiency, effectiveness and cost.
Additionally, government employees have it pretty good. At least on the technical side (engineers), we don’t get paid as much in salary as our contractor peers, but we get pretty good benefits that are costly–in particular, our health benefits and our retirement plan (401K AND pension).
This is not to say there is no role for government workers. You need government workers to oversee work, to make sure the contractor is executing to the contract and not short changing the tax payers, and to assess and mitigate risk. These are typically called inherently government functions.
Where before you were making assumptions that could make your statement true, the above regarding SSI is actually false. Social Security income is taxable to the recipient.
I’m not sure what point you’re trying to make with this.
I think there are some instances where there is a play to be made, but in the example that is the subject of this thread, privatization of the operation of the Casco Bay Bridge, this doesn’t work. The bridge won’t be owned by the private entity therefore there is no depreciation to be recognized by the private entity. In the general sense, only if the private entity has either actual or constructive ownership of the capital asset may they recognize depreciation expense. Granted there are instances where a local, state, or federal government may sell a capital asset to a private actor, but that’s fairly uncommon IME.
I think it can also be misleading to call deducting depreciation expense ‘reaping tax benefits’ since they are simply treated as ordinary business expenses. Taking a deduction for payroll isn’t what I would characterize as ‘reaping tax benefits’. More like normal business operations.
In any event, the amount of dollars contemplated with SSI would generally be too low to be taxable even if it was subject to tax.
And I’m still not sure the relevance, is there a thought that there is some fee shifting from paying for government pensions to welfare for the indigent? Those folks would be getting assistance regardless to I’m not seeing g what the point is. Highly benefited government union employees can be more expensive than alternatives. That’s not very controversial.
The relevance is that Supplemental Security Income (which is indeed non-taxable, like I said) is not a program for “the indigent”; it is a program specifically for the elderly who either have little work history or who spent their careers in low-wage low-benefit jobs and now in retirement have inadequate income to support themselves. (Disabled people are also eligible, again limited to those with a work history that does not yield sufficient disability income.) People get SSI precisely because they have no pensions and didn’t have jobs that paid well.
Consider those minimum- or near-minimum-wage bus drivers. They replaced government employees who earned a living wage and had both health insurance and a pension plan. In retirement, the government employees draw their pension and usually remain taxpayers. Meanwhile, the replacements during their working career didn’t earn a living wage, so even while driving the bus they were able to draw food stamps, have health benefits through Medicaid/MediCal, get housing assistance and/or LIEAP (low-income energy assistance–the government pays their heating bill), etc. In retirement, they’ve got no pension and their Social Security doesn’t pay very much, courtesy of years of low-wage work, so the taxpayers top up their income with SSI benefits, pay for Medicaid, hand out food stamps and LIEAP, etc. Including both their working career and their golden years, which group really costs more?
But it’s not like the lower wage replacements wouldn’t already necessitate those costs if they didn’t replace the higher wage counterparts at thE bridge. The costs you describe are built in and a net neutral. In the privatization calculus, the gain is reduction in cost for higher cost employees.
One of the things privatisation promotes is initiative. Take the bridge above. The operating company might decide to make more money by putting advertising on the bridge, for instance. There’s no incentive for government employees to do that. Or they might review the maintenance costs and find that a cheaper paint is just as good. Etc.
Exactly. They may find that cheaper paint is just as good because they don’t care if it’s insufficient at some future date because they won’t have to absorb the loss.
Private businesses are free to do what they like, but overwhelmingly they pursue safe guaranteed profits, which means disregarding long term benefits in favor of short term profits. Only the threat of a loss will have them spend money that does not guarantee a return.
In at least some instances, though, the lower wage replacements are THE SAME PEOPLE. They get laid off by the government and rehired, at lower wages and/or with fewer benefits, by the new contractor. If you take the same people and pay them less, such that they start qualifying for welfare to supplement their income, the wages and the welfare are coming out of different buckets, but ultimately it all comes from the taxpayer’s pocketbook. Moreover, when large employers in an area start paying less, that can drive down wages area-wide, and more people fall into the welfare-eligible category. That’s not a net neutral.
In order to have a net neutral, the higher-wage people who were laid off need to find jobs paying similar wages to what they earned before, while the lower-wage replacements need to be people who were either unemployed or had other lower-wage jobs. That’s not usually what happens.
This may happen some of the time, but it’s a stretch to say this is true all of the time. Private businesses are operated by people. Some will behave badly, and others altruistically. In both groups you will find people who will act without a guarantee of return. This applies to government workers too. Example, I bought my team donuts paid for by the company. No guaranteed return of any kind
I’m sure rehiring the same people does happen. It happens in the private sector as well. But again, unless the cost shift from higher wages to welfare is flat, there will be a net delta in overall cost. Do you think that calculus always ends up on the side where the employee is being paid more in dollars and transfer payments? If that’s true, then the worker would be better off, no?
They’re doing something interesting with contracting/privatizing around here (DFW area), where the state is contracting with private firms (happens to be Ferrovial from Spain) to front the money to expand and renovate existing freeways with managed toll lanes. They’re having the companies pay for all the improvements- tolled and non-tolled, with the agreement that the company can keep the tolls from the tolled lanes for some set period of time.
Seems like an absolutely great idea to me- everyone wins. The state gets a brand-new highway with more free lanes and better interchanges than before, the drivers get more free lanes and the option to drive the toll lanes if they want to pay to get somewhere faster, and the company that builds it gets a guaranteed stream of revenue for like half a century.
(yet, despite that, the Tea-party loons around here are dead-set against it, because OMG! TOLLS! FOREIGN COMPANY! and their brains shut down… so much as they aren’t already shut down.)
I have an idea of what you’re talking about, but the terms you couch them in are unnecessarily absolute and give the sense of a binary treatment between public and private actors. There are some giant players like Apple, Wal-Mart, Google, etc. who dominate the news with their behaviors both good and bad, but the private sector is composed of many more companies than those. To imply that private businesses are always or even most of the time willing to sacrifice longer term benefits for short term profits is a bold claim. Sure it happens, but the brush you use is the wrong size.
And it’s not like the private sector has a monopoly on short term focus. Election cycle politics makes can make for not the greatest choices at the federal, state, and local levels too.
Distinguish between “contracting out” and “privatization”.
Contracting out, as the OP describes - some or all the operations are run by a private entity, but the government retains ownership of the asset(s). The theory is that by efficiency and efficiency of scale, costs will be lower (and predictable) - and this savings will be split between the private operator (profits) and the government (savings). If you contract to an existing large corporation, their efficient HR department, payroll, administration, scheduling etc. will all do the same or better job cheaper than the equivalent civil service job; if they do this for multiple locations, economies of scale kick in.
The downside of this is that the obvious savings is by screwing over the workers. Why should a toll collector / garbageman / IT worker / bus driver work for more than minimum wage? Why should you need 40 hours a week? If you think your IT experience is worth more, meet Mohinder, who can do your job for less and support an extended family back in India. Plus, as others point out, in a term contract, there’s no incentive to plan for the future or the big picture; the company could lose the contract at the 3-year renewal, so why plan for the long term? And if they do lose it, which people get re-screwed over?
As for Privatization - handing the equipment over to the private sector - it has its own complications. The government gets a huge infusion of cash (or several payments) that appear to make the government’s budget balance. This is like selling the furniture to buy groceries, it only works for a while and leaves the government worse off; plus they lose a lot of control ovr key assets. (Should a main bridge really be privately owned?)
You know that businesses operate on a bottom line basis and government doesn’t, right? Businesses have the option to cut their losses if they lose money, government can’t do that when providing for the public good. A business may invest for a long term goal, but they don’t last long if they throw good money after bad when the returns expected from that investment don’t pay off.
I think that’s too simple a presentation. A non-profit is a business that isn’t government. Do they operate on a bottom line basis? What is a bottom line basis?
A governmental agency can make cuts when they are losing money, or more accurately when they do not have sufficient budget. CA has been furloughing state employees for some time during low budget years. Local governments have reduced pension benefits for new hires, the state has sought voter approval for bonds to fund shortfalls, etc.
It’s true that a business won’t last long if they make continually poor investment decisions. This isn’t unique to business though. SeeOrange County and the City of Bell.
