Rauner Poised To Pursue State Privatization Deals

Governor wants more revenue but spinning off taxpayer-owned assets and services is risky business and ultimately requires asking the tough question: “Why do this?” reveals a BGA Rescuing Illinois report.

John Cullerton photo courtesy of the Sun-Times.

This story was published with the Illinois Times.

When Gov. Bruce Rauner announced plans in October to sell the James R. Thompson Center, he made a pitch worthy of his deal-making days in the private sector.


“We’ve got to drive value for taxpayers,” the former private equity executive said as he asserted the building is ineffective for government offices and declared his plan “good news” for Illinois.

Bruce RaunerRauner said the downtown Chicago office tower isn’t the only property being eyed for sale as he’s reviewing all Illinois-owned assets, including those in central and downstate Illinois. His comments follow a union’s earlier disclosure that Rauner is asking state workers for more latitude to seek private operators for government services.

As Illinois falls short of cash, faces declining revenue and wrestles with more than $100 million in unfunded pension obligations, Rauner is signaling that one way to ease those financial burdens is by spinning off government assets and services to private operators for millions of dollars and likely more. It’s not a new idea: Past governors from Jim Edgar to Pat Quinn embraced aspects of outsourcing.

But the state’s past ham-handed execution of private deals — from a veteran’s home to the lottery to health care for prisoners — illustrates why privatization is no panacea or cure-all.

Often, the actual process to approve such deals historically lacks transparency, oversight and protections to make sure the government doesn’t get hoodwinked, a Better Government Association analysis finds.

Although Rauner offers few details of his plans for privatization, his fellow Republicans in the Legislature have brought ideas to him in hopes that — given the state’s finances — they can convince Democrats who control the General Assembly to consider such proposals.  


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“I do believe it is a prudent option,” said Republican House Minority Leader Jim Durkin. “We have to look into every area of government for efficiencies.”

Here’s a sampling of areas Rauner and his fellow Republicans are considering for privatization:

  • The Department of Commerce and Economic Opportunity. Privatizing the business recruitment agency is a top priority for Rauner. This year, House Democrats largely gave Rauner what he wanted in a bill, but the governor said he couldn’t support a sunset provision to review the private contract in three years.
  • The Department of Corrections. State Sen. Dave Syverson (R-Rockford) says Illinois can save substantially by setting up a private nursing home for aging inmates. While corrections reform advocates say elderly prisoners should be housed in a central facility, neither they nor Democratic lawmakers interviewed support a private operator.
  • The Department of Central Management Services. Sen. Michael Connelly (R-Lisle) thinks the state’s central management services can be reformed to hand over functions to the private sector. Among the areas: property management, which can be better handled by a private company, he said. Sen. Syverson agrees, saying everything from landscaping to fleet vehicles should be examined.
  • State buildings. Durkin introduced legislation to help speed Rauner’s proposed sale of the James R. Thompson Center in Chicago. Assessing the value of state-owned properties is prudent and the Thompson Center is “the whitest of white elephants of state government,” Durkin said. (See sidebar: Save, Don’t Raze Thompson Center)

A more near-term agenda item is the Illinois Lottery. After a deal to outsource management of the Illinois Lottery flopped in spectacular fashion, Rauner is looking for a new private manager, a move one longtime critic says would be a mistake.

“I don’t think the default should be give it back to private industry,” state Rep. Jack Franks (D-Woodstock) said.

For years, Franks repeatedly criticized the lottery plan, an agreement struck by Quinn in 2010. That contract with Northstar Lottery Group officially ended when Rauner fired the company in September. Northstar fell short of promised revenue goals by hundreds of millions of dollars.

The lottery isn’t the only private deal that ran into problems.

Concerns over the quality of medical care given to Illinois prison inmates raised questions about a $1.4 billion contract between the state and Wexford Health Sources of Pittsburgh.

The 10-year contract to treat the state’s more than 40,000 inmates was signed in 2011. An audit of the contractor’s performance at each state prison is under way after a push for a review by Illinois Rep. Greg Harris (D-Chicago), who said he received complaints about delayed care of inmates, staffing shortages and other issues.

One of the problems with the contract with Wexford is that there was no monitoring system put in place as a condition of the agreement, Harris said. Issues arising from poor care of the inmates ultimately may cost the state money to fix the problems, he added. Vendors need to be held accountable through better oversight, he said.

Noting that there were “clear problems” with the care of inmates, Harris said he believes contractors lack incentives to provide the best medical treatment unless someone from government is providing diligent supervision.

From a private company’s vantage point, he said, “there’s an incentive for putting money in your pocket rather than providing care.”

Under Gov. Edgar, operation of the Illinois Veterans’ Home in downstate Anna was handed over to a private manager, a move that led to a myriad of staffing problems, quality of service complaints and multiple vendors.
 


After seven years of private operation, Gov. Rod Blagojevich signed into law a measure in 2003 to take back state control of the facility. Citing poor quality of food and service, Blagojevich said in a statement at the time that under the state’s watch the priority for the facility would “be on care for veterans, not on a private company’s bottom line.”

That’s not to say Blagojevich was against selling off government assets or services to private operators.

 Far from it.

During his term, the state studied the possible sales of the Illinois Tollway and the lottery. A tollway sale proved to be too controversial and Blagojevich himself publicly dismissed the idea.  

Since taking office in January, Rauner’s biggest privatization push calls for contracting out management of the Department of Commerce and Economic Opportunity.

Skeptics point to problems with other states’ moves to turn business recruiting agencies over to private contractors, with a scandal-plagued program in Wisconsin serving as one of the most blatant examples of a seemingly good idea gone bad.



Democrats in the Illinois House passed a bill in June that gave Rauner his privately operated agency. But the governor said he wouldn’t support it because the bill requires a review for renewal of the program within three years.

In September, the Council 31 American Federation of State, County and Municipal Employees (AFSCME) put out a bulletin to its members asserting that Rauner was asking the union to give up a say on privatizing state jobs.

Under the union’s contract, the state is expected to discuss contracting plans with the union and explain why outsourcing is a more cost-effective use of state dollars.

The union stipulation is important.

In 2013, AFSCME successfully scuttled a contract with a company, Maximum Health Services, hired to sift out Medicaid fraud. The union argued that state workers could do the work more efficiently. It ultimately won an arbitrator’s ruling, which determined the private contract violated AFSCME’s collective bargaining agreement. Rauner and AFSCME are currently in labor contract negotiations.

Rauner’s office had no comment on the governor’s privatization plans. “I don’t have any information,” a spokeswoman said.

House and Senate Republicans, who are in the minority of the Illinois General Assembly, said they are hopeful Rauner can show leadership on the idea.

“This administration is markedly different than previous administrations,” Durkin said. “That’s how [Rauner] became successful. He gets the most out of his transactions for the beneficiaries he’s working for — he’s looking for every way to make Illinois more efficient.”

And while Durkin said he believes every area of state government needs to be evaluated for privatization, he adds that oversight is key.

“We have to quantify how we’re going to benefit from this. There have to be benchmarks in the contract with the vendor to make sure they are meeting objectives,” he said.

Durkin stops short of saying there needs to be a law laying out guidelines but adds that there are limitations to outsourcing.

“It’s not as if privatization across the board is good,” Durkin said.

In Durkin’s comment there seems to be some common ground with Democratic leaders who control both chambers of the legislature. Those leaders also express caution about going overboard.

“The problem is people pop up and say we should run government like a business,” said Steve Brown, a spokesman for Illinois House Speaker Michael Madigan. “That doesn’t really work. The government is there to provide some sort of a safety net.”

A spokeswoman for Senate President John Cullerton made a similar assertion.

The senate majority leader  “is open to some areas of privatization, but he’s not looking at it as a top-tier solution” to the state’s budget crisis, said Rikeesha Phelon, a Cullerton spokesperson.

Across the country, many local governments are cooling to outsourcing services following problems with private contracts, said Mildred Warner, a professor at Cornell University who studies and writes about the trend.

While some governments continue to explore privatizing services, a number are reversing the practice and bringing services back under full government control, she says citing her own research. Taken together, privatization is beginning to flatten in the U.S., she said.


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A key problem with public-private arrangements, according to Warner is that many lack true competition beyond a bidding process.

“Most people think they can sign a contract and walk away — you have to monitor,” Warner said. “There is no statistical support that privatization is cheaper. Why? The theory is competition leads to lower costs but there’s no competition. It’s still a monopoly and private actors maximize profit at the cost of quality.”

Warner and other academic researchers point to Chicago’s privatization of the city’s parking meters as a poster child of a bad deal. Under former Mayor Richard M. Daley, Chicago was paid more than $1 billion for a 75-year lease of the parking meters. The deal underestimated the value of the city asset and almost all the money was used to shore up budget shortfalls.

Chicago and Illinois politicians have touted the promise of privatization only to see expectations crash hard. Chicago’s parking meter debacle, which also resulted in hefty rate hikes, is the subject of academic research papers illustrating what can go wrong with such deals.

Users of the privatized Chicago Skyway raise similar gripes.

Recognizing the problems with the Daley administration’s deals, Mayor Rahm Emanuel endorsed a BGA-backed plan to make privatization contracts more transparent. The law, passed by the Chicago City Council November 18, may provide a template for entering state outsourcing deals.   

Rauner previously acknowledged private deals can go bad, criticizing the process set up by Quinn to select lottery manager Northstar. Others urge caution.

“I’m a business guy. I’m not saying you should never do privatization,” said Franks, a partner in a Marengo law firm. “We have to think long term. We have a fiduciary obligation to the taxpayers.”
 

About the Author

Brett Chase

Brett Chase investigates waste, fraud and corruption in a number of areas, including the environment, housing, health care and transportation. A former reporter and editor for Crain's Chicago Business, the Milwaukee Journal Sentinel and Bloomberg News, Chase has covered government and business for more than 20 years.