Look to state government privatization for ways to reform Virginia

Published 10:03 am Saturday, March 26, 2011

by Leonard Gilroy

As Virginia’s state government and many local governments throughout the Commonwealth look for ways to “reform” their operations, examples of what other governments are doing around the country will be helpful in those efforts.

Reason Foundation’s recently released Annual Privatization Report 2010 provides a comprehensive overview of state privatization activity, and it’s clear that states’ current fiscal malaise is prompting policymakers of all political stripes to either explore or implement privatization initiatives across a broad swath of services, large and small. Despite the fact that Virginia has historically been one of the more robust states for privatization, even Commonwealth policymakers well-versed in the subject may find inspiration and innovation in what other states are doing today.

Recent highlights in state privatization include:

n Illinois Lottery: In September 2010, Illinois Gov. Pat Quinn announced the winning bidder for a first-of-its-kind contract to take over the management of the state lottery. According to state officials, the deal will generate $4.8 billion for the state over the next five years, a $1.1 billion increase over the revenues projected under state management. In fact, that’s the most notable aspect of the deal-the private manager is guaranteeing increased revenues to the state over and above what officials estimate would be generated under in-house operation.

Under the terms of the 10-year contract, the winning bidder-Northstar Lottery Group, a partnership between vendors GTECH and Scientific Games-will take over responsibility for lottery operations, management and marketing functions in exchange for a portion of revenues. The state will continue to exercise control and oversight over all significant business decisions, including the state approval of annual business plans and ability to access all vendor information regarding lottery operations.

Vendors bid on the guaranteed revenues they would return to the state over the first five years of the contract, with Northstar pledging revenues to the state stepping up from $851 million in 2012 to over $1 billion in 2016. Through a combination of an annual management fee and incentives for enhanced revenues, Northstar could earn over $330 million over five years if it reaches its revenue targets.

n Child Welfare Services: The privatization of child welfare services has been an area of quiet, but substantive, evolution at the state level in recent years. Reason colleague Lisa Snell prepared a comprehensive overview of privatization trends in child welfare for the 2010 report, which notes a shift away from simply contracting for a subset of specific services toward performance-based contracts that focus on purchasing for results and outcomes, a key driver of accountability.

Further, the trend has also seen the scope of privatization expand from merely providing discrete services to the provision of large-scale services, with over a dozen states transferring some or all case management to the private providers, giving them primary decision-making authority over day-to-day case decisions.

Nebraska and Washington state are the most recent states to embrace privatized, performance-based child welfare case management, but Kansas and Florida are the two states that have privatized all statewide child welfare services (other than investigations), providing valuable case studies.

An April 2010 Casey Family Foundation report examined both states’ experiences, and it found that Kansas’ child protection system has benefited from privatization through increased data collection and accountability, a renewed focus on permanency and — most importantly — better outcomes, such as a 60 percent reduction in the number of children in residential placement, a doubling of adoptions and a 30 percent reduction in the average length of stay in care.

Similarly, privatization has brought significant progress in Florida, and while tricky in the early years of transition, the child welfare system has dramatically improved overall since implementation, with significant reductions in foster care populations and the number of children in out-of-home care, among other factors.

n Separately, the U.S. Department of Health and Human Services completed a demonstration project in 2010 evaluating three privatized child welfare programs (Florida, Missouri and Illinois) that employed a collaborative approach to planning and implementing performance-based contracts in foster care case management or residential youth services.

The project found that performance increased over time in all sites from year one to year two, with Florida improving outcomes by 13.4 percent, Missouri by 18.1 percent and Illinois by 29.1 percent. Such encouraging outcomes in these states should prompt others to explore how privatization could improve outcomes for children in public child-welfare systems.

Gov. Bob McDonnell’s Reform Commission can hopefully find some actions to replicate in Virginia from what is happening around the country as governments strive to re-design their programs to be more relevant in today’s society.

LEONARD GILROY is director of government reform at Reason Foundation and senior fellow for government reform at the Thomas Jefferson Institute for Public Policy in Springfield. He can be reached at leonard.gilroy@reason.org.