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Perils of privatization

Monday, Jun 23, 2014

* As this Sun-Times story shows, privatization often means less sunlight

Chicago’s Navy Pier — touted as the biggest tourist attraction in Illinois — has long been a patronage haven where political insiders turned for jobs and lucrative deals to sell everything from expensive meals to gumballs.

Who was cashing in used to be a matter of public record. It no longer is, since the state of Illinois and City Hall turned over operation of the government-owned pier to a private, not-for-profit group three years ago for $1-a-year rent.

Navy Pier Inc. doesn’t have to explain how it’s spending $115 million in government bonds that were sold to pay for a face-lift for the 98-year-old pier, either. […]

(F)ormer Mayor Richard M. Daley’s handprints are all over Navy Pier Inc. Five months before Daley left office in May 2011, his former chief of staff John Schmidt incorporated Navy Pier Inc. The deal for NPI to take over control and governance of the pier was signed a month before Daley departed City Hall, taking effect in July 2011. Also, NPI’s board includes Daley’s daughter, his former campaign manager, two of his former chiefs of staff, his onetime top City Hall lawyer and civic leaders who were longtime Daley supporters. […]

Beside a roster of pier employees and salaries, Brodsky also declined to make public contracts that Navy Pier Inc. has signed with restaurants and other vendors — all public information before his group took over in July 2011. […]

On Friday, the Better Government Association, which also was denied Navy Pier Inc. records, filed suit against McPier and NPI in Cook County circuit court to get them. The watchdog group argues the not-for-profit agency was created to shield pier operations from public view.

* And as this AP story shows, sometimes it doesn’t work as originally advertised

Illinois’ private lottery contract has never reached the lofty sales promises it used to win a bid four years ago and is expected to fall more than $200 million short of what it owes the state when the budget year ends June 30.

But Northstar Lottery Group says it’s been hamstrung by state officials, with whom they have an already frosty relationship and accuse of throwing up road blocks — from canceling games it wanted to launch to prohibiting the sponsorship of Chicago’s Pitchfork Music Festival in 2013 because of headliner R.Kelly.

Regardless, Northstar’s 10-year contract with the state details that falling short of its goals by 10 percent two years in a row is grounds for ending the partnership, no questions asked. It missed targets by almost 20 percent last year, and is on track to do the same this year. […]

When Northstar took over the 40-year-old program, it promised contributions of $1 billion to the state in the fifth year of its contract. But it has been about $400 million short since in its first three years — money that is supposed to go toward schools, charitable organizations and a $31 billion capital construction program launched in 2009.

* So, what could possibly go wrong?

Last year North Riverside officials received a letter from a state agency ordering the village to start paying more into its underfunded pension accounts or face a financial reckoning.

The ultimatum and a shortage of cash prompted the village to consider an unusual solution — privatizing its fire department. […]

The letters, obtained by the Tribune, detail an enforcement mechanism that will allow the department to divert sales taxes and other revenue from a town’s coffers to local police and fire pension funds starting in 2016.

The mechanism was included in a 2010 law that requires local governments to pay enough toward their police and fire pensions each year to make the pensions 90 percent funded by 2040. Currently, the state requires municipalities to make annual payments but does not have the same enforcement tool.

North Riverside officials are publicizing the fire department privatization plan in advance of a Department of Insurance hearing Thursday, during which they plan to pitch the idea.


- Posted by Rich Miller        

  1. - Steve - Monday, Jun 23, 14 @ 10:03 am:

    It’s disingenuous to call Navy Pier privatization. It’s private when the property is sold to the private sector. Until then ,it’s not private. After all, most private malls aren’t funded by government bonds.

  2. - DuPage - Monday, Jun 23, 14 @ 10:11 am:

    North Riverside’s privatization plan is obviously a scheme to not pay their financial obligations to their pension system(s).

  3. - wordslinger - Monday, Jun 23, 14 @ 10:12 am:

    –(F)ormer Mayor Richard M. Daley’s handprints are all over Navy Pier Inc–

    The great legacy of Richard II continues. He truly was the indispensable man.

    I guess that’s how you run government like a business. Big business surely loved him.

  4. - OneMan - Monday, Jun 23, 14 @ 10:14 am:

    The lottery thing is interesting because if I were Northstar I would have put all sorts of things in the contract in case the State of Illinois decided to be, well the State of Illinois.

    Reductions if video gaming came, reductions if they got in the way of my marketing reductions if the state got in my was as it were.

    But I suspect they wanted the business so bad, they either decided it would be best to ignore the ‘government risk’ as it were or didn’t see it coming.

    Heck some guy wrote about these risks 8 years ago…

  5. - A guy... - Monday, Jun 23, 14 @ 10:16 am:

    3 excellent stories for the price of one Rich.
    1) The whole Navy Pier story is fascinating, but their obligation to share info seems air tight now. It shows how the City Council does business. No reporting amendment in the agreement. I don’t even remember this happening in RMD’s last days. Or just very vaguely. It would seem this kind of thing was predictable with an agreement like this. But, it’s only making news now…3 years hence. Oy.

    2)With the proliferation of video poker gaming all over the place, a lot of lottery players have moved into these mini parlors instead of a less predictable lottery. The law of diminishing returns at work. “A fool and his money part quickly”. They’ll never hit those goals whether privatized or publicly managed.

    3) North Riverside is the first of many munis who will attempt privatizing. If you’re a non home-rule community (not sure if North Riverside is or not), it’s next to impossible to raise revenue to meet these pension payments even if you sacrifice a whole slew of other services. Go to referendum to raise taxes for public pensions? That would be a futile mission. The only way to fix this is through collective bargaining or cities and villages around the state petitioning for bankruptcy. This is going to get worse before it gets better.

  6. - walker - Monday, Jun 23, 14 @ 10:36 am:

    @One Man: Very impressive analysis that you wrote in 2006.

    The interesting policy question is: where’s the breakeven for the state when deciding whether to operate it internally or to sell. How do we factor in risk and unpredictability, versus presumed improvements in productivity?

    Do we just take the highest bidder, say “show me”, and lay off some risk. Or do we believe that at some level the State can run it “better.”

    Illinois is already among the most “privatized” and “outsourced” state governments in the country. That’s one reason we have a very low number of state employees per capita. It’s part of our management problem — not always part of our solution.

    Didn’t we try private fire companies at first, and find them lacking? Just sayin.

  7. - Bemused - Monday, Jun 23, 14 @ 10:39 am:

    Eventually this private non-profit thing will need to be looked into. Seems to be a way around some government regulations and you can not FOIA their documents.

    I bumped into this issue when a central IL Housing Authority created a non-profit to run some of their construction projects thru. It seemed to allow them to get around Prevailing wage and competitive bidding issues. I filed a complaint with IDOL who let it pass even though the Housing Authority documents showed they created the non-profit and controlled appointments to the non-profit board. Early on both entities shared board members.

    What was even more interesting, some of the revenue from the construction projects when finished went to bonuses for Housing Authority employees. This info was gained from Housing Authority minutes which could be acquired thru FOIA.

  8. - privatization - Monday, Jun 23, 14 @ 10:47 am:

    Looking into my Crystal ball I can see the future for Illinois. It will start slow and it appears already has in Chicago. We can privatize almost everything in the state and save billions on Pensions. We can also save on health insurance since the contractor would be in charge of that too. The Unions will not complain because as in other states the private employees will still be in the Unions. This will save the whole state! No more Pension payments other than the already. earned.

  9. - A guy... - Monday, Jun 23, 14 @ 10:51 am:

    Walk, we certainly have and certainly did see some issues with privatization in the Fire Service. I for one would like to see something different than total privatization. Some consolidation of public unions could alleviate some of these issues. What is a lot different now than before is how much more of the Fire Service is actually EMS service rather than Fire. That area is easier to privatize. There needs to be some “cool heads” negotiating in good faith on this before it gets out of hand. Only both sides can move this away from being caught between a rock and hard place. The more intractable people are on this, the worse it is for everyone.

  10. - Plutocrat03 - Monday, Jun 23, 14 @ 11:04 am:

    This is faux privatization at best. A coarse effort to eliminate public scrutiny as worst.

    Remember that sunshine is the best disinfectant……

  11. - phocion - Monday, Jun 23, 14 @ 11:07 am:

    Rich, you failed to include the most interesting nugget on the McPier article: The AG issued an opinion saying that McPier is exempt from FOIA. This is a breathtaking backtrack from AG Madigan’s oft-claimed position of a liberally construing the Freedom of Information Act. Fortuntely, an AG Opinion has, at best, persuasive authority with a Court. Hopefully the BGA will prevail in its litigation for a little sunlight at McPier.

  12. - Demoralized - Monday, Jun 23, 14 @ 11:10 am:

    I don’t see how FOIA applies to a private organization. The operation of McPier is now privatized. The fact that they are renting the space from the government doesn’t make them a government entity subject to FOIA.

    It’s fine if you think the set-up stinks. But that doesn’t give anybody a right to get info from a private organization.

  13. - A guy... - Monday, Jun 23, 14 @ 11:15 am:

    Demo, you’re absolutely right. Even if this looks like an abuse of power (it is), the time to address it was in the agreement, not 3 years later. This craziness was absolutely predictable. Subjecting NFPs to FOIA would have more unintended harmful consequences than anyone could imagine. That would be loony at a whole different level.

  14. - lake county democrat - Monday, Jun 23, 14 @ 11:19 am:

    Speaking of the lottery, the Sunday New York Times had an interesting op-ed referencing a Univesity of NY at Buffalo study about gambling expansion and the effect on the poor:

  15. - James the Intolerant - Monday, Jun 23, 14 @ 11:33 am:

    When I was with the city many of the electrical functions were outsourced. We paid twice what it would cost the city workers to do it. Since total benefits cost for employees was approx. 35%, including pension, that would seem to cost taxpayers more than the pension cost.

  16. - Arizona Bob - Monday, Jun 23, 14 @ 12:37 pm:

    =I don’t see how FOIA applies to a private organization.=

    It’s pretty simple. If you want to be transparent in government, you require that key bidding information, as well as contracts with vendors and hirees and their salaries, be submitted to the government agency. Then the docuements become subject to FOIA.

    Of course the entire intent here was to avoid transparency, and have taxpayers pay a premium to hire the politically connected to well paid, little work positions.You know, like the siz figure “pay off” non-profit board job Blago was looking to get his wife into, according to the phone transcripts.

    Seems like the Dems did a pretty good job of accomplishing that goal here.

  17. - Upon Further Review - Monday, Jun 23, 14 @ 12:39 pm:

    I cannot argue what happened with these contracts, but the deals smack more of crony capitalism than privatization. I have seen some improved results from some privatization deals such as when the Chicago Park District and the Cook County Forest Preserves turned over their golf courses to private managers.

  18. - Charlatan Heston - Monday, Jun 23, 14 @ 12:41 pm:

    Their 990’s are interesting but are far from the whole story…

  19. - Demoralized - Monday, Jun 23, 14 @ 12:41 pm:

    @Arizona Bob:

    My point was that a private entity isn’t subject to FOIA. As @A guy said, this was an issue to be dealt with at the time McPier was privatized. It is what it is now and I doubt there’s anything that can be done about it.

    Are you now advocating that anybody that does any sort of business with the government subject their records to FOIA? Do you know what can of worms you are opening? I thought you were for less government intervention.

  20. - Anon - Monday, Jun 23, 14 @ 2:01 pm:

    AZ Bob makes a good point (for a change)in suggesting that governments require certain information in any contracts with the private sector to manage public facilities. That way private companies aren’t subject to FOIA, but information pertinent to the public would be FOIAble from the government agency.

  21. - anon - Monday, Jun 23, 14 @ 2:14 pm:

    “Go to referendum to raise taxes for public pensions? That would be a futile mission. The only way to fix this is through collective bargaining or cities and villages around the state petitioning for bankruptcy.” If the voters aren’t willing to pay for pensions, why should they have any fire protection services at all? Let them fully internalize the risk of their house burning down and let them pay the vastly increased insurance premiums on their property as a result of living in an unprotected area. Enough is enough.

  22. - Fake Herzog - Monday, Jun 23, 14 @ 2:37 pm:

    Regarding the lottery deal: everyone likes to point out that the private company is falling short of its goals. Fine. It should be held to its own contractual goals (as long as the state is keeping up its end of the bargain). But, how many of these stories note that the private company is also bringing in more revenue for the state than the state ever did — in other words, despite falling short of the goals, Northstar is doing a better job than the state.

  23. - steve schnorf - Monday, Jun 23, 14 @ 3:05 pm:

    Fake, unfortunately for your point, we don’t know how much the non-privatized lottery would be bring in, so we have no idea whether Northstar is bringing in more or less that would otherwise be earned, we only know they are failing to do what they contracted to do

  24. - fed up - Monday, Jun 23, 14 @ 3:10 pm:

    Fake, what the stories dont mention is that they got the contract by falsly claiming the amount of revenue they would bring in. A competitor who submitted an honest bid but lost to Northstars inflated dishonest bid might be able to make more $$$ for the state.

  25. - Yellow Dog Democrat - Monday, Jun 23, 14 @ 8:26 pm:


    Also handy for getting around patronage prohibitions.

Sorry, comments for this post are now closed.

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