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When public projects get too risky

Posted by David Kassel on April 10, 2011

In the March/April issue of Public Administration Review, two academic researchers describe an extraordinary breakdown in public sector management.

In “Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County, Alabama,” Michael Howell-Moroney and Jeremy Hall detail a highly risky debt scheme that county officials engaged in, hoping to finance a major sewer project without raising sewer rates.  It didn’t work.

The scheme involved the county’s use of auction rate debt and financial derivative instruments known as rate swaps — yes, the same types of instruments that fueled the subprime mortgage crisis.  The whole thing went awry when the national mortgage crisis hit; and, as of the writing of the article, Jefferson County was on the verge of bankruptcy, unable to pay service on $3.3 billion worth of sewer debt.  Jefferson County is relatively small by national standards, but it holds the sixth highest level of debt of any county in the nation.  If the county were to go bankrupt, it would be the largest municpal bankrupty in U.S. history.

Howell-Moroney and Hall take us step by step through a thicket of poor judgment by private financial institutions, mismanagement and corruption by state and county officials, and a lack of adequate oversight by regulatory authorities.  They tell a compelling story, but it should be noted that  Jefferson County isn’t alone in engaging in risky financial and managerial schemes for public projects, although it appears to have dug itself deeper into a financial and legal mess than most. 

In recent years, municipalities around the country have resorted to novel and often complex financial and managerial arrangements in undertaking similar capital projects.  Often termed “public-private partnerships,” these are strictly business arrangements, and the long-term financial risks are often disproportionately placed on the public sector entities.

I discuss some of these cases in my book, “Managing Public Sector Projects,” such as that of Cranston, Rhode Island, which entered into a 25-year agreement with a contractor to upgrade its wastewater treatment system.  The agreement involved a $48 million up-front cash advance to the city to be paid back over the life of the contract.  Cranston projected it would improve its municipal credit rating due to the contract, but, in fact, the opposite occurred — its bond rating went down.  In the 10-year period following the 1997 contract signing, the city’s sewer rates jumped 55 percent.

In Lynn, Massachusetts, the sewer commission sought a legislative exemption in 1998 from the state’s public works bidding law to undertake a major sewer sewer system and treatment plant upgrade.  The commission ended up with a non-competitive solicitation process for sewer contractors that failed to identify beforehand the specifications of the sewer system it wanted.  The result was the approval of a proposal that was projected by the Massachusetts Inspector General to cost $22 million more than if the process had been competitively bid.

Jefferson County appears to have combined no-bid contracting arrangements with risky financing.  Program specifications were also missing in this case, and the county ended up approving numerous sewer projects that were found to be not required under terms of a consent decree with the Environmental Protection Agency.

To date, 21 Jefferson County employees and private contractors have been indicted by federal prosecutors in connection with the sewer program, according to Howell-Moroney and Hall.  Numerous no-bid contract and change orders were allegedly approved by county officials in exchange for bribes and other favors.  The $10 million to $20 million of additional costs found to have resulted from those alleged instances of fraud and mismanagement was then multiplied many times over by the debacle of the interest swap arrangements.

Howell-Moroney and Hall call for improved interest rate swap regulation and improved financial risk analysis by private-sector ratings agencies.  They also call on public agencies, such as Jefferson County government, to specify clearer goals and objectives in undertaking public projects.

These are worthwhile recommendations.  We’re finding out the hard way not only that there are no easy financial paths to follow in undertaking critically important public sector projects, but those who promise easy fixes are not to be trusted.

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Tracking the stimulus money

Posted by David Kassel on September 24, 2009

In the name of transparency and accountability, a lot of people are putting a lot of effort into tracking the federal economic stimulus money now flowing into cities and states.

The question is how effective and valuable are the results of those tracking efforts?  Are the federal government and the states getting a real handle on the funding under the economic stimulus bill, also known as the American Recovery and Reinvestment Act of 2009?

In May, the Washington Post reported that the White House supported tracking site, Recovery.gov, was providing little useful information about where the money was going under the program.  Moreover, the reporting requirements on public agencies didn’t extend to the contractor level, according to The Post.   The site now lists contractors, but the results, as noted below, may not always be accurate.

On the other hand, Recovery.org, a privately operated site by Onvia, posts stimulus-related, government bid solicitations, which identify specific stimulus projects in individual states.  This appears to involve much more detailed information than that available on the government site.  To be fair, Onvia, as the Post pointed out, has spent more than a decade developing its search technology.  Recovery.gov is only been around for a few months.

The first quarterly reports from the states are due October 1, and will be posted on the government site.  Under the Recovery Act, states and localities must report quarterly on the use of the funds and provide estimates of the number of jobs created and retained.

I went onto both the federal and the private-sector websites and tried to see for myself what was going on.  I chose my home state of Massachusetts.

As of September 18, 60 stimulus contracts in Massachusetts were displayed on the government’s Recovery.gov website.   I couldn’t find a total for the value of all of those contracts.  In at least one case, something seemed to be wrong.   According to the information displayed on the site, the Columbia Construction Company of Reading, MA, had recieved a $57 million contract from the General Services Administration for a roof replacement of a Veterans Affairs Center in Philadelphia, PA.  The project location was listed as Andover, MA.  Why would a roof replacement of a federal building in Philadelphia be listed as a Massachusetts project and why would it cost that much?

I went to the private-sector, Recovery.org site.

As of September 20, Recovery.org listed 537 projects totalling $1.8 billion in Massachusetts.  There was no listing here of the Philadelphia roof replacement project under Andover, Massachusetts.  However, this site did list a $57 million project to modernize the IRS Service Center in Andover, MA.  The Columbia Construction Company was listed there as the winner of the contract.  That made more sense.  

Recovery.org also lists projects voted by viewers as the most and least worthwhile, and most expensive.  For instance, the most expensive project listed on September 20 was a $270 million project to build a tunnel and building in Alameda and Contra Costa counties in California.  The most unnecessary project was a tiny $7,000 project to purchase solar bus stop signage in Weirton, W. VA.    The second most unnecessary project was a $100 million task order contract to pre-selected contractors to support construction activities in the National Park Service in New Mexico, Oklahoma, and Texas.

Meanwhile, there are other problems in tracking the federal stimulus money that have nothing to do with these two websites.   One of them is that the Single Audit mechanism for state and local governments doesn’t work well in assessing the economic stimulus program, according to the Government Accountability Office.

The Single Audit Act requires state and local governments and nonprofit organizations receiving more than $500,000 in federal awards in a year to obtain an audit.   The GAO reported that Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on deficiencies noted in Recovery Act programs.  The GAO recommended that Congress put more money into Single Audit activities.

Clearly, close and accurate tracking of this funding is needed, not only to satisfy the public that the money is being used for the right things, but to help stem the inevitable waste, fraud and abuse.  As of September 2, according to the GAO, the agency had received 80 allegations of fraud and other ethics issues related to stimulus funding that were considered credible enough to warrant further review. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

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A note to readers: Posts will return soon on this blog

Posted by David Kassel on March 1, 2009

No, I haven’t abandoned this blog.  I have been on hiatus from it for the past several months as I finish a draft of a book for a series being sponsored by the American Society for Public Administration.

The book’s working title is Public Sector Project Management: a Strategic Management Framework for Success and Accountability.  I’m hoping it will be of interest to public-sector managers at all levels of government and to students in graduate-level public management courses.

The book may even be timely, given the planned infusion of infrastructure projects around the country, funded under President Obama’s economic stimulus bill.  While a draft of the book is contractually due in August of 2009, I hope to have a draft finished by early June.

So, bear with me.  I hope to return soon with some interesting posts.

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