Privatization and Transparency

I've written a little about ethics issues involving quasi-governmental entities and private entities doing government work (oversight, misuse, and personal financial disclosure). But there are many other issues that arise, and become problematic, when public work is done by private entities. One that has become a big issue in recent years is transparency. Although transparency laws are usually state rather than local, the same theories and considerations might be applied with respect to the application of local conflict of interest laws.

I was drawn to the issue by Frayda Bluestein's post last week in Coates' Canons: The North Carolina Local Government Law Blog, "When Do Government Transparency Laws Apply to Private Entities?" Bluestein's answer to the question is, it depends.

Governmental Function or Exercise of Control?
The basic issue is usually whether the entity is an independent contractor or effectively part of government. There is no bright line between the two. Nor is there a single approach to determining the difference, or even agreement that it matters which an entity is.

The two most prominent theories applied by courts involve the private entity's governmental function and the government's exercise of control over the private entity. In North Carolina, the government's exercise of control is the predominant theory. Bluestein looked at how the factors considered by NC courts would be applied with respect to volunteer fire departments (VFDs):

Some VFDs are explicitly part of city or county government, while others are independent nonprofit organizations that operate under contracts with public agencies. Most VFDs receive the bulk of their funds from these contracts, and in many cases, they are supported by taxes levied specifically for the purpose funding the VFD.  On the other hand, there is rarely the degree of control and oversight of a VFD that there was in the News & Observer case. Applying the factors in the case law, it seems likely that most VFDs would not be considered agencies of local government, though the combination of dedicated tax funds and the governmental nature of the function might cause a court to reach a different conclusion.

What Governments Can Do to Ensure Transparency
Bluestein notes that these matters do not have to be left to the courts to determine. "Local governments may include requirements for accountability in the contracts they make with private organizations." In addition, ordinances and statutes can require not only the application of transparency laws to private entities doing government work, but they may also require the application of conflict of interest laws, including jurisdiction of ethics commissions over these entities.

A  2010 report by Oregon's Attorney General on the state's transparency laws states that, "A number of individuals testified that public bodies avoid the reach of the public records law by contracting governmental functions out to private entities and not taking custody of records that relate to those functions. Oregon appellate court decisions address this problem to some extent, but only if the requester can show that the ostensibly private entity is the functional equivalent of a public body."

The report notes that other states address this problem "more comprehensively" through statute. "For example, Minnesota law provides that public bodies must include in such contracts provisions that make it clear that records of the private entity associated with performing those functions are public records. Minn Stat § 13.05 subd 11. Wisconsin law requires government bodies to make their contractors’ records available for public inspection, if the records were created as part of the contract. Wis Stat § 19.36(3)."

A Cloaking Device
In a short essay entitled "Looking for an Invisible Government" (undated), the former executive director of Connecticut's Freedom of Information Commission, Mitchell W. Pearlman, used an entertaining image to get across a view on the effect of privatization on transparency that is similar to the Oregon witnesses quoted above. He began his essay as follows:

In the TV and movie series Star Trek, the evil Klingon Empire can make its spaceships invisible by something called a “cloaking device.”  The futuristic spacecraft are there, they just can’t be seen. In a metaphorical sense, government is also using a cloaking device which keeps some of its functions and expenditures from being seen by the public, although those functions and expenditures are likewise there.  The cloaking device is commonly referred to as privatization.

Pearlman noted that when the original government transparency laws were written in the 1960s and 1970s, the legislators did not anticipate the extent of privatization that would occur. The legislatures did not amend the laws to reflect privatization. This is why the law on the application of these laws to private entities has been handled primarily by courts.

The Connecticut Approach
The Connecticut Supreme Court went in a different direction than the North Carolina courts. It applied a functional equivalence test similar to Oregon's. Pearlman lists the four criteria for this test as follows (note that exercise of control, the principal North Carolina consideration, is one of the criteria):

whether the entity performs a governmental function
the level of government funding
the extent of government involvement in or regulation over the entity
whether the entity was created by the government

All four criteria do not have to be present and, in some situations, an entity can be considered public for some of its functions and private for others. Pearlman too uses the example of a volunteer fire department, which often does charitable work that is private (except to the extent that all charities are considered to act in the public interest and, therefore, must disclose certain information to the state government).

New Kinds of Privatization: Assisting, Operating, and Partnering
Pearlman notes three relatively recent kinds of privatization that create nonprofit entities that are often considered to stand outside of government ethics regulation, including transparency. One sort of nonprofit assists government, for example, a foundation that assists public universities. These foundations are allowed to provide perks to public officials that would not be permitted under state laws. They can also hire officials' relatives.

Another sort of nonprofit operates government-funded facilities or programs, such as schools. These nonprofits are sometimes a way for organizers to make money from property they own, or take salaries far higher than would be provided by governments. They can also be used by for-profit companies to make money from nonprofits that they form. It is easier for such self-dealing to occur when the entities are not subject to transparency or ethics laws.

Finally, Pearlman looks at problems involving public-private partnerships, where millions of tax dollars are spent without transparency or sufficient government oversight.

Urban Development Corporations
This last kind of entity is studied in great detail in a long paper entitled "Baltimore Development Corporation: A Case Study of Economic Development Corporations, Shadow Government, and the Fight for Public Transparency and Accountability" by Maximilian Tondro and Prof. Garrett Power.

The authors note that "quasi-public entities modeled on private businesses and insulated from direct political control became the primary entities responsible for urban development." They say that these entities have successfully resisted attempts to increase transparency and public oversight "by asserting that successful redevelopment required secrecy and autonomy in negotiations with private partners who required quick action and flexibility of their counterparts. This argument has had success not only with legislatures but also with the courts … which have accepted that transparency and accountability must be balanced against the efficiency and effectiveness of these quasi-public development corporations."

The courts have found that the Baltimore Development Corporation is subject to transparency laws, but not to competitive bidding laws.

Budgetary Transparency
Among the most important public documents are budgets. Governments at all levels are putting their budgets and expenditures online. Shouldn't private entities doing government work or getting government grants do the same? A CalPIRG Education Fund paper, "California Budget Transparency 2.0," notes that one of the principal omissions of the state online budget information website is expenditures by quasi-public and independent agencies. This creates a big hole in the public's knowledge of where their taxes are going.

For a more international perspective on privatization and transparency, see Richard Calland, "Transparency in the Profit-Making World" (draft).

See the next blog post, which looks at problems that can arise from privatization by focusing on a charter school system that was investigated in depth by the New York Times.

Robert Wechsler
Director of Research-Retired, City Ethics

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