Privatization and Transparency

Anonymous

Mon, 06/06/2011 - 10:33

Contractors and Vendors

I've written a little about ethics issues involving quasi-governmental
entities and private entities doing government work (<a href="http://www.cityethics.org/content/jurisdiction-and-oversight-over-nonpr…; target="”_blank”">oversight</a>,
<a href="http://www.cityethics.org/content/misuse-baltimore-city-foundation" target="”_blank”">misuse</a>,
and
<a href="http://www.cityethics.org/node/535" target="”_blank”">personal financial
disclosure</a>). 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 <a href="http://sogweb.sog.unc.edu/blogs/localgovt/?p=4676" target="”_blank”">Frayda
Bluestein's post last week</a> 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):<ul>

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.</ul>

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 href="http://www.doj.state.or.us/pdf/government_transparency_report.pdf" target="”_blank”">A
2010 report by Oregon's Attorney General</a>
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. <a href="https://www.revisor.mn.gov/statutes/?id=13.05" target="”_blank”">Minn Stat § 13.05 subd 11</a>.
Wisconsin law requires government bodies to make their contractors’
records available for public inspection, if the records were created as
part of the contract. <a href="http://legis.wisconsin.gov/statutes/Stat0019.pdf" target="”_blank”">Wis Stat § 19.36(3)</a>." 
 
A Cloaking Device 
In a
short essay entitled "<a href="http://www.ctfog.org/publications/articles/Invisible_Govt.htm" target="”_blank”">Looking
for
an Invisible Government</a>" (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:<ul>

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.</ul>

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):<ul>

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</ul>

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 "<a href="http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=102…; target="”_blank”">Baltimore
Development
Corporation: A Case Study of Economic Development
Corporations, Shadow Government, and the Fight for Public Transparency
and Accountability</a>" 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, "<a href="http://www.scribd.com/doc/36210006/California-Government-Transparency-R…; target="”_blank”">California
Budget Transparency 2.0</a>," 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, "<a href="http://policydialogue.org/files/publications/Transparency_in_Profit-Mak…; target="”_blank”">Transparency
in the Profit-Making World</a>" (draft). 
 
See <a href="http://www.cityethics.org/content/good-example-problems-can-arise-priva… next blog post</a>, 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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