Management & Labor

Private Instigator

Indiana likes to fashion itself as "the crossroads of America," with 14 interstate highways moving people into and through the state. As in so many other...
by | December 31, 2007

Indiana likes to fashion itself as "the crossroads of America," with 14 interstate highways moving people into and through the state. As in so many other places, many of those roads could use some work, which is why Governor Mitch Daniels thought he could solve a lot of problems simply by leasing out the Indiana Toll Road, which runs across 157 miles of the state's northern tier. A Spanish-Australian consortium was eager to turn the road into a money-making enterprise -- something the road had never been under five decades of state management -- and the companies involved were willing to pay $3.85 billion for the privilege. That was enough money to leave Indiana's transportation and infrastructure funds flush for the next decade.

Full funding for transportation is something other states can only look on with envy as they continue counting up their infrastructure costs, particularly after the collapse of the bridge over the Mississippi River in Minneapolis. Daniels believed he got a great deal. What's more, he believed that the toll road lease would lead to more such ventures, notably a new set of privately run roads servicing the Indianapolis area.

But since the agreement was signed in 2006, things haven't gone as Daniels expected. Although out-of-state drivers would bear the brunt of the initial toll hike -- 70 percent for cars, 113 percent for trucks -- public criticism has lingered in some quarters. In 2006, partly as a result of the controversy, Democrats narrowly gained control of the state House -- turning a 52-48 Republican majority into their current 51-49 advantage. Two of their wins came in districts where the toll road deal was especially unpopular.

With Democrats now sharing power, Daniels has had to shelve some of his other privatization plans. His idea for an "Indiana Commerce Connector" helping to move goods and people in and out of Indianapolis went nowhere, and his desire to privatize the lottery has also been put on hold.

But Daniels hasn't given up. His party is confident it can regain control of the Indiana House (the state Senate has been a GOP stronghold for years), because of the retirement of a number of conservative Democrats who represent districts that Republicans should be able to pick up. And Daniels, of course, is optimistic that he can win reelection this year. However, his current poll ratings against two potential Democratic opponents, who are not particularly well-known, suggest he is vulnerable.

PRIVATIZER IN CHIEF

Nevertheless, Daniels remains the most ambitious privatizer of any governor currently in office, turning over to outside entities not just control of a major cross-state highway but prisons, hospitals and welfare case management. Like most privatizers, Daniels doesn't like the term, but his pursuit of the idea led the New York Times last summer to dub him "Governor Privatize."

The toll road deal was the most striking illustration of Daniels' whole approach to government. The 58-year-old Daniels, who served as President George W. Bush's first budget director, is one of the most fervent believers in the familiar doctrine that government needs to operate more efficiently, in something resembling a competitive environment and with sets of incentives that bear some passing resemblance to the profit motive. Where government agencies or operations face no real competition, Daniels believes, you have to instill some. He has consistently challenged state workers and agencies to come up with ways of streamlining their shops and saving money. "The state government I see looking forward will be fewer people, better paid," Daniels says. "A lot of them will be overseeing contracts for compliance and results and therefore deserving of being very well compensated."

"He's not afraid to advocate and push for ideas that may be a little politically on the dangerous side," says Indiana House Speaker Patrick Bauer, a Democrat and perhaps the most persistent critic of Daniels' privatization efforts. He calls the toll road lease "a very, very bad deal," arguing that the state could have collected far greater returns by continuing to manage the road itself.

The strong political backlash Daniels experienced due to the lease has proved sobering not just to him but to other governors, who have grown more cautious about unveiling their own proposals. But with transportation needs continuing to grow at a time when budgets are getting tighter, more governors -- not fewer -- are looking to private leases as a means of financial salvation. In recent weeks, Charlie Crist of Florida has floated the idea of leasing major roadways in hopes of addressing his state's growing budget shortfall. "If you're totally flush and you'd rather have your money in the highway, you should leave it there," says John Schmidt, an attorney who worked on both the toll road deal and Mayor Richard M. Daley's earlier leasing of the Chicago Skyway to the same foreign consortium. "But if you have another use for that cash, why wouldn't you redeploy the capital from that infrastructure?"

HOW TO SELL A ROAD

Daniels still sounds flabbergasted when he recalls the opposition to the toll road lease, which he calls "a hell of a deal. At the beginning, I don't think anybody foresaw that it would be as controversial as it was. We took a toll road that was losing money and turned it into $4 billion of cold, hard cash." Daniels takes great pride in the fact that within months the upfront lease payment had earned more in interest than the road itself had cleared for the state in 50 years. As a result of the deal, Indiana is able to pay for some 200 projects that had previously been in limbo.

Although the Chicago Skyway deal served as a model for Indiana's approach, several things were different. For example, a lot of work had recently been completed on the Skyway, so there wasn't the same need for capital improvements that Daniels insisted on in his deal. Also, it wasn't practical to think about expanding Chicago's elevated roadway, but the Indiana Toll Road contract demands that the private operators expand lanes when congestion reaches a certain level.

Daniels attempted in the toll road negotiations to anticipate all manner of potential pitfalls and recognizes that the only way third-party contracts work is if they are monitored carefully. He created a toll road oversight board that includes local officials and citizens and reports quarterly on its new management. He used to carry with him a copy of his 285-page toll road contract to wave around while giving speeches, pointing out that it covered every conceivable contingency down to the amount of time road kill could stay on the highway (eight hours). More important, the contract addresses issues such as what happens to the road if the leasing consortium goes bankrupt (it reverts back to the state) and places limits on the size of toll increases.

Perhaps the fact that everything was tied up in a nice, neat bow created part of the problem. Daniels presented the deal to the legislature as a fait accompli, essentially saying here is this great deal -- take it or leave it. Although successful in muscling the package through, he didn't do much of a job selling its benefits to a skeptical public. Politically, Daniels' approach -- and this is characteristic -- was quite the opposite. "The toll road thing was like a force-feeding," says University of Evansville political scientist Robert Dion. "It really did not sit well with people because it was jammed through."

DEAL OR NO DEAL?

Tolls had not been raised along the road for two decades, which made automobile drivers especially wary of the almost immediate increase from 3 cents to 5.1 cents per mile. (Truck tolls will increase incrementally from 9.3 cents to 20.3 cents per mile by 2010.) The sudden rise lent credence to the arguments of its opponents that the deal was a giveaway to private interests. "Clearly, the entities that leased the road were looking at it as a very lucrative deal," says Dave Menzer, of Citizens Action Coalition, which sued in an unsuccessful attempt to block the lease. "We felt that this deal was done behind closed doors, the public was not engaged and public opinion was ignored."

Part of what turned public opinion against the deal was the fact that the companies involved were foreign. Nobody seemed ready to argue that this was a happy example of "in-sourcing" -- of foreign investment in construction that could never be taken back overseas. Instead, in the wake of the failed Dubai Ports World deal to lease U.S. ports, it was viewed as "a potential threat to our national security if foreign companies can monitor what is moving on our roads," Menzer says. Fears of Spain and Australia persuading private investors to turn over data to their governments about the specifics of tonnage moving across the Midwest may sound overblown, but it was an argument that proved to have resonance.

There haven't been any fresh sources of controversy in the wake of the consortium actually running the road -- no significant problems with maintenance or potholes, let alone security concerns. And construction already is underway along the road's western reaches, coming out of Gary, as the consortium spends a major portion of the $700 million it promised to devote to immediate improvements.

But Bauer and other leasing critics continue to register one complaint, namely, that Daniels gave away too much for too little. Sure, transportation funds are flush now, but if the lump-sum payment is spent during the next 10 years, the state could feel shortchanged for decades even as the private operators continue to raise tolls. "If they had gotten $2 billion to $2.5 billion upfront and then a share in the profits over 75 years," says Robert Poole, director of transportation studies at the Reason Foundation, "there would have been less political criticism."

The two toll road deals completed since Indiana's, involving Virginia's Pocahontas Parkway and the Northwest Parkway in Colorado, have both included revenue sharing. Because privatizing existing roads is a fairly new business, no one is really sure what they're really worth -- how much money a state should see before it can be certain it's made a really good deal. Daniels was convinced that the size of his deal -- $4 billion is a lot of money, relative to Indiana's $13 billion annual budget -- would prove simply too lucrative to pass up.

The deal went through, of course, but because it was so politically costly, other governors have been more careful in their approach. Arguably, perhaps, too careful. New Jersey Governor Jon Corzine, for instance, floated the idea of "monetizing" the value of future tolls along the New Jersey Turnpike and the Garden State Parkway last February but has yet to release the specifics of his plan. He promises to do so in his State of the State address this month, but the fact is that opponents were able to tear into it throughout last year's legislative elections in New Jersey without his offering any specifics to counter their complaints, weakening his own hand.

Pennsylvania Governor Ed Rendell has sought a middle ground between Daniels' bluster and Corzine's caution, fully engaging the public and the legislature in his plans to lease the Pennsylvania Turnpike. The legislature has been skeptical and wants instead to impose tolls along Interstate 80. In addition to the political difficulties of collecting tolls on a highway that has always been free -- almost an unprecedented act -- it's doubtful that the legislature's plan will gain approval from the Federal Highway Administration, despite a congressional pilot program to allow states to collect tolls on interstates for road maintenance and improvement. Anticipating that the I-80 plans might not pass muster, Rendell has been openly soliciting bids for Turnpike leases, just in case. Since the numbers that are being bandied about reach as high as $18 billion, Rendell is betting, much as Daniels did, that a real deal laid out in actual, hard cash will be difficult for the legislature to turn down.

"The lessons from Indiana, which certainly Corzine and Rendell have taken to heart, are to brief your legislature early on so that you don't catch them by surprise, which is somewhat what happened in Indiana," says Ken Orski, editor and publisher of Innovation Briefs, a transportation newsletter, "and secondly, to explain the deal more clearly to the public."

CHANGING STRIPES

Daniels keeps a legal pad in his desk drawer on which he jots down a personal list of the errors of his administration. But that doesn't stop him from trying new ideas (and the toll road, by the way, isn't on his personal ledger). "To me, it is a fact of life that the more things you try, the more mistakes you make," he says. "There are folks, including some in my own party, who are still uncomfortable, who say it's been too much, too fast."

Daniels was not only the first Republican elected to govern Indiana in 16 years. He also represented a stylistic break with his predecessors, who tended to be conciliatory and generally sought consensus. That is in keeping with the character of the state, historians of which, Daniels notes, have described Indiana as "conservative," "cautious" and "risk-averse." That has not been Daniels' approach. He seems to believe that where there is consensus, there is little need for leadership from the top. And he combines a bold approach to leadership with a policy wonkishness that makes him the kind of governor who throws out a fair number of provocative ideas at any given time. During a typical State of the State address, he outlines so many brash notions that some observers believe a few are just filler meant to give cover to legislative Republicans who are free to choose some things on which to oppose him.

Daniels worked as an aide to President Ronald Reagan and U.S. Senator Richard Lugar (while Lugar served as mayor of Indianapolis) before becoming a top executive at drug maker Eli Lilly. As director of the federal Office of Management and Budget during President Bush's first term, Daniels was known for his bite, suggesting that the congressional motto might as well be "Don't just stand there, spend something." In Indiana, he learned to tame his tongue after making a remark in 2005 about legislators "car bombing" his agenda, which drew widespread complaints. "He has had to adjust some," says Jack Colwell, a longtime columnist for the South Bend Tribune. "He's used to being an executive at Eli Lilly, where you give an order and people do what you say. In government, of course, it's a little different."

Daniels is fond of presenting charts demonstrating how much things are improving, sometimes through the simple act of being measured. But, as with the toll road, not everything has worked out well. He's been blamed for some major snafus, including a riot last April at a privately operated Indiana prison that involved inmates imported from Arizona. He's been criticized for the lack of governmental experience some of his hires have brought to their jobs, and he's also earned some criticism about how effectively contractors are handling the work of doling out social service money to indigent Hoosiers and the nonprofit groups that offer them aid. "It's a horrible disaster," Bauer says. "I know it's causing a lot of the help for the poor and sick not to get there in a timely fashion." In August, the state cancelled a chaplaincy program meant to help Family and Social Service Administration employees cope with the troubled privatization of some departmental functions, having determined that it was expensive but met few of its stated goals.

Perhaps no agency, though, demonstrates the ups and downs of Daniels' approach more clearly than the Bureau of Motor Vehicles. Such agencies are always politically sensitive as the place where the most citizens engage directly with the government. For Daniels, the BMV has been a public-relations disaster. A botched computer system changeover resulted in the system looking hapless. At the same time, Daniels' plan to close down license branches made for unhappy residents in affected areas of the state. Still, on Daniels' watch, the BMV has cut the average wait time from when a resident meets a greeter at the door -- a Daniels innovation, although perhaps borrowed from Wal-Mart -- to completing a transaction, from 40 minutes to 10 minutes.

UNPOPULAR BUT UNDAUNTED

The toll road lease controversy, and the surprisingly contentious reaction to his insistence on statewide adoption of daylight savings time, continue to alienate many Hoosiers. But Daniels' political fortunes may well rest on his hopes of overhauling the property-tax code. More than two-dozen Indiana mayors were ousted largely because of the issue last year, including Indianapolis Mayor Bart Peterson. Daniels has proposed a constitutional cap on rates, limiting residential rates to 1 percent of assessed value, rental properties to 2 percent and commercial property to 3 percent. He would pay for the package largely through a sales-tax hike.

But Daniels hopes to save money as well through efficiencies. His property-tax plan would eliminate 1,008 elected township and county assessors, replacing them with 10 regional administrators. He appointed Joe Kernan, the man he beat to win office in 2004, and Randall Shepherd, the chief justice of the state Supreme Court, to head a commission that recently unveiled a plan to modernize and streamline local government, which has largely been unchanged in structure since the 1850s.

Consolidation of local government has been the doomed hope of many a governor in recent years. But Daniels enjoys setting his sights on big targets. So far, he has more often than not delivered on what he has promised to do. If some of his ideas, notably his efforts in the area of privatization, have proven to be unpopular, Daniels has simply moved forward with his agenda, undaunted. "This is a governor who is not concerned with the political implications of anything that he does," says Ed Feigenbaum, editor of Indiana Legislative Insight, "and he views that as a positive."

Join the Discussion

After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.

More from Management & Labor