Tag Archives: James A. Bacon

Coping with Risk in Highway Megaprojects

Aubrey Layne explains the concept of fiduciary risk.

Aubrey Layne explains the concept of fiduciary risk.

by James A. Bacon

As Transportation Secretary Aubrey Layne has had more time to dig into his job, he has developed an ever more nuanced appreciation of how things went wrong with the U.S. 460 Connector. There was more to the fiasco, which could cost the Commonwealth up to $300 million, than a simple failure to acquire necessary wetlands permits before opening the spending spigots and then discovering that the permits were not forthcoming. The McDonnell administration, he says, negotiated a public-private partnership deal without sufficient appreciation of risks entailed with the project.

“I can’t tell you if they didn’t know they weren’t transferring the risk [to the private-sector partner] and got out-foxed, or whether they didn’t give a damn,” Layne told Bacon’s Rebellion in an interview today. Either way, the Commonwealth was left holding the bag when plans for the 55-mile Interstate-quality highway linking Petersburg and Suffolk had to be redrawn to do less environmental damage. He still hopes to recover some of the $250 million paid to U.S. 460 Mobility Partners (over and above $50 million in sunk design and engineering costs) for pre-construction work, but that outcome is uncertain.

Layne is optimistic that public-private partnership (P3) reforms enacted with bipartisan cooperation this year will prevent recurrences of the U.S. 460 debacle and help the state negotiate better terms in future deals than it got with the Interstate 495 and Interstate 95 express lanes projects in Northern Virginia, which effectively capped bus transit on the highways for the next half century. The McAuliffe administration’s big test will be to do a better job structuring the financing and risk of $2 billion in proposed improvements to Interstate 66 in Northern Virginia.

Before 1995, the Virginia Department of Transportation (VDOT) had one way of building roads. It designed them, built them, arranged its own financing, operated them, maintained them and absorbed the risk of anything going wrong. The system got the job done but it had drawbacks. It overlooked potentially creative solutions to engineering and design problems, and it was prone to cost overruns. Then the General Assembly passed legislation enabling public-private partnerships, which provided the Commonwealth a whole new range of options for financing big projects and shifting selected risks to the private sector.

Facing a severe transportation budget crunch, the McDonnell administration made the strategic decision early on to use P3s to leverage scarce public dollars with private capital. From a high-level perspective, this made sense because the Commonwealth had limited capacity to issue road-building bonds without jeopardizing its AAA bond rating and then-Governor Bob McDonnell had not yet pushed through tax increases to bolster transportation funding. Moreover, the administration wanted to take advantage of historically low interest rates on long-term bonds.

But politics and ideology were pushing P3s as well, says Layne. There was a bias that something is always better if the private sector does it. Sometimes the private sector can do things better than VDOT, he says, and sometimes the private sector is better suited to take on certain risks than the state. But not always. The McAuliffe administration’s goal is to find the best fit — the best balance of cost and allocation of risk — on a case by case basis.

The devil is in the details. Layne, a Republican and a McDonnell supporter at the time, backed the governor’s mega-project funding priorities and voted to approve them while serving on the Commonwealth Transportation Board. Indeed, he chaired an independent bonding authority that issued bonds for the U.S. 460 project.  But now that he’s transportation secretary, he realizes the issues were far more complex than presented to him and the CTB board.

The McDonnell administration first proposed a public-private partnership for the U.S. 460 project with the hope that outsiders could devise a more creative way of building and financing the highway than VDOT could come up with. Three consortia took a look and came up with similar conclusions — there would be insufficient toll revenue to finance more than a fraction of the construction cost with bonds. The McDonnell administration then switched gears, deciding to pay for most of the project with state funds but retaining the P3 structure in order to outsource the design and construction of the project to a private-sector partner, which turned out to be U.S. 460 Mobility Partners. The state should have gone back to square one and started over, says Layne, re-defining the project and putting it up for bids instead of using the P3 structure. Instead of getting multiple bidders to compete, the state wound up negotiating with a single player, U.S. 460 Mobility Partners. Even worse, Governor McDonnell had signaled that U.S. 460 was his highest priority, and there was no back-up plan — the administration had to reach a deal with U.S. 460 Mobility Partners or the project would never get built during McDonnell’s term. U.S. 460 Mobility Partners had all the bargaining leverge.

Negotiations took place within the P3 structure, which meant that the deliberations were secret and the contract not released to the public. VDOT briefed the CTB, the state’s transportation oversight board, but failed to disclose the information that critical wetlands permits had not been obtained and might not be obtainable.

The final contract for the U.S. 460 deal was more than 700 pages long. Layne says he can’t imagine than anyone in state government read the whole thing. “I’m confident that no one person understood it all. No one person could tell you what the deal was, what risk was transferred, and what risk the state was taking. And that’s a recipe for disaster” when negotiating with sophisticated business people on the other side of the table.

The dynamic would have played out very differently, says Layne, if the McDonnell administration had set up U.S. 460 as a design-build project.  First, VDOT would have opened up the proposal to competitive bids, very likely getting a lower price even while the private contractor took on the risk of delivering the project on budget and on time. Second, VDOT guidelines would have ensured that all necessary permits were granted before the project commenced and the state started shelling out money.

Layne doesn’t blame U.S. 460 Mobility Partners for negotiating the best deal for itself that it could. It’s not a charity. The company’s management had a fiduciary responsibility to get the best deal for its shareholders that they could. But elected officials have a fiduciary responsibility to the public. The challenge for the Commonwealth is to bring to bear an equally acute understanding of risks and rewards and to cut the best deal possible for the taxpayers. That’s where the state failed utterly with U.S. 460. If he’d had negotiated such a disastrous real estate sector when he worked in the real estate business, he says, he would have been fired.

Now it’s Layne’s turn. He has to structure a mega-project deal for I-66. Tomorrow, I’ll describe how is approaching that task — the biggest financial transaction he’s ever undertaken.

A StrikeForce about as Effective as the Iraqi Army

conservative_strikeforceIn 2013 former Attorney General Ken Cuccinelli lost to Terry McAuliffe by 56,000 votes in a gubernatorial race in which he was outspent by two to one. Would $85,000 more in his campaign war chest have made a difference in the election?

Probably not — the number was a small fraction of the $21 million Cuccinelli spent — but it’s a point worth pondering, given news that the Conservative StrikeForce PAC has agreed to pay $85,000 and hand over fund-raising contact lists to Cuccinelli, according to the Washington Post.

In a lawsuit, Cuccinelli had accused the PAC of raising funds that were never delivered to his campaign. Estimating that the group raised about $435,000 from emails using his name, he alleged that he’d received only $10,000.

Between January 2013 and June 2014, according to Federal Election Commission records, Conservative StrikeForce raised more than $2.8 million overall, of which it paid only $82,000 toward candidates or campaign committees.

“It’s just a thunderous precedent . . . to make it harder and more expensive to be deceitful and misleading with people in the political arena as far as donations go,” Cuccinelli said. “In an already sour environment, people who think they’re supporting something they believe in are defrauded.”

The Washington Post article provides no response from Arlington-based Conservative StrikeForce, its chairman, Dennis Whitfield, or its independent treasurer and outside consultant, Scott MacKenzie. But an outside observer must wonder if this s a case of an opportunist mimicking the police and veteran fund-raising scams in a political context. In a similar case, the Post notes, a committee to recruit conservative physician Ben Carson to run in the 2016 presidential race spent $2.44 million to raise $2.4 million.

Bacon’s bottom line: Maybe this was a case in which Conservative StrikeForce just wasn’t very effective at its job, which it defined on its website as raising small contributions for conservative candidates through mail, direct mail and telephone solicitations. Or maybe it was a cynical ploy for the organizers to pay themselves handsome salaries and perks. We don’t know. But, sad to say, in the wild, wild world of political financing, we’ll probably be reading about a lot more cases like this one.

– JAB

Federal Bailouts and the Buildup of Risk

bailout_barometer

Graphic credit: Federal Reserve Bank of Richmond

by James A. Bacon

The federal government plays a much bigger role in shaping the United States economy than is evident in its taxing and spending policies. Uncle Sam funnels credit to favored constituencies through subsidized credit programs like TIFIA transportation loans and the Import-Export bank as well as by protecting lenders from losses due to a borrower’s default. Members of Congress are exercised, as well they ought to be, by the dispensing of subsidized credits to corporate interests. But loan guarantees have a far bigger impact — and expose the federal government, and the U.S. economy — to far greater risk.

Sixty percent of the U.S. financial system’s loans are explicitly or implicitly backed by the federal government, the Federal Reserve Board of Richmond has found in its updated Bailout Barometer. That’s up from roughly 45% as recently as 1999.

The capitalist financial system is inherently prone to booms and busts. Busts lead to corporate failures, and big corporate failures can trigger panics, in which even financially sound firms get caught in the undertow. The U.S. has sought to alleviate this pain by providing loan guarantees. Some guarantees are self-financing, such as federal insurance on bank deposits. Other guarantees are policed by regulators, and yet others are implied but ambiguous and not spelled out in advance. But the end result is that actors in the financial system adjust their behavior — taking on more risk than they would otherwise — in ways that could create new, bigger problems in the future. As the Richmond Fed explains:

Implicit guarantees effectively subsidize risk. Investors in implicitly protected markets feel little need to demand higher yields to compensate for the risk of loss. Implicitly protected funding sources are therefore cheaper, causing market participants to rely more heavily on them. At the same time, risk is more likely to accumulate in protected areas since market participants are less likely to prepare for the possibility of distress — for example, by holding adequate capital to cushion against losses, or by building safeguarding features into contracts — and creditors are less likely to monitor their activities. This is the so-called “moral hazard” problem of the financial safety net: The expectation of government support weakens the private sector’s ability and willingness to limit risk, resulting in excessive risk-taking. …

The Richmond Fed’s view is that the moral hazard from the [Too Big To Fail] problem is pervasive in our financial system. The U.S. government’s history of market interventions — from the bailout of Continental Illinois National Bank and Trust Company in 1984 to the public concerns raised during the Long-Term Capital Management crisis in 1998 — shaped market participants’ expectations of official support leading up to the events of 2007-08. According to Richmond Fed estimates, the proportion of total U.S. financial firms’ liabilities covered by the federal financial safety net has increased by one-third since our first estimate in 1999. The safety net covered 60 percent of financial sector liabilities as of 2013. More than 40 percent of that support is implicit and ambiguous.

Bacon’s bottom line: While the current financial regime did alleviate the pain of the 2007 market collapse, the system could be allowing even bigger risks to build up. Like generals fighting the last war, regulators are fighting the last panic. The new risks will not be the same as the old ones, and we won’t know what they are until they explode in the next financial debacle. But spurred by the Fed’s near-zero interest rate policies, investors are chasing higher returns by taking greater risks, and financial markets are concocting elaborate new financial instruments to circumvent the regulators.

The global derivatives market was calculated in 2013 to be roughly $1.2 quadrillion in notional value, or about 20 times the global economy. Admittedly, most of that is tied to interest rates, currency values and stock indexes, not the economic sectors guaranteed by the federal government. But it illustrates how arcane financial instruments can magnify or hedge risks in ways we mere mortals — and government bureaucrats earning low, six-figure salaries — can barely comprehend.

I don’t know what will trigger the next financial crisis. Most likely, it will come from a quarter that most people would never expect. I don’t know when it will come. But the history of capitalism since the South Sea Bubble of 1720 suggests that one will come along eventually. If a bunch of multibillionaire hedge fund managers lose multibillion dollar bets and wind up selling apples on the street, I will lose no sleep. But if those hedge fund multibillionaires’ losses are back-stopped by federal loan guarantees, effectively socializing their losses, I will have a deep and abiding rage.

Fixing Food Deserts Won’t Fix Food Insecurity

by James A. Bacon

Speaking of food…food_desert there’s new research out on the differences in diet and nutrition between different socioeconomic groups. The conventional wisdom is that a major factor explaining the gap in nutritional quality between affluent and poor Americans is the difficulty poor people have in accessing fresher, healthier food — the food desert phenomenon.

Using new data sets unavailable to previous researchers, Jessie Handbury, Molly Schnell and Ilya Rahkovsky were able to hone in food-buying practices of poor and affluent shoppers in the same grocery store. They found that the same patterns prevailed  — affluent people buy healthier, more nutritious food than poor people do.

“Our results indicate that improving access to healthy foods alone will do little to close the gap in the nutritional quality of grocery purchases across different socioeconomic groups,” they write in “What Drives Nutritional Disparities? Retail Access and Food Purchases across the Socioeconomic Spectrum,” published by the National Bureau of Economic Research. “Improving the concentration and nutritional quality of stores in the average low-income and low-education neighborhood to match those of the average high-income and high-education neighborhood would only close the gap in nutritional consumption across these groups by 1-3%.”

The authors suggest that two other variables are at play: the price of food and consumer preferences for certain kinds of food over others. Their research did not indicate the relative importance of those factors played in influencing food purchases.

Bacon’s bottom line: Once food preferences are established, it is very difficult to change them. That’s not to say it can’t be done — If I learned to like brocolli and brussel sprouts, for cryin’ out loud, anybody can change their food preferences — but it is a long, slow process. The problem is compounded by the fact that the food preferred by the poor — loaded with salt, fat and sugar — is engineered to taste better than healthy foods. And it’s compounded yet again by the fact is that many Americans across the income spectrum have lost the cultural knowledge of how to cook healthy foods. Educated Americans acquire that knowledge by watching cooking channels, buying cook books, and exposing themselves to new foods at finer restaurants. Those options are less available to the poor.

Spending money to induce grocery stores to locate in food deserts and stock their shelves with nutritious food is a fool’s errand. Grocers won’t stock shelf space with food that no one buys. Conversely, if poor people (a) showed a strong preference for nutritious food and (b) could afford to buy it, grocers would need no prodding — they would supply what the customer demanded.

The lousy nutrition of America’s poor is a demand-side problem, not a supply-side problem. To change how America eats, the first order of business is to change what Americans want to eat and can afford to eat.

The Agribusiness Opportunity

Source: New Geography

Source: New Geography

by James A. Bacon

If prostitution is the “oldest profession,” farming is likely the second oldest. Humans have been farming for thousands of years and, if they want to continue to eat, they’ll be farming for thousands of years more. Young people don’t see much future in farming (unless it’s locally grown organic food), and small towns and rural areas in the United States continue to bleed population. But there’s an argument to be made that farming has a great future.

Agriculture is already one of the United States’ biggest export sectors, and overseas markets are likely to continue to grow as developing the world population increases and rising incomes increase food consumption. Those mega-trends portend a favorable environment for large-scale agribusiness capable of moving large volumes of food commodities. Meanwhile, the rise of the locally grown food movement will create opportunities for community gardens and artisinal producers serving local markets.

That future of agriculture may not look like today’s massively mechanized, resource-intensive farming industry. It will be more knowledge-intensive, utilizing insights from biology and ecology to grow crops with fewer herbicides, pesticides and fertilizers. It will be less labor intensive, as leaf and berry pickers replace unskilled migrant workers. As the nature of the business changes, farming could well rebound as a career path for the young. As Joel Kotkin and Mark Schill write in New Geography, “The farms of the future are increasingly high-tech and run by highly skilled professionals and technicians.”

As we think about how to revitalize the economy of rural/small town Virginia, we don’t give much thought to stimulating agricultural production. Perhaps we should.

On the surface, the data compiled by Kotkin and Schill seems none too encouraging for Virginia. They honed in on metropolitan regions with at least 5,000 total jobs falling into one of 68 ag- and food production-related industries, including crop and animal production. Only four Virginia metros made it onto the list (as seen above), and they ranked in the bottom half of the 124 regions listed.  But that’s OK. I see farming and agribusiness as relatively untapped opportunity — fields of opportunities ripe for entrepreneurial innovation.

Richmond Childrens Hospital Deal Collapses

Did VCU's commitment to  its new $168 million childrens' pavilion kill plans for a consolidated Richmond regional childrens' hospital?

Did VCU’s commitment to its new $168 million childrens’ pavilion kill plans for a consolidated Richmond regional childrens’ hospital?

by James A. Bacon

To be sure, building a new, free-standing childrens’ hospital for the Richmond region would be an expensive proposition — on the order of $600 million. But when mega-philanthropists Alice and William H. Goodwin are willing to kick in $150 million, a fund-raising campaign has been organized to raise another $100 million to $150 million, and dozens of pediatric physicians in the region are backing the project, one would think that community leaders could find a way to make it happen.

But all bets are off now that two key participants, Virginia Commonwealth University and Bon Secours Richmond Health System announced yesterday that they had pulled out of the deal. Goodwin, who with his wife has worked on the idea for eight years, said he would be willing to resume talks if the hospitals were, but otherwise, “I don’t need another couple of years of discussions.”

The collapse of the Childrens’ Hospital in the Richmond region stands in stark contrast to the announcement in Febuary by Inova Health Systems in Fairfax County that it would purchase the old Exxon-Mobil headquarters facility, assessed at $193 million in value, in order to house a world-class facility dedicated to genomics and personalized medicine.  The big difference is that Inova did not have to balance competing interests in the same way that promoters of the Richmond childrens’ facility do.

The argument in favor of consolidating patient care for children in a single state-of-the-art facility is that a specialized facility can provide superior care and better medical outcomes for children than a system that is fragmented between three major health systems, VCU, Bons Secours and HCA. (For-profit HCA was not a party to the childrens’ hospital negotiations.) It is a truism of medical economics that the greater the number of medical procedures performed by a medical practice and its physicians, the more efficient the operations, the lower the cost and the better the outcomes. Another advantage of a dedicated childrens’ facility is that combining pediatric practices would create a larger volume that could support more specialties, saving many patients and their families from traveling outside the region for their medical care.

Against those advantages is the hard business reality that neither VCU nor Bon Secours is willing to give up their significant pediatric practices out of the goodness of their hearts. Both health systems would lose major revenue streams during a time of great uncertainty caused by the legal challenge to Obamacare subsidies, the refusal of the General Assembly to expand Virginia’s Medicaid program and federal funding issues regarding the training of new physicians.

“This particular model that was proposed was a free-standing hospital with no ownership by VCU or Bon Secours,” said Tony R. Ardabell, CEO of Bon Secours Richmond, as quoted in the Richmond Times-Dispatch. “That would have been a tremendous negative impact to the bottom line, and we were worried about the sustainability of our ministry at St. Mary’s Hospital for the whole population of Richmond.”

“As a safety-net hospital we are headed into a very, very serious set of storms that are not totally predictable but you can see them out into the future being difficult periods,” said VCU President Michael Rao.

Goodwin’s reaction: Those are short-term problems. He is looking at a 50-year time horizon.

While the financial environment for the health care industry undoubtedly is cloudy, Bon Secours and VCU are staggeringly profitable. At least they were in 2013, according to data reported to Virginia Health Information; it is possible that the Obamacare roll-out and other factors have impacted profits negatively since then. Here is the data:

Note: The Bon Secours data is a composite of the four Bon Secours hospitals in the Richmond region; it is not clear from the VHI profiles if Bon Secours Richmond regional administrative overhead is included. Also note: The definition of "operating income" is profit before interest and taxes.

Note: The Bon Secours data is a composite of the four Bon Secours hospitals in the Richmond region; it is not clear from the VHI profiles if Bon Secours Richmond regional administrative overhead is included. Also note: The definition of “operating income” is profit before interest and taxes.

For all the benefits it would offer the community, a new children’s hospital would create problems for VCU and Bon Secours, which would stand to lose tens of millions, perhaps hundreds of millions, of dollars of pediatric business, saddling them with tremendous stranded costs in existing facilities, staff and equipment. The problem would be all the more acute for VCU, which is building a $168 million Children’s Pavilion on Broad Street to consolidate pediatrics services across the downtown campus.

But questions arise about the responsibility that these two not-for-profit enterprises have toward the public good. One could argue that the primary responsibility of VCU and Bon Secours should be to the health of the community, not their highly profitable bottom lines. If a consolidated, state-of-the-art childrens’ facility would provide superior health care to the region’s young people, the VCU and Bon Secours boards of directors have some serious soul searching to do.

One More Time Now… Devolve Transportation Funding to the States

Graphic credit: Wall Street Journal

Graphic credit: Wall Street Journal

by James A. Bacon

Congress is floundering over what to do about the Highway Trust Fund, which collects the federal gasoline tax and plows it back to the states to finance a smorgasbord of transportation projects. The original justification for the gas tax was to build the Interstate Highway System, but the program has morphed over the years into a  piggy bank for all manner of Interstate, highway, transit and miscellaneous projects that must be supplemented with General Fund appropriations. Congress persons are loathe to relinquish the perk of doling out money to constituents, but fiscal pressures make it impractical to continue the General Fund subsidies, while raising the gas tax is a political killer. What’s a Congress person to do? What he or she does best — dither.

Meanwhile, in the wake of Amtrak’s deadly derailment last week, we hear the usual wailing and gnashing of teeth that America isn’t investing enough in infrastructure.

The idea that the United States is significantly under-investing in infrastructure is nonsense — the kind of special pleading you hear from big construction and engineering firms who grow fat on infrastructure spending. Among the G-7 countries (Japan, Germany, France, the United Kingdom, Italy, Canada and the U.S.), the total capital stock of the U.S. (transportation and other infrastructure) is the third highest, equivalent to 52% of the Gross Domestic Product, as seen in the graphic above, published today in the Wall Street Journal. While Japan is off-the-charts higher, that country arguably has way over-invested in transportation, creating a system that it cannot afford to maintain over the long run.

infastructure_quality

Graphic credit: Wall Street Journal

Likewise, the quality of infrastructure (the general state of repair) is also in the middle of the pack, as seen at left.

The problem isn’t the level of spending, it’s the mis-allocation of spending. As WSJ columnist Greg IP writes (sounding a long-time theme here at Bacon’s Rebellion), the economic Return on Investment of federally funded projects varies widely; indeed  the feds have no mechanism for ascertaining ROI. “It’s nobody’s job in Washington to figure out which roads or bridges we should invest in,” Ip quotes Aaron Klein with the Bipartisan Policy Center as saying.

pavement_life_cycle2It’s time for Congress to get out of the business of building new transportation infrastructure. Having constructed the Interstate Highway System, Uncle Sam should commit to maintaining it and devolve responsibility for other projects to the states. That means adjusting the gas tax to whatever level it takes to maintain that system at an optimal level, and no higher. By optimum, I mean at a reasonably high state of quality and repair and with sufficient spending to undertake deep repairs at the most economically advantageous point on the life-cycle curve. Presumably, that level would require a much lower federal gas tax than the one in place now. A reduction in the federal gas tax would free the states to increase their own gas taxes by a like amount, more, or less, depending upon their circumstances.

A bedrock principle for maintaining an optimum level of infrastructure investment is to put each component — roads, highways, mass transit, ports, airports, railroads — on a user-pays basis. When users pay for the transportation amenities they want, they are more careful about what they ask for. Any other system results in a political free-for-all in which every interest group seeks to get its favored projects funded at the expense of everyone else, in which case ideology and politics prevail over economic rationality.

Do Asians Face Discrimination at Top Virginia Universities?

racial_breakdownby James A. Bacon

Many Asian-Americans are getting frustrated with the enrollment caps on Asians at some of the United States’ most prestigious institutions of higher education. As Jason Riley recently opined in the Wall Street Journal, Asian-Americans are the new Jews, academic high achievers who are under-represented on top college campuses in comparison to their qualifications.

A coalition of more than 60 Asian-American groups is asking federal authorities to investigate possible racial bias in undergraduate admissions at Harvard University. Harvard, like many prestigious universities, makes extra room for “legacies,” mostly white, in appreciation of, or expectation of, generous alumni contributions. At the same time, Harvard also considers race/ethnicity among other factors when admitting African-Americans and Hispanics. That leaves non-legacy but high-achieving Asian-Americans in the cold at a competitive disadvantage. Writes Riley:

Asians have some of the highest academic credentials but the lowest acceptance rates at the nation’s top schools, a result that the coalition attributes to “just-for-Asians admissions standards that impose unfair and illegal burdens on Asian-American college applicants.” A 2009 paper by Princeton sociologists Thomas J. Espenshade and Alexandria Walton Radford found that “Asian-Americans have the lowest acceptance rate for each SAT test score bracket, having to score on average approximately 140 points higher than a white student, 270 points higher than a Hispanic student and 450 points higher than a black student on the SAT to be on equal footing.”

Bacon’s take. So, I began wondering, what is the track record of Virginia’s public universities? Are Asian-Americans getting a fair shake in the Old Dominion? I had no idea what to expect, but I crunched some numbers.

Asian-Americans represented 5.5% of Virginia’s population in 2010, according to the U.S. Census Bureau. (The percentage is probably higher today.) But that’s not a proper basis for comparison. Asians out-perform all other racial/ethnic groups academically in high school, so a better basis of comparison is the percentage of academic high achievers. There may be different ways to calculate that number, and I welcome any input on different ways to do it. What I did was consult the Virginia Department of Education’s online build-a-database tool to ascertain a racial breakdown of students who scored “advanced pass” in their SOLs for all grades.  For each racial/ethnic group, I averaged the advanced-pass rate to derive a composite score, as seen in the pie chart above.

By this metric, Asian-Americans comprise 12% of the top-scoring students in Virginia K-12 schools. For purposes of the argument I’m making, this is a very conservative measure. The numbers could well be even more skewed for metrics of college-ready students such as SAT scores or AP exam results.

So, how does the Asian enrollment compare for Virginia’s most selective institutions of higher education? Here are the percentages for Asian undergraduate enrollees at Virginia’s highest-ranked public universities:

asian_enrollments

The University of Virginia is dead-on target but the other three fall far short. While suggestive enough to demand digging deeper, these numbers are not, by themselves, proof of discrimination against Asian-Americans. Perhaps one reason there are so few Asians at James Madison University, to take one example, is that the institution gets very few Asian-American applicants.  A better basis of comparison is the percentage of applicants accepted at each university.

uva_admissionsWhile I could not find current racial breakdowns of admission as a percentage of applicants in an online search this morning, I did locate a research paper that provided some statistics for fall 2003 admissions. The paper, “Affirmative Action at Three Universities,” compared undergraduate admissions at the University of Virginia and North Carolina State along with law school admissions at the College of William & Mary.

While Asians were admitted at a slightly lower rate than Hispanics or whites at the University of Virginia, the rate was not severely out of line. Any discrimination in admissions was markedly in favor of African-Americans, not against Asians. At the William & Mary law school, Hispanics were severely under-represented, while Asians were somewhat under-represented. (Please note: This data is more than 10 years old and not necessarily reflective of current patterns.)

This scatter-shot evidence suggests that Asians may face discrimination when applying to some of Virginia’s top-tier universities. But the evidence is impressionistic at best. It would be necessary to get better data before drawing definitive conclusions. On the other hand, I would argue that the evidence is strong enough to warrant taking a closer look.

Juggling Risk on Interstate 66

i66by James A. Bacon

The specter of the botched U.S. 460 project will be hovering over the Commonwealth Transportation Board (CTB) today as Transportation Secretary Aubrey Layne updates the board about project financing for Interstate 66 outside the Washington Capital Beltway, expected to cost in the realm of $2 billion.

Del. Greg Habeeb, R-Salem, set the stage Sunday in an op-ed in the Richmond Times-Dispatch, in which he advocated using a Public Private Partnership (P3) to finance improvements to the critical Northern Virginia transportation corridor as opposed to a “design-build” contract. Design-build was the approach employed in the U.S. 460 connector between Petersburg and Suffolk that resulted in $300 million spent “without a single shovel of dirt being turned.”

Habeeb is asking a vital question: What is the best way to finance and operate mega-transportation projects with costs running into the billions of dollars? Under the old model, the Virginia Department of Transportation (VDOT) designed, built, financed and operated big projects entirely in-house. But with limited transportation funding available and restrictions on how much the state could borrow during the Warner, Kaine and McDonnell administrations, nothing much was getting built. The idea behind P3s was to leverage scarce state funding with private sector funding for tolled projects capable of generating a revenue stream. Toll revenues would pay off the private-sector bonds used to finance the improvements. In effect, P3s amounted to an end run around the tight strictures on how much debt the commonwealth could issue without jeopardizing its AAA credit rating. The debt, and the risk that went along with it, would be shifted to the private sector.

Habeeb likes P3s. Construction of express lanes on Interstate 495 and 95 in Northern Virginia opened on budget and ahead of schedule, he says. Further, he adds, “These two projects produced $5 billion in economic activity but because they were pursued as P3s taxpayers contributed only $492 in state transportation funds.”

By contrast, he writes, the U.S. 460 project was conducted as a design-build, in which design and construction were outsourced to a private-sector consortium but the state planned to finance and operate the highway, “leaving taxpayers on the hook if the project failed” … which it did, costing taxpayers in the neighborhood of $300 million.”

I think there’s a time and place for P3s, but the cost-benefit calculus is more complex than Habeeb acknowledges in a 750-word op-ed. The big bugaboo is risk. There are many types of risk associated with transportation megaprojects, and it isn’t always clear what they are and who is shouldering it. Virginia’s Office of Transportation Public Private Partnerships was tracking risks in the U.S. 460 project — the risk that really mattered, and ended up killing the project, whether or not the U.S. Army Corps of Engineers would not issue required wetlands permits — but the concerns were ignored by the McDonnell administration for political reasons.

Would the U.S. 460 fiasco have been avoided if it had been a P3? Undoubtedly, a private-sector partner would have taken greater precautions to get its permits lined up before expending $300 million of its own money on design and construction-mobilization costs. So, most likely, the fiasco would not have occurred. On the other hand, a P3 partnership was not practicable. Toll revenues would have been so meager that only a small percentage of the project could have been funded privately — that’s why the state decided to take over the financing itself.

It’s easy to forget that there are risks associated with P3s as well. What happens if toll revenues fail to meet forecasts, as has been the case with the 495 Express Lanes? It all depends on how a particular deal is structured. Many projects are backed by federal loan guarantees called TIFIA (Transportation Infrastructure Finance and Innovation Act) loans. Every bond financing provides a buffer for modest revenue shortfalls. But if revenues fall far short, TIFIA eats the loss before non-guaranteed loans do. Instead of state taxpayers taking the hit, federal taxpayers do. If TIFIA bond holders get wiped out, then holders of the private bonds are next in line. In the worst case scenario, as happened with the Pocahontas Parkway outside Richmond, a project can get turned over to the banks.

The commonwealth ordinarily takes great pains to protect itself from financial liabilities in case of P3 failure. But there are other risks. P3 contracts usually last 50 to 100 years, and private-sector partners negotiate terms that protect their revenue stream over the long run. Typically, they insert clauses that restrict the state from building roads, rail lines or other transportation alternatives that might divert paying customers. Unfortunately, there is no way to predict 50 years in advance how future growth and development will alter travel patterns and what options might be necessary.  P3 anti-competitive clauses could limit the ability of the state to provide adequate transportation to some of its citizens far into the future. Those are risks that may not become evident for decades.

I, for one, will be interested to see how Secretary Layne proposes to finance the I-66 improvements. Hopefully, he’s learned the right lessons from the U.S.460 experience.

Update: In an op-ed published May 27, Layne states that the U.S. 460 project was not a design-build project but a P3. “Had the U.S. 460 projet been procured as a design-build rather than a P3, it is highly unlikely that state standards for such projects would have permitted it to go so far forward as it did.”

Sexual Chaos on Campus

Vigen Guroian

Vigen Guroian

by James A. Bacon

Vigen Guroian, a professor of religious studies at the University of Virginia, ran a sexuality seminar a year ago in which students talked candidly about what he describes as the “deep, pervasive sexual chaos” that dominated the grounds. William Wilson, an academic dean, has met with “dozens” of young women so shaken from their sexual experiences that they had stopped attending classes.

Guroian and Wilson are well versed in the problem of rape and sexual assault on campus. And in an op-ed piece published yesterday in the Richmond Times-Dispatch as well as an essay in First Things, they argue that university and student leaders campaigning against the “culture of rape” are focusing on the symptom rather than the underlying cause — “a toxic sexual environment that damages all the young people touched by it.”

William Wilson

William Wilson

Their analysis of sexual violence at the University of Virginia, which erupted into a national issue with the now-discredited Rolling Stone article about a fraternity-house gang rape, dovetails precisely with the arguments I advanced in this blog at the time. One difference is that, while I opined from afar, Guroian and Wilson base their observations on testimony from dozens of students. Another is that they are even more strident in their portrayal of how campus sexual culture has degenerated.

During the sexual revolution of the 1960s, colleges and universities abolished the “rules, manners and conventions of courtship” that they had long encouraged, write the two religion profs. No more sexually segregated dormitories. No more adult supervision at frat houses. No more restrictions about visits to bedrooms. As the old restraints fell away, a new campus culture of sexuality arose.

Our students have told us what is wrong. In vivid detail they have recounted stories about “incestuous” dorm “hook-up” parties, young women spread out all but naked on fraternity house floors in the early  morning hours, and the general rough and tumble of sex gone awry, a formless sex with no purpose other than momentary impulse or recreational titillation. …

We contend that young women were not empowered by the changes that followed. Rather, the hook-up culture and casual cohabitation in dormitories gravely disadvantaged young women. …

None of our students have objected that we exaggerate the sexual free-for-all that envelopes their lives. No one has argued that the demise of dating and courtship has brought about liberation from repressive sex roles. The laissez-faire sexual economy, which the university lets happen, puts young women at risk and threatens to turn young men into louts.

What is to be done? Defining the problem narrowly as rape and sexual assault is not helpful.

When for administrative purposes we categorize rape as one specimen among many of sexual misconduct, we lose a vital sense of the full scale of sexual disorder that afflicts college life. When we become incapable of responding to rape as what it is, an act just one step short of murder, then all else that has gone awry with sex in the university takes on the look of normality.

One way to start is to admit what is occurring: “For decades a destructive disordering of relations between the sexes has festered right under our eyes [and] a feckless institutionalization of the sexual revolution in our colleges has resulted in maiming countless young people,” write Guroian and Wilson. They go on:

Complete neutrality about sex leads to complete sexual exploitation, and sometimes violence. We must stop blaming fraternities, drinking or the heritage of an all-male university education for the sexual chaos beyond our classrooms. That chaos is of our own making.