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Source link: http://archive.mises.org/12722/its-fun-to-collude-with-the-y-m-c-a/

It’s Fun to Collude With the Y-M-C-A!

May 15, 2010 by

As previously reported here, the Justice Department takes “bid rigging” very seriously. This refers to the alleged practice of potential bidders at an auction agreeing in advance what bids they will make. Although such agreements are informal and voluntary, the DOJ considers it a felony antitrust violation as it violates the “right” of the auction sellers to receive the most competitive bids. The DOJ gets especially irate when the auction seller is a governmental entity, such as the Defense Department or a municipal government selling bonds or tax liens.

But what of the opposite scenario? When the government is the purchaser rather then the seller, no criminal liability generally attaches to collusion or “bid rigging.” Actually, there’s no liability of any sort. Collusion between governments and favored bidders is a common practice that somehow escapes antitrust scrutiny. That’s not to say there isn’t some judicial relief for such behavior.

Last week here in Charlottesville, Virginia, a coalition of three local athletic clubs sued both the city and neighboring Albemarle County alleging, in effect, the same type of collusion the DOJ routinely prosecutes when the bidders are non-governmental entities. The clubs claim they were unfairly excluded from bidding on a lucrative contract that ultimately went to the local YMCA chapter.

In 2005, Albemarle County officials decided they needed more indoor recreational facilities. Lo and behold, the YMCA appeared and offered to construct a new facility in the county — provided the county’s board of supervisors contributed $2 million towards construction. The county agreed to the funding, even though the YMCA had not raised any of the other funds to cover the estimated cost of the facility (which somehow increased from $7 million to over $14 million less than two years later).

In June 2007 — with no construction having taken place — the YMCA then made its move against the City of Charlottesville. The city claimed it needed a new pool to service the high school and other under-served populations. The YMCA proposed combining a new pool with the facility it was already planning to build with Albemarle County’s $2 million. The only suitable location, according to the YMCA, was within an existing city park — one which was already used extensively by the public.

By August 2007, the YMCA had convinced the Charlottesville City Council to approve a 40-year, $1-per-year ground lease for three-to-five acres in the city’s McIntire Park (where some city officials would also like to place a botanical garden, as I reported in an earlier article). State law required the City Council to issue a formal “request for proposal” seeking bidders for the proposed lease. The notice, however, said the only acceptable bids were for a “nonprofit youth and family community recreation program to construct a facility to operate their program.”

The operative word here is “nonprofit.” All for-profit recreation companies, including three that already operated within Charlottesville and Albemarle County, were excluded by definition. The notice also failed to mention the generous $1-a-year rent. And the city only kept the “bidding” open for 11 days. Not surprisingly, the YMCA submitted the only bid and won the contract. The city subsequently signed a separate “use agreement” with the YMCA and committed $1.25 million towards the new facility.

The city never stated any rationale for excluding for-profit companies. The purpose of the project is to provide subsidized access to indoor recreation facilities — at least that’s the publicly stated purpose. The three for-profit clubs believe they were wrongly deprived of the chance to better the YMCA’s offer:

This exclusion prevented any for-profit entity from submitting a bid on the Lease, even if that entity was capable of constructing a superior facility which would have been available to City residents on the same or more favorable terms while at the same time paying applicable taxes. Had the City instead advertised simply for the construction of a fitness and recreation center while continuing to require the reduced membership prices contained in the Use Agreement, it still would have received the bid from the YMCA. However, the CIty would also have received a bid from one of more of the Plaintiffs, each of whom has a proven track record of successfully running fitness facilities in the Charlottesville-Alebmarle area. These additional bids would have been required to meet the terms of the Use Agreement, and may have contained a more upscale or advanced facility while at the same time paying increased rent or real estate taxes.

Now the for-profit clubs claim the city’s (and county’s) actions violated their constitutional rights to due process and equal protection. Those arguments won’t find many sympathizers here. There’s of course no libertarian “right” to bid on a government contract. For our purposes, the issue is whether the city and county colluded with the YMCA to defraud the taxpayers. Based on the facts I’ve reviewed, the answer is clearly yes.

As the for-profit clubs’ lawsuit explains, the city in particular made the worst possible deal for itself. It gave away public parkland for $1-per-year to a nonprofit entity that (1) has no track record of successfully running an athletic club in the area, (2) would not pay any taxes back to the local governments on its operations, and (3) has raised no significant funding for construction beyond the $3.25 million committed by the city and county. All of this suggests the most likely outcome, assuming the facility is even built, will be a club that won’t be able to compete against the existing for-profit facilities — and an eventual bailout by city officials who will refuse to allow the facility to go under.

(And if you think I’m exaggerating, I have a hockey arena in Glendale, Arizona, that you’d might like to buy. Hockey team included!)

And that brings us to the real reason the city wants to build this YMCA facility. It’s not necessary to provide recreation services — the for-profit market already does that quite well. It’s to build a political monument to the “leaders” involved in the decision to fund and construct the YMCA. By no small coincidence, the chairman of the YMCA, Kurt Krueger, also happens to be a partner at McGuire Woods, the most politically connected law firm in Virginia. He was the mastermind of this little “bid rigging” scheme. If he weren’t openly colluding with city and county officials, he might well be facing a Justice Department antitrust investigation right now. (And I’m certainly not suggesting or implying there should be such an investigation — I write for the Mises Institute, after all, not the Competitive Enterprise Institute.)

“Collusion” is only an evil when the government is not a part of it. That’s what the antitrust regulators would have you believe. If a handful of potential bidders at a real estate or tax lien auction decide on a common strategy, it’s a felony because they are acting outside the government’s view; it’s the secrecy of the act — not the act itself — that triggers the state’s retribution. Conversely, when a political lobbyist like Mr. Krueger and lays out a detailed scheme to not just collude but, if you concur with these lawsuits, flagrantly violate state procurement laws, he is simply a civic leader looking out for the community’s interest.

{ 5 comments }

newson May 16, 2010 at 6:15 am

s.m. oliva is begging for a tax audit (for the good of the children).

Fred Furash May 16, 2010 at 10:37 am

This is the typical kind of double standard one finds with the government. Remember, stealing is bad only if you don’t share with, or are part of, the government.

iawai May 17, 2010 at 9:21 am

If bid rigging were a serious issue to auctioneers – wouldn’t a contract remedy suffice? Something that negotiates a penalty for selling at a price above the auction rate for some period of time (attaching only between the parties, not a deed restriction) would be a novel and voluntary solution.

But when all you have is a hammer, every problem becomes a nail: don’t like the way someone behaves? Fine them, imprison them, kill them. Those are the solutions the State has, and those are the only solutions they know how to implement.

Ryan May 17, 2010 at 10:11 am

Beautifully written. Things like this happen in virtually every city in the USA and is a major source of municipal debt. We should shout this from the rooftops.

S.M. Oliva May 17, 2010 at 12:06 pm

iawai —

I would note that government “requests for proposals” — like the one I discuss above — often contain a “no-collusion” clause, meaning bidders certify they have not entered into any side agreements with others regarding the bid.

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