Opinion: Free Market Minute

Let’s Make a Deal

Civic assets: the new cash cows

For a growing number of cities and municipalities, when fiscal times get tough, the tough go…to the market. Take recently cited examples from Dallas, Los Angeles, Chicago, Las Vegas, Nassau County NY, and Pittsburgh PA. All are looking for new angles to increase local revenues. They are looking for cash cows, and finding them by leasing or liquidating many of the civic assets that were supposed to be cash cows for the community in the first place.

Civic assets like zoos, airports, municipal golf courses, convention centers, municipal amphitheaters and sports arenas, parks and recreation centers are increasingly being viewed as an opportunity for a rapid cash infusion into fiscally anemic local governments. With the exception of leasing arrangements, most of these transactions are one-time cash opportunities. In the past two years, even given market declines, the value of municipal assets being flogged to the market has increased over ten-fold. Infrastructure banking sources report that the thirty-five asset sales now in the liquidation pipeline have a total market value of about $45 billion. For the localities playing ‘let’s make a deal,’ that’s a fair chuck of short-term relief.

In these days of fiscal deficit and, one assumes, budgetary stringency, many items once considered ‘necessary’ to the economic vibrancy in a community have become an economic burden. An economic downturn such as the one (or ones) we have been experiencing tends to reveal which community projects are unsustainable. Most were an ill-conceived idea in the first place, many born of a desire for local bragging rights, rather than an expressed demand by the citizens targeted to support them. But if the local community cannot support the facility, and the hoped-for tourism, special events, or other rationale for its existence fails to materialize, the would-be white-hot attraction becomes a costly behemoth.

Tales abound. The seeming reckless abandon—and subsequent failure to produce promised revenues—with which municipalities have banked (or un-banked) their fortunes on a brand-new race track, industrial park, marina, zoo, parking deck, recreation complex or other ‘indispensible investment and money-making idea,’ should give pause to others considering taking the same municipal plunge. The waters have often proved treacherous, and the fiscal burden often lasts for decades.

Quick sales and long-term leases to private entrepreneurs alleviate the short-term fiscal pain. But with items like metered parking for example, private lessees also collect the income streams over the life of their lease. Dramatic evidence underscores the fact private incentives matter a lot. It pays private operators to be efficient, and in cities like Chicago the tripled parking revenues now flowing into the consortium operating city parking meters represents revenues lost to the city, due to its inefficient meter maintenance and management. That private lease/consortium income stream expires, of course, but not for another seventy-five years.

In the John Locke Foundation’s Agenda 2010, local government research director Dr. Michael Sanera outlines how municipalities can move away from (if they have not avoided) costly and inefficient government monopoly ownership and provision of some key services and assets. Essential services might include schools operations, driver licensing, road construction, institutional food services (schools and prisons), and waste water treatment, to name just a few. Under the general rubric of privatization, Agenda presents four alternative approaches available to the city/county/local municipality looking to increase efficiency and unburden itself and its taxpayers, at least somewhat.

One alternative is competitive sourcing of services—through bids. A bidding process for the provision and processing of standardized student tests, for example, would not necessarily preclude a winning government bid. Another approach that is increasingly popular, especially in construction of infrastructure, is the public-private partnership. Pooling private funds with public funds for road construction can alleviate some of the burden, convey private investors rights in terms of tolls to repay the investment, and revert from private to public ownership on a time or revenue-denominated contractual basis. Direct contracting out provides a third way to obtain services on a more cost-efficient basis, particularly when open competitive bids are used.

And finally there are asset sales of the type mentioned above. Many seemingly essential government expenditures are clearly nonessential in the cold light of a steep fiscal crisis — “Do we fire the childrens’teachers, or sell off the city golf course?” becomes a no-brainer. But brutal truth coupled with honest accounting at the inception of many of these ideas could have saved taxpayers billions in the first place. It could also have provided better services and investments where those services and investments are actually satisfying consumer demands.

Short-run, short sighted political motives, self-aggrandizing schemes for public projects with insufficient consumer support and inefficient management, and a tendency to avoid facing the inevitable long-run consequences of fiscal incompetence have landed many cities deep in the red. Privatizing government-provided services through divestiture or competition, or both, can relieve taxpayers of some of the burden of irresponsible municipal choices, and significantly improve essential-service ones.

As pragmatic actions by cities now reveal, fiscal relief for local governments and their taxpayers depends upon de-coupling government from non-essential and non-competitive projects and services. It is proving to be a valuable, if costly lesson, and the question will be “Will the learning last?”