Privatization Run Amok

Finally, a bit of great news:  California Governor Jerry Brown is courageously bucking a national trend by refusing to sell off state buildings and then lease them back.  This trend has been the budget subterfuge of choice among many of the nation's governors.  Lease-backs of state assets are a backdoor way of getting a quick hit of money for troubled state budgets (in California's case, $1.2 billion) while saddling future taxpayers with huge additional expenditures (in California, $6 billion over 35 years).

Yes, welcome to the next frontier in the business campaign against government.  First it was the fight against regulation and public-sector spending, both largely successful.  Now business is vying to own the equity assets of government through arcane lease-back and securitization deals. 

These strategies not only hurt us as taxpayers and citizens (through higher expenditures for less value, and through reduced public discretion over public assets).  They fling open the doors to all sorts of other investor schemes to buy and privatize public assets.  Next stop:  the withering of the State and the arrival of the Total Market Order.

Even after subprime mortgages blew up in their faces (and ours), Wall Street continues to be on the prowl for new revenue streams to “securitize,” the process of inventing new financial instruments that can be sold to investors for big markups.  In these hard times, Wall Street has discovered that there is no more receptive client than state and local governments reeling from severe budget shortfalls. 

Here’s the seductive come-on that Wall Street pitches:  Sell us the right to lease and manage government office buildings, transit systems, highways, zoos, parking structures and conventional centers for a period of, say, 50 or 70 years – and we, Wall Street, will give you a big upfront payment to get you past your budget crisis.  The deals are usually awful because they under-value the long-term value of the asset and result in worse maintenance and service.  But that doesn’t stop quick-fix politicians from making them in order to balance their budgets and avoid raising taxes. 

Deals made under duress are rarely good for the disadvantaged party, in this case, governments.  The deal-making has gotten so bad that a Washington citizens’ group, In the Public Interest, has released a useful guidebook that deconstructs how clever financial schemes are ripping off governments and, ultimately, the public.  “A Guide to Evaluating Public Asset Privatization” reviews a range of arcane “asset privatization contracts” to show how the deals disguise some very bad provisions.  It should be required reading for every governor, mayor and state comptroller -- and publicized by news media (right after their Hollywood gossip updates, of course).

The report describes how Chicago sold the revenues from its parking meters in 2009 to a consortium of investors led by Morgan Stanley.  “Private investors gave the city an upfront payment of $1.15 billion in exchange for meter revenues for the next 75 years," the report writes.  "Since private operators took over the parking meters, rates have significantly risen, whle meter maintenance quality has declined.  Recent analysis shows that Chicago undervalued the asset and should have received a billion additional dollars for the deal.”

Bottom line:  The people of Chicago will pay higher parking fees while suffering from deteriorating meters through the year 2084.  Welcome to the "efficiencies" and "innovation" of the "free market."

The State of Arizona went one step further by leasing its State Capitol and several other office buildings.  The State got an immediate infusion of $735 million to cover its budget shortfall – and it will now have to lease back its own buildings for periods of three to twenty years.  Over the long term, the State of Arizona will pay more money for occupying its own buildings, but politicians there saw it as an acceptable way to mitigate or disguise the short-term financial pain. 

One reason that these asset privatization deals are so suspect is because there are plenty of opportunities for deceptions, sweetheart deals and other conflicts of interest, thanks to a lack of transparency and obscure legal and financial terms.  The collusion between government officials and business that got us into the current financial mess has not gone away; it has simply migrated to new forms:  selling off the public’s crown jewels to Wall Street. 

In the Public Interest's report gives some highly specific advice about ensuring a fair and accountable process for any deals; assessing the government’s capacity to negotiate a good deal for the public; and assuring that the terms of the contract and asset maintenance provisions don’t leave the public defenseless.

A copy of the report can be downloaded here [pdf file].  See also a 2009 report by Ellen Dannin, “Infrastructure Privatization Contracts and Their Effect on Governance,”  and Elliot Sclar’s 2009 article, “The Political Economics of Private Infrastructure Finance:  The New Sub Prime.”

Governor Brown deserves a lot of praise for rescinding the bad deal for California even though it means in the short term that he will have to come up with $1.2 billion somehow.  "The sale of the [eleven state office] buildings really didn't make much sense," he told the NYT.  "We are not kicking the can down the road." 

Brown's plan is to borrow $1.2 billion from various state funds with a pledge to pay it back.  In a sense, it is a self-financing scheme to get California past a rough patch.  It's not ideal, but far better than letting Wall Street prey upon public ignorance and weak-willed politicians with exploitative deals that will burden future generations.