Chicago’s Use of Asset Lease Proceeds: A Clarification

I was surprised to see myself quoted in a Medill Reports article today entitled, “Chicago is blowing its future on current spending, analysts say.” It seems that there must have been some miscommunication between myself and the reporter or some nuance lost in the conversation, because comments I made about municipal asset leases in general were mistakenly interpreted in the article as being made about Chicago specifically. So I’ll clarify.

For example, my comment, “[y]ou have a one-time revenue influx â?? donâ??t go blow that,” was intended as general advice to municipalities and states in contemplating the use of upfront lease proceeds. In fact, I shared very similar thoughts in this commentary, in which I clearly tried to balance the “goal” of investing all lease proceeds for long-term uses with the real world of governing during a recession (specifically citing Chicago):

Whether states are going to sell outright or pursue “sale-leasebacks,” the best and most fiscally responsible way to “spend the windfall” of a long-term transaction is to invest it for long-term economic benefit, such as paying down public debt (akin to paying down additional principal on a mortgage), shoring up underfunded public pensions, and investing in long-lived infrastructure.

However, the fiscal and political realities in many states todayâ??and a strong desire among policymakers to avoid raising taxesâ??make it probable that some portion of a one-time revenue windfall to government will get spent on immediate needs like plugging budget deficits.

Chicago offers an example here, where the over $3 billion the city received from long-term leases of the Skyway toll road, four downtown parking garages and the downtown parking meter system have been used for a variety of purposes involving various time-scales, including paying down public debt, setting up rainy day funds, short- and long-term investments to augment city revenues, and short-term budget fixes. In an ideal world, one could wish for the proceeds to have been spent fully on long-term investments like infrastructure or debt reduction, but the realities of governing in a recession dictate otherwise.

Still, given a choice, many taxpayers would likely choose to have city assets leased than have their taxes raised to balance the budget, even if not all 100 percent of the revenues are dedicated to long-term uses. To their credit, Chicago’s done a relatively good job in tough circumstances balancing the short- and long-term uses of their lease proceeds.

I brought up that same issue again here when ratings agency Fitch said (emphasis mine):

In 2009, the parking meter lease proceeds bolstered the city’s financial position as long-term reserves climbed to over $1.5 billion when available long- and mid-term funds are included. While Fitch views negatively any use of proceeds derived from long-term asset leases for near-term budget relief, the planned spending of these sources through 2012 provides the city with time to develop long-term budget measures to better match recurring spending with revenue.

Similarly, while I did indeed point to the Indiana Toll Road lease as a great example of the use of lease proceedsâ??investing them in an interest-bearing account devoted to statewide highway improvementsâ??my comment was intended to offer a solid example for jurisdictions contemplating asset leases, not a specific recommendation for the city of Chicago. I do think transportation is one great place to invest lease proceeds, but I could (and did, in the article above) say the same thing about paying down debt (which Chicago has done with some lease proceeds) or shoring up underfunded pensions (as a lease of Midway Airport would do by law).

I think the reporter may have misinterpreted that example as “advice” for Chicago, but the reality is that there’s no one way to skin a cat, and a dedicated transportation fund might be right for Indiana but not the highest priority use of lease proceeds for Chicago. That’s a policy decision that needs to be made in each jurisdiction.

I hope this clarifies my position, because I didn’t think it came across accurately in the Medill article. As I say all the time and did indeed tell this reporter, Chicago’s asset leases are a prime example of bold and innovative thinking that has spared the city from worse fiscal pain and gotten the city out of the business of running non-core government enterprises. In fact, I just made those points in my Bacon’s Rebellion column last week.

UPDATE: Fitch’s comment above seems like a sensible, pragmatic way of thinking to me, and it’s worth noting that Mayor Daley seems to have taken to heart the need to address the longer-term fiscal issues the city faces.

For instance, the potential lease of Midway Airport to private investor-operators remains on the table, with the administration recently asking the FAA for more time to approve a transaction. The proceeds of a Midway lease would largely be dedicated to paying off debt and shoring up underfunded public pensions, both sound, long-term fiscal strategies. Also, it’s been reported this week that Mayor Daley is now contemplating the possibility of privatizing certain aspects of the management and operation of McCormick Place, largely for the purpose of making the city’s convention center a less costly and more efficient operation, as the city has lost convention business (and the tax revenues they bring) to Las Vegas and other cities offering lower-cost convention packages.

By advancing innovative solutions like these that would invest in long-term fiscal relief and make the city a more competitive place to do business, the Daley administration is demonstrating that it takes seriously the need to get the city’s fiscal house in order.