Cities Privatize to Fill Budget Gaps

The Great Recession is taking a toll on city and state budgets, and one beneficial outcome might be more efficient public services as these assetts are privatized, leased to private companies, or otherwise subject to competitive bidding. While these strategies are common in Europe and Asia, the U.S. is lagging behind. The Wall Street Journal (Sun., Aug 22, 2010) reports that as much as $45 billion in assets may be up for some form of competitive bidding or privatization according to the Royal Bank of Scotland, ten times the amount just a few years agao.

According to the Journal:

“Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.

“California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it’s parking meters. In Louisiana and Georgia, airports are up for grabs.

“About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland’s RBS Global Banking & Markets. Those assets have a market value of about $45 billion—more than ten times the $4 billion or so two years ago, estimates Dana Levenson, head of infrastructure banking at RBS. Hundreds more deals are being considered, analysts say.”

The danger is that cities and states are using privatization as a stop-gap tactic for plugging budget holes in operating budgets when they should be seen as part of a long-term strategy for rightsizing government. Again, from the Journal:

“Municipalities argue that the money they raise could help build more long-term assets, boost efficiency and avoid raising taxes. “The City of Los Angeles shouldn’t be in the parking business,” says Mike Mullen, senior adviser to L.A.’s mayor. Mr. Mullen was hired from Bank of Montreal to study selling some of the city’s assets, including parking spaces, which bring in about $20 million annually.

“In the U.S., selling public buildings and leasing them back got some attention in the 1980s, but those deals were largely done for tax benefits and the asset generally stayed in public hands.

“The current deals are fundamentally different because control of the asset transfers to private hands. In such deals, “the private investor takes on operating risk,” Mr. [Michael] Likosky [New York University public finance professor] says.”