Fitch on Using One-Time Proceeds from Asset Sales & Leases

My latest commentary makes the point that the revenue derived from sales or long-term leases of government assets should be primarily (or mostly, in the pinch of a fiscal crisis) used for long-term economic benefit, such as paying down public debt, shoring up underfunded pensions, investing in long-lived infrastructure and the like. Similarly, ongoing (recurring) spending should rely on recurring revenues from taxes, fees and the like.

Confusing the two situations—spending proceeds from the divestiture of long-lived assets on recurring spending—is a recipe for long-term structural budget deficits. After all, a one-time influx of revenues is by definition temporary, and the expiration of those revenues will inevitably produce a hole in the budget.

That said, as I wrote in the commentary, we don’t live in a perfect world. Hence, it’s reasonable to spend a limited portion of one-time revenues on near-term budget relief in the middle of a fiscal crisis as a means of avoiding tax hikes or more bonded debt, both of which would dig the hole deeper in one way or another.

In revising its outlook on various Chicago tax revenue, general obligation and fuel tax revenue bonds, ratings agency Fitch amplifies this idea:

Fitch has long noted the city’s use of non-recurring funding sources, primarily a portion of proceeds from fixed asset sales and long-term leases, for near and intermediate-term budget relief. Fitch will monitor management’s ability to fund its largely inflexible spending requirements once sizable non-recurring funding sources are exhausted. Currently, the city maintains $900 million in long-term reserves, boosting its available resources. Although the city’s corporate fund balance is effectively nil, reserves equaled about 20% of spending including medium- and long-term reserves for fiscal 2008. 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.

In other words, if you’re against the wall and in a position where you need to use one-time proceeds to backfill current spending, then at least use it to buy some time to make the more difficult spending cuts.

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Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.