Maryland had $20 billion in pension debt at the end of 2020. This public pension debt stems from unfunded pension benefit promises in both its teachers and regular state employees’ pension systems. Maryland, along with most other states, saw record-high investment returns for its pension plans last fiscal year, but even its 27 percent investment return won’t prevent rising pension costs for employees, retirees, and taxpayers. Maryland needs to find a way to pay down this public pension debt. One source of new funds that state policymakers should explore is payments from a long-term lease of the state-owned Baltimore-Washington International Marshall Airport (BWI). A study from Reason Foundation transportation expert Robert Poole estimates the Baltimore airport could be worth between $1.6 billion and $2.3 billion via a long-term lease to private airport companies and investors. The airport has $642 million in debt, and, after paying off those bonds, the state could net $1.6 billion from a long-term lease of BWI.
Using these funds to pay down pension debt could reduce future pension costs for the state. Maryland is spending $1.8 billion a year in contributions to the pension plans, and $1.4 billion of this is going toward debt payments. Maryland could free up a portion of its budget each year by using the revenue generated from the airport lease to pay down part of this pension debt.
Leasing an airport involves a state or local government entering a long-term public-private partnership. The typical airport lease is 40-to-50 years. Most often, private airport companies provide the entire long-term lease payment upfront, but they can also choose to issue a down payment and provide scheduled payments over time, as was the case with the lease of the Luis Muñoz Marín International Airport in San Juan, Puerto Rico.
The revenue generated from an airport lease could be used for other purposes, such as updating or maintaining existing infrastructure — often referred to as infrastructure asset recycling — or paying down other government debt.
Throughout the world, privately managed airports are becoming the norm. Many large and medium airports in Europe are either fully or partially privatized and are generating revenue for public use, something governments in the United States are missing out on.
These long-term airport leases can be a win-win for governments and airport customers if they are properly designed. Ensuring that there is a transparent leasing process, enough competition between companies bidding on the assets and that there is buy-in from airlines are all key to designing successful airport lease agreements.
The idea of leasing BWI is not entirely new to Maryland policymakers. In 2010, the state considered full privatization of the airport in an attempt to shore up debt. However, the plan fell through when then-Gov. Martin O’Malley (D) felt that the deal offered was not reflective of the true value of the airport. In addition, he believed that the private company needed to act as a job creator and bring value beyond just cutting costs.
Whether an airport lease must meet every one of those requirements is subjective, but experience in other countries demonstrates that it is possible to address these concerns within the details of a lease agreement.
However, given the size of Maryland’s pension debt relative to the potential value of the airport, the state would need to consider additional policy reforms to fully fund retiree benefits and prevent the growth of future unfunded pension liabilities. These public pension reforms should include lowering investment return assumptions so they are more in line with market realities and creating a plan to fully pay off the pension plans’ debts within a realistic time frame.
If well-executed, long-term airport leases can improve the quality of airport services and provide additional revenue for government bodies. Maryland should strongly consider leveraging BWI to help the state at least partially address its serious public pension funding shortfalls.
A version of this column previously appeared in The Washington Post.
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