Privatization and divestment of government assets

As our state and local governments struggle with recession-generated revenue problems, there is a strong temptation to make up those shortfalls through the liquidation of assets (sell off) into the private sector, or the privatization of (historically) government functions and programs which facilitates the "thinning of the ranks" of government employees.

Unfortunately, these planning sessions are almost always short-sighted, and fail to reference the reams of data that demonstrate the long-term costs of such moves, not to mention the waves of regret that are felt by (other) states and municipalities that have gone down this road. The lure of the pawnshop is strong, but our elected officials need to keep their eyes focused on the horizon and drive on by.

Some examples of poor planning:

The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.

"The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.

So the new (private) owners radically raised the rates that citizens pay for parking, and the government's revenue stream dries up. Brilliant.

In Pittsburgh, the mayor is proposing to lease out the parking system for an upfront sum of about $300 million over 50 years and funnel the money into the pension system.

Bill Peduto, a city councilman, is fighting the plan. The spaces generate $35 million annually, and considering that the concessionaires are proposing doubling rates, he says, the city will ultimately lose $3.5 billion over the life of the lease.

Just as a heads-up for county/city officials who might be reading this, there is a new movement of former(?) bankers and lawyers who are making themselves available to "advise" local governments on how to find buyers:

The privatization trend is being spurred by a cottage industry of consultants, lawyers and bankers. Allen & Overy, a New York law firm, dubs it "rescue investing" and recently provided investors a booklet on "jurisdictions of opportunity"—municipalities whose laws, budget woes and credit ratings make them most likely to make deals.

"More public-private partnerships for public infrastructure in the U.S. have reached commercial and financial close than during any comparable period in U.S. history," the booklet says.

Many municipalities have long done a poor job of running their roads, parking spaces and bridges, contends David Horner, a lawyer at Allen & Overy. Maintenance contracts, for example, are highly political and with revenues shrinking, infrastructure is increasingly deteriorating. Critics say buyers are taking advantage of municipalities at a vulnerable time and lack the incentive that governments have to maintain quality.

Before making any divestment decision or privatizing contract, government bodies need to do a whole lot of number-crunching and long-term projections. And those of us who watch need to make sure those officials aren't being influenced to make bad decisions.