The great government fire sale is on
Saturday, May 14, 2011
NEW YORK (AP) — As 2010 drew to a close, the mayor of Newark, N.J., was staring into a budget abyss so deep that he sold 16 city buildings to pay the bills. They included the architecturally significant Newark Symphony Hall and the police and fire headquarters.
In New York, the transit authority may sell its Madison Avenue headquarters, complete with an underground tunnel connected to Grand Central Terminal and air rights to build a skyscraper on top.
And soon, if state legislators have their way, private investors will be able to buy plenty of other municipal treasures: power plants in Wisconsin, prisons in Louisiana and Ohio and municipal buildings in Boston.
The Great Government Tag Sale is on. As states and cities struggle with billions of dollars in shortfalls, elected officials are increasingly selling public assets to cover their costs. Sometimes municipalities sell the buildings to pocket a one-time pile of cash and then lease them back so they can continue to them.
To proponents, selling government property is an efficient way to plug budget holes. That’s one reason the Obama administration has looked at unloading office towers, courthouses, warehouses and shacks. Private owners who develop the properties can inject vibrancy into municipal dead zones, the thinking goes. Buildings that were once exempt from property taxes are put back on the rolls.
But to critics, these sales are as misguided as pulling money out of your house to pay your bills. They point out that the government is letting go of a long-term, valuable asset in exchange for a one-time payment. When the asset is a building, a municipality then has to spend more money on leasing it back or renting another facility.
“This is tantamount to selling the family china only to have to rent it back in order to eat dinner,” says economist Yves Smith, author of the top-rated business blog Naked Capitalism.
The Desperate States of America, yes. But in some cases, politics is influencing policy. Selling state assets has long been a part of the conservative playbook, which calls for moving some of the traditional functions of government to the private sector. And in other instances, the deals are shaded by accusations of corruption.
In Wisconsin, the center of the state budget battles, legislators lobbied for the budget repair bill to allow politicians to sell any state-owned heating, cooling or power plant to anyone for any price at any time — without public approval or a call for bids.
Critics of Republican Gov. Scott Walker charged that Koch Industries, an energy conglomerate that made a $43,000 donation to his campaign, the biggest from any corporation, might stand to benefit. Koch’s head of government affairs, Philip Ellender, says the company was never interested in buying a state-owned power plant.
The provision was removed from the budget bill just before it passed. But it is expected to be taken up again later this year.
In many ways, it’s the perfect time to market these deals as do-or-die propositions. Elected officials across the country say the ravages of the Great Recession have given them no choice, as evidenced by the escalating conflict between governments and the unions representing their employees.
Local and state governments made promises about their retirement benefits but often failed to set aside the money to make good on those promises. Now those governments say they simply can’t afford them. Illinois’ pension fund, for example, is only 45 percent paid for. Actuaries recommend 80 percent.
Years of wishful budgeting and fiscal gimmickry have finally caught up. The states’ “ridiculous” budget and pension accounting would “make Enron blush,” as Microsoft founder Bill Gates recently put it. For fiscal 2012, states face a $125 billion shortfall, according to the Center for Budget and Policy Priorities.
Elected leaders have already raided road-repair budgets and borrowed from emergency-service coffers. They’ve nabbed citizens’ unclaimed checking account cash and sold future proceeds from lotteries. Detroit and Omaha just reduced the pensions of the police.
Now that other options have been exhausted, officials say that to avoid mammoth tax hikes — or any tax hikes, in some cases — they have no choice but to sell municipal assets.
In Newark, last year’s $80 million budget deficit was the worst crisis of Mayor Cory Booker’s career. He had already enacted what critics called savage cuts, from police officers to toilet paper. Booker’s choices were a monstrous tax hike or selling the Brick City’s bricks in exchange for $74 million. Newark will lease back the buildings for 20 years from their buyer, a public agency called the Essex County Improvement Authority, for a total cost of $125 million. “I would rather not have done it. I would rather have done something different,” Booker says. “But it was done to meet the urgencies of the budget crisis.”
Often, the public balks at these deals. In Britain last year, people practically took up pitchforks when the government, as a part of its austerity cure, announced plans to sell Sherwood Forest. The environment secretary backed off. “This is the second worst thing a government can do,” says Jay Powell, a fellow at the Bipartisan Policy Institute. “The worst thing they can do is run out of money.”
In the U.S., taxpayers screamed when New Jersey and Pennsylvania attempted to sell their turnpikes. Fresh in their minds were other deals that have ended in disaster.
In 2008, for example, Chicago Mayor Richard Daley auctioned off the city’s 36,000 parking meters to a private investment group that included Morgan Stanley, the Abu Dhabi Investment Authority and the German-based insurance giant Allianz. Daley did it to balance the budget. The deal may cost Chicago drivers at least $11.6 billion over the next 75 years, 10 times what the system was sold for, according to Bloomberg News. Since the deal went through, Morgan Stanley has raised parking fees 42 percent. It now plans on stuffing more cars into fewer metered spaces by getting rid of marking lines, raising the number of metered slots and expanding the hours that require fees.
City auditors dubbed the parking deal “dubious” because the city’s chief financial officer didn’t calculate how much the system would be worth to the city over the long term. Despite the controversy in Chicago, New York is exploring private options for its parking spaces.
Not everyone is joining the fire-sale fray. In February, California’s newly elected Gov. Jerry Brown torched a deal struck by his predecessor, Arnold Schwarzenegger, to sell 24 state buildings, including the San Francisco Civic Center and the Department of Education, for $2.3 billion. It was hugely unpopular, especially after The Associated Press reported that it would have cost the state $5.2 billion in rent over 20 years — the equivalent of a long-term loan at 10 percent interest. Brown is now proposing to cover the gap with short-term loans.
Meanwhile, the budget collapses are so dire that some local pols are joking — or seriously wondering — whether they should legalize marijuana, rubdown parlors or brothels. Ohio is currently accepting bids from private operators for five prisons. The state might also charge inmates for electricity. In New York City, real estate agents are eagerly awaiting news about which buildings — in the hipster haven of lower Manhattan — the Bloomberg administration will unload as a part of its real-estate downsizing plan.
And in Naperville, Ill., the City Council is debating whether to give corporations the right to splash their logos on city property.
One proposed municipal sponsorship deal would enable Kentucky Fried Chicken to repair potholes and then advertise on them: “This pothole repair brought to you by Kentucky Fried Chicken.”
Associated Press writer David Porter in Newark, N.J., contributed to this report.
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