Public Infrastructure “Privatization” Pitfalls: Penn State Law Prof.’s Article Worth Reading . . . and Passing Along to Your Favorite Elected Official
If I were to choose a single sentence encapsulating why Professor Ellen Dannin’s recent article on public infrastructure privatization is important and worthwhile reading for our elected officials and taxpayers alike, this would be it:
“Nothing at the [Federal Highway Administration] website, however, warns that language commonly found in infrastructure privatization contracts shifts substantial risk–and costs–to the public while also limiting the state and local government’s ability to make policy decisions.” (p. 76)
Prof. Dannin discusses a number of recent public infrastructure privatization deals/proposals (including long-term leases for Chicago’s parking meters and for the PA Turnpike) that essentially created–or very nearly created–classic “heads-I-win, tails-you-lose” deals that provide cash-strapped government entities with up-front revenue that is then–in large measure–subject to recapture based on contractual provisions that essentially seek to guarantee a the private partner’s return on investment in previously-public infrastructure.
Beyond the questionable fiscal sense that such contracts make for state and local governments, Dannin argues that common infrastructure contract provisions–euphemistically termed “compensation events”–actually “create conditions [or incentives] that pit profits against public safety.” (pp.58-59) For example, the proposed terms of the long-term lease contract for the PA Turnpike would have required the Commonwealth to compensate the private counter-party for performing maintenance and ensuring compliance with safety regulations. (p. 59) Here’s another paragraph that highlights the issue starkly:
Clashes between the private sector and public welfare are not hypothetical concerns. For example, in 2006, the Indiana Toll Road contractor installed sand-filled barrels in Toll Road turn-arounds to prevent drivers from using them. However, those turn-arounds were created to get emergency crews to accidents as quickly as possible. State officials and emergency services were not consulted or even informed of the decision to block the turn-arounds, and it was months before the contractor agreed to remove the barrels. These problems could have been avoided had the contractor met its contractual obligation to prepare an emergency response plan for the Toll Road. Thus, privatizing the road left the public with less protection and with its needs for safety not being taken into consideration, despite the requirements of the Toll Road lease.
The article is titled, Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and their Effects on State and Local Governance: Here’s the abstract:
Key arguments for privatizing public infrastructure range from providing money so cash-strapped governments can fix crumbling infrastructure and build much needed new infrastructure to shifting future financial risk from the public to a private contractor. The reality, though, is far different. Provisions commonly found in infrastructure privatization contracts make the public the guarantor of private contractors’ expected revenues. Indeed, were it not for provisions that protect contractors from diminution of their expected returns, the contracts would be far shorter and much less complex. An effect of those contract provisions is to give private contractors a quasi-governmental status with power over new laws, judicial decisions, propositions voted on by the public, and other government actions that a contractor claims will affect toll roads and revenues. Giving private contractors such a role may well violate the non-delegation doctrine that bars private entities from exercising power that is inherently governmental.
This Article examines the operation and effects of three provisions that are commonly found in infrastructure contracts: (1) compensation events; (2) noncompetition provisions; and (3) the contractor’s right to object to and receive compensation for legislative, administrative, and judicial decisions. The operation of these provisions gives private contractors power over decisions that affect the public interest and are normally made by public officials and subject to oversight, disclosure, and accountability—none of which apply to private contractors. The existence and operation of these provisions have gone virtually unexamined and undiscussed. Rather, discussions about infrastructure privatization have been narrowly focused on tolls, reflexive pro- or anti- private or public provisions, and spending or investment decisions on up-front payments.
Finally, this Article places infrastructure privatization in the larger context of funding and building infrastructure for the future. It identifies and critiques substantive and procedural issues that must be resolved if we are to have the high quality infrastructure necessary to meet this nation’s needs and further its goals and if we are to achieve those goals by an open and democratic process.
MCall article on a deal in the works for the City of Bethlehem to take over the East Allen Township municipal water system.
Here’s a link to Iris J. Lav’s (bio) recent NYT op-ed discussing the ongoing debate regarding the prospect for municipal bond default and municipal bankruptcies as (serious) aftershocks of the recession.
Lav’s position is that “this fear of an imminent bond crisis reflects a profound misunderstanding of the differences between the short- and long-term challenges facing state and local governments, and what these governments can do to address them.”
I find myself going back and forth (figuratively speaking, not actually rocking or swaying) a bit when thinking about whether which side in the municipal-default debate has the “profound misunderstanding of the differences between the short- and long-term challenges facing state and local governments, and what these governments can do to address them.”
Is this time different, or will a workable (albeit painful) solution to the long-term challenges facing municipalities across Pennsylvania and the nation? Will budget and taxation fixes (the tools available to state and local governments) be enough to put those governments on sound financial footing? I don’t know. Maybe both. Maybe this time the problems (or at least their causes) are different, but a solution will nonetheless be reached.
Jon Stewart interviewed author T.J. English about his new book, The Savage City: Race, Murder, and a Generation on the Edge (about NYC during the late ’60s and ’70s). I don’t know how much (if at all) the book discusses the dire financial straits NYC was in during that time period, but the interview offers some perspective on our national sense of crisis. As one who falls into the “was not alive at the time” crowd referred to in the interview, I found the perspective offered somewhat reassuring . . .
Daily Show — TJ English Interview (The interview is the final third of the full-episode clip.)
Today’s MCall Online features an article entitled “To cheers, Lower Saucon planners reject Phoebe plans: But council will have final say on whether to allow housing for as many as 500 seniors.”
The Lower Saucon Twp. Planning Commission rejected the proposed rezoning of a 65 acre lot at the intersection of Meadows Rd. and Friedensville Rd.–just southeast of Lehigh’s South Mountain atheletics facilities.
According to the article, the 65 acre parcel is currently zoned to permit single-family residences on roughly 1/2 acre lots. Apparently, the planning commission meeting was well attended, with crowd sentiment decidedly opposed to the proposed rezone. The rezoning would permit Phoebe Ministries to build a continuing-care (55+?) community that could accommodate “as many as 500 residents.” That number–I’d wager–was the primary attendance driver for the meeting, where 200 residents showed up (to a planning commission meeting).
“We hope Phoebe Ministries understands this isn’t about them,” Dugan said.
The tract is zoned suburban residential, which allows for single family homes on roughly half-acre lots.
Jason s. Engelhardt, a planning engineer from Bethlehem representing Phoebe Ministries, said roughly 84 single-family homes could be built on the site.
At previous meetings, residents opposed the heights on some of the buildings, the density proposed-as many as 500 residents — and the strain on public water and sewer systems, alteration of the geology in the carbonate rich region and the impact on neighboring properties.
My questions relate to the concerns expressed by residents about the proposed rezoning. If the tract were currently zoned as green space or some type of preservation purpose, I’d be considerably less likely to support the rezone, but the proposed change should be assessed in light of the current zoning of the tract and the development likely to take place there in the future absent the proposed change.
First, residents expressed concerns about the density of Phoebe’s proposed development. Density, in and of itself, does not provide a sound reason for opposing the proposed change. It is difficult to imagine that aesthetic concerns of township residents could not be addressed through the design of the development. Moreover, the property on the north side of Friedensville Road across from the 65 acre site contains Lehigh University graduate student housing, and there is at least one apartment complex further east on Friedensville Road. While Phoebe’s proposed development would increase density in the area, it would not appear to be wildly out of place by any means.
Second, while 500 seniors sound like–and I suppose, is–a sizeable figure, the shock factor this likely created with residents will be reduced by considering the residential alternative for the site. Specifically, Phoebe’s engineer estimated that 84 single family homes could be constructed on the 65 acre lot as currently zoned. Of course, 84 single family homes do not mean only 84 residents: assuming a household size of 3, that’s 252 people; assuming household of 4, that 336 people. Therefore, rather a marginal increase in the number of township residents of 500, the marginal increase in residents is more likely to be on the order of 175 to 250.
Now, I’m not suggesting that 175 to 250 new township residents would not have a noticeable impact on municipal service demand; however, it seems important to acknowledge who those new residents are likely to be and what services they are likely to demand. Most notably, the single family residential development likely to occur absent the proposed zoning change is sure to bring in a significant number of school children–a particularly pricey proposition. School children are an additional cost/demand that the Phoebe development would not create.
As the Lower Saucon Township Council and residents considers whether or not to ultimately approve the proposed rezoning and Phoebe’s proposed development, it would appear the better part of reason to compare the proposed continuing-care community with 65 acres of green space, but with single-family subdivision that will likely, eventually replace that presently-green space if the rezoning is rejected by the council.
Here’s the link to the multi-municipal comprehensive plan developed by Lower Saucon Township, the Borough of Hellertown, and the Saucon Valley School District.
Back in September, Steven Schrayer posted “Municipal Bankruptcy Filings a Murky Proposition.” He referenced a Wall Street Journal article, “Local Debts Defy Easy Solutions” by David Wessel. In the article, Wessel stated that
[t]here is no obvious mechanism for state and local governments to resolve the coming collision between competing claims of taxpayers, retirees (both current and future) and bondholders.
One existing mechanism, though not one that any municipality would resort to unless it were truly necessary, is municipal bankruptcy under Chapter 9 of the federal bankruptcy code. (Click HERE for a very helpful, non-technical discussion of municipal bankruptcy by Office of Administration of the U.S. Federal Courts.)
Wessel noted that municipal bankruptcies are rare events:
[R]eneging on debts remains a rarity among U.S. state and municipal governments. Fewer than 250 of the nation’s 89,000 local governmental units have filed for bankruptcy since 1980.
Wessel goes on to state that
[r]ecent close calls in Harrisburg, Pa., and Central Falls, R.I., spark predictions that the next phase of the financial crisis will be a tsunami of municipal bankruptcies and defaults. Muni-bond experts at rating agencies and bankruptcy lawyers assure us that isn’t likely.
To characterize Harrisburg as a “close call” suggests that the risk to the state capital has passed, which appears far from certain at this point. Harrisburg is currently awaiting a determination from the DCED on whether it will be permitted to enter Pennsylvania’s Act 47 recovery process for “distressed” municipalities. Whether it will enter the Act 47 and/or whether it will file for bankruptcy under Chapter 9 remains to be seen.
Despite the suggestions – noted by Wessel – from municipal bond experts and rating agencies that a significant increase in municipal bankruptcy filings is unlikely, there is something less-than-reassuring about such assertions. (These are the same rating agencies that did the ratings on the CDOs at the center of the housing meltdown.) It also might have something to do with the conclusion of Wessel’s article:
[b]ankruptcy is a last resort. To avoid it, state and local governments need an alternative that is less unappealing. They don’t have one yet.
While the experts with whom Wessel spoke aren’t (publicly) predicting an increase in municipal bankruptcy filings, sentiment in the finance and legal community does not appear unanimous. For example, after taking bids from a number of law firms of various sizes and from various locations, Harrisburg’s City Counsel selected the New York law firm of Cravath, Swain & Moore to advise the City on whether or not, and then how, to file for bankruptcy under Chapter 9.
The services that Cravath is providing to the City (free of charge) undoubtedly provide a public benefit to the City – namely access to high quality (and otherwise high cost) legal services. However, Cravath’s pro bono representation of Harrisburg also provides an opportunity for Cravath attorneys to gain additional experience (the firm does already have experience in municipal bankruptcy proceedings and in bankruptcy and reorganization work more generally) in a field where – because of the rarity of Chapter 9 filings – experience is harder then usual to come by.
While its pro bono representation of Harrisburg is assuredly driven by a desire to satisfy the ethical obligations of Cravath attorneys to provide pro bono legal services, it is also places the firm in the middle of what would be a highly publicized filing by the state’s capital city. Such experience and publicity would likely make Cravath more competitive when bidding to represent other municipal entities across the country in possible future municipal bankruptcy filings. Cravath’s Harrisburg work can be viewed – at least in part – as a bet against Wessel’s predictions, a bet that in the not-to-distant future, municipal bankruptcies may no longer be the blue-moon occurrences they are today.
The New York Times recently ran a story entitled “Mounting Debts by States Stoke Fears of Crisis,” which focusses on the unfunded pension liabilities facing state and local government units across the country. Most of these pension liabilities were not incurred since the housing market went south and the recession hit, but those events have put municipal governments in a serious bind.
As the downturn has ground on, some of the worst-hit cities and states have resorted to fiscal sleight of hand to stay afloat, helping them close yawning budget gaps each year, but often at great future cost.
Unfunded pension liabilities share certain similarities with deferred maintenance on municipal capital infrastructure. Deferred maintenance creates two major problems. The first, obviously, is that the infrastructure can’t serve its purpose , serve the needs of residents, as effectively. The second – and here is the parallel with unfunded pension obligations – is that the repairs will be necessary and the bill will eventually come due, and will be higher than if it had not been put off.
– Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance atNorthwestern University, and Robert Novy-Marx, an assistant professor of finance at theUniversity of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.
– The states and many cities still carry good ratings, and those issuing warnings are dismissed as alarmists, reminding some analysts of the lead up to the subprime crisis.
Rauh & Novy-Marx (both with the National Bureau of Economic Research), quoted in the story, released a report in October on the unfunded pension liabilities in metropolitan areas across the country. Here’s an excerpt from the release by the Kellogg School of Management (where Rauh teaches):
Six major cities have current pension assets that can only pay for promised benefits through 2020: Philadelphia, Boston, Chicago, Cincinnati, Jacksonville and St. Paul. An additional 18 cities and counties, including New York City, Detroit, Cook County in Illinois and Orange County in California would be solvent through 2020 but not past 2025.
“Philadelphia has the most immediate cause for concern, as the city can pay existing promises with existing assets only through 2015 — less than five years from now,” Rauh said.
Here’s a sobering couple of lines from the study’s conclusion:
What is clear is that state and local governments in the US have massive public pension liabilities on their hands, and that we are not far from the point where these will impact the ability of state and local governments to operate. Given the legal protections that many states accord to liabilities, which in a number of cases derive from state constitutions, attempts to limit these liabilities with benefit cuts for existing workers will only go so far (Brown and Wilcox (2009), Novy‐Marx and Rauh (2010b)).
Click HERE for a PDF of the full study.
The Inquirer has an article discussing the Green 2015 plan being unveiled this week in Philadelphia. [Click HERE for the full story.] The City is seeking to improve residents’ quality of life by increasing their access to green spaces throughout its neighborhoods and to improve storm water management at the same time.
According to the Inquirer:
The plan’s strategy is purposely structured to allow the city to tackle a variety of other urban problems simultaneously. By distributing pocket parks around the city, Green2015 could help Philadelphia provide more play space in underserved neighborhoods, combat childhood obesity by creating exercise space, reduce polluting water runoff reaching the city’s rivers, raise property values, and attract new development.
The City is hoping to save money by greening property it already holds, rather than expending funds to acquire additional space.
PennPraxis director Harris Steinberg, who prepared the report, explained that Green2015 intentionally relies on a shop-your-closet philosophy because Philadelphia has so little money to invest in public amenities. Almost no land would be purchased to meet Nutter’s 500-acre goal. The report includes a priority list of city-owned, ready-to-green spaces.
The consultants recommend that the Nutter administration start by breaking up unused concrete and asphalt at the city’s schools and rec centers, since they are already a convenient draw for neighborhood children.
The Fairmount Park system, at 9,995 acres, is a tremendous green asset for the city, but as the article points out, it is (perhaps to state the obvious) all in one place, which is great if you have easy access to it, but not as helpful if you don’t (again, stating the obvious).
“We’ve always talked about how much parkland we have in Philadelphia, but the problem is that it is all in one place,” said Shawn D. McCaney, a program director at the William Penn Foundation, which helped fund Green2015.
Philadelphia has some great, green public spaces (Fairmount Park system, Rittenhouse Square, Washington Square in Old City, Clark Park in University City), but there’s plenty of blacktop between these destinations. If the City is able to create some green stop-overs in between, more power to them.
The cover story for the September 6, 2010 issue of TIME Magazine is entitled Rethinking Homeownership. (An abridged version of the article is available online HERE.)
The strength of the article is that it highlights the complexity of the homeownership issue. The following excerpt captures the gist of the article:
A house with a front lawn and a picket fence wasn’t just a nice place to live or a risk-free investment; it was a way to transform a nation … No wonder leaders of all political stripes wanted to spend more than $100 billion a year on subsidies and tax breaks to encourage people to buy. But our leaders, with our encouragement, went much to far … Now, as the U.S. recovers from the biggest housing bust since the Great Depression, it is time to rethink how realistic our expectations of homeownership are — and how much money we want to spend chasing them.
The article addresses the historical and cultural narratives idealizing “homesteaders” and agrarian life as well as the archetype of the urban metropolis as grimy and dangerous. It also addresses and calls into question some of the assumptions underlying the traditional response of policy makers — “the more, the merrier” — to the homeownership question: regarding educational outcomes for children; social stability and civic engagement; the cost to the government (and thus to the people) of incentivizing ownership through the federal mortgage-interest tax deduction.
As for recommendations:
. . . save more, invest in people through better education and training, and use the levers of government to help create high-quality jobs — the kind you can raise a family on — instead of coaxing people into becoming homeowners.
If you have or come across a copy of the issue, Rethinking Homeownership is worth a read.
The Natural Resource’s Defense Council (NRDC) operates a great blog — Switchboard — with contributions from their staff members on the full gamut of environmental policy issues. If you are particularly interested in Smart Growth and/or have trouble keeping up with all of the coverage on Switchboard, Kaid Benfield solves your dilemma.
In “Lessons from the Sun Belt: Replacing Sprawl with Smart Growth Requires Sustained Commitment” Benfield points to Maryland as an example of a state that was once a leader in the development and implementation of smart growth policies but has lost its way:
When Parris Glendening was governor in the late 1990s and early 2000s, for example, the state of Maryland had real leadership on progressive land use; it was just beginning to make progress. But Glendening’s work was unfinished, and his successor quickly dismantled the state’s smart growth office and gave lip service at best to the state’s pioneering land use laws. As a result, instead of being strengthened, those programs soon lapsed into not-so-benign neglect, and the state’s landscape shows the unfortunate results.
The fundamental premise of Benfield’s piece should be both sobering and reassuring for smart growth advocates.
So, what’s the lesson in all this? Mecklenburg County, where these communities are located, is as good a poster child as any for the challenges associated with Sun Belt sprawl. It’s a part of the “real” America in a way that, I submit, Washington, New York and San Francisco are not. I think the lesson is that, to borrow an overworked cliché, we are in a marathon rather than a sprint. There are going to be setbacks, variations, and imperfections even in projects and policies that are mostly good. We must keep our eyes on the prize, hold on, and work not just for political advances that disappear with political changes, but for deeper, cultural progress as well.
The problems associated with sprawl developed during the better part of a century as the result of social, political, and economic forces at work within a particular legal/regulatory framework. Changing the legal framework and shifting the forces acting on is a difficult task that will take time. Smart growth advocates should not lose heart if progress does not occur as quickly as one might prefer.
The Morning Call’s story “What Lies Beneath” (CLICK FOR FULL STORY) highlights the “out of sight, out of mind” problem of underground storage tanks used for petroleum products.
It’s disconcerting to read about inspection and cleanup backlogs around the Lehigh Valley and across the Commonwealth when the state regulatory agency with monitoring and enforcement jurisdiction over such issues was hit with among the steepest cuts in last years budget battle.
[T]he deal that ended the state’s budget crisis this month slashed funding for the Department of Environmental Protection by 27 percent. The cut, one of the largest among state agencies, leaves the DEP with significantly fewer inflation-adjusted dollars than it had well over a decade ago. Politics PA 10/24/2009)
The MCall article also highlights the communication challenges posed by fragmented local government units. As the story points out, “pollution knows no boundaries,” but East Allen Township didn’t share relevant information with neighboring Upper Nazareth, whose resident’s were experiencing firsthand effects of leaky tanks in East Allen.
”We didn’t contact anybody,” Deborah Seiple, East Allen’s manager, said in a recent interview. ”As far as I’m concerned and the zoning office is concerned, until DEP gives a final determination as to what’s going on there, it’s in their hands.” (What Lies Beneath)
The state is required to notify the municipality, but public notification is not mandated.
When the EPA approved Pennsylvania’s underground storage tank program in 2003, it required the state to notify municipalities of spills. EPA assumed municipalities would then tell the public.
. . .
Gerald Gasda, South Whitehall manager, said the pollution is a state issue. . . .”Frankly, I’m not aware of any requirement that we notify anybody,” Gasda said. He added he would be willing to create a policy to notify adjacent property owners of tank pollution if residents asked.
. . .
DEP has no plan to revise its notification procedures, meaning it will continue to tell only municipalities and property owners directly affected by leaks. Unless municipalities share that information, residents will have to rely on their own vigilance. (What Lies Beneath)
Residents directly effected can expect notification from DEP. However, residents of municipality in which the leak occurs but not directly effected must rely on municipal officials for discretionary disclosure. Residents of neighboring municipalities must hope that officials from their municipality receive notification from the municipality where the leak occurred and that the leaders in their municipality choose to share that information. Greater intermunicipal cooperation would likely increase the chances that leak information will be shared across the same municipal boundaries that the contamination does not respect.