Saturday, August 01, 2009

Burning the furniture

When there is no money for fuel in the middle of winter, desperate residents have on occasion resorted to burning the furniture. That works as long as the furniture lasts. But come spring, there may be no place to sit or sleep, and no prospect of resorting to the same practice should a heating emergency arise the following winter.

Yet, this is more or less the equivalent of what many states and municipalities are doing in the face of our unprecedented financial crisis. They are selling prized assets to private companies in the hopes of plugging current budget holes. This move is predicated on two premises: First, the public will not accept new taxes or should not be taxed during a downturn to pay for maintaining government services. Second, most government officials believe that the downturn is temporary, and that their finances will return to health once a recovery begins.

If the second premise turns out not to be true, then the first one is merely locking state and municipal governments into a long-term liquidation of public assets. One asset sale will begat another and another because such sales appear painless in the short run.

When Chicago's Mayor Richard Daley sold a 75-year concession for the city's parking system to help balance the city's budget, he hailed it as a creative measure designed to carry the city through a rough financial patch. He even promised that the concessionaire, a subsidiary of Morgan Stanley no less, would actually make improvements in the system. The plan has raised the ire of many city residents and visitors as the service and reliability of the system have tanked.

Perhaps most important, public assets serve needs that cannot always return a profit directly. A well-run parking system can focus on making it easy for people to do their daily chores and not feel that they are paying too much for the privilege. That's critical for merchants who must rely on municipal parking to handle their customers. Parking enforcement can even be relaxed when special events or special circumstances such as construction warrant it.

But private concessionaires have no such interests. Their interest is in maximizing their investment within the rules. They will not concern themselves with the broader needs of a city or state. Such has been the case in Chicago where the private parking system company is attempting to maximize its take through strict enforcement and higher parking rates.

On the other hand, Chicago also privatized the Chicago Skyway, a toll road that is still by far the most direct route into Chicago from the east. For a one-shot cash infusion of $1.83 billion, the city sold a 99-year operating lease to a company owned by foreign corporations. In a post-peak oil world, Chicago may actually get the better of this deal. It is hard to imagine enormous volumes of car and truck traffic making their way over the skyway in the year 2104.

Without any apparent sense of irony, the state of Arizona announced that it wishes to sell its house and senate buildings to private interests and lease them back. The state is assuming financial circumstances will improve so that it can retake ownership sometime in the future.

Public assets are the capital stock of a municipality or state. And, that capital stock is used to provide the services that citizens want and need. If too much of it falls into private hands, we will find out the hard way that those private hands are only too willing to burn the furniture for short-term gain.

Not all privatization schemes are bad ideas. But ones entered into with the intention of bailing out the short-term problems of politicians needing a budget fix rather than serving the public better are bound to turn out badly.


Anonymous said...


I enjoy the blog, however I have to call you out on a couple of points.

First off; the City's parking rates were woefully under priced compared with other major cities (example all of San Francisco's meters are $2 & $3 per hour). Everyone makes a big deal about $3.50 an hour parking in Chicago but this rate is only found in the Loop where one hour of parking in a garage will run you $20, so $3.50 is not a bad deal in comparison. The vast majority of the City's meters were at a ridiculously low $0.25 per hour. What's the big deal you ask? Cheap parking helps to perpetuate the single occupant motor vehicle commute. More fossil fuel consumption, pollution, congestion... well you get the picture. There is a great book on the subject called "The High Cost of Free Parking" by Dr. Donald Schoup.

Second; on my block all of the quarter gobbling parking meters that used to line both sides of the street are gone! In their place is a single pay box which takes coins and credit cards and it's solar powered to boot. Hurray for solar power! I wonder how many tens of thousands of batteries the City went through a year in the old meters? As for service and reliability, it's too early to tell at only a couple of months. I say let's give them at least 6 months to get their act together in replacing infrastructure from the last century.

Third; when it comes to writing tickets at the meters, a recent City Council session revealed that the contractor has been issuing warnings and less than 200 tickets have actually been issued by them. The City has increased their parking enforcement staffing by 30%and are the ones writing all the tickets yet the meter company is taking the heat.

Finally; did the City get the short end of the stick at 1.2 billion dollars? A better question is, what happens if gas hits $10 per gallon and people stop driving their cars? What about a greatly improved mass transit system built over the next twenty five years? Who loses out on the parking revenue? Someone is taking a risk here. Why shouldn't there be rewards? Why is everyone expecting something for nothing?

According to the paper, the proceeds of the meter sale was distributed as follows:

* $400 million was placed into a long-term reserve/revenue replacement fund, bringing the city’s total long-term reserves to $900 million. The interest from this reserve more than replaces the revenue the city was receiving from the meters.

* $325 million is being used for mid-term budget relief through 2012, with $150 million drawn down thus far to balance the city’s fiscal year 2009 budget and the rest scheduled for 2010 it may not last to 2012 but that's what it was meant to do.

* $320 million was placed in a budget stabilization (“rainy day”) fund. Which in my opinion should be earmarked for mass transit initiatives!

* $100 million was placed in a human infrastructure fund used to supplement the budgets of a variety of low-income support programs for a five-year period. In other words, libraries, summer programs and all the stuff we like to use but don't like to pay for.

In closing; when the choices are freeze to death or burn the furniture, I'll take an axe to the piano every time.

Keep up the good work!

Anonymous said...

Nothwithstanding the specifics of the Chicago deals- I've long thought a great way for govt's to meet the future would be to sell off tollroads with absolutely draconian penalty clauses- so when traffic trends down due to fuel cost issues, the private company defaults and the states/ cities get to keep the money and own them again or sell them again. Few companies seem to engage in strategic thought these days- why not sell them with the expectation of foreclosing on them in a few years?( remember draconian performance clauses so they cannot run down the assets first)

Anonymous said...

Burning the furniture is ok for a metaphor, but it would be better to be aboard a wooden boat and be faced with the same issue.

Kurt Cobb said...

Thanks for all the thoughtful comments.

To Anonymous No. 1, I appreciate the perspective about the issue of parking in Chicago and agree with much of what you say. I was aware of how the money received was to be used and perhaps it may turn out in the end to be a good deal for the city if and only if it uses at least a good portion of the money to improve public transit as you suggest.

I'm not suggesting that private companies hired to provide public services shouldn't be rewarded for the risks they are taking. I'm questioning the wisdom of privatization when it includes perverse incentives that may do harm to the overall aims of the city. And, I am questioning it generally, not just when it comes to parking privatization.

As for the idea that Anonymous No. 2 advances, it may be an excellent way to transfer some of the money Wall Street stole from the public back to them albeit indirectly. Now let's see if we can get Wall Street to bite on it.

mattbg said...

In my province in Canada, the endangering of public finances almost seems to be a backdoor strategy used by conservative governments to privatize public assets. The books are held precariously close to "balanced" for political purposes but as soon as things go south, the new imperative is to re-balance the budget, and this task often includes the sale of public buildings or other assets to provide short-term sustenance.

Although I'm not opposed to toll highways, our first toll highway was introduced in this manner in the 1990s. A new highway built for the province with public money was sold to a private company and turned into a toll road for the sake of balancing the budget for a single year.

The national, publicly-funded broadcaster is now being forced to sell off buildings in order to balance their own budget now that the federal government has cut off the dole (though I'm not against cutting off the dole for this organization).

$10 billion in public assets will be sold off over the next five years to help balanced the national budget.

What's most interesting to me, though, is the question of whether or not this is a deliberate strategy and a backdoor way of shrinking government (I am not opposed to shrinking government... just pondering the question).

Anonymous said...

It was a pretty savvy move to grab 75 years of projected parking fees now if there won't be that many cars in a couple of decades.