Cities – including Memphis – are sitting on assets that can be leased to pay for crumbling infrastructure, to improve maintenance and to improve bond ratings.
At least that’s the opinion of Dana Levenson, former Chief Financial Officer for the City of Chicago and architect of the leases of the Chicago Skyway and the city-owned parking garages that brought $2.5 billion into his city’s coffers.
Speaking to this week’s CEOs for Cities meeting in Chicago, Mr. Levenson said the leases not only infused much-needed money into the city budget, but they improved service and operations. “There’s no question that they are better run than when they were under city control,” he said. “In other words, users are getting more value and taxpayers are getting more help.”
Borrowing a leasing concept popular in Europe for years, Levenson spearheaded what was called by some critics a “fire sale” of city assets. Except for one thing: there was no sale. Instead, Chicago entered into a long-term leases, retaining ownership and setting our terms for future operations.
For the Skyway – about eight miles of elevated highway – Chicago entered into a 99-year lease for $1.83 billion. Five groups vied for the Skyway concession contract, and the winning amount was paid by a consortium of Australian and Spanish investors.
When the parking garages came up for lease, 13 companies fought for the right to manage them, and eventually, Chicago signed a contract with Morgan Stanley for $563 million.
Public Policy Innovation
It didn’t take long for some governors to join the new movement. Indiana signed a 75-year lease with the same group that leased the Chicago Skyway and it paid $3.85 billion to manage the Indiana Toll Highway. Virginia inked a 99-year contract for Pocahontas Parkways for $603 million, and Pennsylvania Governor Ed Rendell has the Pennsylvania Turnpike out to bid.
Back in Chicago, although Mr. Levenson left to work for the Royal Bank of Scotland, the momentum continues with Mayor Richard Daley’s interest in leasing Midway Airport.
The big question is whether this interest in leasing public assets is just an momentary aberration in public policy or whether it signals things to come. Regardless, cities looking to get on board should do it now, Mr. Levenson advised.
“The beauty is that cities can unlock capital from dead assets, and we’re not talking about the ‘crown jewels’ unless your idea of ‘crown jewels’ is asphalt. Best of all, the asset stays in place, because no one is going to move the Chicago Skyway or the garages to Australia,” he said. “In other words, the assets remain here, they are better run and future risk is transferred to the private sector.”
Pension funds – like the powerful one for California teachers – are driving the interest in the leases, because private management of public assets can generate 10-12 percent yearly gains. So far, only about $7.4 billion has been spent on these infrastructure leases, a small fraction of the $175 billion of funds in the global marketplace for them. When this amount is leveraged, Mr. Levenson said that the buying power is $700 billion.
While the former banker was motivated by the financial infusion, he said better operations was almost an equal draw. City officials simply aren’t equipped to manage operations like garages and toll roads.
“Garage management by city government consisted of compiling numbers each month,” he said. “We didn’t do anything if the number went up or down. We just kept statistics. In the private sector, they act if the capacity goes down and they base payment on maximizing capacity. For the city, the garages just sit there as profits dip.”
He said the lesson was reinforced by the least of the toll road. “In three months from the time of the contract, the private sector had installed electronic tollways,” he said. “City government would still be thinking about it.”
In Chicago, the money from the leases wasn’t used to balance the operating budget. “You don’t use a windfall to plug a budget hole,” he said. Rather, the Daley Administration used the money to created a long-term reserve fund, paid off bond debt, created a mid-term annuity and used five percent of the total to fund 20 social programs in Chicago.
Most of the opposition to the leasing of infrastructure is more philosophical than practical – complaints about paying tolls to a foreign company and a fear of escalating fees and tolls.
That’s why he said the contracts between City of Chicago and the lessees are so critical. It sets out strict conditions for the lease, including limits for the number and size of fee and toll increases, setting the standard for service and nailing down the fine print that in the end spells the difference between wise public policy and exploitation by the private sector.
And what are the kinds of public assets that should be considered for lease? Mr. Levenson’s list includes convention centers/stadiums, hospitals, prisons, harbors and waterways/ports. “It’s at least worth looking at the possibility,” he said. “It’s sure better than the options – asking the federal government for help, begging for state funds or increasing local taxes.”
Lease, Not Sell
While the terms of the leases in Chicago seem daunting, Mr. Levenson defends them against critics concerned that lawyers cannot now hammer out a contract that foresees all the changes that can take place over a century. And yet, if Chicago can close on the Midway Airport deal, what has largely been a curiosity in public policy may become a stampede.
Interestingly, no one in Chicago is suggesting a lease of the water system. “It’s the ultimate political landmine,” said Mr. Levinson, a conclusion already proven here when Memphis Mayor Willie W. Herenton laid out a proposal to sell Memphis Light, Gas and Water Division.
The public’s reaction to that idea was explosive and immediate, and while it probably created reticence in City Hall for similar proposals, it might be worth taking a thoughtful look at some of our undervalued infrastructure assets as sources for new revenue. And most of all, talk about leases, not sales.
Our Toll Road Candidate
Unfortunately, we’ve already missed the boat on the best opportunity that we had for a lease. From our point of view, we would have started with Tennessee Highway 385 that circles the outer borders of Shelby County – a $500 million gift to developers.
Now, there’s a road we’d have loved to put toll booths on.