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State asset sales not a small issue, but not the largest

23 Aug 2010 by Jim Fickett.

States and cities are selling and leasing back property. This is, in essence, borrowing. The scale is probably in the tens of billions of dollars per year. Although not a small amount in absolute terms, it is small compared to unfunded pension liabilities, which remains the big issue.

An issue sporadically in the news is state and local government sales of assets to balance budgets. Usually, the government in question is giving up a long-term revenue stream in return for a one-time payment. In this respect an asset sale is closely parallel to taking on debt – in both cases one year's budget is improved significantly, while many years of future budgets are each worsened somewhat.

A common example is parking spaces, described in a Wall Street Journal article today that gives some flavor of what is going on:

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. … investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms. …

Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion.

“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. …

About $1 billion has already been spent on operational expenses such as salaries and sanitation …

Around the country, at least a dozen public parking systems are up for bid, including in San Francisco and Las Vegas.

It seems that, as usual, the banks involved are somewhat more astute than the government employees, who have a hard time seeing beyond this year's budget deficit.

This kind of thing makes great headlines, but how important is it really? What is the scale of this compared to other kinds of debt?

The WSJ does at least give some vague impression of the scale of asset sales:

About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland's RBS Global Banking & Markets. Those assets have a market value of about $45 billion—more than ten times the $4 billion or so two years ago, estimates Dana Levenson, head of infrastructure banking at RBS. Hundreds more deals are being considered, analysts say.

Government bureaucracies are slow. For example, the sale of a number of Arizona state buildings, including the legislature, was put in a proposed budget in July 2009, presumably after some significant period of negotiation. And as of June 2010 sales were ongoing.

I would guess, then, that sales completed in the next year (and probably longer) will come mainly from this $45 billion current pipeline. That suggests $45 billion as an approximate upper limit to how much state and local governments might be raising per year via asset sales.

In comparison, states have managed to accumulate about $3 trillion in unfunded retirement liabilities. Probably $45 billion is high for annual asset sales, and $3 trillion, since it does not include local governments, is low for state and local retirement liabilities. So we can say that it would take state and local governments more than 3000/45 = 67 years to accumulate, by means of asset sales, a problem as big as the retirement liability issue.

In other words, (1) the sale of assets is an issue, as the states are giving up long term revenue streams to fix one year's budget, but (2) this is a much smaller problem than that of unfunded retirement liabilities. The latter is going to be one of the defining features of the financial landscape for the next 20 years.