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State and local governments take the lump sum option

3 Nov 2010 by Jim Fickett.

In several different ways state and local governments are taking lump sum payments now and, in exchange, either losing a stream of regular future revenue or agreeing to pay regular future rents. While this does provide yet another example of disappointing budget gimmickry, it is not, quantitatively and in aggregate, a major problem. Looking at (1) securitization of tobacco settlement revenue, (2) leasing of toll roads, parking systems and airports, and (3) selling buildings and leasing them back, I estimate a total of about $70 billion is involved. This is very small compared to either annual state and local government budgets ($2.1 trillion) or unfunded state retirement obligations ($3 trillion).

You have probably seen the headlines about desperate states leasing toll roads to private operators, or selling government buildings and leasing them back. Although it is just possible that we are seeing the beginning of a grand trend, so far the headlines are somewhat exaggerated.

This post is about the ways state and local governments are taking a lump sum payment now and, in exchange, either losing a stream of regular future revenue or agreeing to pay regular future rents. My main purpose is to get some idea of how many deals, and how much money, is actually involved.

Tobacco settlement

The biggest area is one that is currently, at least, not much in the news: issuing bonds secured by future revenues from the 1998 tobacco settlement. Such bond issuance has totaled about $55 billion. Bob Sullivan at MSNBC gave a useful summary in Nov 2008, 10 years after the settlement:

On Nov. 23, 1998, the nation's four largest cigarette sellers agreed to pay $200 billion over 30 years in what seemed like a victory for David over Goliath. The money was supposed to help the states pay for health care and anti-smoking campaigns. Instead, much of it – even payments that aren't due for 20 years – has already been spent on politically popular tax breaks through complicated borrowing schemes initiated by Wall Street investment banks.

Because these states have essentially borrowed against future payments from the tobacco industry, they are now dependent on the continued vitality of cigarette sales. If Big Tobacco stumbles, states will be on the hook for these massive, billion-dollar loans. In other words, David and Goliath are now allies. …

The first tobacco bond and the 94 others that followed have raised a total of $55 billion, said [David] Loughran, the Oppenheimer fund manager.

[a chart shows that 23% of the money raised by bond issues went to cover budget shortfalls]

Toll roads

One hears a great deal about toll roads being sold or leased but, in fact, there have been relatively few completed transactions. In 2009, US PIRG, the federation of state public interest research groups, stated:

By the end of 2008, 15 roads had been privatized in 10 different states–either through long-term highway lease agreements on existing highways or the construction of new private toll roads.

The total cost of the 15 deals was $8.9 billion.

Selling properties and leasing them back

According to a Stateline article, the two states which had taken this option as of Nov 2009 were Arizona and California. In 2009 a major plan was developed to sell off 32 Arizona state properties, for a total of “as much as $735 million”, and lease them back. In 2010 California approved the sale and leaseback of 11 properties for a total of about $2 billion.

That comes to a total of $2.7 billion.

Lease of parking

Chicago granted a 75-year lease on a system of parking meters, receiving in return $1.15 billion. Since then many other such schemes have been discussed but, as far as I can tell, none has come to fruition. Pittsburgh may be close to a $452 million deal.

Giving the Pittsburgh deal the benefit of the doubt, call it $1.5 billion.

Airports

There has been much discussion of privatizing airports, but the idea has not gained traction. The FAA reports,

Congress established FAA's Airport Privatization Pilot Program to explore privatization as a means of generating access to various sources of private capital for airport improvement and development. …

As of October 25, 2010, there are four active applications in the program.

  • Chicago Midway International Airport
  • Gwinnett County Briscoe Field
  • Luís Muñoz Marín International Airport
  • Hendry County Airglades Airport

[and a table on the same page makes it clear no airport has yet been privatized]

Conclusion

Much of the above information is somewhat dated, and there have doubtless been some further deals in the last year or two. However in looking for the above information I found many examples that supplied good headlines for many years without ever being consummated. Further, some of the above deals have resulted in a great deal of bad press that discouraged other deals under discussion. So I think the above numbers are still in the right ballpark.

So, then, we have

  1. Tobacco, $55 billion
  2. Toll roads, $9 billion
  3. Buildings, $3 billion
  4. Parking, $2 billion
  5. Airports, zero

That gives a grand total of $69 billion, which is completely insignificant compared to either one year of state and local government budgets ($2.1 trillion) or state unfunded retirement obligations ($3 trillion).