New York City’s public-private partnerships
New York seems to have developed the best form of public-private partnerships in the nation. The city revitalized itself, after its rapid decline in the 1970s, by allowing private, non-profit interests to take a larger role in public affairs. For example, the city hosts 67 business improvement districts (BIDs) and two major park privatizations, and these show that cities can receive support from the private sector without having to hand over, in exchange, major profit-seeking opportunities and assets to private interests.
Most of the current national discussion about public-private partnerships (P3s) is about selling public assets or leasing them long term to private investors. A recent example is the long-term lease of two major Puerto Rico toll roads to a consortium led by Goldman Sachs whose investors will likely reap revenues of $3.6 billion over 40 years for a $1 billion investment. In the project, the Commonwealth of Puerto Rico granted a monopoly right to private investors to control the asset and charge users for access.
In contrast, the New York City P3s to date have been true partnerships between the public and private sectors with no profit motive. The largest P3 is the Central Park Conservancy:
The Central Park Conservancy was founded in 1980 by a group of dedicated civic and philanthropic leaders. They were determined to end Central Park’s dramatic decline in the 1970s and restore it to its former splendor as America’s first and foremost major urban public space.
In 1998, the Conservancy and the City of New York signed a management agreement formalizing their then 18-year public-private partnership. The relationship was reaffirmed in 2006 when the agreement was renewed for an additional eight years. As the official manager of Central Park, the Conservancy is responsible for the day-to-day maintenance and operation of the Park.
Presently, 90 percent of the Park’s maintenance operations staff is employed by the Conservancy, which provides 85 percent of Central Park’s $42.4 million annual Parkwide expense budget through its fundraising and investment revenue. The City, in addition to the annual fee to the Conservancy for the services it provides, funds lighting, maintenance of the Park drives and enforcement. The New York City Department of Parks & Recreation retains policy control, has discretion over all user permits and events in the Park, and provides 10 percent of the field staff.
The Central Park Conservancy’s board of directors publishes a clear conflict-of-interest policy that specifically prohibits the leadership from profiting financially from the relationship with the city. Prior to its privatization, Central Park had haphazard care, and its buildings and hardscape were debilitated. The change since 1980 has been remarkable, and it’s been done as a free service to the people.
Bryant Park Corporation, another city P3, oversees the small park of the same name at 42nd Street and Sixth Avenue. Similar to the Central Park Conservancy, it was established to refurbish and manage a public park space. The corporation was also founded in 1980 but operates as a business improvement district. BIDs levy assessments on local businesses and landlords and use the revenue to clean streets, provide security and generally keep up neighborhoods. BIDs are non-profit and also provide a free public good.
New York City recently made a request for qualifications for bidders to privatize approximately 85,000 parking spaces. Some press accounts suggest that the city would be open to privatizing operation of the meters but would retain control of rates and share revenue with a private firm. New York already has a successful template for privatization that recognizes the value of open public goods. One hopes that this philosophy will guide the thinking for any further privatizations.
Governor Cuomo has the privatization flu
The governor of New York has announced his intent to ask the state legislature for a new law allowing him to auction off the cash flows of the state’s public assets. Bloomberg reports:
Governor Andrew Cuomo is seeking legislation that would allow private-equity firms to help finance construction of public-works projects, including a new $5.2 billion Tappan Zee Bridge.
The bill would authorize the state to lease bridges, roads and state buildings to help pay for construction, maintenance and operations of infrastructure, said Thomas Madison, executive director of the New York State Thruway Authority. Cuomo doesn’t want to sell state assets, said Karen Rae, deputy secretary of transportation. Carlyle Group LP (CG) and Macquarie Group Ltd. (MQG) are among companies expressing interest in the Tappan Zee.
The Debt Reform Act of 2000 limits the amount of money the state can borrow, and New York is right up against that borrowing ceiling. The Debt Reform Act says the state may only borrow 4 percent of the personal income of the state’s residents, which was $37.8 billion for 2011 (the law only counts debt issued since its enactment in 2000). Currently the state has $32 billion outstanding using the law’s counting method, so remaining capacity is around $5 billion.
I think the governor looked over the state’s books with his staff and got a little spooked thinking about where the Tappan Zee Bridge funding would come from. Maybe the governor’s counselors whispered in his ear that they have been getting calls from the helpful people at Carlyle and Macquarie, who would love to finance some infrastructure. What a relief, the governor might have thought. He could fund this mega-project and not have to fight the legislature to change the law. Instead, he could craft a new law that opens up the state’s public assets to Wall Street and other wealthy investors. They’ve been clamoring to get in, and here is a chance.
Now I can understand the governor’s enthusiasm to offload the cost of infrastructure onto private investors, but the funds to construct a new Tappan Zee Bridge would more likely come from the New York State Thruway Authority than the general financing of the state. The Authority is a public corporation of the state but has no taxing powers. Its debt is not a liability of the state (page 41) and would not count against the state’s debt ceiling. Bonds issued by the Thruway Authority are repaid through fuel taxes and other sources. The Thruway Authority has a debt service limit of $16.5 billion. Total debt service (principal and interest) for the Thruway Authority currently equals $10.7 billion. This consists of bonds that come due through 2032; the payments peak in 2015 and then fall dramatically.
The federal government will lend the state about $2 billion to construct the new bridge, leaving the state to issue toll-backed bonds to fund the balance. There is debt capacity in the Thruway Authority and massive demand among the wealthy of the state for tax-exempt municipal bonds. There is no reason for the governor to create legislation privatizing the public assets of New York State. Although there is not a lot of fiscal space within the current law, there is enough. The governor would serve his citizens more prudently by working with the legislature to boost the Thruway Authority’s borrowing capacity. That would be a bridge to a strong public future for the state instead of pledging the public’s cash flows to multinational corporations.
Fracking’s externalities
Fracking is under increased scrutiny in the U.S. and in Australia, in the state of New South Wales. Both nations have undertaken studies to examine the effect of fracking on groundwater supplies. But there are other potential socialized costs that need to be included in these public studies, including the possible cost of wastewater treatment plants, damage to local roads, air and water pollution and the linkages to earthquakes. The costs of these possible side effects to local communities may exceed the gains they’ll receive from extraction royalties and increased tax revenues. We need some accounting.
In the U.S. the Environmental Protection Agency has begun a study on fracking and water supplies, and it released a status report in December 2011. The EPA anticipates a first round of results by the end of 2012 and a final report to be released in 2014. The agency has conducted literature reviews, requested data from manufacturers of fracking fluids and scheduled case studies with landowners. It also released a startling preliminary report on possible groundwater contamination in Wyoming. From USA Today:
The EPA found that compounds likely associated with fracking chemicals had been detected in the groundwater beneath Pavillion, a small community in central Wyoming where residents say their well water reeks of chemicals. Health officials last year advised them not to drink their water after the EPA found low levels [of] hydrocarbons in their wells.
[...]
The fracking occurred below the level of the drinking water aquifer and close to water wells, the EPA said. Elsewhere, drilling is more remote and fracking occurs much deeper than the level of groundwater that would normally be used.
In Australia the national government has moved much more decisively and imposed a temporary ban on fracking that lasts through the end of April. The national government also allocated about $150 million to conduct an independent review of the health, safety and environmental risks of the process. From Bloomberg:
Prime Minister Julia Gillard said Nov. 21 that the government will allocate A$150 million ($153 million) to establish an independent committee to provide scientific advice on the impact of coal-seam gas projects on water supplies.
“The framework is not designed to add extra work or increase the regulatory burden for upcoming projects,” Gillard said in a statement. “It does mean, however, that their applications will be subject to rigorous and independent scientific assessment before states grant an approval.”
The efforts of both nations are a good start, but government oversight needs to be broadened to account for other environmental and social costs. There is already academic work that creates a framework for enviromental costs for the economy. In 2009, economists Nicholas Muller, Robert Mendelsohn and William Nordhaus published a methodology that weighed both costs and benefits to the economy from air pollution (page 3). Their work focuses on measuring damages and the value added from various industrial processes.
[W]e compare Gross External Damages (GEDs) to value added (VA). The purpose is to determine whether correcting for external costs has a substantial effect on the net economic impact of different industries. We find that the ratio of GED/VA is greater than one for four industries (stone quarrying, solid waste incineration, sewage treatment plants, and fossil fuel power plants). This indicates that the air pollution damages are greater than their net contribution to output of these industries. Several other industries also have high GED/VA ratios.
@ Cate Long: Thank you. And thank you, and thank you again. It is nice to see a balanced piece of journalism appear here, in the MSM.
The reality is that regardless of the size of LP/NG reserves in the U.S. (and contrary to the narrow and limited understanding of OneOfTheSheep, above), the resource is finite, and the U.S. will never, ever achieve “self-sufficiency” in energy production at the present (or foreseeable) rates of consumption.
The undeniably valid point you make in this piece is that if the costs are socialized and the profits taken privately, the American public are NOT served by permitting these practices. That American citizens do not, or cannot, understand that their support of such practices harms them in far greater measure than the curtailed/reduced production that may result. They don’t understand that in order to keep their fuel costs a dollar lower, they are handing three dollars to the producers.
Muniland’s most active states
In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.
The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.
From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.
California is the largest state by wealth, population and municipal bond issuance. Although it represents about 12 percent of the U.S. population, it dominates with 30 percent of muniland trades. Even with its substantial demand, the state still has somewhat higher yields, as seen below. All seven states are rated AA, but Illinois and California trade with higher yields given their weaker fiscal position.
Reading the muni CDS tea leaves
I saw a strange tweet this morning that said “State CDS blew out yesterday per Bloomberg. Not sure what I missed here.” The anonymous tweeter attached the image above of graphs of credit-default swaps for 9 big states. Notice the very sharp one-day spike for every state except Ohio. Those spikes mean that those who trade muni CDS suddenly thought U.S. states were riskier, by anywhere from 2.09 percent to 17.02 percent, in one day. That is a big gap up.
Municipal CDS reference the equivalent cash bonds of the obligor. So a NY10Yr CDS references New York State general obligation bonds that mature in 10 years. CDS and cash bonds use different units of measurement but generally move proportionally to each other. So if investors no longer want New York State general obligation bonds and their price declines, one would usually see the CDS sell off too.
But municipal cash bond markets didn’t sell off yesterday. You can see in the Thomson Reuters Municipal Market Data chart below that New York State general obligations have been trading pretty steady recently. There certainly wasn’t a 17 percent drop yesterday like there was in the NY10Yr muni CDS. What’s going here?
Well-known blogger ZeroHedge published a Muni CDS Market Primer last January that provides good background on the product:
Theoretically, MCDS [municipal CDS] is equivalent to a financed purchase of a muni bond with an interest rate hedge and, therefore, the MCDS spread should track the muni bond spread. However, like in the corporate market, there could be a basis between the two spreads based on demand/supply and transaction cost considerations.
Markit US and Municipal CDS Report: Politics in the New Usual – December 2, 2011
This week saw uncharacteristic volatility in the municipal CDS market, both in single names and the MCDX, widening out dramatically on Tuesday, by 18bp, only to tighten back on Wednesday by the same amount. The tightening Wednesday was easily explained based on the prior day’s move and central bank interventions to provide dollar liquidity to the European financial system helped risky assets rally broadly. However, the widening on Tuesday caught some market participants a bit by surprise. The move appears largely technical and could be due to large trade unwinds hitting the market. More than $1.3bln traded in the Markit MCDX in the prior week according to figures from DTCC, which is significant. Movements in the municipal cash bond market were not nearly as pronounced in comparison lending further credence to the idea that the spike was related to unwinds.
Let Europe kill municipal CDS
The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:
For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies.
I’d suggest that death knell just rang for U.S. municipal credit-default swaps (CDS), too. They’ve recently been on their last legs amid collapsing volumes, but actions in Europe just might have delivered the deathblow.
Credit-default swaps play an arcane role in financial markets. Firms allegedly buy them for protection against the default of bonds they hold in their portfolios. For example, if XYZ Investment Group owned $10 million worth of Greek government bonds that matured in 10 years (GGGB10YR:IND) and the Greek government couldn’t pay their obligations, then the seller of the CDS would step in and pay the CDS owner. Think of the CDS seller as a guarantor or insurance provider of sorts.
CDS are marketed as protection against the risk of default of the cash bond that they reference. Contrary to standing convention though, when the announcement was made that Greek bondholders would be asked to take a 50 percent haircut (or markdown) on the value of their bonds, the CDS governing group announced they would not be triggered. Their rationale was that the bond swap would not be compulsory and that CDS sellers would not need to make payouts to make up losses. Here is how a twitter user responded:
@amb5160 amb5160 the real story today is that CDS, a multi billion (trillion??) dollar asset class is GONE in one day! no more quotes on bberg. insanity
Why invest in insurance if the insurer says no payment is necessary because we have new conditions? It’s easy to understand the outrage.
I was under the impression that ISDA had not made a ruling yet on whether the haircut would be considered a default event triggering payment. If they do not it, I agree it will be a disaster for the cds market.
State taxes on fire
State tax collections are hot, hot, hot. The taxman rustled up 16 percent more in state income taxes for the second quarter of 2011 compared to the same period in 2010. Where is this phenomenal growth coming from?
Based on the most recent data collected by the Rockefeller Institute, states are raking in about $900 billion a year from their three major tax categories: the sales tax, personal income tax and corporate income taxes. Revenues from these three taxes total about 6.25% of U.S. GDP.
But it’s the personal income tax (PIT) that’s really driving the show. In the state of New York the PIT makes up about 60 percent of total tax revenues. In Oregon the PIT is an astonishing 72 percent of the state’s tax haul. Although the national employment level improved slowly the PIT was up on average 11.4 percent across the country year over year, according to Rockefeller. This contrasts sharply with the 4.6 percent national increase in state sales tax collections, especially given that 21 states cut their PIT tax rate while only 12 states cut their sales tax rates.
Robert Ward of the Rockefeller Institute tried to explain this counterintuitive phenomenon in a presentation earlier this month. He pointed out that some states have significant PIT revenues from capital gains. Unlike the federal tax code, twenty-one states treat capital gains as regular income. All the states in the chart above treat income earned from labor in the same way as income earned from capital. And in some states the amounts can be significant: In 2007, 13 percent of New York taxpayers’ annual gross income and 8 percent of New Jersey’s came from capital gains. That is a lot of bond and derivative trading on Wall Street.
Ward also pointed out that states are increasingly relying on personal income taxes. In 1978 PIT was about 25 percent of state tax revenues nationally versus 35 percent in 2008.
As financial markets gyrate, though, state revenues that depend on the PIT will gyrate too. Financial markets have been highly volatile over the last decade. It would be interesting to find any work that ties state PIT revenues and market performance together, and it would be especially interesting to see any work which explains this recent big jump in personal income tax collections.
11% PIT in Oregon (state tax)! Please turn out your lights when you leave!
Vermont rebuilds while Congress fights
The state of Vermont is struggling to gather funds to repair the flood damage from Hurricane Irene, the state’s worst natural disaster since the floods of 1927. Generally the state would rely on support from the federal government to replace and repair this infrastructure, but the U.S. Congress is locked in a fight over funding the Federal Emergency Management Agency as part of a larger fiscal battle that could shut down the federal government. From CBS News:
Congress is headed for a showdown over disaster relief funding that could bring the government to the brink of a government shutdown again.
House Speaker John Boehner has scheduled a vote tomorrow on a bill that would keep the government operating through Nov. 18. If the Senate and the House do not approve the stopgap measure, known as a continuing resolution, before the fiscal year ends Sept 30, the government would be forced to shutdown.
The House bill includes $1 billion in immediate funding for the Federal Emergency Management Agency and $2.65 billion for next year, but the Republican measure also includes a provision to offset the FEMA funds with cuts to the Energy Department’s Advanced Technology Vehicles Manufacturing Loan Program.
Meanwhile up north Vermont is scrambling to make repair funds available from a variety of sources. VTDigger.org reports:
In the meantime, the state [Vermont] is setting up loan programs to ensure that communities aren’t tapped out as they wait for federal reimbursement money.
Vermont banks, the Vermont Municipal Bond Bank and the state Treasurer’s Office announced a financial assistance package to help ease the financial stress on municipalities as they rebuild over the coming year.
The state will advance $24 million in payments that are already slated for town highway aid ($6.2 million), current use ($12.3 million) and payment in lieu of taxes ($5.8 million).
Local banks will “immediately” open lines of credit worth several hundred thousand dollars to millions of dollars to cash-strapped municipalities. In the event that a municipality reaches the lending cap, the originating bank will turn to a “loan pool,” in which other banks offer more capital.
In the short-term, banks that have exhausted other avenues can turn to the Vermont Municipal Bond Bank for cash to meet short-term municipal needs, according to John Valenti, chair of the bond bank board.
I think the lesson here is that states need to plan for less support from the federal government for emergency funding, or at least have back-up plans in place to tide themselves over. Imagine if this crisis had happened in Illinois, a state with limited borrowing capacity which doesn’t have enough cash to cover its current payables. I suppose the repair work would have to wait until members of Congress fought their ideological battles. Battle by battle we are seeing the federal structure weaken. The states must strengthen themselves.
New York Times hot on Cuomo bank
Irene damage estimated at 0.214% of GDP
Irene has come and gone. She was a big girl but fortunately she didn’t cost a lot in terms of economic damages. The biggest toll was the 25 lives she claimed. I mourn those deaths and know their loss is incalculable to their families.
Local, county and state officials responded to the disaster admirably. Local newspapers and television stations are full of stories of families evacuated and emergency measures taken. New Jersey and New York City preemptively evacuated millions of people and shut down mass transit and other infrastructure systems. Given the scale of potential damage the losses have not been that great.
The economic loss of Hurricane Irene has been estimated at approximately $3 – 4 billion. Measured against a gross domestic product of $14 trillion Irene will ding the economy for about 0.214% of its annual output. Some have suggested that this will give the construction industry a boost, but it’s not significant. Irene’s damage, on its own, is not a substantial blow to the U.S. economy, but nine other “weather disasters” have caused more than $35 billion in damages this year, according to the National Climatic Data Center at the U.S. Department of Commerce (hat tip Empty Wheel).
The federal agencies which man the front lines during disasters are facing funding pressures in this time of budget austerity. The Hill reports that the disaster relief funds of the Federal Emergency Management Agency have dipped below a crucial threshold that keeps them from initiatives broader than debris clean-up. The Huffington Post explains that the National Oceanic and Atmospheric Administration will have trouble launching the replacements of current weather-tracking satellites on schedule due to budget reductions.
All levels of government are restraining their expenditures, but ensuring the safety of the people is the primary responsibility of every level of government. I’d like to suggest to members of Congress that there are plenty of areas in the military budget that can be reduced to ensure that all necessary funds for domestic protection efforts are covered. The events of this weekend show that it is vital that FEMA and the NOAA are fully funded.
“The economic loss of Hurricane Irene has been estimated at approximately $3 – 4 billion.”
Where did you get that estimate? The lowest one I was seeing on Monday was $7B, and that’s probably higher now, given the week of VT.
We have everything we need to battle Irene
Hurricane Irene, an enormous storm of unimaginable power, is bearing down on the east coast. Although there could be loss of life and substantial property devastation, America has more than enough resources to meet her and survive mostly intact. Unlike third-world countries we have the people, equipment and money in reserve to clean up. But it maybe the human locusts that follow in her wake that are hardest to battle against.
Irene is expected to make landfall in North Carolina, but it is the northeastern states that have made extraordinary efforts to evacuate the population and shut down public transportation systems. The corridor stretching from New Haven, CT to Atlantic City, NJ is one of the most densely populated areas in America; 55 million people are currently preparing for this large natural disaster.
Cities, counties, states and utility companies are on standby. Funds have been reserved to respond to emergencies and the federal government has a large department, the Federal Emergency Management Agency, ready to provide local assistance. The public sector is ready to go.
But in the aftermath of disasters, bad things happen and authorities are often not around to help out. I’m sure that we will hear stories of looting and fraud following the hurricane — it generally happens after every natural disaster. The AP reported the following after tornadoes swept through Birmingham, Alabama in April:
Looters have carried off televisions, power tools and prescription pills. Elsewhere, unscrupulous businesses are charging double for a tank of gas or jacking up the cost of a hotel room. Authorities also warn of construction workers who leave with the cash before opening their tool kit and the danger that identities could be stolen off wind-blown documents.
Though the region has seen similar scams after hurricanes and the Gulf oil spill, the speed of flimflam men this time around has surprised authorities and survivors.
“We have received a surprising amount of calls,” said Noel Barnes, consumer protection chief for the Alabama attorney general’s office. “We’re not going to allow people to further victimize our citizens.”
Some residents are packing firearms to scare off the lowlifes. In Pleasant Grove, Ala., Mike Capps was guarding his parents’ house over the weekend with an M-1 carbine rifle.
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Resident Muniland expert
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