With this in mind, here's Yves Smith of Naked Capitalism taking a shot at understanding why the Koch brothers may need seven lobbyists in Wisconsin:
Mike Konczal (thanks to ed at ginandtacos) reported earlier today on the latest release of a movie coming to states and cities all over the US, namely the sale of state and local government assets to alleviate pressures on strained budgets.
For those new to this concept, the term of art is the anodyne “infrastructure sales” and the company that more or less invented this lucrative business is Macquarie Bank of Australia (known down under as “the millionaires factory”), although US firms clearly intend to exploit the once in a lifetime opportunity presented by widespread state and municipal budget distress and downgrades.
The problem, of course, is that these deals put important public resources paid for by taxes (or even worse, financed by bonds and thus potentially not even yet fully paid for) in the hands of private investors. They then earn their returns by charging user fees of various sorts. The public must rely on the new owners for reinvestment and maintenance, and depending on how the deal is negotiated, may have ceded control as far as fee increases are concerned. This is tantamount to selling the family china only to have to rent it back in order to eat dinner.
Now defenders will argue that there is nothing wrong with this in practice, as long as the price is fair, no one is harmed. That’s spurious. This is worse than an intergenerational transfer. Those future fees not only must recoup maintenance costs (which any owner would presumably pay) and the time value of money, but also the investor’s target return in excess of that. In addition, the large transaction costs of these deals are ultimately borne by the seller.
And the list of shortcomings thus far are merely those that result if you have two sides that are equally sophisticated. That is hardly the case with municipalities versus bankers and investors. As the old saying goes, “If you sit down for a game of poker and you don’t know who the sucker at the table is, it’s you.”Like I said earlier, this is the Russian oligarch play all over again. Smith has a decidedly "public good" view of these operations and probably would like to see the government maintain control of the operations, but she gets the problem of these asset sales to oligarchs.
But even that dim view presupposes that the government body will try to avoid being fleeced but will. Imagine what happens when government officials are in a position to lend a helping hand with a wholesale giveaway to their cronies.
The real answer is for the governments to get out of these businesses rather than continuing them as monopolies with oligarchs and their army of lobbyists controlling the game.
All this asset sale stuff and buying of revenue streams is likely to go far beyond Wisconsin. In a very controversial deal, the city of Chicago sold its parking meter revenue stream. Smith explains:
Look what happened in the notorious case (to those who follow this netherworld) of the 2008 lease of Chicago’s parking meters. Mayor Richard Daley ramrodded it through, informing the city council of the complex deal a mere two days before the vote. The city had projected revenues foregone over the 75 year life of the deal on present value basis of between $700 million and $1.1 billion for cashflows over the life of deal in the $4 billion to $5 billion range. Chicago got $1.15 billion for the arrangement. Sounds like a winner, right? Well, funny that. The selling memorandum for Morgan Stanley-led investors on the very same deal said revenues would not be $4 billion or $5 billion, but at least $11.6 billion, or more than double the top amount projected by the city. And since they’ve put through two rate increases totaling over a 40% increase already, looks they they are on the way to making that happen.Bloomberg reports that:
Indianapolis, Las Vegas, Los Angeles, Pittsburgh and other cities may follow Chicago in selling future parking revenue for cash to help fill budget holes, according to the [Koch supported] Reason Foundation, a Los Angeles-based researcher that advocates public-private partnerships. Chicago may also lease Midway International Airport, a regional hub 10 miles from downtown.Asset sales may also be what Mayor-elect Rahm Emnauel has in store for Chicago. Here's Smith again:
Rahm insists that Chicago solve its financial crisis, yet observers have noticed the details so far don’t add up. From the Chicago Sun Times:
Emanuel’s plan to create jobs and solve the city’s financial crisis is one of three major addresses Emanuel has delivered during the mayoral campaign.Given how unpopular [Chicago's] parking meter sale has proven to be, and how Rahm is emphasizing “innovation” and “minimizing bureaucratic interference”, can the secret plan he is loath to voice be more infrastructure sales?
But the speech delivered at a Near West Side T-shirt company raised more questions than it answered.
Aside from an immediate spending freeze, following by giving city department heads 60 days to draft plans to cut spending, there was precious little new information.
Emanuel talked about creating so-called “charter” city departments that minimize “bureaucratic interference” and give commissioners “flexibility to achieve programmatic goals in innovative ways.” But, he never really explained what that means
It’s not hard to see that these deals are going to be the sort of “heads I win, tails you lose” arrangements that bankers are so skilled at cutting with the great unwashed public. If they have no or few caps on fee hikes, the Morgan Stanley example shows that the public will be subjected to increases in charges that bear no relationship to inflation rates or maintenance costs. And if the sellers impose restrictions, the investors can skim on maintenance, or in a worst case scenario, dump the project back on the government body (think even a city like Chicago has a snowball’s chance in hell of getting recompense in that scenario from investors like Allianz or the Abu Dhabi Investment Authority, both of which were major participant in the parking meter deal?).Bottom line, the state and local debt crisis appears to be shaping up to be a bonanza for the politically connected with deep pockets. Under the guise of shrinking government, "infrastructure assets," a/k/a local monopolies, will be sold to these oligarchs who will use the governments to keep out competitors, while they jack up rates.