Privatizing government assets a growing trend

Cincinnati Enquirer - March 18, 2012

Barry M. Horstman

Whether it’s Hamilton County selling Drake Hospital property, the city of Cincinnati trying to unload Music Hall or the state of Ohio talking about selling prisons, the turnpike and the lottery, government increasingly appears to be, in real estate jargon, a very motivated seller.

The $15 million Drake deal and the city’s proposed Music Hall transaction, both of which dominated headlines last week, are the latest examples of governments at all levels selling long-time assets, usually to fill gaping budget holes or to address other financial issues.

Cincinnati’s Southern Railway, possible Brent Spence Bridge toll operations, and Ohio’s prison, turnpike and lottery are among the other items that in recent years have been eyed for possible sale or long-term leases as struggling governments consider ways to balance their books and fund major projects.

The trend is neither new nor one that started in Greater Cincinnati – or, for that matter, even the United States. Rather, it is part of an international move toward privatization, in which property or services are transferred from the public to private sectors, typically for big upfront payments that help governments close budget gaps.

Although political philosophy plays a significant role – with Republicans in particular arguing that the private sector often can deliver services such as garbage-collection, corrections, vehicle maintenance or data processing at less cost – the current debate is being driven largely by harsh economic realities that have governments aggressively seeking new sources of revenue.

As Hamilton County Commissioner Greg Hartmann sees it, tough economic times can forge better government.

“Sometimes government’s got to be forced to make tough decisions,” Hartmann said. “That can lead to good decision-making that forces government to focus on its core missions. That’s what’s happening now.”

Lawrence Reed, who heads the Foundation for Economic Education, a think tank based in New York and Georgia, says that the word “privatization” was not even in Webster’s Dictionary until the early 1980s, after British Prime Minister Margaret Thatcher brought it into vogue.

Since then, state and local governments throughout America have started looking at their buildings, land and other property much as a once-well-to-do family that has fallen on hard times views its jewelry – as things that can be sold, often reluctantly, to keep the big bills paid.

“It really is growing,” said Reed, a nationally prominent expert on privatization. “Maybe not by leaps and bounds, but growing nonetheless. You see more of it during difficult times.”

Over the past several years alone, Arizona has sold numerous public buildings, including prisons, state legislative offices, a state hospital and a tower that houses the governor’s office. Then-Gov. Arnold Schwarzenegger hatched a similar plan in California, only to see new Gov. Jerry Brown scrap it last year.

Cash-strapped Chicago in 2008 sold its parking meters to a partnership led by Morgan Stanley – a $1.15 billion deal that provoked an outcry after a public report claimed that the city got only about half what the system was worth and as parking rates have more than doubled, in some areas to $5.75 per hour.

Houston has privatized its city zoo and Texas its call centers for state health and human services. Two years ago, Illinois privatized its lottery, a step that Ohio Gov. John Kasich would like to follow as part of a broad privatization agenda that also could include the state turnpike and lottery.

For governments struggling to make ends meet, the financial lure of such deals is powerful – even if, as skeptics argue, they frequently offer only a short-term solution.

“That big pot of money is very attractive,” said Richard Little, a senior fellow at the Price School of Public Policy at the University of Southern California. “The problem is, sometimes it’s like going to the pawn shop. You get what you can, not necessarily what it’s worth.”

That is the fault that Hartmann and Hamilton County Auditor Dusty Rhodes find with the controversial Drake deal, under which UC Health paid the county $15 million for the Hartwell rehabilitation hospital’s buildings and land.

Rhodes argues that the county sold “a valuable asset at a bargain basement price,” and Hartmann agrees the deal – which will help pay for the Bengals’ and Reds’ stadiums and restore a property tax credit for homeowners – was not a good one for taxpayers.

“Even putting price aside, selling a valuable asset for what amounts to a one-year fix of the (stadiums’ funding) problem is poor policy,” Hartmann said. “It’s shortsighted.”

But Commissioner Todd Portune, who along with Commissioner Chris Monzel put together the Drake deal, contends the county got “full value” and describes the sale as “the right thing to do even if the stadiums weren’t an issue.”

“The stability of Drake Hospital as an institution and its long-term viability have been enhanced as a consequence of what we’ve done here,” Portune said. “The fact that we could do this at a time that’s helpful in addressing the stadium debt is a bonus.”

The proposed Music Hall deal, in contrast, would not produce a big cash payment for the city, but instead would relieve City Hall of tens of millions of dollars in potential future expenses.

Under the deal, the city would sell Music Hall, which has an appraised value of $12.7 million, for $1 to the Music Hall Revitalization Co. Inc. – in exchange for the group assuming responsibility for a $165 million renovation and future maintenance and operating costs.

A bit of civic finger-crossing is involved in that deal, expected to be completed later this year. Because if the group cannot do what it plans, Music Hall’s ownership – and perhaps some hefty bills – would revert to the city.

If the sale is approved, it would not be the first time that City Hall has sold or leased its assets. In the mid-2000s, City Council approved a long-term contract with the non-profit Cincinnati Center City Development Corp. under which 3CDC oversees Fountain Square and rehabbed its underground parking garage.

Although many judge that deal a success, evidenced by substantially increased vitality in and around the square spawned by regularly scheduled concerts and other events, Councilman Christopher Smitherman, who voted against the 2005 contract, has lingering doubts.

“You give up control when you do these deals,“ Smitherman said, referring to programming on the square.

Several years ago, with the city grappling with a budget deficit and examining how to cover a long-term shortfall of hundreds of millions of dollars in its retirement fund, some suggested the sale of the 142-year-old Cincinnati Southern Railway.

Perhaps the city’s least-known asset – but long one of its most profitable – the 336-mile rail line from Queensgate to Chattanooga, Tenn., was built in the late 1800s to help Cincinnati cope with diminishing river freight. Today, it is the only municipally owned long-distance rail line in America.

Tempting as a potential sale price of $500 million-plus was, a deal never came together, not least of which because of city leaders’ preference for holding onto an asset that provides a stable, reliable revenue stream of upwards of $20 million annually in rent payments.

Around the same time, City Manager Milton Dohoney Jr. proposed selling the Greater Cincinnati Water Works to a regional agency – a deal he estimated could produce an average of $14 million annually over 75 years. Some critics viewed that as a step toward eventual privatization, and after the NAACP and other opponents passed a 2009 charter amendment requiring voters’ approval of any regional district, the idea died.

In Ohio, where contracts for private operations of prisons date back to 2000, Kasich initially hoped to expand that by selling five prisons. His administration later decided to sell only one prison – Lake Erie Correctional Institution in Conneaut – and privatize operations at two others.

The $73 million Lake Erie facility deal, Ohio officials say, was the first sale of a state-built prison in the nation and will save Ohio up to $3 million annually. But Policy Matters Ohio, a nonpartisan research group, contends that estimate is based on “flawed accounting assumptions” and argues the sale actually could end up costing millions of dollars more.

There also has been talk in Columbus of possibly selling the Ohio turnpike and lottery, with price and logistics being major sticking points to date.

Like Hartmann, Portune believes privatization discussions compel government officials to focus on their core functions and responsibilities. “To the extent we’re involved in things extraneous to that, we need to at least consider possible alternatives,” he said.

Reed, the Foundation for Economic Education’s president, agrees.

“The more city governments try to do, the less they tend to do those things well,” Reed said. “It would be like suggesting to McDonald’s that they ought to start selling furniture, too. Pretty soon they probably wouldn’t be very good at making hamburgers.”

From that perspective, one could ask, for example, whether a city needs to – or should – own a concert hall, or whether a county is the proper owner of a long-term rehabilitation hospital’s facilities.

Privatization advocates would answer no to both questions, but skeptics view public ownership as a stronger safeguard of public interests, financial and otherwise. And still others say it’s more important to look at the public service or facility involved than with who delivers or owns it.

“The key question is whether the service will continue to be available to the public at a reasonable cost,” USC’s Little said. “If that happens, I don‘t care who owns it.”

Privatizing government assets a growing trend

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