Selling public assets generates fast cash
By selling public assets, local and state governments are raising funds and paying down debts without increasing taxes. The strategy was first applied to toll roads, and now parking garages and state lotteries are up for sale or lease to private investors. Asset concessions are used to bridge budget gaps while increasing or maintaining revenue from unprofitable assets.
After Chicago sold the concession on its Skyway toll road in 2005 for more than $1.8 billion, the city used the money to pay off $460 million in bonds for the roadway. It used the rest of the money to finance other projects and create a $500 million reserve fund. The success of that transaction led the city to sell the concession for the Chicago Downtown Parking System in October 2006. The sale garnered $563 million, of which $122 million was earmarked for capital improvements in city parks. The sale allowed the city to shift financial resources away from parking garage repairs to park district projects.
Currently, Chicago is planning to privatize Midway Airport and is considering privatizing the city’s Municipal Refuse and Recycling Facilities. “Part of the reason I think [the sale of public assets] works is that the Chicago taxpayers have received substantial benefits from the sales,” says Lisa Schrader, spokesperson for Chicago’s Budget Office and Finance Department. Revenues from the sales have been used to pay down the city’s debt on assets, and as a result, Schrader says the city’s credit rating is the highest it has been since 1978.
The Midway sale is part of a Federal Aviation Administration (FAA) enterprise program that will allow the privatization of five airports across the country. The FAA has approved the sale, and Chicago officials are negotiating with airlines that use the airport, 65 percent of which must approve the deal, Schrader says. Officials hope to complete the sale some time this year.
Illinois and Indiana have issued requests for qualifications from companies interested in buying the concession on the states’ lotteries. Illinois Gov. Rod Blagojevich hopes to raise $10 billion from the sale of the 75-year concession of the lottery to apply to the state’s $41 billion debt for its pension plan, says Justin DeJong, spokesman for the Governor’s Office of Management and Budget.
Currently, the Illinois Lottery generates $600 million annually for education programs. DeJong says the state would initiate a new gross receipts tax that would replace that money for education. Details of the concession, such as continuing payments to the state from the private lottery owner, have not yet been decided. The state received a “robust” response to its request for qualifications, DeJong says, and is preparing legislation to clear the way for the final sale.
The sale of Indiana’s lottery is part of Gov. Mitch Daniels’ plan to encourage college graduates to stay in the state — 45 percent now leave after graduation — and to bring scholars and researchers to the state’s universities, says Daniels’ spokeswoman Jane Jankowski. “If we franchise [the lottery], we would get an up-front payment of $1 billion or more that we would use for scholarships [and university grants],” Jankowski says. The state also would require the franchisee to pay approximately $200 million annually, plus a percentage of revenue from the lottery, to replace lottery money that currently funds police, fire and teacher pensions, local motor vehicle excise tax replacement, and local and state capital improvements.
Some attempts by local governments to sell public assets have failed because of public dissatisfaction. However, Chicago residents reacted positively to the sale of the parking system in part because of the city’s openness about how the funds would be used and a general consensus that private companies could better operate the assets because of their focus on a particular service, Schrader says. The company that bought the Skyway installed automatic toll lanes six months after the purchase, far faster than the city could have done, Schrader says. “Operating a toll road is not one of the city’s core competencies,” she says.
Ed Brock and Brian Sedlak, a partner resident in the Chicago office of Jones Day.