Using your assets
In June, many state and local government leaders will be required to publicly disclose the cost of health care and other benefits for their retired employees. A new rule issued by the Norwalk, Conn.-based Government Accounting Standards Board (GASB) will expose the gap between what state and local governments have promised to pay their retirees and how much money they actually have set aside for their benefits.
State pension programs, which cover 12.8 million Americans and manage $2.3 trillion in assets, reportedly owe their current and future retirees between $348 billion and $1.3 trillion more than they have set aside. The new GASB standards now require governments to calculate their other post-employment benefit (OPEB) expenses, which are mostly health care benefits, and will add another $1.1 trillion in liabilities.
In New Jersey alone, the cost of pension benefits has risen from $1.3 billion in 2007 to $3.3 billion in 2008 while OPEB has increased from $1.1 billion to $2.8 billion. That amounts to an overall increase of $3.7 billion, or 154 percent in one year.
Cities and counties face some politically unpalatable choices to close the gaps, including dramatic benefit cuts and tax increases. As an alternative, local governments could consider selling infrastructure assets to private entities, thus ceasing to directly provide certain services for their communities.
For example, a community could sell — through a long-term contract or concession — its wastewater treatment facilities, public buildings, municipal power plants or parking lots to private entities and receive millions of dollars in upfront cash payments, which could then be set aside to pay pension/OPEB liabilities.
During the term of the agreement, the government could continue to have full benefit of the facilities in return for annual “service fees” to the private party that buys the asset, and dictate the services the private owner provides through specific performance standards included in the contract. At the end of the term, ownership of the asset would revert to the community.
Some communities already are using the financing technique to pay for transportation projects. In 2005, Chicago sold its eight-mile Skyway toll road for $1.8 billion and began leasing it back for 99 years. Soon after, Indiana signed a 75-year, $3.85 billion lease for the 157-mile Indiana Toll Road Turnpike. In each case, the international consortium that purchased the roads was given the right to increase tolls within set parameters but was required to implement specific roadway improvements.
Some critics argue that privatizing public assets sends a wrong message: that communities are for sale. Although other unappealing options to handle retiree benefit funding exist, the worst scenario is for public officials to oppose every alternative and do nothing. That could significantly impact credit ratings and dramatically increase the overall borrowing cost of the municipality, with an increase in taxes to cover that cost.
Infrastructure financing — while not a panacea — can provide upfront cash that could be used to pay down daunting retiree health care liabilities without sacrificing service quality, raising taxes or dramatically cutting benefits.
The author is an attorney and partner in the Corporate Department at New York-based Sullivan & Worcester.