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In Government Property We Trust

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In Government Property We Trust

To help reduce pension debt, Connecticut eyes privatizing publicly owned assets. August 12, 2019
Economy, finance, and budgets

Burdened with sky-high and still-rising government-pension costs, states have sought creative ways to come up with new revenue. Some ideas, like an Illinois proposal to borrow more than $100 billion and invest the money in the stock market, have been met with skepticism because of the risks involved. But one plan, currently receiving government consideration in Connecticut, is more promising. It involves turning over government-owned properties to private managers in the hope that they could generate revenues for underfunded pension systems. The proposal, recently detailed by a state commission, is based on the assumption that local governments hold enough unused or underdeveloped properties to create significant new income streams. To succeed, though, the plan will have to overcome traditional government resistance to ceding control of public assets—sometimes prized for their political value by elected officials—to independent managers who’d operate them with a more bottom-line focus.

Connecticut’s proposal to create a “legacy obligation trust” for its pension system is the first of its kind. Under the plan, officials would initially conduct an inventory of state-owned properties and decide which ones might yield additional revenues if managed more effectively. That could include underdeveloped state-owned land ripe for commercialization or publicly owned facilities like golf courses, stadiums, and arenas. The chosen properties would be placed in a trust to benefit the public-pension system, which would hire private managers with incentives to boost revenues. The managers might achieve better results by, say, competitively bidding out concession contracts for publicly owned stadiums and arenas not producing the kinds of returns typical for privately owned facilities. Another option: selling concessions to private firms, which would develop public lands to establish solar farms for generating renewable energy. “The opportunity here is to unlock the hidden equity value of assets that sit on government balance sheets for the benefit of pensions,” Michael Imber, a member of the commission panel and managing director at accounting firm EisnerAmper, said recently.

Though no exact model for this exists yet, several cases show how governments can use property to help reduce pension debt. As part of the bankruptcy-recovery plan for Detroit, several financial institutions contributed hundreds of millions of dollars into the city’s pension system in exchange for property along the city’s waterfront and downtown. A firm controlled by Syncora Guarantee, a bond insurer, received a 20-year lease on the Detroit-Windsor Tunnel as part of its settlement with the city. In another example, the state of Queensland, Australia, in 2011 contributed its toll road to its underfunded pension system, then hired professional managers to improve the road’s operation—and eventually sold the road for $7 billion, to benefit the pension fund.

Whether Connecticut’s trust idea goes forward depends on the state finding enough valuable property to contribute to make a difference. Initially, advocates suggested a goal of $1 billion in property to create the trust, but some ideas, like leveraging state-owned parks for their commercial value, are controversial. Other government assets, like airports, could be privatized, but federal regulations demand that the money they generate be used for aviation, not other government purposes, like a pension system.

Privatization efforts can also be upended by politics. In 2014, Philadelphia’s city council killed an effort by then-mayor Michael Nutter to sell the city-owned local gas works to a private enterprise for $1.86 billion to help support the city’s underfunded pension system. At the time, press reports pointed out that the gas works was a major source of patronage jobs.

Even if Connecticut succeeds in creating the trust, it won’t be enough to solve a $100 billion pension deficit. The state needs to find more ways to cut costs if it’s going to dig out of its hole—but new governor Ned Lamont’s first attempts haven’t been encouraging. In July, he and the state’s public-sector unions agreed on a deal to reduce annual state contributions into the pension system by between $130 million and $140 million over the next several years by backloading payments. Under the arrangement, Connecticut would contribute less now, but with the consequence of ballooning payments in future years—when the problem will be left for somebody else, not Lamont, to fix.

That’s the kind of fiscal gimmick that politicians in Connecticut keep relying on, even as they struggle to find legitimate ways to deal with their growing problem.

Photo: DenisTangneyJr/iStock

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