CHICAGO — For cities and states buried under mountains of debt, it has become a tantalizing proposition: invite private financial institutions to put up the money to fix aging schools, dilapidated rail lines and beat-up roads. Offer investors steady returns on the projects. And give the public the modern services its governments can no longer afford.
Across the country, innovative deals are now being discussed that would put essential pieces of public infrastructure in the hands of global investment firms, the latest effort to cope with a lingering fiscal crisis that has left some communities unable to pay for their needs. Chicago, with a budget deficit of more than $600 million, is planning a private fund that would make 100 public buildings energy efficient, then move on other projects. In other parts of the country, major road construction has been funded using the model.
“We absolutely have to look at other ways” to pay for infrastructure, said Shirley Ybarra, a former Virginia transportation secretary who wrote model legislation used in 32 states for public-private transportation partnerships. “There’s only so much bonding you can do … Roads have to compete with higher education, school bonds, water and all the rest of that stuff.”
But as more cities consider packaging needs as prime business opportunities, questions are growing about how well the profit motive fits with the ideal of serving communities. Some officials worry about yielding control to private interests that can raise fees and decide which neighborhoods to serve based on profitability.
“They’re looking for a revenue stream for their shareholders, not for the taxpayers,” complained Chicago City Council member Scott Waguespack, who criticized the city’s proposal.
As financial pressures increase, cities with worn out infrastructure are weighing the possible trade-offs.
Hard hit by the recession, more cities are stuck with credit ratings just a few notches above junk status, making it harder to raise money through bonds. Much of the highway system around cities dates back to the post-World War II building boom and thousands of schools are more than 50 years old. Local sales taxes and other revenues are sometimes too volatile to depend on for major local expenses.
Although states have used private partnerships for toll roads in the past, ambitious plans are now emerging for everything from rebuilding dozens of schools in Yonkers, N.Y., to constructing a courthouse in Long Beach, Calif. Other metropolitan areas will be looking at transit and other projects, said David Pope, vice chairman of the transportation committee for the U.S. Conference of Mayors.
Mayor Rahm Emanuel says the Chicago Infrastructure Trust will be a “breakout strategy” around the political gridlock that holds up the city’s federal and state funding.
“I cannot tie the city’s economic vitality, its future, its viability to that dysfunction,” Emanuel told hundreds of business and local government leaders at a meeting in June.
The trust is backed by J.P. Morgan Asset Management’s Infrastructure Investments Group, Citibank, Citi Infrastructure Investors, Macquarie Infrastructure and Real Assets, and the Union Labor Life Insurance Co. The five financial powers would put up $1.7 billion for projects approved by a board chosen by the mayor. The $225 million energy retrofit would be repaid with an estimated $20 million a year savings in heating bills.
But some community groups wonder if the private projects could be funded more economically, and whether they can skip over poorer neighborhoods where firms may see less profit.
If something goes wrong, said Amisha Patel, director of Grassroots Collaborative, a community-labor coalition, “There’s nothing we can do about it.”
Concern has been inflamed by Emanuel’s reluctance to reveal the other projects the fund would take on after the energy retrofit. But other infrastructure goals include upgrading an overburdened transit system and speeding up broadband service. The City Council has approved formation of the trust, but Emanuel’s appointees to the board are awaiting approval by the council.
Other public-private projects have triggered controversies about private control.
In one of the largest deals, Indiana got $3.8 billion from an investment group in 2006 to lease the Indiana Toll Road for 75 years. The private firms improved the roadway but also doubled fares for some users, bringing criticism from some legislators who couldn’t do anything about it.
A project for a 10-mile express toll road in the San Diego area in 2007 failed after it did not produce the rates of return the private developer expected.
“I still think there is room for public-private partnerships,” said Marney Cox, chief economist for the San Diego Association of Governments, which wound up taking over the road in a buyout. “But you need to be careful when you put them together that you don’t get your assumptions out of whack and require that growth occur at extraordinary levels.”
Ybarra said government representatives can try to negotiate limits on toll and fee increases. But the private investors have considerable leverage.
“Governments need this more than institutional investors need this, but I think there’s a benefit to both,” said Mark Huamani, an investment analyst at J.P. Morgan.
In Yonkers, a New York suburb with a mix of affluent and poor neighborhoods, officials are looking for $1.7 billion in private investment money to fix dozens of antiquated schools, including the 88-year-old Gorton High School, and say the benefits of private funding outweigh possible problems. Investors’ returns would be paid with future tax revenue.
“We couldn’t repair the buildings faster than they were deteriorating,” said Joe Bracchitta, chief administrative officer for the school district. “We think that this is a way that urban school districts that are in a state of disrepair or decay can find another way to repair themselves and build 21st century environments for their students.”
This story is the latest installment in a joint initiative by The Associated Press and Associated Press Media Editors on the fiscal crisis facing U.S. states and cities, how state and local governments are dealing with severe budget cuts, and how American lives will change because of it.
