The City of Jacksonville, FL is contemplating sale of JEA, its municipal electric, water, and sewer utility. For years Jacksonville has toyed with the idea of selling JEA to a private investor, but the possibility has gained new urgency recently with the release of a valuation study. The city’s current mayor is advocating for the sale, which has generated significant controversy within the city council; a former mayor recently weighed in on the issue with an Op-Ed.
Why sell a utility?
This kind of privatization is uncommon for a couple reasons. First, JEA is a very big utility: it serves more than 450,000 electricity, 340,000 water, and 264,000 sewer customers. Privatization is uncommon for utilities of that size; most privatizations (or municipalizations, for that matter) occur with small or medium-sized utilities.
Second, sale of a municipal utility usually follows some kind of failure. The utility may be failing due to poor investment decisions, mismanagement, or inadequate revenue. Alternatively, a city in financial crisis may choose to sell an otherwise solid utility simply for a badly needed cash infusion. Neither seems to be the case in Jacksonville; by all accounts, JEA is a well-managed utility with a strong record of financial, regulatory, and environmental performance. The city appears to be in solid financial shape. The utility generates a great deal of revenue for the city, both in service fees and taxes.
Instead, it seems that the proposed JEA sale is simply an arbitrage opportunity for Jacksonville. It’s a seller’s market for utilities, and some of the city’s leaders apparently see the multi-billion-dollar windfall from the JEA sale as a chance to channel resources to other city priorities. From a governance and policy perspective, the critical question is: what would Jacksonville do with the billions in proceeds from a JEA sale?
Along with such economic considerations, the sale would shift JEA’s primary governance from city hall to the state’s Public Utilities Commission. For better or worse (or better and worse), JEA’s new owners would make supply, contracting, employment, and investment decisions with its investors in mind.
City as holding company?
The JEA controversy also prompts deeper questions about the nature and purpose of municipal government. In colonial America, the first municipalities were private, investor-owned companies (that’s why the process of forming a city government is called “incorporation”!)—collections of assets that generated profits for their owners. At some level, a municipality is still a collection of assets—utilities, streets, parks, stadiums, etc.—any of which might theoretically be commodified and sold to investors.
But as Alexis deTocqueville observed, local governments are also social institutions that facilitate citizenship and foster democracy. When public infrastructure moves from municipal to investor ownership, the span of local governance shrinks; democracy becomes technocracy, and another element of daily life is transformed from collective choice to private transactions.
This is the second in my series of posts on the recently released White House infrastructure plan.
We’re at a strange point in America’s fiscal history.
Cash on corporate ledgers is high, bond rates remain at historic lows, and investors at home and abroad continue to see the United States as an attractive place to invest. Yet public infrastructure crumbles for want of capital reinvestment. What’s needed is a way to channel all that idle financial capital into public infrastructure. There are basically three ways for the federal government to do that:
(a) tax capital accumulation and spend the tax revenue on infrastructure;
(b) incentivize local/state governments to tap private capital through the bond market; or
(c) encourage direct private investment in public infrastructure.
As noted in my earlier post, option (a) is probably unrealistic without seismic shifts in national politics. Such shifts happen on occasion, but they’re uncommon and unpredictable. The White House plan basically lays a course for a combination of options (b) and (c).
Understanding the ways in which the White House plan seeks to expand private investment in public infrastructure requires getting down in the weeds a bit. First, although the infrastructure matching grant programs in Sections I and II are aimed at state and local governments, those governments are invited to engage private capital in crafting their proposals. Second, it appears that private corporations would be eligible for the $20 billion Section III “Transformative Projects Program.”
The real eyebrow-raising provisions come in Section IV. The federal government already runs a series of programs to support public infrastructure investment, either through direct financial support (e.g., subsidized/simplified loans) or through the tax code (e.g., tax exempt municipal bonds). The White House proposal would relax eligibility for several of these programs so that privately-financed projects (or joint public-private projects) could qualify.
Finally, the White House plan would tweak the tax code to encourage expanded use of Private Activity Bonds (PABs). Without getting into the gory details, these changes would extend many of the tax advantages of municipal bonds to private infrastructure investment. Moreover, public debt assumed by private firms when they purchase public facilities would retain tax exempt. That provision would be most meaningful for large firms seeking to acquire public facilities, and so would make full privatization a more attractive alternative for many governments.
The expanded role for private capital in American infrastructure is perhaps the most controversial element of the president’s proposal. The White House infrastructure plan unabashedly seeks to expand private investment in public works; in response, critics have charged that the plan is a giveaway to corporations.
That critique is accurate but a bit misleading. Privately-owned infrastructure is already common in the United States (especially in energy and telecommunications), and an elaborate regulatory regime already governs pricing, profit, service, safety, and environmental protection for those firms. The shift of infrastructure ownership from public to private sector does not eliminate public governance; indeed, my recent research with David Konisky suggests that regulations are more effective with private than public utilities. Rather, increasing privatization of public works changes the venue of governance from state legislatures, city councils and special district boards to legalistic, technocratic regulatory authorities. The real concern with infrastructure privatization is not so much for rapacious corporations, but rather a loss of local democratic influence over critical infrastructure–David Switzer’s excellent dissertation advanced this idea.
The distributional impacts of infrastructure privatization are worth noting. That means some portion of toll, fee, and rate revenue from infrastructure investment flows to investors. Those investors tend to be relatively wealthy; poor and working-class Americans do not, by and large, own significant shares in utility corporations. Publicly-owned, democratically-governed facilities do not have this distributional effect.
The trouble is that, in too many cases, local democratic governance is a big part of why America faces an infrastructure funding crisis. State and local politicians have been too often unwilling to raise the taxes and fees necessary to maintain infrastructure adequately—even with municipal bond rates at historic lows. National political dynamics make it unlikely that Congress will produce a multi-trillion-dollar infrastructure bailout. Long-term shifts in national politics might eventually change that picture, but the roads, dams, plants, pipes, and ports don’t care. They’ll continue to degrade without reinvestment.
Private ownership of public works strikes many as counterintuitive, maybe even inherently wrong. But the investment capital available in the American economy today is in private coffers. For fans of public infrastructure, channeling that capital into public works through direct investment might be the best available route.
The growing national attention to public infrastructure in the United States has been gratifying to those of us who have been working on the issue for a long time. Infrastructure has been a simmering issue for decades, but a spate of recent high-profile disasters has pushed it to the forefront of American politics. It was a major theme in the 2016 presidential election, and last week the White House announced president Trump’s long-awaited infrastructure plan in a 55-page document.
I’ve had a chance to review and reflect on the proposal; in this inaugural blog post and a few posts to follow, I’ll share some observations about White House’s infrastructure plan. I’m going to focus on the infrastructure plan itself, and in ways that can maybe add some value to the public discourse. So in this series of posts I won’t comment on the president’s budget proposal or regulatory actions—I’ll just stick to the 55-page plan. This post will discuss the White House infrastructure plan’s broad financial elements, since adequacy of finance has garnered most attention. In future posts I’ll address privatization, water infrastructure, and workforce aspects of the plan… and maybe other stuff, too.
Federal funding as federal leverage
America’s infrastructure funding needs are enormous. Drinking water systems alone will require more than a trillion dollars over the next 25 years to maintain health and economic growth. Sewer systems need more than $271 billion over the next two decades. Replacement and repair costs for railroads, highways, bridges, seaports, airports, dams, levees, and myriad other systems are enormous. Even conservative estimates of infrastructure needs put the price tag into the trillions of dollars.
In the face of those daunting figures, the White House plan calls for about $200 billion in federal infrastructure funding, $50 billion of which is to be targeted at rural and tribal infrastructure. The most common critique has been disappointment in the scale federal commitment under the plan (for example), and no one seriously argues that $200 billion is adequate to address the nation’s infrastructure needs. The president’s plan seeks to use the federal contribution to spur local, state, and/or private investment by offering a 10-20% match. That is, a local government could propose a $100 million project; if approved, the federal government might contribute up to $20 million, with the local government responsible for raising the remaining $80 million from other sources. In that way, the federal government essentially subsidizes local/state/private infrastructure investment.
This arrangement is typical for federal infrastructure funding from the 1950s-1970s. Comparatively little of the nation’s critical infrastructure is actually owned by the federal government; most is owned and operated by state/local governments or private corporations. For highways, ports, and water/sewer systems in particular, the great federal spending programs of the past have been set up as proportionate matches or grants-in-aid for construction. In most cases, this cooperative arrangement was a central to the legislative coalition that came together to fund infrastructure. The idea is for the federal government to spur construction, then turn infrastructure over to state/local government for ongoing maintenance and replacement.
The main difference between the White House’s infrastructure funding proposal and the great federal infrastructure programs of decades past is the share of the federal contribution: Uncle Sam paid for 90% of construction costs under the 1956 Interstate Highway Act and 75% under the Clean Water Act, for example. To put things in perspective, the Clean Water Act’s $57 billion of local grants-in-aid would be more than $300 billion in today’s dollars.
State & local governments on the hook
But for a variety of reasons, many local and state governments have not adequately maintained, replaced, or expanded infrastructure. In some cases, disasters or economic decline have made adequate funding difficult. More often, though, state/local politicians find it easier to neglect infrastructure than to maintain it adequately. Repair and reinvestment aren’t very sexy, and politicians everywhere prefer lower taxes and user fees. Hence the multi-trillion-dollar infrastructure costs facing the nation.
Would a larger federal contribution than called for in the Trump plan help close the gap? Absolutely. But the days of federal largesse underwriting infrastructure in the 1950s-1970s are probably over. With entitlements, defense, debt and tax expenditures sucking up the lion’s share of the budget and politicians loathe to raise taxes, it’s difficult to imagine a trillion-dollar federal infrastructure initiative in near future.
Put simply, there is little Congressional appetite for massive federal investment in local and state infrastructure today. The most useful way to think about the White House funding plan is not to compare it to the Interstate Highway Act or Clean Water Act (when the feds paid a lot), but rather to the status quo (when feds pay virtually nothing). It’s exceedingly unlikely that the federal government is going to foot the whole infrastructure bill, or even half of it. State and local officials complaining about federal government failure to pay for their infrastructure replacements is like dinosaurs complaining about asteroids.
Capital for infrastructure has to come from somewhere. Under current political and fiscal conditions, the best prospect for effective federal financing is probably to entice other sources of capital into public infrastructure. That’s what the White House’s plan tries to do. Whether $200 billion is adequate to the task is hard to say.
I’ll take up the thorny question of infrastructure privatization another day.