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Want to buy the Brooklyn Bridge? It’s not for sale yet, but the Indiana Toll Road and the Pocahontas Parkway outside Richmond, Va., recently were leased to the highest bidders. And if Texas Gov. Rick Perry prevails, private firms will pay the Lone Star State $1.2 billion for the right to build a $6 billion toll road from San Antonio to Dallas.
It’s the latest twist in creative ways of generating revenues without raising taxes. States have taken to selling off, leasing out and cashing in on some of their most valuable assets, primarily toll roads.
Several big deals were consummated in 2006, even as a resurgent economy and the return of surpluses gave most states a respite from penny-pinching. Another form of easy money – tax revenues from legalized gambling – also is helping to keep state coffers brimming. And states, like credit card-crazed shoppers, are borrowing more money than ever through the bond markets.
The prize of cash upfront is what’s driving the new phenomenon of states marketing public assets to private corporations.
“Policy-makers are asking themselves, ‘What assets can we lease?'” said Arturo Pérez, a fiscal expert at the National Conference of State Legislatures. “A lot of creative minds are out there working on that.”
Govs. Rod Blagojevich (D) of Illinois and Matt Blunt (R) of Missouri are looking into auctioning off student loan portfolios. Blagojevich, who won re-election in November, also is renewing a push to lease the state lottery for $10 billion, promising the money will be spent on schools.
Indiana’s $3.8 billion deal for a 75-year lease on its toll road made other states take notice. The arrangement with a private Australian-Spanish consortium gives the state a way to pay for $3 billion in transportation upgrades across Indiana over the next 10 years. The companies also agreed to make $400 million in repairs to the 157-mile toll road, which runs across northern Indiana from Illinois to Ohio. Plus, the state will net $700 million to $900 million in interest on the $3.8 billion lump-sum payment.
Indiana Gov. Mitch Daniels (R) figures the deal will trigger the biggest infrastructure building program in state history, create 130,000 new jobs and ultimately benefit the state to the tune of $4.5 billion. That’s a far cry from the losses the 50-year-old toll road chalked up for the state in five of the last seven years, Daniels said.
But Daniels’ deal didn’t sit well with some Hoosiers. He had to twist arms to narrowly win the Legislature’s approval, even though both houses then were under GOP control, and the controversy helped Democrats take over the Indiana House in last year’s elections.
Despite the hard sell and political fallout, Daniels announced he also will seek a private partner to build a $1 billion, 75-mile toll bypass around Indianapolis.
While state finances are the healthiest they’ve been in six years, many state transportation budgets are lagging far behind the demand for repairs and improvements.
Colorado, Georgia, Massachusetts, Missouri, Nevada and Pennsylvania face roadwork to-do lists of more than a billion dollars over several years.
It didn’t help when gasoline prices skyrocketed in midyear. Motorists curbed their driving, cutting into the per-gallon gas taxes that finance most road improvements. Taxpayers groaning at $50 fill-ups were in no mood for gas tax increases.
“Leasing assets is a politically more palatable option,” says Sujit CanagaRetna, a Council of State Governments fiscal analyst.
Virginia agreed to lease the Pocahontas Parkway, outside Richmond, for 99 years to a private Australian firm called Transurban after a nonprofit agency running the nine-mile road went belly up. Transurban paid $522 million, plus agreed to build a 1.6-mile connector to the Richmond airport. The deal generated little controversy because Virginia laws already sanction public-private partnerships.
Traffic tie-ups are a big issue in booming northern Virginia, but lawmakers in Richmond have resisted raising taxes to alleviate the congestion. A special session called by freshman Gov. Tim Kaine (D) last year failed to untie the knot. Kaine predicts public-private partnerships could address up to 20 percent of the state’s long-term highway needs. One proposal is to lease a state-operated toll road linking suburbs around Dulles International Airport to highways into Washington, D.C., for upwards of $6 billion.
In the Southwest, all eyes are on Texas as newly re-elected Gov. Perry pushes his “Trans-Texas Corridor,” a swath of toll roads, railways and pipelines that would cost $183 billion to build over half a century. Three of Perry’s gubernatorial opponents lambasted the first phase of the plan, in which a consortium of foreign firms has agreed to pay the state $1.2 billion and spend $6 billion constructing a 300-mile toll road between Dallas and San Antonio. (The deal is pending until environmental studies are complete.)
Pennsylvania Gov. Ed Rendell (D) in December asked private companies to make their best offers to buy or lease the Pennsylvania Turnpike, which links Philadelphia toPittsburgh and was dubbed “America’s first superhighway” when it opened in 1940. New Jersey also is considering leasing parts of its turnpike. Pennsylvania also is weighing whether to turn to private firms to expand heavily traveled Route 322, the road to State College, while New Jersey is mulling a sale or lease of the 173-mile Garden State Parkway and its 11 toll plazas, as well as the 47-mile Atlantic City Expressway from the Philadelphia suburbs.
Critics argue that private firms are apt to jack up tolls and fees because they have to keep investors, not voters, happy. Others worry that states will fritter away the upfront money.
“I’m mistrustful of something-for-nothing schemes, and, conceptually, these plans have a whiff of that,” said Nick Johnson, a state budget expert for the Center for Budget and Policy Priorities, a liberal think tank in Washington, D.C.
President Bush persuaded Congress in 2005 as part of the transportation bill to make it easier for states to issue tax-exempt bonds for public-private road and bridge projects.
Many states still are trying to recover from a borrowing binge earlier this decade. State and local governments owed nearly $1.9 trillion in 2005 from bond issues, up sharply from $1 trillion in debt outstanding in 2000. Lower debt means better ratings and terms from Wall Street and bondholders.
An easier way for states to bring in cash is to let folks lose it on lottery tickets or at the roulette table – and take a fat cut.
All but Hawaii and Utah have legalized some form of gambling, and experts foresee no letup in governments’ thirst for gaming dollars. Commercial gambling, excluding American Indian casinos, brought in nearly $5 billion in gaming taxes to state and local governments in 2005. That was in addition to $16 billion in profits from state lotteries, and more than $1 billion in fees garnered from casinos on Indian reservations.
Arkansas voters just legalized bingo. And the first slot machines recently were installed at racetracks in Pennsylvania and Florida, which join nine other states with “racinos.”
Pennsylvania is on the verge of becoming the nation’s biggest slots state behind Nevada (not counting American Indian casino”. The first slots parlor in the Quaker State opened at a horse track in the state’s northeast corner. Eventually Pennsylvania plans to have 61,000 one-armed bandits at 14 venues, raising concerns from nearby Delaware, New Jersey, New York and West Virginia that also rely on gaming dollars.
In Mississippi, casinos along the Gulf Coast still may look like riverboats, but they now sit on dry land. Recovery legislation after Hurricane Katrina in 2005 allowed casinos to rebuild 800 feet from the water’s edge. Nine of the dozen casinos destroyed around Gulfport were back in business by last fall.
Indian gaming grew more than three times as fast as the commercial gaming industry in 2005, and “more states are trying to get a cut,” says Alan Meister, an economist who follows the industry for the Analysis Group, a financial strategy and consulting business.
While states cannot tax profits from Indian gaming, they accrue serious money from compacts negotiated with tribes. In the 30 states with tribal casinos, state and local governments got more than $1 billion from fees and revenue-sharing agreements in 2005, according to Meister’s most recent figures. That’s a 20 percent increase from the previous year.
California Gov. Arnold Schwarzenegger (R) has signed 20 deals with American Indian tribes since he took office in 2003, but only 10 have won approval from the Legislature.
Still pending is a deal Schwarzenegger negotiated with the Agua Caliente Band of Cahuilla Indians that could yield the state $1.8 billion through 2030, including nearly $60 million a year from 3,000 new slot machines.
Three other Southern California tribes want agreements modeled on that deal to install 11,000 more slot machines. Democrats, who control the Legislature, objected, arguing these tribal-state agreements leave unionized hotel and casino workers out in the cold.
A move by the U.S. Congress to ban Internet gambling may wind up boosting state lottery profits. The new federal law bans Internet gambling through offshore sites but allows states to operate lotteries online, noted Keith Whyte, executive director of the National Council on Problem Gambling. He expects state lotteries to aggressively use the latest technology to tap into the estimated $12 billion gamblers spend online.
Still, the appetite for more gaming is not uniform. In last year’s election, Ohio and Nebraska voters rejected ballot measures to expand video keno and slot machines, and Rhode Island voters rejected the Narragansett Indian Tribe’s bid to open a $1 billion casino in West Warwick. On the other hand, Arkansas voted to let charities hold bingo games, and in South Dakota, residents chose to keep the state’s video lottery legal.
States were awash in money in 2006, but many are “apprehensive about the surge of expenditures down the road,” says CanagaRetna of the Council of State Governments.
As many as 20 states project deficits for fiscal 2008, which begins in July for all but four states. State treasuries got a break when Medicaid health care costs rose just 2.8 percent in 2006, the smallest increase in a decade. But no one believes the era of rampant health inflation is over.
On top of higher medical bills for the poor, states are under pressure to spend more on schools. That is particularly true for the nearly two dozen states battling lawsuits alleging that their school budgets are inadequate.
Also problematic are future health and pension benefits for retiring state employees that experts estimate could cost $1 trillion. States also are worried about the $11 billion they say it will cost to revamp the issuance of driver’s licenses to comply with new federal anti-terrorism rules.
The preceding article is excerpted from State of the States 2007, Stateline.org’s annual report on significant state policy developments and trends.
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