October 14, 2014

Wastewater Privatization: Case Studies

As Arnold residents prepare to decide whether to sell wastewater facilities in their city to Missouri American Water, they should consider cases where privatizations of this type have already occurred. Water and wastewater privatization in Saint Louis County and Illinois provide some useful comparisons.

Increasing budget constraints and needed upgrades have pushed many cities to privatize public systems in recent decades. A Saint Louis-area example is the privatization of water services in Florissant in 2002. The city divested its water services to Missouri American Water for a total of $14.5 million. The results, as a Show-Me Institute case study on privatization in Missouri noted, were positive:

Florissant took its $14.5 million and immediately budgeted $2,758,000 for street repairs, police projects, and public works projects. It deposited $10 million into a newly created special reserve fund, which served the city for several years after the sale of the water division. The remainder was placed into the city’s existing reserve fund. According to a 2007 city memorandum, “The timing of the sale of the water distribution system was extremely fortuitous and gave the city the cushion necessary to work through the dramatic drop in revenue without correspondingly dramatic service cuts.”

Florissant officials have been satisfied with the service, and Missouri American Water continues to provide water services to large parts of Saint Louis County.

While a wastewater privatization deal has not occurred in the Saint Louis area, many cities nationally have privatized this type of utility. A nearby example is in Mount Vernon, Ill., which contracted with a private company to design, build, and operate a wastewater treatment plant for 20 years in 1986. At that time, Mount Vernon did not have the resources to upgrade its aging treatment plan, thereby running afoul of environmental protection laws and preventing new industry from locating in the city. Environmental Management Corporation (EMC) entered into a deal with the city to build a new treatment plant in return for operating the system for 20 years, retaining and even retraining the existing employees. The city has since extended the agreement to 2023.

As these cases show, privatization of water and wastewater systems can be an effective way of providing public services in fiscally constrained cities.

October 4, 2014

Arnold Wastewater Privatization: The Policy Breakdown

As Arnold residents prepare to decide on whether to sell the city’s wastewater facilities to Missouri American Water for $13.2 million, they should carefully consider both the possible positive and negative results of such a deal and whether the city of Arnold is getting a fair price for its facilities. And while we would argue this is a good deal for Arnold, residents should consider some general criticisms of water privatization deals, which are listed (with opponent responses) below:

Criticism: Privatized water systems mean higher rates for residents. Many cities that have privatized water or sewer systems, including Florissant, Missouri, have seen rates rise, usually faster than inflation.

Proponent response: Wastewater and water system privatizations often occur because cities are faced with expensive, necessary upgrades to sewer infrastructure. Cities that charge a utilities fee that is too low to generate enough funds for large upgrades are forced to decide between a large tax increase or subsidies from the general fund. In the case of Arnold, the city claims it will have to increase rates should privatization not occur. Luckily, Missouri American Water reports that its rate increases will be less than those the city would implement, even with necessary capital improvements.

Criticism: Cities are selling city assets in order to receive short-term cash infusions. This short-term gain will result in high utility fees in the long-term.

Proponent response: Just because cities could spend sales money foolishly, does not mean they will do so. In Florissant, the city spent a portion of the sales proceeds on immediate needs and put $10 million in a rainy day fund. Arnold plans to use proceeds to pay off existing debt, but beyond that residents should ensure that the city does not spend wastefully.

Criticism: Some cities with privatized water systems have seen the drinking water become unsafe. Companies looking to make a profit might cut corners and provide lower service.

Proponent response: Private water and wastewater management has a proven track record in the United States. The vast majority of municipalities that privatize their water or wastewater system end up renewing the contract. Like municipally owned water utilities, in individual cases private companies fail to meet safety standards, but this is not the norm. Also, the issue of water quality is less important under a wastewater system privatization than a water system privatization, for obvious reasons.

The residents of Arnold should carefully consider these questions surrounding the planned wastewater privatization deal, and whether both the funds the city will receive and benefits of private management outweigh the risks of selling a public asset.

August 12, 2014

New Tech To Improve Parking In St. Louis City

Last week, officials with the City of Saint Louis announced their decision to install a new type of parking meter. This is the result of months of a competitive process and trials at specific locations in the city. The winners of the $5 million contract were Xerox and Parkmobile. The city’s plan to update street parking is a win-win situation, with opportunities to implement demand-based pricing as well as maximize the performance of the city’s meter system.

meter11

Above is one of the pilot units of Xerox’s solar-powered IPS single-space meters. The meters accept both coins and credit cards (although the minimum time for a credit card purchase is 1 hour). The Parkmobile app allows people to pay over their phone by space number. The app can warn costumers when only 15 minutes remain, and if the overall time limit is not expiring, users can renew their spot over the phone.

Upgrading the city meters can aid both the city’s bottom line and those people looking for parking. For the city, it reduces the cost of enforcement, as officers can know where expired meters are and focus their ticketing efforts. Moreover, the city can use the data from both the meters and the Parkmobile app to measure the performance of certain parking areas, allowing variable pricing to maximize city revenue.

From the perspective of those looking for parking, the city’s effort to properly price and enforce meter limits can mean more available parking. The new meters and Parkmobile app will make payment convenient and mark the end of having to feed the meter. Additionally, the mobile apps and parking meters may allow people to find available parking by providing information on available spaces, eliminating the hassle of cruising for parking, and decreasing urban congestion. Finally, the city is also conducting a study that might result in the removal of parking meters that do not generate enough revenue for their upkeep. That type of optimization, which saves the city and drivers, is long overdue.

For the City of Saint Louis to realize these benefits, officials must be prepared to coordinate data collection to create a more market-oriented street parking environment. If the city can manage that, and take advantage of rapidly improving software capability, these updates will improve the lives of city residents and the city’s bottom line.

June 5, 2014

When It Comes To Privatization In Education, We Say Opaa!

opaa

My colleague David Stokes has a terrific paper about the privatization of public services in which he highlights many examples of public/private partnerships that benefit society. I thought of his paper when I read this story about a Kansas school district that recently announced it is privatizing its food service:

A decision made Friday morning by the USD 382 Board of Education will result in some changes in the school cafeteria next August — a greater variety of food, more made-from-scratch items, and a possible reconfiguration of space to enhance food presentation and improve efficiency.

A change more visible to the board and administrators will be a hoped-for move of the food service budget out of the red and into the black.

At a special meeting, the Board approved a contract with Opaa!, a Missouri-based company, to manage food service for the district.

The contract is projected to save the district between $30,000 and $60,000.

Opaa! is a family-owned and operated company located in Chesterfield, Mo. The company is partnering with more than 100 public school districts to provide nutritious meals.

This is another example of how private companies can provide services that public entities once provided. It also goes to show that “privatization” need not be such a scary word in education.

May 15, 2014

Great Idea Will Be Hard Sell In Olivette

I think the proposal by BWB Sports to build a privately operated athletic center on leased public land in Olivette, Mo., is terrific. At the same time, I understand the qualms many Olivette residents may have about the proposal. This looks like a great idea that is too much, too fast; a terrific proposal coming at the wrong time, like Galileo under house arrest or Jason Bateman in “It’s Your Move.”

The proposal is for BWB Sports to lease the land that now holds the Olivette Community Center and athletic fields around it. (My kids have played many team sports on those fields.) The company wants to build ice rinks, lacrosse fields, and more, and operate it as a private entity. BWB officials do not appear to be asking for a subsidy (I’ll amend this post if they are), which is one of the reasons I support this. However, the fact that they are going to lease this land will likely limit the expansion of the tax base, as the city will still own the land. (There likely will be some tax base expansion from business equipment taxes, concession sales taxes, etc.) Not to mention the fact that the company will pay Olivette to lease the land.

So, basically, you have some residents of Olivette telling me that the park and community center really are not in very good shape and desperately need an upgrade. While others – the ones showing up at the meetings attacking the proposal – are demanding that the park be protected and the land preserved.

There is no doubt about one thing – this is not a half-measure. This is a major change to the property that I think would significantly upgrade the facilities and use of the land. The only thing the proposal is missing is an outright sale of the property, which is politically impossible and legally complicated. So they are just leasing it, but I doubt that means much to the opponents.

I hope that Olivette officials can see the long-term benefits in this proposal. But, unlike other NIMBY situations, I see some merit in the residents’ concerns. This is not like recent disputes in Brentwood, Maryland Heights, or South County. I understand why some neighbors are objecting. As I said in my study about privatization in Missouri, park privatization proposals are very contentious for good reason. Outsourcing the management of existing park facilities is not that controversial, but wholesale changes to parks themselves are.

This is the latter. I hope it passes. I think the long-term benefits are significant for Olivette and Saint Louis County. This plan would increase use of the property, grow the tax base (somewhat), inject private money into Olivette recreation instead of counting on tax dollars, and more. But I am not going to attack the opponents as NIMBY-based obstructionists, even the Keynesians among them.

March 28, 2014

Further Remonstrances On Clayton Tax Increases

Last week, I blogged about the Clayton economic development sales tax proposal. While that is a bad idea in and of itself, it is unfortunately part of a much larger package of tax hikes. There are four (four!) different proposed tax hikes for voters to consider on the April ballot. If you think that is a lot, well, . . . it is.

I want to focus here on the property tax aspect. The proposals call for two different bond issues, each requiring a separate tax increase. One is for neighborhood road improvements in Clayton, and one is for improvements to Shaw Park, mostly the ice rink. If they both pass, the property tax increase would be 24 cents per $100 of assessed valuation.

Supporters of this tax hike, and most tax hikes, like to make the numbers seem small. “Only 25 cents added to an average restaurant meal” or something similar. For this tax hike, I keep hearing it is less than $20 a month for an average Clayton home. Fair enough; that does not sound so bad. (Math is $500,ooo home x 24-cent tax increase per $100 of assessed valuation = $228 annually.)

However, Clayton residents benefit from the enormous business concentration there, and businesses don’t get a vote on the tax hike. (They can vote with their feet, metaphorically.) What is the tax hike here on a Clayton business?

Well, we don’t know it by business, but we can easily figure it out by building. Take one of Clayton’s nicest buildings: 7701 Forsyth. If these two property tax increases go through, it’s owners would pay $21,175 more each year. That is $21,000 more to support park and road improvements that will benefit the businesses far less than the residents. (The road bonds are all for neighborhoods, not the business areas.)

Take its sister building, 7733 Forsyth. That property would pay $32,000 more in property taxes under these proposals. This for a building whose owners already pay well over a million a year in property taxes. That means higher rents in Clayton. These higher rates would also apply to business property (factory equipment, copiers, computers) so there would be less capital investment in Clayton, though I admit that effect likely would be very small.

That is $53,000 per year from two buildings that already pay an extra downtown tax assessment that can be used for their central business district streets. (It usually isn’t, but it can be and likely has been in the past.) At some point, asking Clayton businesses to pay much higher property taxes that will primarily benefit the residents is a poor policy choice, in my opinion. At a minimum, the proposal to increase the property tax for park renovations should be shelved in favor of privatizing the rink’s operations (but not ownership) just like the Saint Louis City has done with Steinberg Ice Rink.

February 19, 2014

Columbia Says No To A TIF

There was very big news out of Columbia, Mo., Monday night. The Columbia City Council shot down a large Tax Increment Financing (TIF) proposal in a 5-2 vote. The list of TIF rejections in Missouri is, unfortunately, short. Hopefully, this is the start of a trend, not just in Columbia but around the state.

The Columbia city manager and mayor had proposed an enormous TIF district covering large areas of downtown. The idea was that the TIF on several new, very large student housing developments would pay for infrastructure improvements that most people seem to agree downtown Columbia needs. In general terms, this TIF proposal may have been better than most, but that is like saying Mao was better than Stalin. Just because this money would have — at least in the proposal — gone toward infrastructure does not justify passing a TIF that would have enormously changed the tax make-up of downtown Columbia for up to 23 years and put the other taxing districts at a severe disadvantage.

Sometimes it takes political leadership to argue for tax and fee increases. In following this debate, it seemed as if just giving the new developments a subsidy and then using that subsidy for infrastructure was the easy way out. That is how warped we have become in Missouri. Subsidies such as TIF, Enhanced Enterprise Zones (EEZ), etc. are so common that they have become the rule, not the exception. Let there be no doubt about it: If this TIF proposal had passed, then subsidies like it would have become standard for everything in Columbia. And heavy use of TIF and other subsidies would be very bad in the long run for Columbia, just like it has been for the Saint Louis and Kansas City areas.

If there are infrastructure needs in downtown Columbia, they can fund improvements the same way they were funded for a century: bond issues and fee increases, with any new developments paying the full share of tapping into the system. Better yet, privatize the water and electric utilities and use that money to fund necessary improvements. Whatever you do, don’t count on subsidies to do the work that leadership should do.

February 12, 2014

Privatization: Airport Possibilities

The Show-Me Institute recently released a case study called “Government Privatization in Missouri: Successes, Risks, and Opportunities,” by David Stokes. The report discusses many aspects of local government that could benefit from partial or full privatization. One such area the case study addresses is the privatization of commercial airports.

In the United States, due to significant financing advantages given to publicly owned airports and onerous federal regulations, all but one of the 502 commercial service airports in the United States are publicly owned, most by local municipalities. That one private airport is Branson Airport in southern Missouri. As the case study points out:

The success of Branson Airport may be uncertain, but one of the features of private enterprise is that individuals and companies risk their own capital, not of that of their fellow citizens, in hopes of a larger return.

The other six commercial service airports in Missouri are all publicly owned, the largest of which are Lambert-St. Louis International Airport (STL) and Kansas City International Airport (MCI). However, they also can benefit from partial or full privatization. The most basic level of privatization, contracting airport services, already is in place at both Lambert and Kansas City. These contracts allow the airports to attain services through competitive bidding from the private sector. MCI is one of the few airports to privatize its security screening through TSA’s Screening Partnership Program (SPP).

However, airports in Missouri can go much further in privatizing operations. This includes privatizing the management of airports or even leasing the airports to private entities through the Airport Privatization Pilot Program (APPP). Kansas City considered this option for MCI once before. This program is actually the only way a municipality can use proceeds from its airports on other public goods. However, the program requires a complex negotiation between the local municipality, the FAA, airport workers, and the airlines. As the case study states:

Should Kansas City pursue the APPP route of privatization, the city could expect significant proceeds from the sale. However, it would require complex and lengthy negotiations with the potential buyers, airlines, and the FAA in order to participate in a program with no record of long-term success.

The full or partial privatization of airports can have many benefits for air service in the state, whether it is simply reduced costs or financial gain from an airport sale. The case study “Government Privatization in Missouri: Successes, Risks, and Opportunities” outlines some of the possibilities that might allow Missouri to create an example of airport privatization for the rest of the nation.

December 10, 2013

Southwest’s Decision To End Service Could Doom Branson Airport

Southwest Airlines announced on Dec. 5 that it will halt service to Branson Airport next year. Branson Airport is the only privately built commercial service airport in the United States, and there were high hopes that it would serve as a model for private airport operations across the county. The Show-Me Institute has been interested in this project since the early days as an example of private sector possibilities for U.S. airports.

Unfortunately, the airport has had trouble from the start. Timing didn’t help, as the airport opened in 2009, just months after the onset of the largest post-war recession in American history. Falling demand for air service and “capacity discipline” from air carriers meant actual passengers at Branson fell far short of meeting both expectations and operating expenses. In 2011, Branson Airport LLC went into debt forbearance. On top of these financial woes, the airport’s runway has had structural problems that led the airport to sue the construction contractor.

Southwest’s decision in early 2013 to begin service to Branson Airport looked promising to help save the venture from financial demise. Passenger levels increased, but not enough to satisfy Southwest’s bottom line. So on Dec. 5, the airline announced it would end service to Branson as well as two other small airports.

While no one wants to see Branson Airport fail, the overall story is one that shows the benefit of using the market to build transportation infrastructure. Private developers saw an opportunity and took a risk. As it turned out, actual demand is falling short of projections. A private company sought to make a profit and now they, not local taxpayers, may pay the cost.

October 18, 2013

Why Should County Taxpayers Fund Private Medical Research?

Jackson County’s ballot proposal for a medical research tax to raise $800 million over 20 years has had a controversial reception. The proposed tax is intended to fund research on “translational medicine,” which turns existing scientific research into marketable drugs, medical devices, and diagnostic tools. The Pitch recently wrote an excellent summation of different viewpoints on the tax, including those of Show-Me Institute Chairman Crosby Kemper III.

Supporters of the tax leave a few questions unanswered: Why a county-level tax? Supporters cite lack of federal research funds as an impetus to look for more local funds, but sales taxes typically fund public assets such as parks or public safety projects. The half-cent tax would make Kansas City’s already high sales tax rate one of the highest in the country. Do other local governments fund this type of research with specific taxes?

I could only find two comparable taxes: one in Johnson County, Kan., and one in Rochester, Minn. (If anyone knows of other like taxes, please share them in the comments.) Even these two taxes have very important differences, however, from the Jackson County proposal.

Voters in Johnson County passed a one-eighth-cent sales tax in 2008 to fund the Johnson County Education Research Triangle. The money went toward building facilities at Kansas University and Kansas State, as well as to some researcher salaries. Jackson County’s proposal, however, would divert more than half of the revenue to private medical institutions: $20 million to Children’s Mercy and $8 million to St. Luke’s Hospital.

In 2012, voters in Rochester extended a half-cent sales tax that devotes $20 million in bonds (approximately one-seventh of the revenues) to the “Destination Medical Center” (DMC). The Destination Medical Center is the Mayo Clinic’s 20-year, $5 billion project to upgrade its own facilities and the surrounding area’s infrastructure and amenities.

Importantly, the Mayo Clinic initiative uses mostly private funds for the venture — more than $5 billion in Mayo Clinic’s own funds and those of private investors. The $500 million that the state, city, and county pledged over 27 years are primarily for infrastructure and transit improvements, which are the sorts of things public tax dollars typically fund. Additionally, state funds are contingent upon private investment occurring first. Mayo Clinic President and CEO John Noseworthy said in an interview:

We are not asking for a handout. We’re asking for nothing upfront. We’re not asking the state to fund the medical facilities, the science facilities and so on as other states are doing for our competitors, by the way. We’re simply asking for, once we have grown and proven that growth, to have some of that tax revenue infused into the public infrastructure.

Jackson County voters, unlike those in Rochester, are facing a different request. The translational medical research tax is a unique proposal that taxes citizens to fund buildings and salaries for researchers at primarily private institutions, in a field that private investment traditionally funds.

Being on the cutting edge of implementing new and higher taxes is not the right kind of innovation for Kansas City.

September 25, 2013

Emerald Automotive Still Seeking The Green

It’s been a couple years since we first discussed hybrid car start-up Emerald Automotive. When we last left it, Emerald was debating whether it would pursue the (doomed) Aerotropolis tax credits of 2011 — in context, a very creative avenue of funding for a car company. Since then, updates on the very-much earthbound car manufacturer have been infrequent. The last article I’ve been able to find from a major Saint Louis daily was last January, and things weren’t looking good for the project.

The original timetable called for the Hazelwood plant to be producing vans by 2014, but that has been pushed back because the company is still searching for funding — about $160 million — to build the facility, Marble said.

In addition to some private capital, Emerald has received a $3 million loan from Hazelwood and $2 million from the Missouri Technology Corp., plus a $5 million grant from the British government’s Technology Strategy Board.

The company had hoped to snag a $100 million-plus loan from the U.S. Department of Energy’s Advanced Technology Vehicle Manufacturing Program, but withdrew that application last summer to pursue private investment options after federal energy loans stalled in the wake of the Solyndra controversy. Solyndra, a solar-panel manufacturer, went bankrupt after getting a $535 million DOE loan.

It’s never a good sign when your project, rightfully or wrongfully, gets lumped in with publicly financed boondoggles like Solyndra. The online publication Patch.com reported in July that Emerald says it will open its doors in 2015, with 600 jobs waiting in the wings. But as this process drags on, it begs the question: Is the Emerald project actually happening?  I left a message with the Missouri Technology Corporation (MTC) to find out; I haven’t received a return call.

Fortunately, Hazelwood’s office of economic development was more helpful. Hazelwood indicated that after abandoning the Department of Energy’s loan program, Emerald indeed turned its sights to finding investments from the private market and had been giving demonstrations of their product to potential investors. Although Hazelwood did not have a figure for how close Emerald had gotten to its original $160 million goal, it was pretty clear that Emerald wasn’t exactly getting close — at least not yet. Hazelwood and the MTC could take possession of some of Emerald’s patents if the company goes out of business, but as the Mamtek situation reaffirmed, there’s no telling whether the patents are worth anything close to the public loans that supported the company. That should leave us all a little unsettled.

On the positive side, I was happy to hear that the company is turning its attention to getting investments from the private market. That’s how it should have been from the beginning, and how it should be going forward. Every itemized dollar of investment noted in the St. Louis Beacon article was related in some way to government funding. That’s not how capitalism is supposed to work.

Will Emerald find the green? Time — and hopefully, the market — will tell. We’ll keep you posted.

August 7, 2013

More Like This. . .Please?

The Carter Carburetor building has sat dilapidated for numerous years and is a blight for the city of Saint Louis. Just a few decades ago, the Carter Carburetor Corporation was a major employer in the Saint Louis area. Today, the 4-story main building sits empty after Carter Building Inc. (CBI) donated the property to the Saint Louis Land Reutilization Authority (LRA). The LRA’s job is to return property to private use. Unfortunately, the agency has not always accomplished that.

Given the building’s current state, it is exciting that the LRA has found a positive future for the property. The owners of CBI donated the property to the LRA with the understanding that once the current environmental clean-up is complete, the land will be given to the Herbert Hoover Boys and Girls Club.

boys and girls club

The LRA is not responsible for the site’s clean-up, but it is responsible for what happens to the property after that. While the president of the Boys and Girls Club, Flint Fowler, said he looks forward to the Club’s expansion, some locals are wary of the property’s future. Loletta Zasaretii, a resident of the neighborhood, said she would rather see jobs created on the property instead of  “just another ball field.” Although many share Zasaretti’s desire for more jobs in North Saint Louis, the LRA is making the right decision because it is not holding onto the property.

The LRA may not be solving all of the neighborhood’s problems by handing the property over to the Herbert Hoover Boys and Girls Club, a non-profit, tax–exempt organization. But it is definitely moving in the right direction toward improving Saint Louis. Along with making the property more attractive and safer, the Boys and Girls Club — rather than the city — would be responsible for the land’s upkeep. Most importantly, the LRA deserves credit for getting the property off the city’s balance sheet and back into private ownership and productive use. Why can’t the LRA do this same thing with the thousands of other properties it owns?

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