Free Market

An Alternative to Financing Public Works: A Case for Privatization

For the last five years the U.S. economy has been in the dumps. Yields on savings and CDs have plummeted. Corresponding borrowing rates have been attractive for households, and, apparently, states and municipalities as well. However, while households have largely redirected their “savings” towards debt reduction and/or taken steps to reduce monthly debt service payments, many municipalities have defied common sense and used the current interest rate environment to take out additional debt—funding new projects and initiatives in the face of a rising debt load.

Today, Utah is at 75% of its constitutional debt limit, and if items such as unfunded pension liabilities are included, Utah is far in excess of 200% of this constitutional restriction. We believe it’s time for the state of Utah and its municipalities to follow the example of the families who comprise them and use this period to get their fiscal house in order—reduce debt, refinance to lower debt service payments, and return to a conservative fiscal situation as measured by historical standards—not the spendthrift standards of other, less responsible states.

We have seen in recent months a spate of municipal bankruptcies across the country. In fact, two records were recently set for largest municipal bankruptcies in U.S. history: one by Jefferson County, Alabama ($4 billion total debt) and one by Stockton, California (population 300,000). In both cases, revenues from taxes and fees did not keep up with the merciless call of creditors, and current leadership had to bite the bullet to preserve a semblance of public services. The illusion that property values would forever increase and cover these future obligations was the perpetual siren song of city and county managers—a prediction that ultimately and predictably fell flat.

By contrast, Utah’s entire General Obligation (GO) debt in 2011 stood at $3.3 billion, a far cry from the free-wheeling levels of some municipalities, but nevertheless representing a large increase from our historical debt levels. Just three years prior, Utah’s GO debt as a percentage of the constitutional debt limit was 28.30%. By 2011, this figure had increased to 77.28%. In other words, Utah was not immune to the recession’s impact on real estate values. While GO debt is not usually funded directly by property taxes, this is still a troubling development.

Utah also has a statutory debt limit which states “GO debt must not exceed 45% of total appropriations” (a fancy word for taxation by legislative fiat). On the surface it looks like Utah runs a conservative percentage, even leaving a surplus of debt capacity. However, the largest line item, Highway Construction Bonds, which in 2011 comprised 83% of all bond debt, is exempted from this so-called limit and has been since the early 90’s. Predictably, this exempted portion of GO debt has more than tripled in the last 3 years, outpacing population growth 118:1.

Either Utah officials are hoping for a triple-digit percentage population boom in the next two decades, or a lot of money is being funneled into jobs programs building our own “bridges to nowhere.” Now I’m no forensic accountant and interpreting this data is not my forte, but it’s quite clear that we have room for improvement. We should not rest on our “best managed state in the nation” laurels and ignore the ominous warning signs presented by high levels of debt. Agents of the state government, as fiduciaries of public funds, must be held to account.

How can we improve the financial picture? Consider this: how many times have you driven by road construction projects without a single working employee to be seen for miles? Each standing barrel on a construction site represents a $.40/day charge to the state. When was the last time you received excellent service at the DMV? How many private sector employees get free health insurance and amazing pension benefits?

The answers are clear. It’s beyond time to privatize more of the functions assumed by the state government. Market forces encourage restraint and fiscal discipline; government exempts itself from these forces to our collective detriment. Last year, state per capita expenditures totaled nearly $4,000. You and I already being forced to write the check—it’s time to demand more bang for our buck (while working to keep more of our bucks!).

  • TRON

    Utah has a AAA bond rating.  And is currently paying between 2.0% to 3.0% on its bonds. 

    Inflation right now is at 2.1%.

    Which means for the first year Utah is paying a real interest rate of -0.1% to 0.9%, and negative rates after the first year.
    Furthermore highway construction costs have come down between 3.8% and 15% since the recession started, putting our real interest rate at between -2.9% and -15.1% per year.  Now is the perfect time to borrow both for the state and fed.  When construction costs go up our infrastructure will be in place and our kids paying it back at a negative interest rate.

    Hence recessions are the perfect time to borrow, and when a construction boom comes back, we can quit government construction and pay back the bonds at negative interest.  Instead of trying to build during a boom when everything costs more.
    Borrowing now is smart use of taxpayer dollars.

    • Jeremy J Lyman

      It is not government’s place to “invest” or to attempt to time the market.  If government is indeed justified at any level, and it is justified in taxing its citizens to pay for its existence, then it is responsibility of the citizens to save and invest in a responsible manner so that they can pay for the government services as they are needed.  This might be a good time to borrow (if one must borrow) and to build (if something must be built), but you can’t be certain what tomorrow holds.  You should be responsible for making your own decisions and government should not be playing the odds for its citizens. 

  • Tron, that’s a well thought out response and I’ve actually used that line of reasoning before myself in consulting clients. If you must incur debt an inflationary cycle is the time to do it, assuming a coupe of elements hold constant. The first is income to cover additional debt service and the second is necessity or ROI. If that which you’re purchasing can be protected from time decay then borrowing to purchase it could be prudent as long as the income remains to pay it through the term of the debt. In the case of roads, that is certainly not the case. We are building roads far in advance of anticipated population increases, the scale of which won’t even materialize until the roads need to be resurfaced or replaced, which negates any benefit we derived from arbitrage. If there was a way to keep the roads out of service, protected from the elements, and in pristine shape until necessity demands their use, then you’d have a case to make. That seems far-fetched to me. Of course we’re having a strictly pragmatic discussion. A more principles- based discussion migh focus on the disproportionality between funding and utilization. A retiree in Castle Vally Utah probably has little interest in a highway project in Logan Canyon and vice versa. How can we ensure that every Utahn is getting proportional value for their investment in a future generation’s infrastructure.