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Move toward privatization has investors licking chops(Sacramento Bee, The (CA) (KRT) Via Thomson Dialog NewsEdge) May 18--If California tries to lease its state lottery to private investors or unload a state-owned student-loan business, as Gov. Arnold Schwarzenegger proposes, there will likely be no shortage of interested parties. Providing capital to a growing privatization movement, investors are offering billions for state lotteries, toll roads and other government-owned assets nationwide. Indiana sold the operating rights to its main toll highway last year to an international consortium for $3.8 billion. Chicago has leased out its Chicago Skyway toll road for $1.8 billion and is thinking of auctioning off Midway Airport. Texas just passed a law authorizing privately financed construction of several highways. Meanwhile, several states besides California -- Colorado, Maryland, Michigan and Illinois, among them -- have mulled the privatization of their lotteries. The idea is to remedy budget problems without raising taxes. "States often face budget crunches in any given year, and it's tempting to look at fixed assets that aren't generating as much revenue as they could," said Tracy Gordon, a research fellow at the Public Policy Institute of California. Some analysts criticize the sale of public assets as shortsighted strategies that bring in lots of upfront cash but deprive governments of revenue down the road. "You might call it a budget gimmick," said Alan Auerbach, an expert on tax and budget policy at the University of California, Berkeley. Investors are raring to go. Lehman Brothers and Goldman Sachs & Co. made pitches to Schwarzenegger about privatizing California's lottery. Carlyle Group, a well-known investment firm, is creating a $1 billion infrastructure fund. Citigroup just launched a management unit to oversee investments in public infrastructure. "There's a lot of value trapped in these assets," Mark Florian, head of infrastructure investments at Goldman Sachs, told BusinessWeek magazine. Despite his popularity with voters, there's no certainty Schwarzenegger will prevail with his proposal to lease the lottery -- which generates about $1.2 billion annually for public schools -- to private investors. The last time he tried to privatize a segment of state government -- his 2005 proposal to convert the California Public Employees' Retirement System and the California State Teachers' Retirement System pension programs into corporate-style plans similar to a 401(k) -- he was handed a humbling defeat. Democrats who control the Legislature have reacted coolly to his lottery proposal, which the two investment banking firms have said could generate up to $37 billion in upfront cash. Schwarzenegger said a privately run lottery could generate bigger returns for schools; he's called the lottery system "an underperformer" whose privatization would help pay billions in various unfunded liabilities. Jim Hard, president of Service Employees International Union Local 1000, which represents 500 lottery employees, blasted the idea. The move could mean the employees would no longer be public employees, but Hard said he's concerned about taxpayers' interests. "Selling off the public's assets, I think, is a very shortsighted tactic, and as far as I'm concerned, a roundabout recognition of the failure of political leadership," he said. "It's quite possible to make the lottery more effective. ... A piece of the action doesn't have to be sold to Wall Street to do it." Schwarzenegger, in his revised budget proposal this week, also proposed selling EdFund, a state-owned nonprofit agency that guarantees student loans. He said the sale could fetch an estimated $1 billion to help bridge the state's budget gap. "I think that it is very important, when we look for increased revenues, that we don't look at increasing taxes," he told reporters this week. "There are so many other ways where we can go and increase revenues." Schwarzenegger proposed selling EdFund in the upcoming fiscal year, which begins July 1; leasing the lottery may not come until later. Privatization in any form is often controversial. Public backlash against the privatization of the Indiana toll road may have cost Republicans control of the state House of Representatives in November, said fiscal policy analyst Arturo Perez of the National Conference of State Legislatures. Democrats were then able to block the Republican governor's attempt to sell the Hoosier Lottery, even after the state had received 10 bids, Perez said. The governor says he plans to revive the idea next year. In California, public employees have howled at the outsourcing of segments of state government, notably the decision to contract with overseas companies to handle phone calls from food-stamp recipients. And the keepers of California's state and federal water bureaucracy have often clashed with private entrepreneurs seeking to profit from the buying and selling of water. Perhaps the biggest California controversy has been the privatization of part of the Riverside Freeway in Orange County. A firm called California Private Transportation Co. owned and charged tolls on a 10-mile stretch of express lanes running alongside the public freeway. Government officials wanted to widen their portion of the road to alleviate gridlock but were stymied by a non-compete clause that the state Transportation Department signed with California Private Transportation. The clause forbade the government from expanding the road because it might draw business away from the private lanes, said Kevin Klowden, managing economist at the Milken Institute think tank in Santa Monica. The impasse ended when Orange County bought the stretch of road back in 2002 for $207 million. As for Schwarzenegger's proposals, Sacramento political scientist Barbara O'Connor said she thinks the Legislature will be skeptical of a plan "for jettisoning assets that have been long-term products of state policy. "The public is very supportive of the governor," said O'Connor, a professor at California State University, Sacramento. "But this is a major shift in public policy. ... He still deals with a fairly left-of-center leadership in the committee structure (of the Legislature), and they're not going to roll over." But Mark Baldassare, president of the Public Policy Institute of California, said the governor's plan appeals to voters' desire for more government services without higher taxes. And it's not as if he's trying to unload assets that are considered sacred cows. Copyright (c) 2007, The Sacramento Bee, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |