Wednesday, December 4th, 2013
Note: I’m keeping this ebook post pinned to the top during the holiday shopping season. Scroll down for new content.
Here’s a reminder that my first Urbanophile Kindle e-book is out, conveniently in time for the holidays. It’s called “The Urban State of Mind: Meditations on the City” and you can get it at that link from Amazon. The e-book contains 28 of the best, most challenging, most make you think posts from nearly 1,200 articles during the first seven years of the Urbanophile. It’s a great introduction to my work. But what’s more, even for those of you who’ve already read everything, I’m including two new original essays as well as seven brief meditations on the city.
In The Urban State of Mind I write about innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. The essays are designed to provide a different angle on the issue from the conventional wisdom and prompt you to really start thinking about and wrestling with these complex and challenging issues.
Friday, December 6th, 2013
There’s been so much ink spilled over Detroit’s bankruptcy that I haven’t felt the need to add much to it. But this week the judge overseeing the case ruled that the city of Detroit is eligible for bankruptcy. He also went ahead and ruled that pensions can be cut for the city’s retirees. Meanwhile, the city has received an appraisal of less than $2 billion for the most famous paintings in the Detroit Institute of the Arts.
A couple of thoughts on this:
First, every city in America should be doing a strategic review of its assets, and moving everything it doesn’t want turned into de facto debt collateral into entities that can’t be touched by the courts. In the case of the DIA, the city owns the museum and the collection. Hence the question of whether or not art should be sold to satisfy debts. If it were typical separately chartered non-profit institution, this wouldn’t even be a question.
At this point, I’d suggest cities ought to be taking a hard look at whether they own assets like museums, zoos, etc. that should be spun off into a separate non-profit entity. Keep in mind, the tax dollars that support the institutions can continue flowing to it. But this does protect the assets in the event of a bankruptcy.
In the case of Detroit, it seems inevitable that at least some art work will be sold. Given that worker pensions are going to be cut, it would be pretty tough to say no to selling art. Assuming this is the case, post-sale the museum should be spun off as a separate entity to hopefully reboot its standing the museum world. As the trustees of the group that operates it have been adamantly opposed to any sale, one would hope other museums would not hold any violations of industry standards against them for, particularly if they acquire ownership of the building and artwork away from the city afterward. The city of Detroit doesn’t need to be in the museum business anyway. It has bigger fish to fry.
Secondly, public sector employees will have to start rethinking their approach to retirement benefits. The current mindset has been to grab as much as you can anytime you can because the taxpayer will always be forced to cover the promises no matter what. As the actual results in Central Falls, RI and now this show, that’s no longer a good assumption.
Detroit’s workers don’t have lavish pensions as these things go. But they weren’t shy about abusing the system either. They in effect looted their own pensions by taking out extra, unearned “13th checks”. They also used pensions funds to give a guaranteed 7.9% annual rate of return on supplemental savings accounts workers were allowed to establish. All told these “extra” payments drained about $2 billion out of the pension system.
This was not something the city did through an arm’s length transaction. As the Detroit Free Press reported, Mayor Dennis Archer was alarmed by the practice and wanted to stop it. But “the city doesn’t control its pension funds, which have been largely administered by union officials serving on two independent pension boards.” So he tried to amend the city’s charter to stop the practice. According the Free Press, “Archer backed an effort to block the payments through a proposed new city charter, which actually passed in August 1996. Enraged, several city unions and a retiree group sued and won. Archer tried again to block payments through a ballot initiative, called Proposal T, but it failed.”
The unions could brazenly loot their own pension plan because they felt rock-solid assurance that the taxpayers would ultimately be required to make them whole. This bankruptcy is showing that may not be the case after all. It should serve as a warning to unions everywhere not to get too aggressive with their shenanigans.
They’ll of course appeal the judge’s ruling and may win. But the Michigan constitution says pensions are a contract right. The very definition of bankruptcy is that you can’t pay what you’re contractually obligated to. Bankruptcy is all about breaking contracts. The bondholders have contracts that are not supposed to be impaired too, after all. I’m a fan of local government autonomy as you know, but as Steve Eide rightly points out, any freedom worth its name is freedom to fail. If cities and their various constituencies don’t suffer the consequences of their mistakes, they should be heavily micromanaged from on high.
When individuals fail, we have a safety net (unemployment insurance, for example). Plus we have personal bankruptcy to give people a fresh start. We don’t even worry about whether the person is at fault for their own position or not. We provide that backstop regardless. But that backstop doesn’t allow people to go on living like they did before as if nothing happened. Similarly, cities in trouble shouldn’t be abandoned, but they need to realize that there are genuine consequences for failure. A realization that failure has consequences for pension holders as well as the taxpayer should hopefully promote healthier decisions about how retirement benefits should be offered, funded, and administered.
Thursday, December 5th, 2013
Small scale special service districts in their various forms – such as conservancies, business improvement districts, and management agencies – are increasingly common in our urban landscape. This is part of a trend towards public-private partnerships, or perhaps more accurately in this case, privatized/outsourced government.
Are these a good thing or a bad thing? In my latest post at New Geography I take a look. It’s called “Are Special Service Districts a Bane or a Boon?.” Here’s an excerpt:
In fact, the move towards privatized services in wealthier areas could be a good thing for the rest of the city if it is used to free up funds for use where there isn’t as much private capital available. In this case a city could look to move parks, street cleaning, and other items “off the books” via special service districts in areas that can afford to fund such services largely by themselves. The city would then concentrate public funds in poorer or middle class areas. The tradeoff would be that the wealthier areas might be allowed to purchase higher quality services for themselves, but that would be structured in a way that let service quality be raised for others.
On the other hand, it’s not hard to see how this could evolve as a mechanism for “strategic abandonment” as well. In this case the city would cut general service levels then allowing wealthier areas to buy them back. Critics have charged that special service districts are exactly the legal mechanism that will be used to implement planned shrinkage in Detroit.
In the case of Detroit, the city has no good options and may well be forced by reality to make tough choices like this. But not everyplace has that excuse.
Thursday, December 5th, 2013
From the High Line in New York to London’s Silicon Roundabout to the Dharavi slums in Mumbai to bicycling in Copenhagen, British writer and urban historian Leo Hollis offers a broad and sumptuous survey of contemporary urban life in his new book, Cities Are Good For You. Unfortunately, his claim doesn’t quite stick, as Hollis never fully explains what the vignettes and case studies he has assembled add up to—while his scrupulous reporting uncovers plenty of unflattering urban details. The reader comes away with only a vaguely positive impression of cities’ potential to increase prosperity and improve lives.
Wednesday, December 4th, 2013
This week’s video feature is a time lapse of Barcelona, an amazing city, by Alexandr Kravtsov. As always with these, I suggest full screen, high definition. If the video doesn’t display for you, click here.
Tuesday, December 3rd, 2013
[ You've heard me tout the writings of transit consultant Jarrett Walker before and his web site Human Transit. Well he's well-versed in many things besides transit. His background in theater and the humanities I think informs a keen analytical eye he brings to the city generally and many other subjects. He attended the recent City Lab conference, and had the following thoughts in the wake of the discussion there. Think of it as additional commentary on local autonomy, in line with my debate a couple weeks ago - Aaron. ]
The "tea party" US House members who currently dominate the news are unlikely allies of urbanists. But on one core idea, a band of urbanist thinkers are starting to echo a key idea of the radical right: Big and active national government may not be the answer.
Last week, I was honored to be invited to Citylab, a two-day gathering in New York City sponsored by the Aspen Institute, the Atlantic magazine, and Bloomberg Philanthropies. The event featured mayors and civic policy leaders from both North America and overseas as well as leading academics, journalists, and consultants.
I expected the thrilling mix of new ideas, compelling stories, and quirky characters, but I got one thing I didn't expect: A full-throated demand, from several surprising voices, for an urbanist revolt against the power of national governments.
Al Gore said it with his trademark fusion of bluntness and erudition: "The nation-state," he said, "is becoming disintermediated." If you're not an academic at heart, that means: "National governments are becoming irrelevant to urban policy, and hence to the economy of an urban century."
On cue, the New York Times published an op-ed on "The End of the Nation-State," about how cities are leaving nations behind. Citylab also featured a terrific interview with political scientist Benjamin Barber, whose new book If Mayors Ruled the World argues for the irrelevance of nation-states in a world where cities are the real levers of economic power. (According to Barber, the full title of his book should have been: If Mayors Ruled the World: Why They Should and How They Already Do.) When I spoke with Barber later, looking for nuance, he was full-throated in ridiculing the US Federal role in urbanism. On this view, all the well-intentioned money that the Federal government doles out for urban goodies should be spent by cities as they see fit, or perhaps (gasp) never sent to Washington at all.
Follow this logic and you might arrive at a radical urban Federalism, perhaps even one that could meet tea-party demands to "Abolish the IRS!" Pay taxes to your city or state, and let them send a bit of it on to central government to do the few things that only a central government can do. Push power downward to the scale where problems can be solved.
You might even separate urban from rural governance in a way that enables both to thrive, each at its proper scale, replacing the eternal struggle between these necessary opposites that makes today's political discourse so inane. The "size of government" debate is just a pointless and eternal struggle between urban and rural experience, both of which are right. Living in cities means relying on government for many things that the rural resident provides for herself, so of course the attitude toward government is different. But what's really logically different is the role of local government. Both urban and rural experience provide good reason to be suspicious of big-yet-distant national government, which can be as unresponsive to big-city mayors as it is to a Wyoming county official who just needs to get a bridge fixed.
At most of the urbanist and transportation conferences that I attend, though, any shrinking the national government role is met with horror. And that's understandable.
In the US, the prevailing local response to declining federal spending is outrage and redoubled advocacy. In Australia or Canada, two countries I work in extensively, working urbanists and infrastructure advocates seem to agree that of course there must be a bigger central government role in everything, with the US often cited as the model. In the US itself, it's easy to see the current cuts in Federal spending as a disaster for urbanism and infrastructure. It is, but it could also be something else: an invitation to governments that are closer to the people to have their own conversations that lead to local consensus about funding and solutions.
If mayors do end up ruling the world, it will be because the city, unlike the state or nation, is where citizenship is mostly deeply felt. A nation's problems are abstract; if they show up in your life you're more likely to think of them as your community's or city's problems. And that, in short, is why the city may be best positioned to actually build consensus around solving problems, including consensus about raising and spending money.
And yet …
Before urbanists join the tea partiers in trying to shrink the national government, they have to grapple with the problem of inequality. As sites of concentrated opportunity, cities are attracting the poor as well as the rich, and are thus becoming the place where inequality is most painfully evident. But no mayor can be expected to solve a problem that exists on such a scale.
In small-c conservative terms, of course, the problem is not income inequality but rather the declining credibility of a "ladder of opportunity" that convinces everyone that reasonable effort will improve their circumstances. One reason to care about transit, walking, and cycling — for many points on the income spectrum — is that transportation can form such a formidable barrier to opportunity.
All through Citylab, hands were wrung about inequality and the need to Do Something about it, against the backdrop of a New York City mayoral election that is mostly about this issue. A rent control debate, featuring New York City Planning Director Amanda Burden and economist Paul Romer, found no middle ground on the question of whether city policy can usefully intervene to help low income people. Income inequality appeared to be one issue where cities can do little by themselves.
When I asked sociologist Richard Florida about this in the North American context, he pointed me to an article proposing that the US create a Department of Cities. He has good ideas about how to keep this from being just another bureaucracy, but if income inequality is the big issue that only national policy can address, it's not clear that it should be tagged as an urban issue at all. Cities are not where the problems are. Cities are just where people see their society's problems most intensely in daily life, because they get out of their cars.
The great city in the wealthy parts of the world cannot just be an enclave of success. It will deserve the self-government that the mayors seek only if it relentlessly inspires, supports, and gives back to its suburban and rural hinterland, creating its own "ladder of opportunity" for access to the riches of urban life. Only a few people can afford Manhattan or San Francsico, so those cities' money and expertise must focus not just on themselves but on making life in more affordable places incrementally more humane. Turning Newark into Manhattan would just make it unaffordable, so some of the urgency must lie in less photogenic intervention that works for each place's price-point. It lies in providing safe places to walk and cycle, and a safe way to cross the street at every bus stop, even in landscapes of drive-through everything that will be what many people can afford, and what some prefer.
That's why I'm happy to be working not just in San Francisco but also in Houston, where affordability is a leading selling point. It's why I'm suspicious of transit planning that defines an elite "choice rider" as the only important customer, including much of the transit-aestheticism that comes out of urbanist academia. Where are the prestigious awards for the best affordable, scalable, but nonsexy intervention that made low-income inner-ring suburbia more safe and functional? How do we build not just the shining city behind a moat (San Francisco, Manhattan, Singapore) but a chain of humane and functional places, at every price-point, that combine safety, civility and opportunity?
Where is the money in that? If mayors ruled the world, I hope that would be obvious. So let's hope they already do.
This post originally appeared in Human Transit on October 14, 2013.
Sunday, December 1st, 2013
Jim Russell and Richey Piiparinen have released a new whitepaper on Cleveland that should be read by anyone looking to reboot the economies of struggling post-industrial cities. Released under the auspices of Ohio City, Inc., “From Balkanized Cleveland to Global Cleveland: A Theory of Change For Legacy Cities” looks at how a lack of population churn has stunted Cleveland’s ability to connect to the global economy.
This paper puts a different spin on talent and the knowledge economy. “Knowledge” is not just facts acquired through education or work experience. It also includes the set of personal relationships and knowledge of other places and social networks that we all carry to some extent. Global cities not only score well on traditional knowledge measures, but because they are destinations for migrants, they excel in this more broader notion as well.
Cleveland is not a global city. In fact, in his book Caught in the Middle, Richard Longworth said, “When I went to Cleveland I found not alarm but complacency. In a city that is being destroyed by global forces…I found almost nobody willing to actually talk about globalization or global challenges…In all my travels through the Midwest, Cleveland was the only place, big or small, that seemed heedless of the global challenge.”
Part of that comes from a lack of migrants coming in to bring global knowledge and connectivity to global networks. Using IRS data from Telestrian, Russell and Piiparinen note that Cleveland actually only ranks 34th in America in its outflow of people, versus being the 28th largest metropolitan area. The city is actually doing a better than average job of retention.
The problem is that Cleveland ranks 47th in inflow of people. Attraction is very weak. Hence population decline, but also an inbred, closed society. About 75% of the people in metro Cleveland were born in Ohio, versus 30-60% in other, more globalized cities. Among large metros in the US, Cleveland ranks 6th in its percentage of the population living in the state they were born. (In fairness, this in part derives from a low foreign born percentage and the fact that the Cleveland region isn’t a multi-state metro).
I did my own analysis to take a look at the in-migration shed of the city. Cuyahoga County (the central county of the Cleveland region) had reported in-migration from 320 counties during the 2000s, with 228 of these sending at least 100 people to Cleveland. I decided to contrast with better preforming Columbus. There, the core county of Franklin drew people from 486 counties, with 335 of them having at least 100 people. Now Columbus is a huge university town, so I also looked at Indianapolis. Indy’s central county of Marion, which is significantly smaller than Cuyahoga in population, drew from 381 counties, including 273 of 100 or more people.
Clearly Cleveland is drawing fewer people from the outside world, and drawing from fewer places, than cities that are performing better, though one could quibble with the causality arrow here.
As a result, we see what is frequently true in such places. Cleveland’s social and power networks have balkinized. They don’t receive much new information or many new people, and what they do receive they don’t integrate well. Hence what Longworth observed. Cleveland needs much more demographic churn to open up these social networks and generate more global connectivity.
That’s the bad news. The good news is that there’s evidence this is already happening. The authors note that several central city areas have attracted newcomers from both inside and outside of the region – and these are disproportionately young. My own analysis showed that Cleveland had surprisingly strong downtown population growth of 4,200 people, one of the best showings in the Midwest.
The authors also note other potentially encouraging trends. A good number of Cleveland’s gentrifying neighborhoods are also becoming more not less diverse. While all they note diversity doesn’t mean people automatically start interacting with each other, it’s a start. What’s more, they suggest that the decline in social capital that results in diverse neighborhoods might paradoxically be a plus, as Cleveland suffers from excess social capital today. Lastly, they note that Cleveland has pretty high churn already with both New York and Chicago, making it one of the few similar types of cities that already has well-established migration paths. They believe this is poised to continue as high costs and “cool fatigue” push people out of many of today’s key global hubs like New York.
The potential for Cleveland in capturing this is significant in their view. As the paper notes, “This scenario, then, that’s unfolding in which coastal talent is arriving, or re-arriving, into the legacy city landscape can foretell an economic sea change…The long-term economic potential for this talent migration rests not in how many microbrews are consumed or condos are leased, but rather how it affects Cleveland’s global interconnectivity. These migrations are re-arranging Cleveland’s historical insular social networks, with the gentrifying neighborhoods acting as urban portals to the global flow of information.”
This was not intended as a critique of microbreweries. Rather, the idea is that luring people is about way more than just boosting the consuming classes, it’s about tangible change in the social and economic structure of the community.
No one should pretend that positive indicators like strong downtown population growth means Cleveland’s problems are solved. I’d describe this more as “green shoots” than anything. But it’s undeniably positive and provides a platform for further growth.
The authors don’t suggest any particular policies in response to their findings. They were more interested in moving beyond the traditional “brain drain” frame of talent and inject both some key facts around Cleveland’s migration patterns and their talent churn theory of civic change into the local discourse. They got a nice writeup in the Plain Dealer, so they are off to a good start there. But more work will need to be done in the future on an effective policy response.
Wednesday, November 27th, 2013
It’s Thanksgiving week here in the US, and I’ll be off until after the holiday. But I figure, what better to leave you with than a little humor at Canada’s expense?
First, Saturday Night Live’s take on Rob Ford. The embed likely won’t show in a reader or such, so to watch, click here.
And next, Chris Farley stars in Rob Ford the Movie. If the video doesn’t display for you, click here.
Incidentally, although the crack video has now been found, I stand by my previous assertions that dubious reporting and the underhanded ways people tried to get Ford removed from office were wrong. In fact, I think they fuel the persecution complex that helps explain why even today Ford is more popular in Toronto than President Obama and Congress are here.
Tuesday, November 26th, 2013
[ You may remember Daniel Hertz from his mind-blowing analysis of growing public safety inequality in Chicago. He's back with another one, this time a look at how gentrification is affecting the performance of Chicago's neighborhood schools. It's probably relevant to any city that's experiencing gentrification. This one comes from a newish web site called Chicago Bureau, which focuses on youth issues - Aaron. ]
To be on track for college, an elementary student needs to “exceed standards” on the ISAT, according to the University of Chicago Consortium on School Research. In 2001, there were only three neighborhood elementary schools in the entire city with a quarter or more students doing that well.
As a result, for a certain kind of parent, there were only two options for educating a child: getting him into one of the city’s flagship magnets, or moving to the suburbs. That put a lot of pressure on magnets and other test-in schools: like the Daley Sr.-era condo towers that still line North Lake Shore Drive, they had to rise above the rest of the city and offer the people who could afford to move to Evanston or DuPage County some reason not to.
But just like there’s only so much lakefront, there were only so many seats in those magnet schools. And over the last 10 years, as downtown and North Side neighborhoods gentrified, the number of parents trying to seat their children in one of those schools has turned what was always a competitive process into a frenzy. Last year, about half the freshmen admitted to Whitney Young, Northside College Prep and Walter Payton had near-perfect test scores and straight-A report cards. And the crunch is too big to be solved by expansions like the one Mayor Rahm Emanuel recently announced for Payton and Coonley Elementary.
Just as the magnet system began to overcrowd, though, neighborhood elementary schools suddenly began making a turnaround. Some of them, anyway. By 2013, those three “high-achieving” schools had become 15. That’s a 400 percent increase over 12 years — and lots of other neighborhood elementary schools were on track to get there soon.
Unsurprisingly, though, CPS’s new high-scoring schools weren’t distributed all over the city. Instead, progress was contained to the same neighborhoods that had seen the greatest gentrification over the previous 10 or 20 years, or which were already solidly middle-class. As a result, the average high-performing school’s student body in 2013 was only 20 percent low-income, compared to 85 percent for CPS as a whole.
In some cases, the new high-achieving schools had had large middle-class populations from the start and their scores just gradually ticked up. But about half of them saw dramatic demographic transformations. Lakeview’s Blaine Elementary, for example, saw its low-income population fall by 29 percent since 2010. At the same time, the proportion of its students exceeding ISAT standards has jumped by 25 percent. At Audubon Elementary, less than a mile to the west, the number of low-income students dropped 28 percent while ISAT exceed scores have jumped 53 percent over the same four years.
Another eight schools that don’t yet meet the “high-achieving” threshold are also rapidly gentrifying, losing an average of 20 percent of their low-income population over the last four years and doubling their exceed scores.
At the elementary level, then, professional-class families in some parts of Chicago have solved the magnet problem. They don’t have to decamp to the suburbs: they can bring suburban demographics to the city just by sending their kids to their neighborhood CPS school.
And despite all the fuss over teacher accountability, charter schools and innovative curricula, the fact remains that in America, economic background is the single best predictor of a child’s academic success.
Which leaves the city…where? After decades of losing thousands upon thousands of middle-class families thanks to a struggling educational system, it must be good news for that process to be finally reversing itself. A city without a middle class isn’t going anywhere good; the tax receipts alone are cause for celebration, given the state of Chicago’s budget.
A school system without a middle class is also in big trouble, of course. So it’s heartening to see the beginnings, perhaps, of a decline in the kind of economic segregation that led to 87% of CPS students being low-income in the first place.
But if the number of low-income kids in our newly high-achieving schools keeps plummeting, not many of them will be in a position to benefit from the very transformation that’s pushing them out. After all, how many low-income families can afford a decent place to live within the attendance boundaries of neighborhood schools in Lincoln Park or Lakeview?
For a long time, the egalitarian promise of public education was frustrated by families with wealth fleeing the city for suburban school districts, leaving CPS with a heavy burden of poverty in all but a few elite test-in schools.
That dynamic seems to be changing, so that now a greater and greater number of middle-class families are choosing to send their kids to local elementary schools. But if we’re just moving the lines that divide the children who receive a good education from those who don’t—from district boundaries to CPS attendance boundaries—it would be hard to call that significant progress.
There is, though, a difference. The city of Chicago, and the leadership at CPS, have absolutely no power over any of the wealthier districts that surround them. But they can try to shape what happens entirely within their borders. The question of how to mitigate economic segregation in the city’s schools, so that all children have a chance at a decent education—without scaring the middle class back to the suburbs and starting again at square one—will be, I think, one of the greatest challenges our school system will face for the next generation.
This post originally appeared at Chicago Bureau on November 5, 2013.
Sunday, November 24th, 2013
Well, that’s not exactly the headline on the front page of the Wall Street Journal last week. The actual one was “Drop in Traffic Takes Toll on Investors in Private Roads” (subscription required). The Journal nails that part of the story, but only briefly addresses the way that the private companies that build these roads have already reacted by shifting to more favorable (to them) contracts arrangements that virtually guarantee their profits.
One of the theoretical benefits of privatizing a government asset or service through a lease or equivalent is that it hedges future risk by transferring it to the vendor. That obviously comes with a price tag, but that’s clearly because it has value. It provides predictability to the government.
In practice, these contracts have proven to be so stacked in favor of the vendor that the taxpayer retains most of the risk. For example, in the case of the Chicago parking meter lease, the city retains the risk resulting from any street shutdowns due to construction or events like the NATO summit. They have to pay the vendor compensation if anything impairs the value of the meter system. Pretty much the only risk the vendor took on was whether or not people would continue to put quarters into the machines. Similarly, when the Borman Expressway flooded and Indiana decided to make travel on the Toll Road free until it was drained, the state had to pay compensation to the vendor for this. The flood risk was retained by the state. This doesn’t mean it was a bad deal. In fact, it remains a great deal – one of the best from a taxpayer perspective. But the degree of risk transfer can be overstated. The price to construct and maintain roads is pretty well understood by the people doing these deals, so the main risk to the vendor again was revenue risk – would people keep throwing money in the toll baskets?
Well, apparently even just the revenue risk was significant. The Great Recession, a traffic drop off instead of increases, and prices stoked by irrational exuberance have put many private road operators in financial distress. According to the Journal, one such operator – American Roads, LLC – is already in Chapter 11. Their bond insurer is alleging fraud from deliberately inflated traffic projections. The Indiana Toll Road consortium may file bankruptcy. The Dulles Greenway is struggling.
Across the country, toll roads are carrying less traffic than projected. The Metropolitan Planning Council put together this chart showing the trends (via Streetsblog Chicago):
For toll roads run by the government, this is a real public risk. But for privately run roads like the Indiana Toll Road, it’s the investors problem. That’s the beauty of these deals and shows that privatization can work. As Indiana Gov. Mitch Daniels said of his state’s toll road lease, it was the best deal since Manhattan was sold for beads, only this time the natives won.
Perhaps predictably, the private road industry has responded by changing contract terms. Instead of these leases where revenue risk lies with the vendor, they’ve decided they can’t take on any risk at all, so they are now doing business with states increasingly under what’s called an “availability payments” model. What’s this? Well, according to AASHTO:
Availability payments are a means of compensating a private concessionaire for its responsibility to design, construct, operate, and/or maintain a tolled or non-tolled roadway for a set period of time. These payments are made by a public project sponsor (a state DOT or authority, for example) based on particular project milestones or facility performance standards…..Availability payments are often used for toll facilities that are not expected to generate adequate revenues to pay for their own construction and operation. In this case the project sponsor retains the underlying revenue risk associated with the toll facility rather than the private partner. Also in this manner, there is less overall risk to the private entity than with a full concession. Rather than relying on achieving certain levels of traffic and revenue, the concessionaire receives a predictable, fixed set of payments over the life of the agreement. The concessionaire also can rely on the public agency’s credit to secure financing rather than unpredictable toll revenue.
A couple things jump out immediately. First, if the road can’t pay for itself via tolls, isn’t that a flashing red light that says it doesn’t make economic sense from a transport perspective?
Second, from the standpoint of the private vendor what’s not to love? You basically have a similar deal structure as before, except that now instead of tolls that might not materialize, you have a contractually guaranteed, predictable revenue stream from the state. They’ve converted a variable revenue stream into a fixed one. In effect, these deals hand the only real risk that was outsourced, the revenue risk, right back to the taxpayer.
This immediately raises the question as to what the actual value of this type of deal structure is from a taxpayer and motorist perspective. It seems to be a sort of design/build/maintain contract with a mixture of funding sources all of which ultimately fall back on the state and its availability payments stream. Why resort to this type of structure which greatly adds to the opacity of the transaction and makes it much harder to tell if the public got a good deal or not?
Some people say that one source of value in these transaction is the fact that private entities don’t have to comply with cumbersome government procurement rules. But it took nearly three years for the Port Authority to contract its Goethals Bridge replacement project based on availability payments. And one of the parties is a major construction company so it doesn’t seem like that’s big deal here. Possibly, as with the previous leases, this will generate a bunch of tax deductions that in effect siphon off a subsidy from Uncle Sam. I don’t know.
In the case of the project to build two new Ohio River bridges in Louisville, Indiana is using an availability payments based P3 for its bridge, while Kentucky is using a more traditional toll finance system for its side. There’s been little discussion of the merits of these approaches. There are certainly questions in my mind. For example, Indiana has talked about saving $225 million. But if savings materialize during the project, who actually gets them? If the vendor has their payments stream locked in, any savings would fall straight to their bottom line. The same should be true of overruns (though with the way these contracts are written, I wouldn’t take that to the bank), but given the limited number of competitors for these mega-deals and the general lack of visibility into the transaction, I suspect that these guys know going in where they can save a lot money to juice their profits. State DOTs routinely bid projects that come in well below the engineer’s estimate, as they rightly try to be conservative on costs. But in this case the actual savings might not actually flow to the taxpayer but to the vendor.
Is that actually the case? I don’t know. Nor have I seen much in the way of discussion on this in the mainstream press. Given the huge dollars at stake and the risk in any government contract that the taxpayers might get fleeced, the use of these not very easy to understand and model contracts with non-obvious value propositions to the public makes it hard for a financially challenged media to really provide any sunshine. I’d love to see the Journal do a deep dive on this issue, because somebody needs to really trace through the value, the money flows, and the risks associated with these deals.
In the meantime, specialty sites like Toll Roads News have provided some interesting coverage. It’s clear the use of availability payments is ramping up. Here’s their piece on the Goethals Bridge project. They also note that “Indiana to take traffic and revenue risk from outset of procurement of P3 for Illiana Expressway.” Illinois appears to be gearing up for an availability payments model on their share of the Illiana.
Their piece call “Illiana P3 meaning stretched by availability payments – P3s 101” raises a number of excellent points. Here’s an excerpt:
Boosters of the Illiana Expressway in the empty countryside south out of Chicago are suggesting by their choice of words that the public private partnership (P3) envisaged puts major risk on “investors”. The Northwest Times newspaper for example had a headline that the governors of Indiana and Illinois were in town to “pitch Illiana Expressway to investors.”
However when a P3 is not a toll concession but an availability payments deal (an AP-P3) it is fundamentally different. Now the P3 operator is entitled to be paid for having the highway available to the state regardless of traffic and revenue. The road has only to be operated and maintained – at rather predictable cost – and the payments roll in. They are quite independent of the traffic and revenue. The state may run a toll operation on the road but it assumes the traffic and revenue risk.
The great bulk of the risk – residing in the traffic and revenue forecasts – is assumed by the state and its taxpayers just as surely as if it was a state tollroad operation. AP-P3s then don’t look for real “investors.” They look for contractors, big contractors with a big contract, but a contract all the same..
Bingo. Public officials are using the lingo “investment” when what they are really doing is creating a very complex and opaque construction contract. It’s very misleading. No one should be surprised when down the road we discover the taxpayers got pillaged on these days. Of course, these contracts no doubt have non-disclosure agreements designed to protect the “confidential” information of the vendor that make it unlikely the real financials will ever be fully known by the public.
In any event, this is emerging area clearly needs much more public scrutiny than it has gotten to date.