Financial journalists around the country have been chewing over Chicago’s new Infrastructure Trust, and let’s just say that if these public funding experts got to vote on it, the result would not be 41-6. There’s a lot of skepticism over whether public-private partnerships are actually cheaper than bonding, and some worry that they may be more expensive, as shrewd businesses figure out ways to inflate the costs.
Here’s Ezra Klein of the Washington Post:
The big question, however, is why Chicago would do things this way. An infrastructure bank, after all, is just another form of borrowing. Chicago would get money upfront from, say, Citibank or J.P. Morgan to build a new bus system or subway extension, and then the riders would pay the investors back over time in the form of higher fees and fares. This is just another way to tax residents to pay for projects. So the question is whether the infrastructure bank somehow gives Chicago access to funds that the city couldn’t get any other way.
For this to work reasonably well, a city has to be smart about how it structures its contracts with private investors. Otherwise, there’s a real possibility that Chicago could pay too much for its infrastructure and, essentially, get fleeced by shrewd investors like Citibank and J.P. Morgan.
Indeed, one of the reasons Chicago’s credit rating got downgraded in 2010 was because of the losses on the parking meter sale.
Cate Long of Reuters points out that Boston, with a bond rating of Aaa, pays 2.28 percent to borrow money, while Chicago, with a bond rating of Aa3, pays 3.32 percent. Nonetheless, she writes, the extra vig is cheaper than inviting in private companies looking to make a profit.
The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel’s proposed infrastructure trust. America’s urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city’s rebuilding to private investors. Boston Mayor Menino has the right approach and should be a model for Chicago Mayor Emanuel.
Aaron Renn of Urbanophile thinks the Infrastructure Trust will be easy for companies to abuse:
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... we’ve seen enough of what happens when companies load up with special purpose vehicles and off balance sheet transactions to know that it dramatically reduces transparency. This will make it difficult to assess just how much debt the city has taken on. If the ratings agencies haven’t caught on to this, you can believe they will at some point if more cities shift to these types of financing structures.
Unfortunately, infrastructure banks are often presented as if they are “free money” to the public. I believe this greatly misrepresents the reality. Any money invested by the bank has to be paid back. An infrastructure bank seems to be just another fancy name for borrowing money. We should probably evaluate it just like we do debt.
At Forbes, Mark Bergen points out that Chicago’s Chief Financial Officer, Lois Scott, has often been on the other side of these transactions:
The other lingering question is whether these private projects won’t end up costing more than they would through regular bond issuance. Chicago’s credit rating is shoddy. Just today, Moody’s lowered it’s outlook for the city from stable to a brooding “negative.”
But do keep this in mind: before Emanuel handpicked her, the city CFO ran Scott Balice Strategies, a financial advising firm that, as the Chicago Reader spotted, gained some notoriety for pushing strapped localities to take their public assets and put them on the auction block.
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