By Helene Berlin, MUPP ‘01
Contents
Helene Berlin is a Senior Analyst with Applied Real Estate Analysis, Inc., in Chicago.
As local governments are strained for capital and operating funds, they are increasingly turning to the private sector for financial contributions. What are the implications of including an increasing amount of private funding to support public works projects such as park or bridges? Does contributing funds “purchase” the rights of private entities such as corporations or non-profit citizen groups to make decisions on the usage of facilities they have helped to pay for?
In Chicago, a controversy over access from the city’s lakeshore to the venerable Buckingham Fountain recently resulted in discussion of how to pay for a crossing over Lake Shore Drive to the fountain. The Grant Park Conservancy, a private non-profit citizens group in Chicago, proposed finding a private donor to underwrite the project, for which the City of Chicago does not now have funding.
Chicago’s Millennium Park provides another prime example of an accelerating trend to use private funds to support public projects. What was first envisioned as a purely public works program became an unusual venture – a $470 million public park more than fifty percent financed by public funds (bonds and TIF) and the remaining portion mostly funded by large contributions from private corporations and financial institutions. In addition, the private sector also provided a $30 million maintenance endowment for the park.
Private financing is also part of the myriad discussions of how to pay for the vast rebuilding of New Orleans after Hurricane Katrina and the devastating flood to the city.
These examples illustrate the growing disinclination of legislative bodies to adequately fund public infrastructure maintenance and the inclination of municipal officials and citizens alike to increasingly look for and accept private funding to finance public projects
Behind the Trend
For reasons ranging from distrust of “big government” and devolution trends to politician’s penchant for overlooking unseen problems, infrastructure spending has increasingly taken the back burner to more pressing needs in budgets. The states have been given increasing responsibility for public works projects and, increasingly, the private sector has become more involved in public works financing through what are now commonplace public-private partnerships in cities.
As cities, counties, and states become more and more strapped for funds from traditional sources, they look for alternative ways to fund both capital projects and services. They are frequently turning to innovative project finance, which includes financing partnerships between public and private entities.
The Urban Development Action Grant (UDAG) program, begun in 1976, gave municipalities the federal government’s blessing to use private funding. The UDAG program outlined criteria—a ratio of public-to-private financing, job retention and/or creation, estimated increase in property tax revenues -- that, when taken together, allowed a local government to compete for federal funds to bridge a project's demonstrated funding gap. The private partner was expected to hold to a set of clearly articulated standards, including protecting the public interest often by sharing with the public sector its profits above a negotiated amount.
Myriad questions arise from government officials and members of the public when private interests become part of the financing, administration, decision-making, or even day-to-day management of public facilities. For example, will Millennium Park’s corporate contributors feel entitled to use the park for their private functions? Since they have also contributed to the operating budget, will they want to have input in deciding how the park is used? Should public facilities be administered by private (for-profit or not-for-profit) entities? To keep a facility from operating under fiscal constraints, should it allow private companies and groups to rent the facility, thus periodically closing it to the public?
How Public-Private Issues Play Out
Baltimore
Inner Harbor
Baltimore’s Harborplace development was one of the first
large-scale civic projects developed with public-private partnership
techniques. The Baltimore Inner Harbor project was a ground-breaking
experiment. It developed a public area in which private retail businesses
would operate through the use of a partnership between a private developer
and the city’s redevelopment agency. Its success ultimately set
the model for other similar partnerships between governments and private
entities to create public spaces with elements of private enterprise.
A key tenet of the renewal plan was that it would be a public amenity
which would bring all the property around the water's edge into public
ownership or public control.
Announcement of the development proposal produced mixed reactions. The proposal
included about 150,000 square feet of retail use, considered by many the key
to the Inner Harbor's revitalization. Others, however, believed that the project
should not include private development. Nearby businesses were threatened by
future Inner Harbor competition and voiced opposition.
The opposition produced a ballot referendum calling for the creation of a public park on the Inner Harbor which contained no private development. The City countered with its own referendum that provided for private development limited to a total of three acres. The city proposal prevailed. Harborplace officially opened in the summer of 1980. At the time, there was no precedent for the type of arrangement under which Harborplace was built and run.
Millennium
Park, Chicago
The unprecedented scope of involvement by the private sector in building Chicago’s
Millennium Park brings up many questions and issues regarding the roles and
responsibilities of the public and private sectors when working together. During
the summer of 2005, Toyota Motor Sales USA paid the City of Chicago to use
Millennium Park for a private event. Separately, during the same summer, a
popular concert was held at the Pritzker Pavilion in Millennium Park, which
required paid admission. In both cases the respective areas of the park were
closed to the public. Among those raising issues with these events was Erma
Tranter, MUPP ’78, founder and head of the watchdog group Friends of
the Parks. Tranter does not believe that Millennium Park should ever be closed
to the public and contends that there are issues in accepting private contributions
for a public facility.
Bob O’Neill, president of the Grant Park Conservancy, sees the issue differently. Knowing the need for operating funds for maintaining well-used parks like Grant Park and Millennium Park, he believes that closing the park to the public just a few times a year is striking a good equilibrium. He also emphasizes that spending private monies on parks should be accomplished with public input.
“It’s a balance,” O’Neill said, “You do it and do it in moderation, but you get the benefits.”
The Central
Park Conservancy, New York City
In 1998, the Central Park Conservancy, a private organization that had worked
on park issues and fund-raised for rehabilitation of the park for nearly 20
years, was awarded the management contract for the park. The Conservancy essentially
evolved from a citizen’s group that supplemented the park budget to the
organization that now has the primary responsibility for planning and managing
the park.
Established in 1980, the Conservancy raised nearly $270 million from individuals, corporations, and foundations. It provides more than 85 percent of Central Park's annual $20 million operating budget and is responsible for all basic care of the 840-acre landmark. The Conservancy funds approximately three out of every four Central Park employees.
Other parks organizations have used the Central Park Conservancy’s model to varying degrees. In Brooklyn, NY, for example, the Prospect Park Alliance has a similar relationship with the city, but does not have a formal management agreement.
Do the Conservancy’s private and corporate donors have a say about Central Park’s use and programs? Lane Addonizio, the Conservancy’s director of planning, points out that while the Conservancy manages the park, the City retains policy control.
“For any event with more than 20 people, a group must apply for a permit,” Addonizio explains. “But there is always a kind of tension and concern over this. The City can shoot down any use or policy that we suggest.
Lincoln
Park, Chicago
In Chicago, the Lincoln Park Conservancy (formerly the Friends of Lincoln Park)
has agreements with the Chicago Park District to co-manage with the district
the Alfred Caldwell Lily Pool and the North Pond, both of which were restored
with the financial help of the Conservancy. In addition, the Conservancy has
an agreement with the Park District to create a master plan for the restoration
of the Lincoln Park Conservatory.
“We restore
the site and we manage the site so that restoration doesn’t have
to happen again too soon,” explained Steve Zelmar, head of the
Conservancy.
“This is a new kind of arrangement, in which we leverage additional funds,
especially in high profile areas,” said Chris Gent, deputy director of
planning and development at the Chicago Park District. “It allows us to
spend money on neighborhood parks.” Gent confirmed that funds saved in
this manner go into the general capital budget and are not earmarked for specific
parks.
This project-by-project approach is not as far-reaching as the Central Park Conservancy’s relationship with the City of New York, but it does bring a private, not-for-profit group into park management. These agreements are the first such arrangements between the Chicago Park Districts and a not-for-profit organization.
Working on a per-project basis with the Park District, allows the Lincoln Park Conservancy to improve and maintain selected segments of the park, as well as a way for the group to build ties with the Park District, said Zelmar.
According to Zelmar, Lincoln Park is the largest park in Chicago, with 1200 acres, but the park district allocates maintenance funding largely per park, as opposed to per acre. Like Friends of the Parks, Zelmar’s group would probably “think very hard with regard to closing the park” to the public for any reason.
Since 2002, Lincoln Park neighborhood residents and activists have been grappling with a proposed use for part of the park by the Latin School of Chicago, a private institution. Latin School proposed to pay one third of the estimated $2.2 million to create a running track at the south end of the park, near the school’s buildings. In return, the school wants use of the running track during designated times. Opponents of the plan believe that the public park district would essentially be allowing a private entity to buy into a public facility and giving it priority usage of the facility. The Park District has maintained that Latin School would have to schedule use of the track as would any group. They also say that the track would be available for use by public schools. The question remains: Will the fact that a private entity – in this case a private school – paying a significant part of the construction costs entitle it to priority use?
Equity Issues
At the heart of discussions of public-private partnerships to support public facilities is the issue of equity. Do private contributions encourage equitable facilities throughout a city, or do they contribute to inequities in facilities? Or does the involvement of private groups in funding and management of parks have no impact on the equity balance throughout a city? For example, if the result of the Lincoln Park Conservancy’s contributions of money and manpower is to free up public funds to be used for parks in neighborhoods that are less affluent than lake-front areas, could that be considered an equitable trade-off? However, when the Chicago Park District works with such private contributors, it does not earmark “saved” funds for specific parks, but rather leaves the savings in the general fund. Can that be considered equitable?
Michael Pagano, professor and director of the UIC Public Administration Program in CUPPA, does not consider this equitable. “Equity is violated if the city doesn't provide minimum services to a park. Likewise, equity is violated if the city shifts resources from a park that has significant voluntary (sweat labor) or capital contributions,” he says. “Once the latter situation happens, we run the risk of privatizing the park and making it accessible only to those who contribute because ‘public’ funding could dry up and be re-appropriated to other parks.”
Erma Tranter, president of Friends of the Parks in Chicago, sees private contributions to parks a good model “when it is free and clear money, but when the Park District matches money, then it becomes an equity issue; then you have to put into the mix the issue of fairness.”
She cites playgrounds in Chicago parks that have been given a higher priority for construction or renovation because their neighborhoods have been able to provide the matching funds required by the park district. “If there is a requirement for a match, poorer neighborhoods that can’t make up the match do not get priority for playgrounds.”
Pagano agrees. “If communities are not well off, they are unlikely to have matching funds for park amenities. That would certainly violate any notion of vertical equity. Those neighborhoods with resources get the park's monetary match, those without resources don't.”
Although equity is in doubt, Pagano says a matching program can be seen as a way to leverage additional dollars from economically advantaged neighborhoods.
Because public budgets are one-year commitments, there will always be inequities in any given year, Pagano points out. The real question is, over time, do parks provide adequate and generally equal services to residents.
“The crucial aspect of this is how long does “over time” mean?” he asks.
Also, all parks are not, nor need they be, exactly the same in facilities.
As Pagano puts it, “I would argue that if a city decides to build a park, a minimum threshold or adequate level of services should be forthcoming. But if neighbors decide to dedicate their own sweat labor to enhance the park or if a wealthy patron builds more playground equipment, those efforts do not mean that the city should increase levels at all parks. These examples are embellishments or enhancements that do not rely on the public purse. These contributions are icing on the cake.”
Another possible equity issue involves facilities in one jurisdiction that serve residents of others. For example, in cities like Chicago, not all parks are truly neighborhood parks.
“Some parks are designed to serve a very large population [e.g., Lincoln Park, Millennium Park] that are not necessarily 'neighborhoods',” Pagano explains. “The question of equity is this: if the parks are paid for by city residents and the users are non-residents, are non-residents receiving a 'free' public good?”
Are Chicago residents, for example, essentially subsidizing their suburban friends and out-of-towners? As mentioned above, since Millennium Park opened in downtown Chicago in 2004, several equity and private use issues has come to the fore. The Lollapalooza music festival kept a significant portion of Grant Park closed to the public for three days in August, 2006.
These situations bring up questions. Should a company or any other private entity be able to pay to have a public place closed to the public for a private function? Do private entities they have the right to close a portion or all of a public facility --- in this case, very popular and high profile facility? For that matter, is it equitable for the public agency to close one of its properties to the public in order to make money for the facility’s operation?
Although Tranter
doesn’t see a problem with private contributions to public parks,
she does not believe that any public park should ever be closed off
for private uses. A private group, she points out, manages Central
Park, but that group fights any closing of park areas to the public.
“When the public and private sectors co-invest at a 50-50 split, does the "public" have
access for half the time and private donors the other half? Is that equitable?
Or is the donor contributing to the 'greater public good' meaning that the donor
does not expect a quid pro quo? It’s a question of public philosophy,” Pagano
said.
WHERE TO GO FOR MORE INFORMATION ON PUBLIC/PRIVATE FINANCE:
CEO’s for
Cities - www.ceosforcities.org
brings together mayors, researchers, private business executives, foundations,
and civic and business leaders to tackle issues affecting the future of U.S.
cities. Look to their research link for information related to urban issues
and communities.
Government Finance
Officers Association – www.gfoa.org
Begun in 1906, GFOA is a professional association of state/provincial and local
finance officers in the US and Canada. See their research resources for project
evaluation for public-private partnerships.
The National
Council for Public-Private Partnerships – www.ncppp.org
is a non-profit, non-partisan organization founded in 1985 to provide training
and education programs nationwide on the ideas and innovations on partnerships.
Information provided includes publications, case studies, and issue papers.
Central Park Conservancy, New York - www.centralparknyc.org/
Harborplace, Baltimore, MD - www.harborplace.com
Friends of the Park, Chicago - www.fotp.org
Grant Park Convervancy, Chicago – www.grantparkconservancy.com/
Millennium Park, Chicago - www.millenniumpark.org/
Other Sources:
“Lakefront bridge plan revived,” Leslie Baldacci and Andrew Herrmann, Chicago Sun-Times, October 14, 2005.
“How the City Sank,” Nicolai Ouroussoff, New York Times, October 9, 2005.
“Public/private joint ventures: The government as partner - Bane or benefit?, M.J. Brodie, Real Estate Issues, August, 1995
Do You Have A Comment? Share your story with others!
Email your stories of success or learning experiences on public/private finance partnerships to cuppa@uic.edu and we may post your comments on our website at www.uic.edu/cuppa/pubs.html.
Faculty
Editorial
By Michael A. Pagano, professor and director, Public Administration With David
Perry, director, Great Cities Institute
On
Butterflies and Chaos: City Infrastructure Finance Today
(For a copy of the full article, please see CEOs for Cities website: http://www.ceosforcities.org/rethink/research/index.php)
The massive rebuilding efforts in the wake of Hurricane Katrina may presage the decision environment of many American cities in the not-too-distant-future. Even today as any new mayor assumes the position of city leader, she is dumbstruck by what appears to be a series of miscalculations made by previous administrations. Like the proverbial butterfly in the Amazon, a single perturbation years ago compounded by a series of minor, sometimes unnoticeable, changes and shifts now reverberate in a cacophony of crisis upon crisis. As the city’s fiscal situation looks even worse from the mayor’s new seat than it ever did before, the mayor asks: “How did I get stuck holding the bag?” It may not look exactly like Katrina and the scope of problems may not rival New Orleans’ devastation, but it certainly appears worse on the inside than it did from the outside.
The metropolis is in many ways fragmented, authority is decentralized, accountability and responsibility are divided and unclear, and the resident-citizen is billed for infrastructure and service-delivery costs that benefit a large number of non-paying consumers. Governance structures in the metropolis today appear to be chaotic, fragmented, splintered and fractured. The lessons of the past century are that fragmentation and pricing policies embrace competition and market-like expectations of government fiscal policies. If cities wish to abide by the people’s wishes, they will find ways of building infrastructure in an efficient and equitable manner. For example, pricing of infrastructure systems does not often follow the benefits principle (in which the user pays). Instead, they are most often paid for in the most expeditious manner (if you have authority to increase the tax rate, then raise it!) rather than in an efficient manner (will the user pay for her portion of the infrastructure’s consumption?) and equitable manner (does everyone who needs it have access to it?). Cities’ street and bridge systems rely on city and state funds (city residents, therefore, pay twice) but the users are not just city residents. Recent studies demonstrate that nearly half of state-local spending on transportation is paid for not by any transportation-related tax (e.g., fuel tax) but by general taxes (property, sales, income) as if the value of a resident’s home indicates usage of the street and bridge system. Or, as if non-residents are in no way linked to use of or payment for the transportation system.
An extensive analysis of the history of infrastructure finance and construction in US cities led to the conclusion that city officials operate within an environment of ‘organized chaos.’ Some of the elements of this organized chaos include the following:
- Neither mayor nor taxpayer is fully aware of which government is responsible for which set of services
- Proliferation of governments across the region looks like a patchwork quilt of accountability
- Pricing via fees is not full-cost or marginal and is still subject to political considerations
- Pricing via taxes ignores willingness to pay, leading to inefficiencies
- Economic growth nationally has been strong in the non-profit sector, yet PILOTs generate less than foregone property tax revenues.
- Services support by general tax revenue extract payment from residents and property owners rather than all users (including commuters), and the size of the tax base may lag the growth rate of services demanded by users.
- Authorization to levy only one general tax (property, sales, income) has spatial implications that can exacerbate destructive competition
- Budgeting practices artificially segregate the decision space between repairing or maintaining a facility and building or reconstructing the city’s physical infrastructure.
- Infrastructure failures occur at unpredictable times due to maintenance neglect from previous years.
- More and more control rests with localized special assessment, business improvement, and TIF districts.
In important ways, the effect of the tremendous growth in the number of special districts and municipalities’ creating an overlay of special-purpose sub-municipal governments for the purpose of localizing investment in infrastructure is to make clearer and cleaner the linkage between infrastructure investment activities and the individual beneficiary of such activity. The effect has also been that infrastructure provision has fractured into tens of thousands of local government providers, including the explosion of public authorities over the last 50 years, giving rise to accountability problems. Full faith and credit debt is no longer the most important type of municipal debt issuance, in part due to legal constraints; revenue (non-guaranteed) debt is much more important to financing infrastructure today than ever before. Homeowners associations finance some infrastructure, non-profits often do not. The policy space within which city officials negotiate infrastructure investment has become nearly impossible to understand.
Cities need to innovate once again and reconsider fundamentally the way infrastructure is financed, or at least to continue to experiment with different pricing mechanisms. The successful innovations will be adopted and diffused. And the future infrastructure of cities will be more efficient, equitable, and regional in scope.
The Big Picture – What can we do?
- Infrastructure
Restoration Grants
A federal Infrastructure Restoration Grant should be targeted to centers of employment, which have the highest needs as measured by infrastructure use, to account for the wear-and-tear of employment centers’ infrastructure by non-residents.
- Municipal
Taxing Authority
Although a similar argument could easily be made for creating a state version of the Infrastructure Restoration Grant, this proposal is for states to allow cities to design a tax/fee system that the cities need and can match to their economic base. Cities are proscribed from levying certain taxes by their states, such as a commuter tax. Infrastructure investment is influenced not only by the needs of commerce and industry, but also by the fiscal needs of the city. The fiscal system in many cities encourages city officials to make infrastructure investment decisions that are clearly anti-regional in character but simultaneously are smart choices for the city’s fiscal health (e.g., investing in the transportation infrastructure at a city’s edge for an automall in order to reap sales tax revenues and also to shift costs of congestion and road infrastructure on neighboring cities).
Transparent and efficient fiscal systems that more closely align cities’ ‘economic bases’ to their revenue systems and that bring together both users of infrastructure and the payers in a market-like transaction ought to be encouraged or at a minimum allowed by state action.
- Interlocal/Regional
Agreements.
The metropolitan region is increasingly the demographic as well as the economic unit of local life and global competitiveness. Even as “region” becomes more key to understanding the nation’s economic growth potential, the mix, complexity and splintering of governments, financing mechanisms and public-private collaborations add up to an almost impossible layering of politics, debt policy and infrastructure systems, which in turn confounds the regional demands for infrastructure and the capacity to provide it. Infrastructure in such a time is, arguably, the prime area for governance reform, requiring as it does (and will) horizontal cooperation among local governments and vertical integration with the state and federal government
- Aligning Users/Payers,
Accounting for Needs.
As the march toward political decentralization, increasing use of user fees, and privatization continue to “marketize” transactions of governments, cities are probably not in a position to counter the trend. They can create better and innovative financial systems that ensure (1) efficiency is met and the benefits principle followed; (2) equity is met and users pay for infrastructure use, and an ability-to-pay principle is followed; (3) maintenance costs are incorporated into the pricing structure so that the decision to build fixed assets doesn't trump the long-term care and repair of those assets, (4) the approach is a regional solution to a regional problem. This is an approach that calls on cities in the region to design a comprehensive infrastructure pricing system that is not limited to general tax sources (property, sales, income) but on a more firm nexus between payer and user.
- Budgeting
Reform.
Internal budget reforms need to explicitly link the capital and operating budgets of municipalities in order to better gauge the future infrastructure costs that result from present-day investment decisions.
- Valuing Assets.
Revenues from asset sales or lease-back arrangements can be used for infrastructure maintenance, especially if state and federal aid is not forthcoming.
Recent sale-leasebacks of highways (Indiana Toll Road, Chicago Skyway) are a recognition that the economic and monetary value of assets held by the government sector are sizable and can leverage resources from private investors and users. - Invest Prudently
Fully fund infrastructure investments! The costs of an asset are not only the initial construction costs and later the renovation costs. Operating and maintaining the facility require planning for day-to-day use and adequate funding.
Investment decisions today, if they include the full costs of financing infrastructure, including operating and maintenance costs, lock in future legislative financial decisions..
Innovative infrastructure
finance must take center stage in policy debates on the fiscal futures
of cities and on the quality of life in the broader region. Financial
strategies for infrastructure projects should be designed to ensure
that users of the infrastructure pay for both construction and maintenance
costs, and that it can be afforded over time. Higher levels of government
ought to intervene in providing support to users who have a low taxing
capacity and a relatively high use of infrastructure as well as to
non-residents who benefit from the city’s provision of a service
but whose payment cannot be effectively captured by pricing schemes.
Linking payment to an asset’s use cements the market-like relationship
in the minds of the consumers, who can then adjust levels of consumption based
on their preferences. While market-based financial strategies will create more
efficient and effective infrastructure systems that more closely link true
costs of infrastructure to their beneficiaries, urban policymakers must also
address the infrastructure needs of segments of the population who cannot afford
to pay their fair share. A carefully designed financial structure must incorporate
dimensions of both the ability of the users to pay for their consumption of
infrastructure services (a horizontal equity concern) and the benefits received
by the consumers. These two pillars of public finance systems (the benefits
principle and the ability-to-pay principle) must be restored and, in many cases,
must replace the existing fiscal systems of convenience and chaos that have
evolved over the last century.
“Public works on a noble scale” is how Robert Caro described Robert Moses’ approach to his powerful control of public authorities, a perspective that certainly may have had adherents in the mid-20th Century. What needs to be thought about and pursued in the 21st Century is something a bit different, recognizing the fractured and fragmented metropolis and the ‘marketized’ public policies toward government services today. The perspective today might more realistically be thought of as public works on an urban scale.