Bay State's big selloff
THE COMMONWEALTH of Massachusetts faces a $13.3 billion unfunded liability for healthcare benefits it has promised to provide its retired public employees. This is in addition to the $13 billion in unfunded pension payments it has also promised. Combined, this unfunded liability is larger than the entire state budget and doesn't include the unfunded portions of the 103 municipal systems.
Government has always marched to its own beat when it comes to providing workplace benefits for current and retired public employees. Maybe it can take some cues from the private sector on how to dig itself out.
While for years the private sector has been curtailing benefit plans to cope with its own fiscal realities, state and municipal governments have continued to offer Cadillac benefit plans -- without worrying about their costs. These include both cash pension payments and "other post-employment benefits," which are noncash, mostly healthcare, benefits. But the bill is coming due, and without action many of these systems could go bankrupt.
Governor Deval Patrick and the Legislature have proposed to use $300 million from the federal tobacco lawsuit settlement to establish a trust fund to begin to pay down the liability. They have also approved legislation to allow municipal pension systems to join the state system, which historically has shown better investment returns. While this is a good start, they will have to take bolder action to address the staggering liability that has built up over the years.
Many of the options for addressing such a massive problem are unpleasant at best, and often politically unrealistic. They include tax increases, dramatic benefit cuts, or shifting more benefit costs from government to public employees. Faced with these options, state and local governments should look closely at selling certain infrastructure assets as a way to pay down these liabilities.
Under this approach, state and municipal governments would get out of the business of directly providing certain services and sell assets related to these services -- such as buildings, water treatment and sewage facilities, roads and bridges, and municipal power plants -- to private entities using "concessions," or long-term leases of up to 99 years.
For example, a community could sell, pursuant to a long-term contract or concession, its wastewater treatment facility to a private entity and receive hundreds of millions of dollars in cash that could be set aside to pay down its liabilities. During the term of the contract or concession, the community's wastewater would be treated by the private entity, and the community would be able to dictate the level of service by including specific performance standards in the contract. At the end of the term, ownership of the asset reverts to the municipality.
This type of infrastructure financing provides state and local governments with an instant source of revenue in return for annual "service fees" to the private provider. The model could also be used to finance service expansion.
Other governments have already done this. Chicago sold its 8-mile Skyway toll road for $1.8 billion in 2005, and then leased it back for 99 years. Soon after, Indiana concluded a 75-year, $3.85 billion lease for the 157-mile Indiana Toll Road Turnpike. Recently, UBS Financial Services prepared a report for the State of New Jersey outlining assets such as the New Jersey Turnpike, the Garden State Parkway, and its lottery system as prospects for selling or leasing in order to alleviate some of the state's budget problems.
Some critics will undoubtedly argue that privatizing public assets sends the message that communities are for sale. But it's important to remember just how unappealing the alternatives are as Massachusetts confronts more than $25 billion in unfunded liabilities.
The worst scenario is for public officials to oppose every alternative and do nothing. This could have a significant impact on credit ratings and dramatically increase the cost of borrowing. Increased borrowing costs would necessitate the tax increases that state and municipal officials rejected in the first place, and raise the very real possibility of municipal bankruptcies.
Infrastructure financing -- while not a panacea -- merits serious consideration. It can provide a one-time cash infusion to pay down these daunting liabilities without sacrificing service quality, raising taxes, or dramatically cutting benefits.
Robert Gillispie is an attorney and partner at Sullivan & Worcester LLP. 
