Recent surveys show that most U.S. cities have bounced back from the deep recession of 2007-2009, with fiscal conditions continuing to show improvement driven by an increase in general revenue funds. But there’s a dark cloud on the horizon for city budgets: the pressing need to maintain and upgrade crumbling infrastructure and the question of how to fund the effort.
Decisions about how to pay for infrastructure needs can make the difference between fiscal health and fiscal calamity. While revenues for cities have improved due to the modest recovery, they are still about 8 percent lower than they were in 2006, before the onset of the last recession. That means that city managers have had to make some tough choices to keep their budgets in balance, and one of the toughest involves funding infrastructure needs. Underfunding infrastructure maintenance on an ongoing basis has been endemic, and the backlog of infrastructure investment is now estimated to be over $3 trillion nationally. No wonder that cities identify infrastructure funding as their most challenging fiscal issue going forward, according to the most recent City Fiscal Conditions survey.
A recent example of how not to meet that challenge is provided by the city of Lamar, Colo. In 2004, because of high natural gas prices, low coal prices and increasing maintenance costs, city authorities authorized the conversion of an existing gas-fired power plant into a coal-fired plant, hoping to make some short-term political hay by lowering utility bills for constituents. Years of work on the new plant was undertaken by the Arkansas River Power Authority, of which Lamar was one of six municipal member.
But the repowering project was plagued with cost overruns and engineering problems. Despite the ongoing issues, including a subsequent lawsuit brought by an environmental group, Lamar’s representatives voted with other ARPA members to take on new debt to pay for the project’s rising costs on four separate occasions, funding it through a series of bond issuances. All in all, the city approved $155 million in debt funding for the doomed project, which was abandoned in 2014 after the Lamar Utilities Board bowed to political pressure and agreed to a settlement with environmental activists that effectively closed down operation of the new plant.
Now Lamar has filed suit in an attempt to shirk its obligations related to the repowering project, including its share of debt service on the bonds issued by ARPA. If the courts allow Lamar to sue its way out of debt payments that it expressly approved, borrowing for future projects will be jeopardized as potential investors see that the city has set a precedent of fiscal mismanagement while attempting to evade paying for that mismanagement.
Perhaps Lamar’s story can be seen as a case-study example of the failure of the old model of funding infrastructure needs by running up debt and issuing bonds without concern for the consequences. If courts start to allow the dismissal of debt owed by cities, financial services institutions won’t be interested in backing the bond financing for infrastructure projects that serve the public good.
One way cities can avoid this type of debacle while still funding their infrastructure needs is through Public-Private Partnerships. In 2010 Rialto, Calif., faced a failing water utility with a host of environmental, operational and financial challenges. Contamination issues, years of deferred maintenance and lack of improvements to the system’s old facilities led to water main breaks and bad service. Pension liabilities also weighed heavily on the utility’s ability to raise capital.
The city itself, after a near default in the early 2000s and declining revenues due to the recession, couldn’t tackle the financing alone. So Rialto decided on a PPP for the struggling utility. The city procured a 30-year concession with Veolia Water, a large water operator, and Table Rock Capital, a boutique equity firm specializing in infrastructure PPPs. Ullico, a major labor-owned insurance and investment company, joined Table Rock as one of the largest investors in the deal. This collaboration led to a comprehensive labor agreement, resulting in significant cost savings. The reorganized water authority, Rialto Water Services, took over the operations in exchange for the right to collect revenue from ratepayers. They also compensated the city with an upfront payment of $30 million, wiped out the city’s $27.4 million in utility debt, and agreed to invest in a $42 million upgrade of the water system. The deal effectively shifted all the fiscal risk of running a utility to the new entity, while lightening the city’s budgetary load.
The growing burden of infrastructure financing runs immense risks for the fiscal stability of cities, but new and innovative methods of funding, such as PPPs, represent a successful model of shouldering that burden, in stark contrast to the old “run up debt and damn the torpedoes” model of the past. Cities and municipalities across the nation struggling with the same issues would do well to take note.
Brian Robertson is CEO of Crispin Solutions, a public affairs and communications consulting firm, and co-founder of The Common Trust, a public policy group. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
