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Roads To Riches

by Emily Thornton
BUSINESS WEEK

Why investors are clamoring to take over America’s highways, bridges, and airports—and why the public should be nervous

Steve Hogan was in a bind. The executive director of Colorado’s Northwest Parkway Public Highway Authority had run up $416 million in debt to build the 10-mile toll road between north Denver and the Boulder Turnpike, and he was starting to worry about the high payments. So he tried to refinance, asking bankers in late 2005 to pitch investors on new, lower-interest-rate bonds. But none of the hundreds of investors canvassed was interested.

Then, one day last spring, Hogan got a letter from Morgan Stanley (MS ) that promised to solve all of his problems. The bank suggested Hogan could lease the road to a private investor and raise enough money to pay off the whole chunk of debt. Now Hogan, after being inundated with proposals, is in hot-and-heavy negotiations with a team of bidders from Portugal and Brazil. “We literally got responses from around the world,” he says.

In the past year, banks and private investment firms have fallen in love with public infrastructure. They’re smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they’re beginning to consider infrastructure a brand new asset class in itself.

With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. “There’s a lot of value trapped in these assets,” says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).

There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they’re pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.

But are investors getting an even better deal? It’s a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What’s more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, “A Golden Gate for Investors”).

There’s also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.

Such concerns weigh on the minds of public officials like Hogan. He intends to negotiate aggressively with corporate suitors and has decreed that the buyer must share future toll-hike revenues with the local governments that built the highway. But with the market for infrastructure still in its infancy, every deal is different. The ideal blend of up-front payment, toll hikes, and revenue sharing hasn’t been found.

FLOOD OF MONEY
The nascent market in roads and bridges in the U.S. follows the shift toward privatization in Europe and Australia that began with British Prime Minister Margaret Thatcher in the 1980s. It took longer to develop in the U.S. because of the $383 billion municipal bond market, which has been an efficient source of capital for governments over the years.

But with the explosion of money flowing into private investments recently, fund managers have been exploring the fringes of the investing world in search of fresh opportunities. Now a slew of Wall Street firms—Goldman, Morgan Stanley, the Carlyle Group, Citigroup, and many others—is piling into infrastructure, following the lead of pioneers like Australia’s Macquarie Group. Rob Collins, head of infrastructure mergers and acquisitions at Morgan Stanley, estimates that 30 funds are being raised around the world that could wield as much as $500 billion in buying power for U.S. assets.

Many investors think of infrastructure investing as a natural extension of the private equity model, which is based on rich cash flows and lots of debt. But there are important differences. Private equity deals typically play out over 5 to 10 years; infrastructure deals run for decades. And the risk levels are vastly different. Infrastructure is ultra-low-risk because competition is limited by a host of forces that make it difficult to build, say, a rival toll road. With captive customers, the cash flows are virtually guaranteed. The only major variables are the initial prices paid, the amount of debt used for financing, and the pace and magnitude of toll hikes—easy things for Wall Street to model. “With each passing week, there are more parties expressing unsolicited interest in some kind of a financial transaction that will involve one of our assets directly or indirectly,” says Anthony R. Coscia, chairman of the Port Authority of New York & New Jersey.

Firms are even beginning to market infrastructure to investors as a separate asset class, safe like high-grade bonds but with stock market-like returns—and no correlation with either. The Standard & Poor’s 500-stock index has returned about 10% a year, counting dividends, since 1926. Bonds have returned about 5%. Firms say infrastructure will beat both, and without having to sweat out market dips along the way. That’s a huge selling point at a time when stock, bond, and commodity markets around the world are becoming increasingly interconnected.

Investors can’t get in fast enough. They recently deluged Goldman Sachs with $6.5 billion for its new infrastructure fund, more than twice the $3 billion it was seeking. “We’re using [infrastructure] as a fixed-income proxy,” says William R. Atwood, executive director of the Illinois State Board of Investment, who plans to invest $600 million to $650 million, or 5% of its portfolio, in infrastructure funds over the next three years. “We’re hoping to get 11% to 12% returns and lower risk.” Pension funds in particular like the long-term investment horizons, which match their funding needs well. Infrastructure “delivers similar yield expectations to high-yield bonds and real estate, with less risk,” says Cynthia F. Steer, chief research strategist at pension consulting firm Rogerscasey.

On the other side of the bargaining table from the investment firms sit struggling governments suddenly amenable to the idea of selling control of assets to solve short-term problems. The burden of maintaining roads, bridges, and other facilities, ma
ny built during the 1950s, is becoming difficult to bear. Federal, state, and local governments need to spend an estimated $155.5 billion improving highways and bridges in 2007, according to transportation officials, up 50% over the past 10 years. And that’s hardly the only obstacle they face. In 2006 alone, states increased their Medicaid spending by an estimated 7.7%, to $132 billion. And state and local governments could be on the hook for up to $1.5 trillion in retiree liabilities, estimates Credit Suisse. At the same time, politicians find it difficult to raise taxes. Chicago’s former chief financial officer, Dana R. Levenson, sums up the situation: “There is money to be had, and cities need money.” U.S. Representative Chaka Fattah, a Pennsylvania Democrat who is running for mayor of Philadelphia, proposes to privatize the Philadelphia International Airport and use the proceeds to fund poverty programs—a much easier sell than a tax increase.

The combination of eager sellers and hungry buyers is shaking loose public assets across the country. The 99-year lease of the Chicago Skyway that went for $1.8 billion in 2005 was the first major transaction. Last year came the Indiana deal. Now states and cities are exploring the sale of leases for the turnpikes in New Jersey and Pennsylvania, a toll road in Texas, Chicago Midway Airport, and several state lotteries. Suddenly politicians around the country are wondering how much cash they might be sitting on. Based on the going rate of about 40 times toll revenues, the iconic Golden Gate Bridge could probably fetch $3.4 billion were California interested in selling. The Brooklyn Bridge? If permission were granted by New York City to charge the same tolls as the George Washington Bridge, a private owner might shell out as much as $3.5 billion for it.

PAVEMENT PRICING
But there’s a downside to the quick cash: planned toll hikes that are usually quite aggressive. Chicago’s Skyway could see car tolls rise from $2 in 2005 to $5 by 2017. For some perspective, if a similar scheme were applied to the Pennsylvania Turnpike during its 67 years of existence, the toll for traveling from the Delaware River to the Ohio border would be as much as $553 now instead of $22.75. Macquarie, which teamed up with Spain’s Cintra to purchase the Chicago Skyway and the Indiana Toll Road, underscored the governmental trade-off during a presentation at the recent White House Surface Transportation Legislative Leadership Summit: “More Money or Lower Tolls.” In an extreme scenario, governments could begin to sell properties that aren’t tolled to private owners who will impose fees.

Of course, tolls won’t go to the moon if they result in dramatic reductions in traffic. For example, investment firm NW Financial Group estimates that if the Chicago Skyway pricing scheme were applied to New York’s Holland Tunnel over its 80 years, it would cost $185 to travel through it instead of the current $6. “No one will pay that much,” says Murray E. Bleach, president of Macquarie Holdings (USA) Inc. “It’s just not going to happen.”

Still, Indiana legislators became so alarmed by promised hikes that they changed the terms before the toll road lease was completed. The state set aside $60 million to pay the difference in tolls for up to two years or until the buyers install electronic tolling equipment. After that, the fee for cars with electronic toll cards will rise to $4.80 over the full 157 miles, while the fee for cars without the cards will soar to $8. After 2010, both rates will rise each year by 2%, the pace of inflation, or the rate of economic growth, whichever is highest.

The certainty of future toll hikes doesn’t jibe with the uncertainty of service quality. Assets sold now could change hands many times over the next 50 years, with each new buyer feeling increasing pressure to make the deal work financially. It’s hardly a stretch to imagine service suffering in such a scenario; already, the record in the U.S. has been spotty. In 2003 the city of Atlanta ended a lease of its water system after receiving complaints about everything from billing disputes to water-main breaks. The city wrestled with the owner, United Water Inc., over basics like the percentage of water meters it should monitor. Both parties acknowledge that the contract lacked specifics. In the end, “we didn’t believe we were getting performance,” says Robert Hunter, commissioner for Atlanta’s Dept. of Watershed Management. “I don’t believe the city will ever look at privatizing essential services again.” United Water says the contract wasn’t financially feasible because Atlanta’s water system was in worse shape than the city had represented.

A CHAMPION’S PERSPECTIVE
States are wrestling with other public policy issues, too. Bankers say New York could reap a combined $70 billion for long-term leases on a bunch of assets, including the state’s lottery, the Tappan Zee Bridge, and the New York State Thruway. New York state officials have looked into the option of leasing the lottery, which itself might command $35 billion—a sum that could substantially upgrade, say, New York’s higher education system. The downside? The state would probably have to remove constraints on the lottery’s marketing designed to discourage people from gambling more than they can afford. If the state insists on keeping the constraints in place, it could reduce the value of selling it.

Chicago’s experience shows the possibilities and the pitfalls of privatization. Former CFO Levenson has been one of the movement’s biggest champions. He was an architect of the Skyway deal, which kicked off the market. Then he sold control of parking garages to Morgan Stanley for $563 million. Next, he started shopping around a lease for Midway Airport that could fetch as much as $3 billion. And soon the city hopes to auction off rights to operate some recycling plants. Levenson dismisses critics who argue that he has dumped prized assets. “This is not like where a person goes in and buys a loaf of bread from a store and walks out with that loaf of bread,” he says. “Some entity, we expect, will make an offer to lease the Midway Airport for 75 to 99 years, and the following day I’m pretty sure it will still be there.”

Wearing a crisp suit and stylish eyeglasses, Levenson looks like the Wall Streeter he once was, working for Bank One Corp. and Bank of America Corp. (BAC ) before taking the Chicago city job in 2004. In April he returned to banking: As a managing director at the Royal Bank of Scotland Group (RBS ), he now beats the bushes for infrastructure deals. Levenson doesn’t understand how local governments can afford not to put public works up for sale. Thanks to the 99-year lease for the Skyway, Chicago has paid off its debt and handed over $100 million to social programs like Meals on Wheels. Plus, says Levenson, it’s earning as much in annual interest on the $500 million it has banked from the transaction as it used to earn from running the Skyway ($25 million).

In some ways, Levenson argues, the city still has control over the highway. The agreement with the new owners spells out guidelines in mind-numbing detail, dictating everything from how quickly potholes must be filled (24 hours) to how rapidly squirrel carcasses must be removed (8 hours). If Macquarie and Cintra violate those conditions, the city can take back the road.

So far, the buyers have strictly adhered to the rules. At 7 a.m. on a Wednesday in March, five workers begin another day at the Chicago Skyway’s Snow Command. On their to-do list are potholes to be checked and cracks to be sealed. Juan Rodriguez used to patrol the freeway for Chicago city. Today, he cruises the road for private owners. He discovers some potholes have grown unacceptably large because of salt that was spread the previous night. There’s some tire debris that must be removed, and a disabled vehicle holding up traffic.

A SMOOTH
RIDE?

In the past, Rodriguez says, he had to write out a ticket for each problem, which would be added to a long list of chores. Addressing problems often took days, Rodriguez recalls. But by 10:25 a.m., all of this morning’s issues on the Skyway’s 7.8-mile stretch of pavement are resolved. “The new owners are taking the Skyway to a whole new level,” he says.

They’ve certainly spent money on improvements. The message “a clean workplace is a happy workplace” is scrawled on a whiteboard in a freshly painted and ventilated garage where workers meet. There’s electronic tolling, which didn’t exist before. A bunch of new lanes are under construction. The investments seem to be paying off: Since taking over two years ago, the Skyway’s operators estimate traffic has risen 5%.

It’s all encouraging, except that Chicago “probably could have gotten more without privatizing,” according to Dennis J. Enright, a principal and founder of NW Financial. His firm’s analysis shows that Chicago could have done a lot better by handling the whole deal itself. It could have raised tolls and sold tax-exempt municipal bonds backed by the scheduled hikes. That would have given the city the up-front cash it needed while preserving some of the income from the toll hikes. Instead, that money will go to Macquarie and Cintra.

Meanwhile, the higher tolls will take a big bite out of lower-income people’s wallets. “You have to ask yourself if you want roads that used to be considered a public service to be rationed by income class,” says Princeton University economics professor Uwe E. Reinhardt. Chicago says it hasn’t received any formal complaints from citizens, though two different drivers recently went to extremes to avoid tolls, says Skyway maintenance manager Michael S. Lowrey. When the new owners introduced free towing for broken-down vehicles, the drivers called the Skyway for help, claiming to be stranded. After workers hauled the vehicles past the tollbooths, they hopped in their cars and sped away.

For workers, the privatization wave has wrought many changes. Skyway toll takers used to be full-time city employees with rich benefits. Now most are part-time independent contractors without benefits. Brian Rainville, executive director of the Chicago Teamsters Joint Council 25, helps manage the union’s pension fund. When he listened to a recent pitch from a pension consultant about infrastructure funds, it sparked a realization: The returns he might generate for his pensioners could be canceled out by the union’s shrinking number of contributors. “It’s pretty obvious that it’s not sound fiscal policy for the [pension] fund to undercut the people it’s serving,” Rainville says.

Pushback against private investors is now playing out in different ways elsewhere. In Pennsylvania, the state turnpike commission is going head-to-head with private bidders for the right to operate the state’s 537-mile toll road. Pennsylvania desperately needs cash to repair its nearly 6,000 structurally deficient bridges. Some pundits expected Pennsylvania Governor Edward G. Rendell to propose hikes in gas taxes and other fees to fund the projects. But in December, Rendell unexpectedly announced plans to privatize the turnpike. Timothy J. Carson, vice-chairman of the commission, scrambled to submit an expression of interest for the turnpike to continue to run itself. His proposal is being judged against many others, including those from big Wall Street firms.

Carson isn’t dissuaded by arguments that investors are better qualified to run turnpikes profitably. “There’s no magic here,” he says. “These [deals] are largely driven by one factor: the permitted toll increases.” Carson says the state doesn’t need to hand over the turnpike to private owners. Historically, he says, the state wanted the turnpike to collect only enough money to break even. But it could just as easily adopt its own toll-hike schedule. The state could also charge tolls on more roads. In other words, the public could remain in control simply by changing the turnpike’s mission. That would ensure that the benefits of the toll hikes were spread throughout the populace, says Carson.

Pennsylvania’s isn’t the only turnpike authority exploring the possibility of bidding for roads. The North Texas Tollway Authority calculated in March that it would have valued a partially constructed 25-mile stretch of highway near Dallas 26% more than a private investor had bid. Now it’s considering making a formal bid. And on Apr. 11, the Texas House of Representatives passed an amendment by a vote of 134 to 5 to impose a two-year moratorium on privatizing state toll roads. “We need to put the brakes on these private toll contracts before we sign away half a century of future revenues,” said representative Lois W. Kolkhorst, who proposed the bill. A similar bill was passed in the state senate on Apr. 19.

With so much money at stake and so many options available to states, it’s impossible to know how the great infrastructure craze may play out. But this much is certain, says Pennsylvania’s Carson: “People are willing to pay more than they are currently being charged. The only question is to what extent you’re willing to take advantage of that.”

Thornton is as associate editor for BusinessWeek.

Discussion

2 comments for “Roads To Riches”

  1. FYI, management of the Oak Ridge Cemetery that holds Abraham Lincoln’s tomb is possibly going to be outsourced to a publicly traded cemetary-management service. It sounds like it’s a “go getter” company that pays a nice dividend (although it doesn’t have a particularly high credit-rating).

    If hot stock tips about the privatization of national monument management doesn’t strike one as an especially positive piece of news, note that the privatization of the Oak Ridge Cemetery isn’t a done deal. There are other financing options:

    WICS NewsChannel 20
    Oak Ridge Privatization at Committee of the Whole
    It was the subject of closed-door discussion the week prior at City Council, but Oak Ridge Cemetery took center stage at Tuesday night’s Committee of the Whole meeting.
    Wednesday, November 13 2013, 12:06 PM CST

    The cemetery requires hundreds of thousands of dollars in subsidies to stay afloat, and the city is considering putting it under private management. Several people showed up tonight to urge against doing that, and they were supported by at least one alderman.

    “The Fire Department doesn’t break even,” Ward 7 Alderman Joe McMenamin said. “That’s a $30 million subsidy. The Police Department doesn’t break even. The library doesn’t break even.”

    Pennsylvania-based cemetery management company StoneMor Cemetery Products contacted the city earlier this year about private management.

    The city’s budget director said a “request for proposal” will be going out, but that does not guarantee the city will end up turning management over to a private company. There was also discussion over other ways to cut costs, including hiring salespeople for burial plots.

    In the meantime, the cemetery’s director said he’s been working to cut costs . He said the cemetery can receive up to $400,000 in subsidies this fiscal year. So far it has used about $220,000.

    Anyone interested in investing in a final resting place near Lincoln? Unlike most public sector fire sales, this one might actually benefit the public.

    In other news…

    Posted by Pterrafractyl | November 13, 2013, 10:59 pm
  2. Mark Ames has a great new piece on the privatization of law enforcement in Missouri and the role played by the “Show-Me Institute”, Missouri’s pro-privatize-everything ‘think tank’:

    Pando Daily
    FOUND: Ferguson Mayor bragged about privatized law enforcement services months before Brown shooting

    By Mark Ames
    On March 7, 2015

    Ferguson mayor James Knowles is not happy with the Department of Justice’s report about his city. Responding yesterday to the DOJ’s claims of widespread abuses of power and process by Ferguson’s police and courts, Mayor Knowles railed to the St Louis Dispatch:

    “Their assertion is it happens regularly. Based on what? I’m not sure yet.

    “Do they have a statistic that tells me that they’ve examined every arrest that we’ve made for the past four years and that half, or all, or 10 percent, or 5 percent are unconstitutional or without cause? They do not have that. They have not examined at that level that I know of at this point.”

    Certainly if the DOJ’s findings accurately reflect a serious problem in Ferguson then Knowles should have known about it. This, after all, is a man who has long boasted of his obsession in “disrupting” how his city is run to ensure maximum efficiency. Which is to say, maximum profitability.

    In early 2014, just a few months before the city of Ferguson exploded in street protests after the shooting of Michael Brown, Mayor Knowles, gave an interview to Missouri’s leading libertarian think-tank, the Show-Me Institute. In that interview, embedded below, Mayor Knowles explained the many wonderful benefits of privatization. When asked if there was anything he would not consider privatizing in Ferguson, Mayor Knowles answered:

    “Really there isn’t much that we haven’t explored that we didn’t see was a good idea.”


    And while Knowles did tell the Show-Me Institute interviewer that he wasn’t in favor of privatizing the police force itself, he explained that he was actively working to privatize law enforcement services:

    “Even though I say law enforcement shouldn’t be privatized, there are many aspects of law enforcement that can be privatized, and again can offer assistance to law enforcement. We have red light cameras in the city of Ferguson. We have a speed camera which they’re installing currently. It’s been widely criticized that we have a situation where private industry will make a portion off the tickets that are issued.

    Indeed, as the DOJ report and others have discovered, much of Ferguson’s “offender-funded” criminal justice system and municipal budget begins with exorbitant moving and parking violations that then spiral into a ruinous cycle of debts, fines, and fees.

    Ferguson’s privatized red-light and speeding cameras, which were challenged and criticized by Ferguson residents, were installed under dubious legal and constitutional means, as even Mayor Knowles acknowledges in his interview. For one thing, they ticket the owner of the car, rather than the driver of the car. There is also evidence all over the country of how the private companies that operate traffic violation cameras bribe officials, subvert democracy by suing to stop local anti-camera voter initiatives, tweak stop lights in order to increase ticketing (and private profits), and target low-income communities.

    The company that contracts out Ferguson’s red light cameras, American Traffic Solutions, settled a class action lawsuit in Missouri forcing it to refund 20 percent of all 900,000 tickets the company issued in the state since 2005. Missouri’s state Supreme Court is expected to rule this year on the constitutionality of the privatized red-light and speeding cameras.

    And yet, in his interview with the Show-Me Institute, Mayor Knowles held up privatized red light and speeding cameras as one of the best examples of privatized law enforcement services.

    As I wrote last year, the blueprint for Ferguson’s “offender-funded” criminal justice system was first proposed by one of the men most responsible for creating the modern libertarian movement and taking it to local granular municipal politics: Reason magazine’s Robert Poole. Poole ran Reason magazine in the 1970s—a time when Reason ran overtly racist articles defending South Africa’s white-supremacist apartheid rule, and ran a special issue in 1976 promoting “the who’s who of early American Holocaust deniers” in the words of Holocaust expert Deborah Lipstadt.

    At the same time, Poole worked for a DARPA spinoff in Santa Barbara tasked with studying privatizing local government. Why the Pentagon would pay Americans to study privatizing American cities is something that has yet to be answered, but in any event, in 1978, Poole used whatever knowledge he gained working for DARPA to set up (with Koch money) the Reason Foundation: The first American organization dedicated solely to privatizing local government.

    Many people including Poole’s supporters say that Robert Poole either invented “privatization” politics, or at the very least, is responsible for popularizing an idea that was as obscure as it was frowned upon and marginalized.

    Even before Reagan moved into the White House, Poole published “Cutting Back City Hall”—a how-to neoliberal primer on privatizing local government that some of Thatcher’s top advisers credited with influencing the Thatcher Revolution. In 1983, the Anglo-American world was going so fast in Poole’s direction that he could rightly boast:

    “Four years ago when I was writing Cutting Back City Hall, the editor winced at my use of the term ‘privatization.’ Today, the term appears in the title of a book endorsed by people such as David Stockman, and nobody bats an eye.”

    Under Poole’s editorship in the early 80s, Reason magazine published a big feature article headlined “The St. Louis Solution” calling for privatizing city streets, sidewalks and services, just as some of St. Louis’ richest and most segregated townships have done since the post-Civil War era.

    Some 35 years later, it’s remarkable to consider the state of Ferguson today and how closely it resembles Robert Poole’s libertarian blueprint in 1979.

    For example, Poole’s policy proposal for privatizing the criminal justice system called for exactly the sort of revenue-generating system that Ferguson uses today. Some choice quotes from Poole’s privatization primer nearly four decades ago:

    “Make the users (i.e., the criminals) pay the costs, wherever possible.”

    “[L]aw enforcement, like any other service, is essentially a business activity.”

    And forget any hope that the awful events in Ferguson might cause a major rethink by Mayor Knowles and those who share his view of privatization-as-panacea. Two months after Michael Brown was shot and killed by a Ferguson police officer, Silicon Valley’s libertarian hero Rand Paul flew into Missouri for a $5000-a-seat round table event to raise money for the Show-Me Institute’s “Privatize Missouri” campaign.

    All all the disturbing things in that article, perhaps it’s the fact that Robert Poole developed his ‘privatized local government’ scheme as part of his work for a DARPA spinoff that might be the most disturbing, especially since so much of the GOP’s behavior over the last four decades has seemed almost like an intelligence-run operation using advancedy military psyop techniques intended to prepare the US public for the eventual relinquishment of its own democracy into the hands of an international group of oligarchs. You have to wonder what other society-destroying plans were developed at DARPA spinoffs from that era and how many of them were put into place.

    Also don’t assume that the “Show-Me Institute” limited its damaging advice to Missouri. That would have been nice, but no, Missouri’s top oligarch, “King Rex” Sinquefield’s Show-Me Institute has been showing Kansas how to slit its own throat for years. And that’s why Kansas governor Sam Brownback recently had a show-and-tell at the Show-Me Institute: He needed to show off all the budget-busting tax cuts and tell everyone how great things are going:

    cjonline.com
    Brownback takes tax cut message to Missouri
    Wealthy political activist seeks to bring Kansas rates to Show-Me state
    Posted: March 5, 2015 – 1:51pm

    By Jonathan Shorman
    jonathan.shorman@cjonline.com

    ST. LOUIS — Gov. Sam Brownback had been taking questions for several minutes when a polo-clad man in the front row raised his hand.

    Brownback had just finished a speech to an intimate crowd here Thursday morning as a couple of dozen people listened while chewing on pastries. He had lambasted the media and downplayed the state’s massive revenue shortfall — expected to total more than $1 billion over the next two fiscal years.

    The man asked how large Kansas’ current year budget deficit is. The visiting governor listened intently and responded that he had made allotments to deal with the $600 million current deficit.

    But the man asking the question was not just an ordinary Missouri citizen, but Rex Sinquefield — one of the richest and most powerful individuals in the entire state.

    Sinquefield, a St. Louis businessman and philanthropist, has established himself as a dominant player in Missouri politics over the past several years, funneling hundreds of millions of dollars to advocacy groups and political candidates.

    Even as Brownback faces a grim budget situation that will probably require a combination of tax increases and spending cuts, he is pushing a counter-narrative in Missouri about what his income tax-slashing policies have produced. How the governor is perceived in the Show-Me state holds implications for his national legacy — helping to determine whether the former U.S. senator and one-time presidential candidate’s model is exported to Missouri and other states.

    Sinquefield, perhaps the most important person in the audience Thursday for Brownback, can help shape how the governor and his signature policy are perceived in Missouri by a wielding a seemingly unlimited bank account to bring his economic vision across Kansas’ eastern border.

    “Kansas is leading the whole nation and is setting the example for everybody,” Sinquefield said in an interview with The Topeka Capital-Journal.

    A robust defense

    Brownback may already have Sinquefield on his side, but the governor made his best case Thursday anyway.

    Brownback spent much of his hourlong presentation to the Show-Me Institute (a Sinquefield-funded group) defending Kansas’ tax policy.

    The Republican governor said the primary objective of all his economic policy has been to reverse Kansas’ population decline as a percentage of the country’s entire population — an accomplishment that would boost the state’s power and influence relative to the rest of the United States.

    Brownback dismissed the furor sparked by the state’s revenue shortfall. In response to lower revenue, he has proposed a budget that calls for increases in tobacco and liquor taxes and would pause additional income tax rate cuts pending revenue growth.

    “The yelling about it is far greater than the pain that’s here,” Brownback said.

    Just this week, K-State President Kirk Schulz bemoaned a $3.1 million cut recommended by a Senate committee.

    “Continued cuts in higher education have a harmful effect on the opportunities we can provide to the students and citizens of Kansas,” Schulz said. “At a time when we see increasing enrollment, the amount of state support continues to remain in flux. We had agreed to manage a flat budget for the next two fiscal years, and the proposed change in this agreement is disappointing.”

    The governor said, as he has said before, that he is seeking to move Kansas from a state that depends on income taxes to one that uses consumption taxes. In response to a question from an audience member, Brownback said he doesn’t know at what level the state’s consumption taxes would have to be set to offset a zero income tax rate.

    Kansas state and local sales taxes are already higher than all but one of its neighbors, however. According to the Tax Foundation, in 2014 Kansas had a combined state and local sales tax average of 8.15 percent — the 12th highest in the country. Only Oklahoma ranked higher, at 8.72 percent for 5th place.

    Brownback said his policies are helping, if the objective is to grow the economy and create an environment friendly to small business. But, he said, it takes time.

    But critics aren’t so sure that is always happening. Annie McKay, director of the Kansas Center for Economic Growth, has expressed concern that money saved by business owners and other individuals from lower taxes isn’t always being reinvested back into their businesses, or even into the Kansas economy generally.

    In data released this week in conjunction with the Kansas Economic Progress Council, the group says the governor’s own economic benchmarks show the state trailing behind the region in several key indicators. According to their analysis, Kansas lags behind a six-state region in population growth, overall production of goods and services, private industry employment growth and private industry wage growth.

    “While other states in our region are experiencing superior economic growth, Kansas continues to struggle to pay its bills and meet basic needs as a result of the unaffordable tax cuts passed in 2012 and 2013. Kansans are having to pay an unprecedented tab for the failed experiment with little to nothing to show for it in our economy,” McKay said.

    Missouri watches

    As Kansas’ fiscal drama has played out over the past few years, its neighbor to the east has been watching intently.

    Missouri passed its own tax cut package last year. The bill, which was passed into law by a Republican-controlled legislature over the objection of Democratic Gov. Jay Nixon, reduces the top personal income tax rate from 6 percent to 5.5 percent by one-tenth of a percent each year beginning in 2017. But revenues must grow each year for the reduction to take place.

    In addition, a 25 percent individual income tax deduction for business income will also be phased in.

    While the Missouri cuts aren’t like the sweeping cuts in Kansas, some observers still think they spell trouble for the state. Amy Blouin, director of the Missouri Budget Project, a nonpartisan group that was critical of the tax legislation, includes some elements of what she calls Kansas’ failed policy.

    “Last year during the legislative session in Missouri, lawmakers already started to dissociate themselves with Kansas, trying to make claims that the tax cuts they were passing were not the same thing,” Blouin said.

    Policymakers in Missouri are already aware of Kansas’ fiscal difficulties, Blouin said, though Brownback on Wednesday gave his side of the story. At a luncheon in Jefferson City, the state capital, he said his tax policy had planted the “seeds of growth” in Kansas.

    Dozens of Missouri lawmakers attended the Wednesday lunch to listen to Brownback’s ideas, The Associated Press reported, including some of Missouri’s lead budget writers, Senate President Pro Tem Tom Dempsey and House Speaker John Diehl.

    Senate Appropriations Committee chairman Sen. Kurt Schaefer of Columbia told the AP the governor had “some really compelling numbers.”

    “I’m not saying this is the way for people to go. It is a way to move forward,” Brownback said Thursday of his policies.

    Sinquefield, who poured resources into lobbying for a failed tax cut effort in 2013 and the successful 2014 legislation, wants the state to keep moving closer to Brownback’s vision. In a brief interview, he enthusiastically threw his support behind the Kansas governor’s efforts.

    “People on the left who like to criticize me, I say gloat now and gloat fast because your gloating days are soon going to be over when Kansas starts really growing and joining the ranks of the no-tax states, that’s going to be the killer argument. This is a live experiment that everybody gets to watch right now,” Sinquefield said.

    Sinquefield’s use of the term “live experiment” to describe Kansas comes after Brownback’s now infamous remark during an MSNBC interview in 2012.

    “We’ll see how it works. We’ll have a real live experiment,” Brownback said then of his tax policy.

    The comment was criticized at the time and Democrats and others critical of the policy have since latched onto it, declaring that the experiment has failed. But at least for Sinquefield, the results are not yet in.

    He has also set his sights on re-creating the experiment in Missouri. He appeared confident that the major expected gubernatorial candidates will pursue lower taxes.

    Sinquefield indicated that both Republican Catherine Hanaway and Democratic Attorney General Chris Koster support decreasing taxation. Sinquefield has been providing regular funding to Hanaway’s campaign and had donated at least $900,000 by the end of 2014.

    Missouri has no limits on campaign contributions. The other Republican expected to run for governor, State Auditor Thomas Schweich, had decried what he viewed as Sinquefield’s sway over the state’s politics. A week ago, however, Schweich shot himself dead in his suburban St. Louis home.

    “If Catherine Hanaway gets elected, we’ll move at a Kansas pace because she said the income tax has to go. And Chris Koster, the Democratic nominee, has told me that the tax on businesses and pass-throughs, which right now in Missouri with the new law when it takes effect will be 4.5 (percent) said it should go to three immediately. And he’s a Democrat. So the air is ripe in Missouri for big tax cuts,” Sinquefield said.

    Sinquefield didn’t appear concerned about Kansas’ revenue loss, and asked rhetorically what people expect when taxes are cut.

    Brownback didn’t appear overly concerned, either, during his St. Louis speech.

    “Sinquefield didn’t appear concerned about Kansas’ revenue loss, and asked rhetorically what people expect when taxes are cut.” Uh, well they may have expected the tax cuts to pay for themselves if they were foolish enough to listen to Art Laffer when he was telling then that’s what would happen.

    So it will be interesting to see how Sinequefield sells future Kansas-style tax cuts to the people of Missouri since he clearly agrees with sane people that taxs cuts cut revenues too. And yet, as we saw above:


    Sinquefield, who poured resources into lobbying for a failed tax cut effort in 2013 and the successful 2014 legislation, wants the state to keep moving closer to Brownback’s vision. In a brief interview, he enthusiastically threw his support behind the Kansas governor’s efforts.

    “People on the left who like to criticize me, I say gloat now and gloat fast because your gloating days are soon going to be over when Kansas starts really growing and joining the ranks of the no-tax states, that’s going to be the killer argument. This is a live experiment that everybody gets to watch right now,” Sinquefield said.

    Sinquefield is clearly intent on bringing the Kansas miracle (of tax cuts for the rich and tax hikes for the poor) to Missouri so he’s also clearly intent on convincing Missouri that everything is going swimmingly in Kansas, where there’s “a live experiment that everybody gets to watch right now”. So either Kansas is about to experience some sort of surprise economic boom that solves its budget woes or somehow Sinquefield’s media machine is going to have an even more challenging Big Lie to tell than normal.

    As Mark Ames suggests above, “forget any hope that the awful events in Ferguson might cause a major rethink by Mayor Knowles and those who share his view of privatization-as-panacea”. And as we just saw, we should also forget any hope that the Kansas disaster will cause a major rethink of Rex Sinquefield’s supply-side ideological nonsense. And really, why would there be a rethink when these initiatives have been so successful so far? Sure, it’s only success at cutting taxes for the rich and cutting public services but that’s the whole point! More for the rich and less for everyone else has clearly the meta-objective for the right-wing oligarchy for decades. Robert Poole was just ahead of his time back in the 70’s.

    And just imagine how far ahead of its time Missouri will be in realm of privatizing everything once Sinquefield manages to convince Missouri to following the Brownback vision. Privatizing Missiouri will be like taking candy from a baby at that point.

    So it’s really just a question of what type of overwhelming psyop is Sinequefield going to unleash on the people of Missouri in order to convince the masses that Brownback’s s@!t doesn’t stink before the full-spectrum privatization of Missouri can really get underway. Maybe DARPA can help.

    Posted by Pterrafractyl | March 9, 2015, 6:53 pm

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