General Practice, Solo & Small Firm DivisionBest of ABA Sections
State & Local Government Law
Privatization and Creative Funding Opportunities
Christopher L. Rissetto, Steven A. Diaz, and Mary F. Withum
During the past decade, efforts to balance government budgets from the federal to the local level have greatly reduced the amount of money available to expand and upgrade important infrastructure assets. At the same time, the need for infrastructure replacement, expansion, and completion continues to grow, including the compliance requirements of federal and some state programs. Privatization and other creative financing mechanisms have been explored as increasingly viable means of addressing these needs. This article briefly discusses recent key initiatives at the federal level that are being implemented to encourage and expand privatization and other infrastructure funding options.
State Revolving Funds. State Revolving Funds (SRF), which are funded by revenues from both the state and federal governments, were first established to provide low interest loans for the construction of wastewater treatment plants as grant funding for the Clean Water Act was phased out. Since first implemented, SRFs have been used to provide financing for other types of infrastructure projects such as airport facilities, transit systems, and waterworks plants. The principal environmental statute enacted during the immediately preceding legislative term—the Safe Drinking Water Act Amendments of 1996—incorporated an SRF approach to funding construction for water projects.
One limitation on the use of SRFs has been that the available—though limited—funds can only be obtained by public agencies. A creative public/private solution to this impediment was recently implemented involving a wastewater treatment plant in Franklin, Ohio, which is discussed in more detail below. The plant itself was sold to a private company that had operated the plant under contract for ten years while the local government retained control of the sewage and collection system as well as ownership of the plant site, thereby enabling it to remain classified as "publicly owned." This arrangement allows the district to tap into SRF funds to finance needed upgrades that the private plant owner/operator cannot do.
State Infrastructure Banks. State Infrastructure Banks (SIB) represent a refinement and expansion of the SRF program. Infrastructure banks were first initiated for transportation programs. The National Highway System Designation Act of 1995 included a provision that authorized the Department of Transportation to establish a pilot program for ten SIBs. Last spring, out of fifteen applications, ten state programs were selected. Under the new program, the ten states can place up to 10 percent of their federal highway grants in an SIB. The states must contribute their traditional matching share to the bank’s capitalization.
It is expected that the SIBs will become an effective vehicle for financing public-private transportation infrastructure projects since the SIBs can provide greater flexibility, leveraging ability, and innovation now lacking in traditional federal programs tied to an allocation formula.
Reauthorization of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). The enactment of ISTEA in 1991 authorized increased spending flexibility that allowed certain federal dollars that would previously have been earmarked solely for highways or for mass transit to be transferred from one transportation mode to another, depending upon local needs, project readiness, and other factors. Other changes allow local matching funds for federal grants to come from new sources. For example, toll revenues spent on capital transportation projects are acceptable as the local match on a federal grant, thereby freeing that local money for other uses.
The ISTEA will come up for reauthorization in 1997, with legislative hearings starting early in the year. Because ISTEA was a bipartisan work product, it is likely that the practicality and flexibility of the funding it authorized will be expanded. The appropriations under the reauthorized ISTEA will be enormous and will likely include legislative designation of particular projects for funding. It is also likely that the successful elements and programs created under ISTEA may ultimately be copied and expanded to other areas of essential federal spending such as environmental programs.
Asset Sale Proceeds. Another creative means to finance infrastructure improvements is through the sale of public assets to the private sector that then steps in to operate privately the public assets, such as toll roads, airports, or wastewater treatment plants. The proceeds of the sale can be used to finance other infrastructure improvements.
While this concept is popular in theory, many statutory impediments—particularly at the federal level—have discouraged its widespread implementation. The primary impediment has surfaced from the 100 percent grant repayment requirement found in the "Uniform Administrative Requirements for Grants and Cooperative Agreements to States and Local Governments," referred to as the Common Rule. Under the Common Rule, once an infrastructure asset is sold to the private sector, state and local governments must repay to the federal government the full amount of any federal grant funds used to construct that asset.
The impetus for change in the Common Rule repayment requirements began with Executive Order 12,803, issued by President Bush and later enhanced by President Clinton in Executive Orders 12,875 and 12,893. Executive Order 12,803, which is the most far reaching of the three, authorizes executive agencies to grant exceptions to the strict disposition requirements of the Common Rule. Of greatest impact is the provision of the order that allows a state or local government to repay the federal grants on a depreciated basis rather than at the full 100 percent rate.
With the change in the repayment requirements, the sale of public infrastructure assets to the private sector has recently begun to take hold. For example, the wastewater treatment plant in Franklin, Ohio, discussed briefly above, was sold to a private company, Wheelabrator-Ohio, during the past year since the depreciated federal grant repayment obligation reduced the municipality’s costs of sale and thus enabled the private company and the municipality to negotiate an acceptable sale price.
In fact, under the criteria of Executive Order 12,803, the federal grant had depreciated to zero so that the municipality was able to reap approximately $6 million from the sale, which it used to reduce certain debt obligations as well as finance other infrastructure improvements. The private company will undertake the operations of the wastewater treatment plant at rates lower than the municipality had charged for operation.
Potential Drawbacks. The current success of privatization through asset sales, however, is not without potential problems. For example, the sale of a public asset to the private sector raises the potential for employee layoffs or morale problems. Wheelabrator-Ohio has attempted to deal with this concern at its Franklin, Ohio, plant by either offering employment in the same position to the current employees or offering the employees another job opportunity within the company. The large size of the Wheelabrator organization, as well as its expansive network of operating agreements encompassing other wastewater treatment plants throughout the country, has enabled the public to private employee transition to flow more smoothly.
Compliance issues raise another potential drawback to privatization initiatives. Again, the Franklin, Ohio, plant privatization provides useful guidance on overcoming this issue. At this plant, the municipality and the private operator jointly hold the National Pollution Discharge Elimination System permit. This mechanism encourages both the municipality and the private company to keep the system operating properly since both share the risks and financial liabilities of permit violations.
Christopher L. Rissetto is a partner and Mary F. Withum is a senior associate at Holland & Knight LLP in Washington, D.C. Steven A. Diaz is a partner at Dykema Gosset PLLC in Washington, D.C.
This article is an abridged version of one that originally appeared in State & Local Law News, Winter 1997 (20:2).