KENNEDY: The long and short of it

There’s an old saying to the effect that a politician’s idea of “long term” is the next election. Our system rewards folks who can front-load the goodies and postpone the pain, even when doing so is clearly not in the long-term public interest. Budget deficits are an obvious case in point.

It’s interesting, however, that many of the same people who point with alarm to the eventual consequences of those budget deficits are themselves enthusiastically burdening future generations by entering long-term transactions where the gain is upfront and the pain deferred.

As a recent article in the journal Public Administration Review wryly noted, “In the Middle Ages, the children of people who died in debt were responsible for their parents’ obligations and could be held in a debtors’ prison to ensure repayment. Today, happily, laws shield children from intergenerational debt collection. No laws stop governments, however, from borrowing and shifting the cost of repayment to future generations. … One means of accomplishing this feat is the long-term asset lease.”

The article analyzed Indiana’s toll road lease, and found that “the bulk of the benefits come early and the majority of the costs arrive late in the lease.” Because such leases securitize a longer stream of revenue than is the case with revenue bonds, leases can provide a higher upfront payment than revenue bonds. As the author notes, “This can be very attractive to current decision-makers, but the higher upfront payment is possible only because more future revenue is sacrificed.”

The toll road lease has a 75-year term. Indianapolis recently entered into a 50-year contract under which a consortium headed by a politically well-connected vendor will manage our parking infrastructure. That contract was the subject of considerable criticism for a variety of reasons, especially its length and the degree to which the city was ceding both future revenue and control of an important asset to a private company.

In each of these transactions, a major consideration was lack of political will. In our political environment, any effort to raise taxes or fees to provide services is seen as suicidal. It’s easier to let private entities raise tolls and parking fees—and much easier to let future generations pay the piper.

Politicians’ protests to the contrary, unreasonably long-term contracts inevitably entail risks that governments ought not take.

The coal gasification plant at Rockford provides a perfect illustration. When gas prices were high, Leucadia National Corp. proposed building a plant to turn coal into synthetic natural gas. The company would then enter into long-term, fixed-price contracts to sell that synthetic gas to utilities. The goal was to provide a hedge against volatility and what then looked to be likely price hikes. Instead, gas prices plunged, and in 2008, utilities withdrew from the deal.

Gov. Daniels, for some reason, was determined to save Leucadia from the market risk it had assumed. In 2009, he obligated the state to buy the gas at the fixed price for 30 years and to sell it to the utilities on the open market. According to The Indianapolis Star, the deal will add $1.1 billion to Hoosier energy bills over eight years.

These too-clever-by-half mechanisms are intergenerational transfers. They burden taxpayers now in diapers in order to deliver today’s services. Officeholders are “solving problems” by sending the bill to our children and grandchildren. It’s no less pernicious than running up the national debt—it’s just less visible.

Shades of the Middle Ages.•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com. Send comments on this column to ibjedit@ibj.com.