Outsourcing The Taxing Power

There is a lively debate currently raging over the apparent intent of the Ballard Administration to sell Indianapolis’ water and sewer utilities. Most of the criticism centers on allegations that the decision-making process has been less than transparent—that whatever the merits of an ultimate deal, the public has been largely shut out of the discussions.

In response to such criticisms, the Administration points out that its Request for Expression of Interest and all of the twenty-plus responses have been posted on the Mayor’s website. Fair enough (although that defense reminds me of the scene from A Hitchhiker’s Guide to the Galaxy, where the Vogon spaceship is preparing to destroy Earth to make way for an inter-galactic highway. When the hero protests that Earth has had no opportunity to appeal the decision, the Vogons respond that “The plans have been posted in the appropriate offices on Alpha Centuri for fifty of your Earth years.”). There have also been public hearings, although those have been focused more generally on the subject of Indianapolis’ decaying infrastructure.

Transparent process or not, it is now generally believed that the City is negotiating to sell the water and sewer utilities, probably to Citizens Gas and Coke Utility. Such a sale would consolidate management of the three utilities, and may well make sense, at least from the City’s point of view.

The Water Company is struggling to pay the bonds issued when the Peterson Administration bought it for what critics said then was an inflated price. Furthermore, substantial outlays will be required to bring both systems up to basic environmental and safety standards after decades of deferred maintenance, and the Environmental Protection Agency will insist that those repairs be done. The real question is, why would Citizens—or any other buyer—pay a billion-plus dollars for two utilities that—according to the City’s own reckoning—are somewhere between four and five billion in the hole?  

The simple answer is that a buyer can “monetize the income stream.” In plain English, that means that a buyer isn’t buying a bunch of fixed, decaying capital assets. It is buying the right to charge—and  increase—water and sewer rates.

The city would have to increase rates too, of course, but doing so would incur the wrath of citizens who have made it quite clear that they resent paying for even essential city services. The current Mayor owes his job to the anti-tax fervor that demands more for less, and who can blame him for learning that lesson?

Governor Daniels showed the way with the sale of the toll road. By selling an asset rather than paying to maintain it, a Mayor or Governor achieves two goals: an immediate infusion of cash, and deniability when rates or tolls go up.

There is a copious literature about the pitfalls of privatization. What is curiously lacking in that literature is a recognition that in too many situations, what we are really outsourcing is that quintessentially governmental power—the taxing power.