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Shadow Elite: If You Believe That, I've Got a Bridge to Sell You....

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A note from Shadow Elite author Janine Wedel:

America's governors descended on Washington this week for their association's winter meeting. To see the amiable crowd mingling in black tie at the Governors' Ball, you'd never guess these public servants are in the midst of a fiscal tsunami, frantically slashing jobs and vital services as they face a combined $134 billion budget hole over the next three years. This post, by Donald Cohen, Executive Director of the Center on Policy Initiatives, is a troubling look at one way politicians are trying to help plug that staggering hole: selling off bridges, buildings, even parking meters to private enterprise, in deals engineered by the very Wall Street interests that helped bring on what some call the Great Recession.

It's a hometown version of Government Inc., one of the disturbing trends I explore in my book Shadow Elite, in which private contractors are increasingly taking over public functions, or in this case, actual public assets, and laying the groundwork for power brokers to pursue their own agenda. The average citizen has little or no say as to how these deals get done. And there is an even more profound loss: private business not only buys that hard asset, but also buys the power that comes with it, usurping the ability to make policy decisions affecting you and me that used to be the job of government, with traditional check and balance. As the power goes, so does the public sphere. As Cohen shows, politicians who need easy money are engaging in a sort of fiscal swindle, and the ones getting conned are taxpayers, their children and grandchildren, as public assets fall into private hands for decades, or, perhaps, forever.

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A century ago, con men got away with selling the Brooklyn Bridge to immigrants looking to buy a piece of America and get rich quick. The swindle became standard shorthand and joke for gullibility.

Today it's no punchline. Mayors and governors staring down massive budget gaps are putting bridges, buildings, parking lots, and more up for sale. Who's buying? Wall Street, which, in turn, wants to sell off your public assets to investors with the promise of sure-fire returns. Sound familiar, too good to be true? It is. But with layoffs and severe public service cuts looming, the prospect of fast cash - whatever the long-term consequence - is intoxicating. And politicians are drinking it up.

In December 2008, Chicago's Mayor Daley rushed a 75-year lease of the City's 36,000 parking meters through City Council for $1.15 billion in much-needed budget cash. There were no public hearings, no financial analysis, no alternative solutions given to the Council before it voted. The Mayor's maneuvering was so airtight that his next proposed budget included this revenue even before the deal was done. Aldermen were given the impossible choice - question the deal or fill a $150 million shortfall. The result: a Morgan Stanley-led venture, Chicago Parking Meters, snagged a "win-win" deal for themselves, and a "win now-lose later" deal for the city.

The way the deal went down, and its implications, underscore the troubling developments examined by Janine Wedel in her recent book, Shadow Elite.
Increasingly, small groups of power brokers, not public servants, are helping to midwife decisions, with little or no oversight, that benefit themselves, the politicians and players they're connected to (here, primarily in the form of an easy budget fix), but not necessarily you, the voter and taxpayer.

That's what happened in Chicago. When the private operator upped rates and installed faulty meters, a public backlash led to an after-the-fact investigation. The Chicago Inspector General concluded the parking meter lease was a "dubious financial deal." The IG said the city received nearly a billion less for the system that it was worth, and the hasty "crisis" nature of the decision making process meant that Daley didn't evaluate better deals.

Before the ink dried, lawyers, accountants and financial advisers earned a reported 7 million in fees. {In classic shadow elite fashion, some of these same power brokers, including Morgan Stanley and a law firm with a partner who is reportedly one of Mayor Daley's best friends, Katten Muchin Rosenman, would later show up in Pittsburgh, earning fees there for parking privatization guidance.}

And what did the public get? The "desperation sale" includes a provision that says the city has to pay the operator for lost revenue each time the city closes a street for repairs, art fairs or block parties. The company actually bills the city any time cars can't park at their meters.

But the long-term consequences are far more disturbing. As Wedel argues, deals like the one in Chicago go well beyond simple government contracting. Private interests are increasingly eating up not just public assets or functions, but also the public power that comes with those assets, power to make policy in a way that good government demands: with transparency, accountability and with the interest of the public front and center. With each lease signed, pieces of official government disappear, as does your right as a taxpaying citizen to control what should be part of the public sphere, now and well into the future.

Take the provision that prevents Chicago from opening new parking garages nearby that could compete with private parking meters. It's a straight-jacket that will prevent public policy making for 75 years. Imagine a city council 40 years from now that wants to build parking lots to help control, say, sprawl or global warming. They would have to pay the parking meter company (whoever owns it in the future) for lost revenue if they wanted to act, as they rightfully should, in the public interest.

The privatization craze is happening all over the country, and the risk of vanishing public power spreads with it. Los Angeles Mayor Antonio Villaraigosa is proposing deals to cash in on city parking, as well as a fire sale of the City's Convention Center. The irony there is that a new nearby redevelopment project is finally putting the Convention Center in the black after years of subsidies. Public convention centers often run with city subsidies because the city benefits in various ways from tourism. Shifting the Center to private control could jeopardize that economic benefit, if the operators make decisions based solely on their bottom line.

Governments are also selling or leasing their own buildings. Last month, the Arizona Legislature announced a 20 year sale-leaseback offer of the State Capitol, a deal put together by Morgan Stanley and Citigroup. And in California, Governor Schwarzenegger is proposing to sell landmarks, possibly San Quentin State Prison, the Los Angeles Memorial Coliseum and the California State Fairgrounds, among others.

But at least one community learned the hard way about a myth that Wedel discusses in Shadow Elite: that private interests can do the job of government better than public servants. Three years ago, Milton, Georgia signed a lump-sum contract with international management firm CH2M Hill to handle all day-to-day city operations except public safety. Luckily for Milton taxpayers, the deal was performance-based. CH2M Hill wasn't performing as promised, and just last month city officials cancelled the contract, actually saving a million dollars a year by taking those functions back to the public sphere.

Milton Georgia had the luxury of being able to return that Brooklyn Bridge they got sold on. Hopefully, today's mayors and governors will begin to realize what sounds too good to be true, probably is, and put the hard questions to dealmakers before they jump. In resisting a seemingly easy fix, they'll preserve for future generations the power to chart their own course, and protect the public interest without the distorting incentives that come from private control.

Edited by Linda Keenan.

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