US cities could turn billions invested in airports into cash for other projects for the first time

More than two dozen local governments across the country sit atop gold mines worth an estimated $ 131 billion – money they could use to bail out the pensions of under-employed workers. funded, to support conventions and tourism businesses that have been curtailed by the pandemic, or to build or improve new existing urban infrastructure such as roads and parks.

A recent study by the Libertarian Reason Foundation suggests that cities, counties, regional transportation authorities or state governments that have medium and large-sized airports in the United States could access huge sums of money by leasing these airports to private airport operating companies. The legal process, according to Reason’s study, would follow the same formula used when those same government entities enter into long-term privatization deals with companies that then charge tolls to pay off the debt they typically incur to fund the big ones. upfront rental fees that they typically pay, while still making big profits.

It is a method for local or state governments to turn their substantial investments in critical infrastructure, often made over decades, into cash that they can use to fund other initiatives. In some cases, such agreements allow cities, regional or state governments to build entirely new infrastructure, such as highways, which they would not otherwise be able to afford.

Until recently, it was illegal for local governments to enter into these kinds of privatization deals involving airports. Because all public airports in the United States receive at least federal airport development grants, they have historically had to comply with federal funding rules that state that local airport owners cannot embezzle the money they do. they get from these airports to projects or for purposes not directly related to them.

But in 2018, Congress authorized the Airport Investment Partnership Program, which allows local government entities that own airports to use the proceeds of certain types of long-term leases at those airports for other government purposes. The only big limitation: Governments must first repay any existing bond debt against their airports before using any remaining rental proceeds for non-airport purposes.

In most cases, municipal governments – which are typically the owners of this country’s major commercial airports – would still walk away from an airport lease with billions of dollars in cash, even after paying off the bond debt. from their airport. Yet even after paying off any bond debt backed by airport facilities, most cities or other government entities that lease their airports to operating companies would reap a cash bonanza that they would never otherwise have been able to access.

And make no mistake, the sums of money local governments could tap into are huge: The Reason Foundation estimates that $ 131 billion could be unlocked by leasing just 31 large and mid-sized US airports assessed by its study.

For example, the rental of the Los Angeles International Airport could bring in $ 17.8 billion to its owner, the city of Los Angeles. San Francisco International Airport, which is jointly owned by the city and county of San Francisco, could bring in $ 11.9 billion under a lease, according to the Reason study. Leasing the Dallas-Fort Worth Airport, jointly owned by these two cities, could earn them $ 11.9 billion in cash, while doing the same with Hartsfield-Jackson Airport could bring in $ 9.2 billion. dollars to the city of Atlanta.

Alternatively, local governments that own airports could choose to enter into agreements to lease only part of their airports to operating companies by partnering with an airport management company to create a public-private partnership. who would serve as the airport operator. The city or other local government could keep, say, a 40% stake in the partnership. This would produce less cash for immediate use elsewhere in its jurisdiction, but it would retain greater control over how their airports are managed and developed and / or greater financial flexibility which could be useful if this government entity were to raise more. of cash later.

Certainly Robert Poole, study author and co-founder and director of transportation policy for the Reason Foundation, warns the local government against viewing airport lease agreements as a quick way to score short-term political points with voters.

The “proceeds from the rental of a major infrastructure asset such as an airport should be used to strengthen the jurisdiction’s balance sheet, rather than using such a windfall for short-term operating budget needs”, he wrote.

But he also listed three areas where the money raised by leasing an airport from an operating company could be put to good use by the city or other local governments:

• Necessary infrastructure that the government agency could not otherwise afford
• Repayment of existing jurisdictional debt
• Cover all or part of a funding gap in the government entity’s employee retirement program

“The relative attractiveness of using the lease proceeds for each of these purposes will likely depend on the specifics of the city, county or state in question,” Poole wrote. “A government with an urgent need for major unfunded infrastructure may find this use the most attractive, while a jurisdiction where unfunded pension liabilities threaten either significant tax increases or something else. apparent bankruptcy may prefer to use an airport windfall to shore up his retirement system. . “

In fact, the Reason study found several U.S. jurisdictions where the proceeds from leasing the airport under a public-private partnership agreement would produce more than enough cash to cover the unfunded pension liabilities of these. jurisdictions. He found other cases where such products “could significantly reduce these liabilities.” But he also found several jurisdictions in his study where the proceeds from leasing the airport to an operating company would not generate enough cash to have a more than modest impact on the jurisdiction’s extra large pension liabilities.

Poole also noted that his estimated combined value of $ 131 billion in rental value from 31 airports is, by his own assessment, a conservative estimate. Thus, it is possible that some or all of the 31 airports he examined could generate even greater sums of money for the jurisdictions that own them.

This is because the study assessments of the different airports it looked at assumed that each airport’s value was 20 times greater than its annual profit before interest, taxes, depreciation and amortization, or EBITDA, which is a widely used measure. annual cash flow. However, earlier this summer, Sydney International Airport, Australia’s largest, secured a $ 17 billion lease offer that valued the airport 26 times its EBITDA. Still, Sidney officials rejected the offer because they believed it undervalued the airport. This suggests that the Poole valuations of these 31 U.S. airports could be significantly lower than their actual market values. And that potentially means that the combined value of those 31 U.S. airports included in the Reason study is significantly higher than the $ 131 billion the study tied them to.

Skytrax, a British aviation consultancy, notes that 11 of what it considers the world’s top 25 airports are privatized, most through lease agreements like those advocated by the Reason study.

The Reason study further suggests that the privatization of airports through such long-term lease agreements could also help raise the level of service at US airports. Such agreements, the study suggests, would allow these airport management companies to invest in new airport facilities and services faster and more nimbly than government agencies could make such investments. And under private (leased) ownership / operating arrangements, US airports could migrate more quickly from their current heavy reliance on fees and charges paid by airlines to a more revenue-generating model. dependent on users of non-aeronautical airports, retail concessions, parking, rental cars, and other non-air airport revenue sources. This would reduce the barrier for airlines to enter airports they do not currently serve or for the expansion of services at airports where they currently have a small presence.

Several airlines have already spoken out in favor of recent proposals by private airport operators to lease airports in Chicago, St. Louis and Westchester County, NY.

In line with the Reason Foundation’s longstanding advocacy for public-private partnerships for the construction, growth and operation of capital-intensive infrastructure such as highways and airports, Pool encourages cities, regions or US states to seriously consider such rental agreements. Such arrangements are becoming more and more common, he noted, in Europe, Australia and Latin America.

Currently, 75% of air travelers in Europe and 66% of those in Latin America use airports that are operated by airport management companies rather than being directly operated by government agencies. In most of these cases, cities or other government agencies have retained at least a small percentage of the capital of special purpose companies which they have formed in partnership with a professional airport management company. Such public-private partnership agreements often entail special tax and financial advantages which the management companies of purely private airports often cannot claim.

Currently, the United States has the smallest participation in such agreements of any economically advanced country in the world, with the only lease agreement at an airport in San Juan, Puerto Rico, an American territory in the Caribbean.