Economists call it a moral hazard when one party enters into a partnership knowing that the other partner bears most or all of the risk.
Proposals awaiting legislative action in Frankfort put Kentucky’s local governments and taxpayers on the risky end of just such a hazard.
A priority for the state Chamber of Commerce, the public-private partnership (P3) bills would create an alternative procurement process for capital projects and government services. Most states have enacted public-private partnership laws of some sort, mainly to finance transportation projects, such as toll roads, tunnels and bridges. Gov. Steve Beshear vetoed such a bill last year because it included a ban on tolls on a proposed Ohio River bridge in Northern Kentucky.
We’re less worried about the risks to state government and universities. They have experts to vet deals and protect the public interest; they also already enter into public-private partnerships. The University of Kentucky’s aggressive expansion of student housing is a conspicuous example. Another is the innovative deal to bring high-speed broadband to every Kentucky county, which Gov. Matt Bevin recently hinted he wants to undo.
Local governments, however, have far less expertise and are more vulnerable to pressure from powerful interests. They would be more at risk of falling for lopsided partnerships in which private businesses, entrusted with public functions, take advantage of unsuspecting taxpayers and ratepayers and lock them into bad long-term deals.
The local government or agency would have to seek state approval only if the contractual value exceeded 30 percent of its general fund revenue in the preceding year. An 11-member Kentucky Local Government Public-Private Partnership Board would be established to review the deals.
Thirty percent of revenue seems like a high threshold for scrutiny. And would it be possible to evade scrutiny by entering into multiple contracts for less than the 30 percent ceiling?
The litany of mismanagement and corruption in local governments is sadly too familiar to Kentuckians. Most recently, Morgan County’s former judge-executive was convicted of taking kickbacks on bridge contracts after a tornado almost wiped out his county. Or ask ratepayers in Pike County’s Mountain Water District about how local governments can fall prey to bad deals. Not even Pike County’s elected officials have been able to pry loose information about the costs of having turned over the water system’s operation to a politically-connected business. The Court of Appeals ruled last summer that the information is public record; the private company appealed to the Supreme Court, which has not yet ruled.
We’re all for unleashing Kentucky’s local governments from an obsolete state constitution that concentrates power in Frankfort. Last year, the state Senate denied voters a say on a constitutional amendment that would let local voters enact temporary sales-tax increases for local purposes.
Some local governments hammered by the steep downturn in coal-severance revenue face tax increases and severe cuts in services and personnel. It would be ironic if lawmakers who refused local governments more taxation powers also refuse to protect them and their taxpayers from being preyed upon by private interests and public officials who may not have the public interest at heart.
The legislation gives the finance cabinet until December to develop regulations based on consultations with interests that stand to profit from public-private partnerships (contractors, construction managers, engineers, architects, bankers) but no one who would be exclusively looking out for the public’s interest.
We don’t oppose public-private partnerships — certainly not in this era when elected officials flee from the mention of tax increases to save crumbling infrastructure and when Kentucky’s economy is impeded by the nation’s slowest Internet service.
But lawmakers can improve the P3 bills by asking tough questions and demanding stronger protections for taxpayers.