California differs from other states because it always has been less of a reality than a promise. Oh, there’s reality enough to go around in the Golden State, but the future always seems more important here than the present, and what might be often trumps what is.

 

A case in point: Gov. Arnold Schwarzenegger is promising that he can achieve near miracles in reforming the state’s budget woes by entering into public-private partnerships. In case you aren’t familiar with the concept, it goes like this:

The state could build infrastructure by contracting with private firms to do the work, paying for projects with tax revenues. To avoid having to come up with massive amounts of cash all at once, which would mandate huge tax increases for a few years, the state can borrow the money from the public by issuing bonds. That’s a bit like taking out a mortgage to build a house, except that the state usually pays a lower interest rate. Bonds have two important advantages — they allow the costs to be stretched out over a long period of years, reducing the treasury’s annual out-of-pocket, and when they end, they end. Temporary tax hikes often turn out to be anything but temporary, so avoiding the necessity of developing the discipline to reduce taxes after projects are paid for instead of inventing new projects on which to spend freed-up tax revenues is the second benefit.

 

That makes the governor’s preference seem almost reasonable. He wants to get private parties to invest with the state in the infrastructure projects. The usual formula calls for the private partner to operate the project after it’s completed for 10, 20 or even 50 years, taking a profit each year from the operation as the payback for its up-front investment. The arrangement is supposed to reduce the investment the state has to make, thus relieving the burden on the taxpayers’ collective wallet.

These arrangements have been tried from time to time since the beginning of this country’s history, and surely were tried elsewhere long before that. Historically, they are poor performers. Even George Washington lost money investing in such a project as a participant in a private partner syndicate.

Schwarzenegger’s sales pitch points to Canada’s experimentation with such partnerships, which he extols as the best thing that could happen to a government construction project. The Associated Press took a look, recently, at some of the projects about which the governor unembarrassedly sings praises and discovered that while he stands on the south side of the border pronouncing the northern side’s grass to be much greener than his, those up there seem to think he needs his spectacles adjusted.

 

Both government and university studies done in Canada of the long-term outcomes of public-private partnerships formed to construct infrastructure concluded what anybody ought to be able to see — adding a profit margin doesn’t really make things cheaper. It’s an accounting trick. The government says it didn’t have to raise taxes because it isn’t going to have to pay the full bill for the project. That’s absolutely true, but somebody is going to pay it, and that somebody expects to be rewarded for paying it by receiving it back with a profit added. And who pays that? Why, the public, those same taxpayers whose taxes didn’t go up directly but whose pocketbooks will be vacuumed of cash nevertheless.

Some public-private partnerships actually make sense, but usually they only make sense for discreet projects with narrowly defined goals and benefits. Major ones often provide little benefit to the government partner beyond allowing the government to hide the true cost to the public.

“Faster, better, cheaper …” That’s the way the governor describes the benefits to California’s taxpayers of public-private partnerships to build things like roads and schools. Compare his formula to how you might approach a major long-term investment and see if you really believe in the faster-better-cheaper explanation.

 

What if you wanted a new home to live in? One way to get it is to save up money for a down payment, hire an architect to design it, hire a builder to build it, buy the land, and take out a huge loan – the mortgage – to pay everybody up front. Alternatively, you could look around and find a house you liked that somebody else already had built, and you could rent the house. If you like it a lot, and if your landlord likes you, you might actually stay in that house for the next 30 years. But over the years, the rent will rise, so while you can plan for the rent expense in the short term, long-term planning is a little more difficult. You’ll be paying for the landlord’s mortgage, plus whatever profit he may add, but the least of that profit will be the increase in the landlord’s equity.

 

That’ll be 2 cents, please.