Privatization Pitch: Better Way to Raise Revenue for Cities? : Pressure mounts as local governments scurry for revenue; but selling LAX is unwise--there may be other ways to tap its revenue

When Los Angeles International Airport opened the first hangar door in 1947, its enormous success as a commercial airport was by no means assured. Los Angeles, the city, was just beginning to undergo the massive postwar building and population boom that would transform it into a major international hub. Los Angeles, the airport, opened on that hope--a wing and a prayer, as it were.

The city, which owns LAX and operates it through its airport commission, enticed airlines to use the new airport by offering unbeatable financial incentives. The city signed long-term operating agreements giving carriers what turned out, decades later, to be bargain-basement landing fees. What’s more, the City Council passed charter provisions, similar to those in other cities, that protected airport revenues from the reach of other city departments that might siphon off the airport’s profits.

THE PROBLEM: Today it is the city’s budget that is in the red--perhaps $100 million at the end of this fiscal year--and the airport that consistently turns a profit, $25.6 million last year alone. City officials have looked longingly at those untouchable airport profits for some time now. But that revenue is off-limits and likely to remain so without major legal changes: Charter provisions that cordon off airport profits must be rescinded by voters; revenue bonds that maintain the airport’s low landing fees as part of an operating formula must expire; and the Federal Aviation Administration must sign off on these changes.

Exasperated with the formidable barriers to the city’s use of airport revenue, local officials have begun to talk about selling LAX. Council President John Ferraro, who recently called for a study on the feasibility of selling or leasing LAX, is only the latest to publicly eye LAX’s coffers and dream about an airport purchase price estimated as high as $2 billion. Ferraro’s council colleagues, Joy Picus and Joel Wachs, also have expressed interest in finding a way to tap revenue from the airport.

The financial arrangement that best served LAX during its tenuous infancy is clearly no longer in the best interests of the city or of the community it serves. The airport’s long-term agreements expire at the end of this year; but without major charter and revenue bond changes, the city cannot even significantly raise the landing fees it charges, much less sell the airport.

The airport commission must find a way to update the city’s financial arrangements at LAX. The commission is already looking into alternatives to the present lease structure and has hired a consulting firm to study a range of options, including both private and reconfigured public ownership. That study will be completed by midyear.

What council and airport commission members need to do in the meantime is not grandstand but carefully consider the widest possible range of options, including private as well as continued public ownership on terms more profitable to the city. They should then initiate the dismantling of some of the ironclad protections they gave airport revenues. Once they do, they must remember that whether LAX is in public or private hands is much less important than the protection of the public interest. It is by no means obvious that selling LAX is the best or the only direction to take.

WHAT IS PRIVATIZATION? Recurring deficits in local and state governments across the country, along with growing appeal of the conservative notion that almost any public task is better performed in private hands, have sparked interest in privatization--turning over public assets or government functions to private firms. Privatization usually means substituting private employees or firms for public ones to perform specific functions, a process known as “contracting out.”

Most state and local governments contract out some services; most have achieved some direct cost savings as a result. In Los Angeles County, private firms perform some asphalt resurfacing, janitorial services, street sweeping, fleet maintenance and other services. Orange County currently contracts out services worth more than $2 billion and plans to do more.

Recent attention has focused on turning public facilities, their property as well as their operations, over to private business. Nationally, asset sales are not common. Airports have generated the most interest because they generate so much money. In 1987, the British government sold the British Airport Authority, which owns and operates the three main London airports--Heathrow, Gatwick and Stansted--and four major Scottish airports.

But no commercial airport in the U.S. has been sold and only a few large commercial fields are privately operated. Burbank Airport is one; owned by a multicity airport authority, it has been operated since 1978 by Lockheed Air Terminal. Several smaller airports, including those at Albany, N.Y., and the Pacoima, Lancaster, El Monte, Compton and La Verne airports in Los Angeles County are also privately operated.

THE POTENTIAL: The major advantage to the city from the sale of LAX would be the revenue it would gain. In addition to the $1.3 billion to $2 billion sale price, the city would realize millions in new property-tax revenue each year by adding the airport to the tax rolls; 1% of $1.3 billion would be another $13 million. Prudent investment of the airport’s sale price could yield perhaps $150 million more in annual city revenue.

Privatization supporters also argue that airport owners, in pursuit of greater profits, would expand terminal and runway capacity at a faster pace than is occurring now. Capital airport projects are currently financed through an 8% passenger ticket tax; the FAA distributes these funds for expansion projects at airports throughout the country. Advocates say that because of this cumbersome financing system, expansion has failed to keep pace with the near-doubling in air travel since deregulation in 1978.

But discussions of privatization quickly reinforce the adage that there is no free lunch.

SOME WARNING LIGHTS: If airlines must pay higher landing fees, either because the city has sold LAX into private hands or because the city still owns the airport but upped the landing fees it charges, the airlines are likely to pass along those increases in the form of higher ticket prices.

Moreover, while the city might get new revenue by privatizing LAX, it could lose federal revenue, notably the $18 million or so it received last year from the FAA for runway extensions, resurfacing, new lights and other improvements. The FAA must insure such funds are properly used, and one reason it blocked the proposed sale of the Albany, N.Y., airport into private hands was because federal officials were concerned that some federal funds might be used to pay dividends to shareholders. However, the FAA seems more comfortable with private management --as opposed to ownership--of airports and has continued to grant improvement funds to those facilities.

Privatization could very well generate capital to expand airport capacity. Yet private ownership or operation of a major municipal service such as an airport also inevitably raises concerns about price gauging, corruption and lack of accountability.

WHAT’S BEST FOR L.A.? That’s why private sale or lease should not be the only option for LAX. A privately owned or managed LAX will best serve this city only if the city sets well-defined efficiency goals and obligations to debt and equity holders and ties the pay of airport managers to their performance.

Privatization also works best when the service or asset is in a competitive market and that is unlikely to be the case in Los Angeles. Competition from other companies can “discipline” managerial behavior; the lack of competition can lead to higher costs and concerns about corruption.

The challenge for Los Angeles’ leaders, as the airport’s operating agreements expire, is to define the conditions under which managers--whether they are public or private--will be most likely to act in the public’s interest. The challenge is also to garner enough public support to remove the legal obstacles to private management or ownership as well as those that block more rational distribution of airport profits.

That process involves gaining Council and voter approval to amend the charter, and seeking the support of the FAA. This slow work is unlikely to generate headlines. But in the world of city finance--and airport operation--there are no quick fixes, and few pots of gold at the end of the runway.