There’s Opportunity in Ashes of Those Closed Military Bases
Recent economic news has signaled that the California economy is sliding again. This slide is compounded by the fact that California, crippled by huge reductions in federal spending on aerospace and defense, never really benefited from the economic recovery enjoyed by the rest of the nation for the last three years.
However, one of the drags on the state’s economy during this period--the closure of military bases--also represents a tremendous opportunity for revitalizing California and its communities.
The key to this revitalization lies in converting these sites to productive use quickly and effectively. The majority of the installations are in or near heavily populated metropolitan areas, and their sites and existing infrastructure offer myriad possibilities for much-needed residential, commercial and recreational development.
The private sector can return these sites to productive use, but to accomplish these conversions expeditiously requires strong partnerships between business and the local, state and federal governments.
The private sector has largely avoided development of the closed bases because of the ordnance and toxic waste with which many are polluted. The federal government bears the responsibility for cleaning up this waste. But in this era of budget-cutting, the Pentagon does not have the resources to fund the cleanup effort. Moreover, with the competing demands generated by a shrinking defense budget, cleaning up closed bases ranks below maintaining weapons systems--and clothing and arming troops--on the Pentagon’s list of priorities.
Yet the private sector, through the capital markets, offers a powerful solution to accelerating the cleanup of these valuable sites, a solution that would benefit not only California and its communities but also the federal government.
The crux of the solution lies in changing the way that the environmental cleanup is financed, in particular by converting the Pentagon’s fiscal responsibility from an upfront, lump-sum payment to a stream of payments paid out over 10 to 12 years.
Here’s how it would work:
Once the costs of a cleanup have been quantified, the state or local communities could negotiate a contract with the Pentagon under which those costs would be paid out over several years. For example, if the cleanup costs for a given base were estimated at $100 million, the Pentagon could pledge to pay $14 million over each of the next 10 years or $11 million over each of the next 15 years to satisfy its obligations. The state or local authority would then issue revenue bonds backed by this payment stream to pay for the base cleanup.
In essence, the locality lends the Pentagon money--with the Treasury rate corresponding to the loan term as the interest rate--and then sells the loan to investors in the form of revenue bonds. This process has numerous precedents in the capital markets, although rarely with the federal government as the borrower.
Enactment of such a program hinges on dispelling perceptions of risk in two areas.
First, payments on these contracts would span a number of years and require ongoing congressional appropriations. Given the vagaries of the current political environment, investors and the credit rating agencies will be wary of the Defense Department’s ability to structure such contracts and to continue to fund them for the term of the bonds. This political uncertainty, for example, might limit the amount the state or local authority could borrow to 50 cents on each pledged dollar. However, even this reduced amount would still dramatically jump-start the conversion process. Most bases contain a variety of parcels and facilities, some of which are more valuable than others. The local authority could dedicate the funds to clean up the most productive and readily usable parcels of each base, delaying cleanup of the rest for later years. In a sense, the community could borrow against the value of the entire base to fund the cleanup and conversion of its most productive elements.
The second concern involves environmental liabilities. State and local governments understandably do not want to absorb any share of the costs of site restoration, which is the clear responsibility of the federal government. So the contracts must be structured simply as a financing mechanism to accelerate cleanup, and not linked in any way to issues of liability. This approach is supported by provisions in the 1993 defense authorization and appropriation bills, which indemnify states and local governments to protect them against claims arising from toxic contamination on these bases.
This financing program would yield several advantages for California and its communities. It would spur the investment in and development of new environmental technologies throughout the state. It would create thousands of new, high-wage jobs in the environmental industries required for the cleanup process. It would accelerate the cleanup of these valuable properties and more quickly return them to commercial, residential and other uses. And the federal government would benefit as well, because it could defer its financial liabilities over a longer period of time, enabling it to better manage its resources.
This new way of thinking about recycling closed military bases has many of the hallmarks of successful public-private partnerships. It requires no new public spending and effectively leverages current federal spending. Nor does it create any new bureaucracies or expand existing ones. Most important, the program aligns the motivations of the private sector and government to achieve mutual aims, thereby harnessing the power of the capital markets to serve the best interests of California.
