HJR 72: Joint Subcommittee Studying Public-Private Partnerships Related to Seaports in Virginia

September 24, 2009

The Joint Subcommittee Studying Public-Private Partnerships Related to Seaports in Virginia held its sixth meeting at Old Dominion University in Norfolk.

Presentations

Paul D. Fraim, Mayor, City of Norfolk
Mayor Fraim thanked the joint subcommittee for allowing him to expand upon his remarks from the previous meeting. His comments focused on the proposed tax exemption of privately operated port operations. He stated that Norfolk is proud to be the home to the Port of Virginia’s largest and busiest facility, Norfolk International Terminals. For more than 300 years, international trade has defined the city. Mayor Fraim explained that the Port of Virginia has been developed and nurtured by Virginians for generations and that we owe it to those generations and to future generations to be good stewards of the Port.

Mayor Fraim mentioned the recent Virginia Port Authority (VPA), Virginia International Terminals (VIT), and APM Terminals discussions that have been ongoing since December 2008 under a Federal Maritime Commission Discussion Agreement. Although these discussions are not part of the overall Public-Private Transportation Act (PPTA) process or the bid review currently underway, Mayor Fraim explained that such a development gives greater reason for pause and careful examination. Whatever the outcome, the long-range interests of the Commonwealth and the Port must be kept in view, regardless of how attractive short-term proposals may be.

Mayor Fraim then mentioned the three proposals submitted by CenterPoint, Carrix, and the Carlyle Group. As he understands it, the Virginia Port Authority would remain an asset of the Commonwealth and continue to be exempted from real property, leasehold, and business property taxation under the provisions set forth in the Virginia Code. However, each of the three proposers has structured its proposal to capitalize and enjoy VPA’s tax-exempt status. This would be precedent-setting and contrary to prior experience. As discussed with the joint subcommittee during the last meeting, when the U.S. Navy leases base property to a McDonald’s restaurant in Virginia, this becomes a taxable event and local taxes are collected on the value of the McDonald’s lease in the form of a leasehold tax. Local business taxes are also collected such as meals tax and machinery and tools tax - even though the business is situated on land that is owned by the federal government. For example, the City of Norfolk collected $1.6 million in calendar year 2008 in business-related taxes from private businesses operating on Norfolk Naval Base. He stated that a private port operator, proposing to lease state-owned property and conduct business as a private entity, should be treated no differently.

Mayor Fraim then mentioned the 1999 Joint Legislative Audit and Review Commission's report titled Review of the Impact of State-Owned Ports and Local Governments (http://jlarc.virginia.gov/reports/Rpt241.pdf). According to the report, port host cities in Virginia have a disproportionate cost to share compared against the actual economic benefits received. In fact, under the current structure, the Port actually costs host communities more than they are compensated for in terms of lost tax revenue; additional police, fire, and rescue services; and added street maintenance and transportation infrastructure impacts on communities, not counting the truck traffic congestion, noise, and pollution that affect citizens’ quality of life on a daily basis.
As a result of the JLARC Study findings, the 2000 Virginia General Assembly amended the Virginia Code governing the calculation of a Port Service Fee. This legislation outlined a new Payment in Lieu of Taxes (PILOT) methodology for determining what the Commonwealth and the VPA should contribute annually to VPA host localities. Unfortunately, the PILOT program has not been fully funded to date. As Mayor Fraim explained, since the PILOT program became law more than nine years ago, Norfolk has had to calculate and collect an annual port service charge using the same inequitable formula it used prior to the 2000 PILOT legislation. This consistent underfunding and tax exemption of port operations have placed an ever increasing fiscal burden on communities that are already classified by the Commonwealth as recently as March 2009 as “fiscally stressed.” In FY 09, the City of Norfolk received a combined total of $1.1 million for the city’s support and provision of fire-rescue and roadway maintenance costs attributed to port operations. The service charge amount from the VPA totaled $485,000 and Norfolk's proportional share of Port Highway Funds from the Commonwealth totaled $610,000. In estimating the City of Norfolk’s service charge to be received from the Virginia Port Authority, the city made a variety of assumptions based on the best publicly available information. The 2000 legislation references “Total Tonnage” as a key component of the calculation. It is clear that the City of Norfolk receives a fraction of the potential revenue under existing law, or as would be available to the city if these facilities were fully taxable.

Mayor Fraim explained that the city understands that these are tough economic times for the region, state, and country. The Commonwealth could potentially gain a significant short-term financial benefit if it were to accept one of the three competing proposals. However such a decision requires careful evaluation of each proposal, including the adequacy of compensation for host communities. Specific to the PPTA process, representatives from the port host communities should be appointed to the PPTA Independent Review Panel, as is typically accomplished in other PPTA processes. As the three conceptual proposals are considered, either the proposers and/or the Commonwealth must identify how they would address the inadequacy of the currently employed PILOT methodology.

In closing, Mayor Fraim stated that whether the VPA operations remain a state function or ultimately are privatized, any successful model must provide equitable compensation for host jurisdictions as a primary component of its overall business plan.

Dr. Robert Martinez
Dr. Martinez began his remarks by stressing that he was speaking solely from his own perspective, not on behalf of his company, Norfolk Southern. His remarks focused on the primary questions that the Virginia Port Authority and the Secretary of Transportation should consider in their review of the proposals. Fifteen years after its passage, Virginia's PPTA remains one of the most progressive, flexible, and market-oriented pieces of legislation. Dr. Martinez believes it would be a mistake to insert the General Assembly directly into the PPTA process. The current procedures attract private capital to Virginia and allowing direct participation by the General Assembly might hinder the state's ability to attract that capital for other infrastructure projects. He recommends that this joint subcommittee pull together a series of considerations that the oversight board should answer in its deliberations prior to making a decision on these proposals.

Dr. Martinez set out some thoughts to consider as the proposals move through the PPTA process. The VPA has done well over the years. Therefore, it is a business model that works, but that does not mean it should not be questioned. Virginia must focus attention on its surface transportation connections to inland markets (pertaining to road/highway issues and freight rail). In looking at these proposals, it is important to consider how inland transportation connections will be enhanced. Dr. Martinez commented that the timing of this process is not the best. This is perhaps the worst international maritime freight period since World War II. The markets have been in much greater turmoil than prior to last year's financial meltdown, which makes proper valuation more difficult than in normalized markets. Next, he mentioned the length of the proposed concession and stated that no one can accurately undertake a 60-year valuation. Another important consideration involves looking at the treatment of VPA and VIT debt. Dr. Martinez concluded by stating that there are many great items in the proposals (e.g., financing, operating style, or operating management) that are not necessarily related to a privatization proposal per se and that could be pursued without a public-private transportation agreement.

Dr. Wayne K. Talley, Executive Director, ODU Maritime Institute
Dr. Talley presented sets of questions that should be asked in connection with the three proposals. The questions regarded the following areas and the entire presentation can be viewed on the joint subcommittee’s website:

• Private operator payments.
• Quality of service.
• Penalties and rewards.
• Bankruptcy and goals.
• Length of contract.
• The recent VIT/APM proposal.
• Timing of privatization.

Jerry A. Bridges, Executive Director, Virginia Port Authority
Mr. Bridges explained that the Port of Virginia is a port that (i) is efficient and, during its best year in 2007, handled more than two million TEUs making it the third busiest container port on the United States East Coast (USEC); (ii) is a very healthy operation that has the necessary infrastructure in place, or is building it, to handle a growing volume of containers; (iii) is continuing to use its natural assets to its advantage; and (iv) has historically had good labor relations with its union. All of these things stem from a long-term, forward-thinking relationship of 29 years between the Virginia Port Authority (governmental agency) and Virginia International Terminals Inc. (private operator). In the industry the VPA-VIT set-up is seen as a model owner-operator relationship. They have a close collaboration and work together on multiple fronts: infrastructure development, customer service, economic development, and advance planning. In 1982, TEUs at the Port of Virginia totaled 289,000 and grew to two million in 2007. For 29 years, the VPA terminals have been run and managed by a private operator. Many of the benefits that the Commonwealth has enjoyed as a result of the Port’s success are the result of a continual collaborative economic development effort among VPA, VIT, the Virginia Economic Development Partnership, other state agencies, and local governments. The most visible result of that effort is that one out every nine jobs in the Commonwealth is in some way tied to the marine cargo operations in Hampton Roads. It is hard to estimate what the job creation and/or impact will be as two out of the three bidders have no experience in maritime operations. Mr. Bridges stressed that job retention and creation are the result of a competitive port and that job loss only comes when the Port cannot compete with other USEC ports.

Next Meeting

The next meeting will be November 12, 2009, at noon at Old Dominion University.

Chairman:
The Hon. Harry Purkey

For information, contact:
Kevin Stokes, Caroline Stalker , DLS Staff