Out of Control Policy Blog

Daley Announces Winning $1.1 Billion Bid for Chicago Parking Meter System

Today, Chicago Mayor Richard Daley—the U.S. urban privatization leader— announced the winning bidder for a blockbuster $1.1 billion (yes, that's BILLION), 75-year lease of the city's downtown parking meter system. Assuming City Council approval later this week (they passed the Midway lease a unanimous 49-0 just a few weeks ago), this will represent the first privatization of an urban parking meter system in U.S. history.

We know by now that Mayor Daley has a knack for finding crafty asset lease opportunities, but the parking meter system lease really represents the cutting edge of creative thinking about just how far you can go in mining your balance sheet for opportunities to leverage and extract value from government assets. Here's the skinny:

Motorists will pay $6.50 an hour by 2013 to feed downtown parking meters – more than double the current rate – and neighborhood parkers will see an eight-fold increase under a $1.15 billion privatization plan unveiled Tuesday.

Buoyed by the nearly $5 billion gravy train generated by privatizing the Chicago Skyway, downtown parking garages and Midway Airport, Mayor Daley on Tuesday unloaded yet another city asset: Chicago's 36,000 parking meters.

The winning 75-year bid was submitted by Chicago Parking Meters LLC, a partnership that includes Morgan Stanley Infrastructure Partners and LAZ Parking.

In exchange for net parking meter revenues that totaled $19.5 million in 2007, the city will get an upfront payment of $1.15 billion and wash its hands of responsibility for maintenance, collections and technology upgrades.

The city will continue to write parking tickets but the contractor can "supplement" those efforts "to protect its revenue," meaning enforcement could get tougher.

Chicago's metered parking system operates under six different zones with varying rates and time limits. Motorists pay anywhere from 25 cents an hour in outlying neighborhoods to $3 an hour downtown.

The rates have been a bargain for decades, but not for long.

In addition to the possibility of "congestion pricing," the deal calls for meter rates in the Loop to rise from $3 an hour to $3.50 in 2009, $4.25 in 2010, $5 in 2011, $5.75 in 2012 and $6.50 in 2013. Central business district rates outside the Loop will go from $1 an hour to $2 in 2009, $2.50 in 2010, $3 in 2011, $3.50 in 2012 and $4 in 2013. Rates will be cut in half between the hours of 9 p.m. and 8 a.m.

Neighborhood parking rates that now range from 25 to 75 cents an hour will rise to $1 in 2009, $1.25 in 2010, $1.50 in 2011, $1.75 in 2012 and $2 in 2013.

Hours of operation will also be standardized.

After 2013, rates are expected to rise "at the rate of inflation," subject to City Council approval. Aldermen will retain the right to alter the number of meters and their hours of operation. But if they "negatively impact" meter revenue, the private operator will have to be "made whole."

"Seventy percent of these rates haven't been adjusted in 20 years. Charging market rates makes great sense in terms of making available spaces for small businesses," said Chief Financial Officer Paul Volpe.

If charging market rates makes so much sense, Daley was asked why the city didn't do it.

"Well, many times, people were afraid to do it," he said. "This is the best thing that has happened for us in regards to getting out of this business. This is not the core business of the city of Chicago."

Daley plans to divide the proceeds into four different funds: a $400 million long-term reserve to replace annual parking meter revenue; $325 million to help balance city budgets through 2012 and plug the gap currently filled by the soon-to-expire mid-term fund created when the Chicago Skyway was privatized; $100 million for human service programs; and a $324 million "rainy day fund" to bridge the gap until the nation's moribund economy starts to grow again. [...]

By the middle of 2011, all Chicago parking meters will have to offer both cash and cashless payment options.

That means more pay-and-display boxes and pay-by-phone options far beyond the 1,000 beeper-like devices that sold out in a week last fall.

The Brave New World of parking technology could also include sending e-mails to motorists describing parking and traffic conditions and calling their cell phones to let them know the meter is about to expire and asking them if they want to purchase more time.

More here and here.

Just as the Skyway lease sparked tremendous national interest in brownfield toll road leases, just as the parking garages lease sparked several cities to pursue garage privatization, and just as the Midway Airport lease has New Orleans, Austin and other cities seriously exploring airport privatization, so too can we expect the parking meter system lease to spark a national interest in pursuing similar opportunities. I'll go out on a limb and say that within the next month, I expect to post an article from some other city or county exploring parking meter privatization, citing Chicago as the inspiration.

Seriously—how many cities before today knew they were potentially sitting on a gold mine with such an unsexy, mundane asset as parking meter system? How many urban leaders knew before today that they could turn a system with $20 million in annual revenues into a billion-dollar opportunity? Few, I'd wager. Today, it's a live opportunity thanks to Daley.

For additional perspective on the parking meter lease, I spoke today with Michael Smith, a projects lawyer with the firm Baker & McKenzie in Chicago, who represented other bidder groups in the parking meter auction. Like myself, Smith sees the parking meter/garage transaction as a watershed event for the PPP (public-private partnership) market in the U.S. According to Smith, "some constituencies have traditionally rejected privatization of assets that are perceived as inherently public assets such as airports and toll roads. However, nothing about parking meters or a parking garage is inherently a public asset except the collection of the fines and the ownership of the underlying pavement. In the Chicago transaction, collection of fines will remain the City's right and responsibility and the City will continue to own and have the right to modify the streets".

Smith says that his firm is already talking with a number of municipalities looking at public private partnerships as a way to manage their budget problems and that officials are universally impressed with Chicago's results. "Municipal bond markets are frozen and municipalities are competing with each other and with the world to keep taxes low. With these high bid values out of Chicago as an example, municipalities are finding that they have no choice but to reconsider how they own and operate their assets." Smith predicts that municipalities and states will first look to enter into public private partnerships for their more simple assets like parking meters and parking garages. Those experiments, if successful, will likely lead to acceptance of PPPs for less obvious assets, such as waste collection, wastewater management, public transportation and other similar businesses and real estate run or owned by municipalities."

Smith was also quick to point out the political significance of the premium price paid for the parking meters: "These sale prices show the extraordinary value that PPPs can generate for the public. As a rule of thumb, well run non-public companies sell for between seven to ten times earnings. The parking meters were generating roughly $18 million in revenue, so Morgan Stanley's bid reflected a sale price of approximately 50 times earnings. That high valuation follows on the heels of the Chicago parking garages lease, which sold for a similarly extraordinary multiple of historical earnings. The City of Chicago was smart to recognize that the parking meter system was an asset worth more than a billion dollars in private hands, but generating little revenue for the City. It just made good business sense to let someone else operate and run the system"

Critics will say that that the increase in value is simply the result of the increases in the parking charges that will follow privatization. Smith challenges those criticisms: "The City of Chicago squeezed value out of its assets and will now be able to use the money in a deliberate and positive way. Instead of indiscriminately subsidizing parking, increasing congestion and inefficiently operating its parking meter system, the City can now use that money to improve government or decrease the general tax burden. Chicago will be a better place for having done this."

As local governments everywhere begin to reckon with the magnitude of their budget gaps in the wake of the economic decline, Mayor Daley's leadership on privatization should serve as a case study. His privatization initiatives have provided opportunities to extract maximum value of the city's investments in non-core enterprises–such as running a parking meter business–and apply the proceeds to shore up the city's fiscal health, expanding the boundaries of what is possible when governments think creatively about how to best manage the assets they own.

» Reason's Annual Privatization Report 2008
» Reason's Privatization Research and Commentary

Leonard Gilroy is Director of Government Reform


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Comments to "Daley Announces Winning $1.1 Billion Bid for Chicago Parking Meter System":

Matt | May 27, 2009, 2:01pm | #

I hope you realize how stupid this article looks now. The city gave up its parking for a fraction of what its worth and the private company does not seem to know how to run a parking system. A lose-lose for everyone.



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