Commentary

Leveraging Denver’s Parking Meters

I’ve written extensively about Chicago’s groundbreaking, $1.15 billion parking meter system lease in recent months (the newest and most comprehensive piece is here, but there are many others). Now there are stirrings in another city where policymakers are contemplating a similar idea—Denver. Per the Rocky Mountain Independent:

Denver collects about $9 million a year from its parking meters and kiosks. But what if the city can get a lot more money by having a private company manage them instead?

“A lot of other cities are looking at the possibility,” Denver city councilman Doug Linkhart said. “It’s a pretty firm source of revenue. It doesn’t vary during tough economic times.”

Linkhart cited a recent Chicago deal in which the city received more than $1 billion from a private company to maintain and collect the revenue from the city’s parking meters for 75 years. […]

Linkhart noted that at a time when Denver is facing a $120 million budget shortfall for 2010, the city needs to find creative ways to generate revenue.

“Our services are not keeping up with standards,” he said. “We’re looking at big cuts in libraries and recreation centers, and employee layoffs. Rather than going through the pain of all that, we should be using our assets, rather than cutting services.”

Linkhart doesn’t expect Denver to be able to get $1 billion for its parking meters like Chicago did. For one thing, Denver has far fewer meters, 5,265, while Chicago has 30,000. “What I heard is: Chicago gets $23 million (a year) in revenue, and we get $9 million, so they get two and half times as much revenue,” he said. “So if we use the same proportions, we could get about 40 percent of what they got, or around $460 million (in a lease agreement).” That kind of money would be more than enough to solve the budget crisis this year, Linkhart said.

“If we can sell it as an investment, we can use a bigger chunk up front, stick (part of) it in a bank and collect interest, and invest part of it,” he said. “We could use the money now, rather than collect the $9 million a year forever.”

I think Linkhart deserves credit for raising this issue, because Denver should take every opportunity to unlock the value trapped in public assets to help solve their long-term fiscal challenges. As for how much of a windfall Denver might be able to tap, it’s not as simple as comparing to Chicago’s deal—each parking system is different, each deal structure is different, policy considerations are going to be different, etc. The only way to really know is to do your financial due diligence and then put it out to bid—after all, the true value is what someone is willing to bid on the system.

But whatever that magic number may be, there are several fiscally responsible approaches to answering the “what to do with the windfall” question, as I discuss in this post here.

Turns out Denver public works officials are not so keen on the parking meter privatization idea so far, but unfortunately they seem to be misinformed on some key facts:

Officials for Denver Public Works, which also is responsible for parking management in the city, said they are dubious about the benefits of the long-term lease contract in Chicago. “We call it the ‘Chicago experiment,'” said Revekka Balancier, spokeswoman for Denver Public Works. “We would be losing revenue by privatizing, especially if we raise the rates like they did.”

She said that if Chicago had raised the rates but kept the revenue from the parking meters, “they would have made twice what they got in this contract” or about $2.8 billion over the 75 years of the deal.

False. She’s drawing that figure from the debunked Chicago inspector general study (discussed in detail here and here), which ignored significant risks and long-term operational and capital costs to produce wildly inaccurate valuation estimates.

When you do the math properly (as the City’s financial advisor, William Blair & Co., has already done here), then it becomes clear that only in the best case scenario could the city have possibly even matched the $1.15 billion valuation. And that’s just in a cold analysis of the net present value of risk-adjusted, future cash flows—the reality, as I discussed here, is that it is highly unlikely that the city could have never monetized its parking meter system for $1.15 billion if it was trying to sell investors on the idea of in-house operational efficiency and the city’s internal capacity for advancing a massive modernization project. Markets typically take a skeptical view of such promises from governments. Moving on:

Balancier said that although Chicago retains the right to collect money from parking citations, nothing is stopping the company from hiring its own enforcement officers to ensure that motorists are paying for parking, and the city can’t collect that extra money.

Again, wrong. As I wrote here, under the terms of the parking meter contract, the city retains full responsibility for rate setting, parking regulation enforcement and fine collection. The deal also preserves the city council’s decision-making authority over the number of meters and hours of operation, as well as the city director of revenue’s authority over the length of time a customer can park.

The concessionaire does have the ability under the contract to supplement the city’s ticketing function if the city’s own performance wanes in the future. But since all parking fines will continue to be collected by and to the benefit of the city alone, the operator does not stand to realize even a penny from enhanced ticketing. Hence, hiring additional private ticketers would effectively represent a net cost to the operator, with no additional offsetting revenues.

As I’ve said before and will say again, it’s hard to have an informed discussion of the merits and drawbacks of ideas like this when even the public officials that are supposed to be on top of this stuff get the basics wrong.

Reason Foundation’s Annual Privatization Report 2009
Reason Foundation’s Privatization Research and Commentary