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Reason Foundation

Chicago Leads the Way on Local Government Privatization

Chris Mitchell
November 19, 2008, 9:49am

In his latest column, Reason Foundation's Leonard Gilroy looks at Chicago's recent privatization successes being spearheaded by Democratic Mayor Richard Daley:
As the economy has deteriorated in recent months, so too have the fiscal conditions in local government. Last Friday, the mayors of three big cities–Philadelphia, Atlanta, and Phoenix–sent a letter to Treasury Secretary Henry Paulson asking the feds to use a portion of the $700 billion bailout to assist local governments struggling with growing budget shortfalls. Fairfax County's current half-billion dollar shortfall may be a warning sign that many cities and counties in the Commonwealth too are in dire fiscal straits. Rather than ask federal taxpayers to bail them out, cities and counties should embrace a variety of privatization strategies to help them do more with less. As one key example, in the business world financially-stressed firms often find it good practice to divest assets. Divisions or subsidiaries that are poorly run by a large conglomerate often receive a new lease on life under new, leaner management. The one-time windfall from the sale permits the seller to pay down debt or obtain capital for other needed investments–without having to engage in new borrowing. It should be no different within the context of local government assets. In recent years, Chicago Mayor Richard Daley has brought this concept to local government, implementing a groundbreaking privatization strategy that relies on long-term leases of city assets, generating billions of dollars to boost the city's fiscal health. Daley's no stranger to privatization, having privatized over three dozen services or activities within city government. But in 2005 he took privatization to a whole new level when he leased the Chicago Skyway to an international consortium for 99 years in return for a $1.8 billion upfront payment. The city paid off $825 million in outstanding debt, established a $500 million rainy day fund, set up a $375 million mid-term annuity to help cover city operating costs, and directed the remaining $100 million to a multi-year infusion for various human services and community investment programs. The Chicago Tribune recognized the benefits of the Skyway lease in an October 2, 2008 editorial: "The city's deal to lease the Chicago Skyway to a Spanish-Australian consortium for 99 years has demonstrated the benefits of leasing public assets judiciously. Chicago got a $1.8 billion windfall [...] [t]hat raised the city's credit rating and lowered its borrowing costs." Indeed, Moody's Investor Service upgraded Chicago's bond rating to its highest level in 25 years soon thereafter, citing the "vital infusion" of lease proceeds as a key factor. The Skyway lease was only the beginning. In 2006, Daley leased four adjacent underground parking garages beneath Grant and Millennium parks to Morgan Stanley in $563 million, 99-year concession. The city dedicated $278 million of the garage lease proceeds to retire debt, $157 million to civic and park improvements, and annuitized the remaining $120 million to kick off $5 million every year to shore up the parks budget. The deal also requires Morgan Stanley to invest over $550 million to rebuild garage infrastructure over the life of the deal. Daley broke ground again in September 2008 when he announced the winning bidder for a $2.5 billion, 99-year lease of Midway Airport in what will be the first privatization of a domestic commercial airport. The deal was unanimously approved by the city council (49-0) last month and now awaits federal approval; financial close is expected by year-end. Under state law, 90 percent of the proceeds from the Midway lease must be dedicated to infrastructure improvements and to shore up city pension funds. The remainder will be unrestricted. Chicago has several other precedent-setting privatization initiatives in the works. Earlier this year, the city accepted bids for a long-term lease of the city's downtown parking meter system. According to media reports, the lease is anticipated to be 50 years in length and will grant the operator the right to maintain and operate the meters in exchange for an upfront payment to the city. The city will retain parking enforcement authority and the right to set parking fees. In addition, seven firms have expressed interest in pursuing long-term leases of the city's three material recycling and recovery facilities. Daley's recent privatization deals have not spared the city from fiscal troubles in the economic downturn–the city currently faces an estimated FY2009 $469 million budget gap. But by investing the proceeds in a combination of short-, mid- and long-term investments, Daley has cushioned the fiscal blow and placed the city in a far better position to weather the storm. While larger local governments like Fairfax County, Richmond, or Virginia Beach may have assets more conducive to Chicago-style leases, there are numerous privatization opportunities for smaller localities as well, as evidenced most dramatically by the recent wave of privatized city governments in metro Atlanta (including Sandy Springs and four other new cities) that are saving millions of taxpayer dollars while improving service delivery and customer satisfaction. As cities and counties in Virginia and elsewhere begin to reckon with the magnitude of their budget gaps in the wake of the financial meltdown and looming recession, Mayor Daley's leadership on privatization should serve as a case study. His privatization initiatives provided opportunities to extract maximum value of its investments in non-core enterprises and apply the proceeds to short and long term fiscal needs, expanding the boundaries of what is possible for local governments with regard to privatization and asset leasing.
Reason's Annual Privatization Report Government Innovators in Action

Chris Mitchell is Director of Communications/Media Contact


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