Just a few short years ago, few would have predicted that parking assets would be the next hot trend in municipal privatization. Then Chicago offered a game-changer by tapping nearly $1.7 billion through two long-term leases of municipal parking assets in recent years, allowing the city to close a massive budget deficit, retire debt and invest for a rainy day. Virginia and D.C. policymakers should take note, because their peers are already racing to follow in Chicago's footsteps.
Parking is a natural privatization opportunity. Few public officials would argue that providing municipal parking facilities—garages, surface lots and parking meter systems—is a core function of government. Rather, parking is essentially a commercial venture, and governments aren't particularly adept at running business enterprises, presenting opportunities for private providers to improve operations. Privatization in parking can take on different forms, from long-term leases of city facilities to multiple leases for competition between garages or parking areas.
Though parking privatization is commonplace in Europe and elsewhere, Chicago has been the U.S. pioneer in demonstrating the power of leveraging municipal parking assets. In 2006, the city announced a 99-year, $563 million lease of four underground parking garages (over 9,100 spaces) located downtown, beneath Grant and Millennium parks. In return for the $563 million upfront payment—primarily used for debt reduction and the establishment of reserve funds—winning bidder Morgan Stanley Infrastructure Partners (MSIP) took over operations and agreed to rebuild garage infrastructure over the life of the contract, allowing the city to avoid taking on tens of millions in long-term capital costs.
Chicago was not done yet. In December 2008, Mayor Richard Daley announced a blockbuster $1.15 billion bid for a 75-year concession (lease) of the city's 36,000 downtown parking meters, marking the first privatization of an urban parking meter system in the United States. In exchange for an upfront $1.15 billion payment, the agreement grants the operator—a consortium led by MSIP and LAZ Parking—the right to maintain and operate the meters throughout the life of the contract. The deal also requires the operator to do a wholesale system overhaul, replacing over 30,000 antiquated, coin-based meters with just over 4,000 high-tech, multi-space meters that will facilitate customer friendly payment via cash, credit and debit cards.
Furthermore, the system replacement is occurring at the concessionaire's own expense—separate from the $1.15 billion up-front payment. Since those 4,000 new meters are going to need replacement every seven to 10 years, the concessionaire will realistically have to replace this system many times over during the course of the concession term, removing significant future operation, maintenance and capital expenditure costs from the city's books for decades to come.
The city retains responsibility for rate setting, parking regulation enforcement, fine collection and other key rules of operation (e.g., number of total meters, hours of operation, parking time limits, etc.). City officials made a policy decision to allow parking rates to rise each year for the first five years of the contract in order to maximize bid values, and any subsequent rate increases will be subject to city council approval and capped by inflation.
While glitches in Chicago's early implementation of the parking meter lease prompted significant scrutiny from local officials and media (see my article here and Stephen Goldsmith's recent Governing article here for details), these hiccups lasted just a few short weeks early in a major transition for a 75-year deal. In fact, as operational improvements subsequently took hold, the concessionaire quickly began to outperform the city's previous operation. The concessionaire has reduced the average repair time for broken meters from 2 days (under city operation) to less than 2 hours, and the full replacement of the 36,000 parking meters is nearly completed, roughly one year ahead of schedule.
Perhaps more controversial was Windy City officials' decision to reallocate much of the parking meter lease proceeds away from longer-term investments in order to help close the city's recent $400 million budget deficit. Ideally it would have been desirable to fully invest the proceeds in long-term investments like infrastructure, debt reduction or shoring up under-funded public pensions, but the realities of governing in a recession dictated otherwise. Given a choice though, even many lease critics would likely prefer to see lease proceeds used to close the deficit, rather than see tax increases or a gutting of city services to balance the budget.
Chicago's far better off today as a result of its innovations in parking privatization. This has been a wake-up call to municipal policymakers elsewhere that didn't realize they were sitting on similar opportunities to do more with less by getting government out of the parking business. In fact, cities like Los Angeles, Pittsburgh, Indianapolis and Las Vegas are now in a race for Number Two.
While using Chicago as a starting point, each city will be crafting their own transaction based on local policy priorities and decisions. Each city has its own reasons for pursuing parking asset leases. For example, Indianapolis would use the proceeds to fund needed citywide infrastructure improvements, while Pittsburgh is looking to generate $200 million to shore up its woefully under-funded public pension fund to avoid a state takeover.
Policymakers in each of these jurisdictions owe a debt of gratitude to Chicago and Mayor Daley for pioneering an innovative approach to helping cities address major fiscal and economic challenges. Given the budget pinch that Washington D.C., Richmond and other cities in the "neighborhood" are feeling these days, shouldn't they also be exploring similar opportunities to leverage their parking assets to help their governments do more with less in tough fiscal times?
Leonard Gilroy is Director of Government Reform at Reason Foundation and Senior Fellow for Government Reform at the Thomas Jefferson Institute for Public Policy. This column was originally published at Bacon's Rebellion