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Setting the Record Straight on Chicago Parking Meter Privatization

Early implementation challenges subside; L.A., Indianapolis and other cities consider similar proposals

Leonard Gilroy
August 7, 2009

In December 2008, Chicago Mayor Richard Daley announced the winning $1.15 billion bid for a 75-year concession (lease) of the city's downtown parking meters, marking the first privatization of an urban parking meter system in the United States. With over 36,000 meters generating roughly $19 million per year, Chicago's is among the largest parking meter operations in the country and is already serving as a model for Los Angeles, Indianapolis and other local governments contemplating similar deals.

While glitches in the early implementation have prompted significant scrutiny of the transaction from local officials and media, the turbulence of the early rollout now seems to have subsided as operational improvements have taken hold in recent months.

1. Understanding the Parking Meter Concession

In exchange for an up-front $1.15 billion payment, the agreement grants the operator— Chicago Parking Meters, LLC, a consortium led by Morgan Stanley Infrastructure Partners—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 the antiquated coin-based meter system with a high-tech, multi-space/multipay meter system that will facilitate payment via cash, credit and debit cards and potentially other pay systems.

"This is the best thing that has happened for us in regards to getting out of this business," Mayor Daley said in announcing the deal. "This is not the core business of the city of Chicago." The deal follows right on the heels of the 2005 lease of the Chicago Skyway (netting the city $1.8 billion) and the 2006 lease of four downtown parking garages (netting $563 million).

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 operator 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.

Parking rates will be allowed to rise each year for the first five years of the contract, after which any subsequent rate increases over the remainder of the contract term will be subject to city council approval. Increases in any given y ear would be capped to increases in the consumer price index.

Furthermore, the contract requires the operator to replace and upgrade the entire meter system—at its own expense, separate from the $1.1 billion up-front payment—removing significant future operations, maintenance and capital expenditure costs from the city's books for decades to come.

The city split the proceeds from the parking meter agreement in four ways:

Michael Smith, a projects lawyer with the firm Baker & McKenzie in Chicago, which represented other bidder groups in the parking meter auction, told Reason Foundation that he sees this transaction as a watershed event for the public-private partnership market in the U.S. that will likely prompt imitators in other local governments. According to Smith, "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."

The bidding process for the parking meter transaction was structured along the same lines as the city's earlier Skyway and parking garage transactions. The city hired a financial advisor in June 2007 to begin preliminary due diligence and market valuation regarding a potential lease. In February 2008, the city issued a request for qualifications to potential investors and parking operators regarding a parking system lease. Respondents were asked to demonstrate their technical capabilities with regard to operations and maintenance, their ability to implement technological and equipment improvements and their capacity to raise the necessary financing and access operating capital. In March 2008, ten prospective bidders submitted qualification statements, of which six were deemed qualified by the city. The city then began conducting an extensive due diligence process with each of the six bidders as it refined the concession agreement on which the teams would ultimately bid.

In December 2008, the city received two bids from Morgan Stanley ($1.008 billion) and Macquarie ($964 million). Since the two bids were within ten percent of each other, the city initiated a best-and-final bid process. In the second round, Morgan Stanley responded with a $1.157 billion bid, nearly $140 million higher than Macquarie's $1.019 billion bid. Both bids exceeded the city's $1 billion minimum acceptable bid threshold. According to city Chief Financial Officer Gene Saffold, "The best-andfinal round heightened the competitive tension among the bidders—and ensured that Chicago received the absolute highest bid."

2. Chicago's Early Transition Sees Operational, Political Challenges

The transition to private operation began in February 2009 and was immediately beset with operational challenges, feeding a media and political backlash that focused enormous scrutiny on the early implementation. The combination of the onset of parking rate increases and early transition challenges prompted some pundits and observers—even city aldermen who voted for the concession—to label the months-old initiative a failure and a bad deal for the city. However, by the summer of 2009, the operational issues that plagued the early rollout were largely resolved and the system overhaul was well underway and ahead of schedule.

Operational Issues

The early months of the transition to private meter system operation saw some unexpected operational glitches that attracted significant media attention. In an April 2009 news conference, Chicago Parking Meters CEO Dennis Pedrelli acknowledged that the concessionaire "underestimated the resources required" to reprogram meters to reflect higher rates and address a backlog of broken, jammed and mismarked meters that prompted numerous complaints from citizens over dysfunctional meters and unfair fines. In late May, 250 newly installed meters malfunctioned in a single day.

Furthermore, during the spring, local blogs and media outlets hyped a series of incidents of vandalism against meters that further sensationalized the parking meter concession. However, parking experts note that most cities experience a certain amount of parking meter vandalism on an ongoing basis, particularly in response to rate increases. According to the city, Chicago has not seen an atypical level of vandalism in 2009.

In May 2009, Mayor Daley took responsibility for the implementation glitches, noting that the city should have undertaken the transition to privatization more gradually. As Daley told the Chicago Sun-Times, "I'll take the responsibility. […] There should have been a transition—a much better transition—and there wasn't. That's one thing we learned. There should have been a three-month transition." However, Daley added that the transfer of the Chicago Skyway and the downtown parking garages to concessionaires had proceeded without incident and that if the city did not have the cash infusion from the parking meter concession, "you're talking about a serious economic crisis for Chicago."

Despite the early glitches in implementation, the city reports that parking meter operations have been steadily improving and that the concessionaire has responded well following the transitional problems:

Political challenges

With media reports stoking a barrage of citizen complaints regarding the parking meter deal, the city council began to question the transaction and the troubled implementation. Daley administration officials and concessionaire representatives were brought before several contentious council hearings to address questions on various aspects of the deal and its rollout. In June 2009, the council approved an ordinance requiring a 15-day review period before a council vote on future proposals to privatize city assets.

Further, Alderman Leslie Hairston—one of five on the council voting against the deal in December—asked Illinois Attorney General Lisa Madigan to launch a consumer fraud investigation to examine potential "deceptive business practices" concerning broken meters and subsequent parking violation fees; at press time, Madigan's investigation was still ongoing.

What raised perhaps the most council scrutiny was a June 2009 report issued by the city's Office of the Inspector General (OIG) arguing that the city did not properly estimate the value of its parking meter system prior to the lease. The report included a valuation analysis claiming that the deal should have been worth at least $2.13 billion. In a press conference responding to the report, Mayor Daley's chief of staff, Paul Volpe, called the OIG's estimate of $2.13 billion "ridiculous" and labeled the report "misguided and inaccurate," as it failed to adequately account for the inherent risks in parking meter operations.

In the aftermath of the OIG report, a June 2009 city council resolution called for city officials to appear before the council's finance committee to testify on the parking meter concession bidding process, criteria used to determine bidder qualifications and the financial analysis used to determine an acceptable bid amount. In a memorandum prepared as a supplement to his committee testimony, city Chief Financial Officer Gene Saffold noted that:

There is a wide gap between academic theory and the actual marketplace. It is misguided to compare a theoretical value with an actual market value—one that was reached through taking an asset to market, using a competitive process. Readers of these academic exercises are left with the mistaken impression that the city received less than market value. That is not the case.

Saffold backed up his testimony with a report prepared for the committee by the city's financial advisor on the parking meter concession, William Blair & Company, critiquing the OIG valuation analysis (the Blair report and its appendices are available here). Specifically, the Blair report noted two significant inaccuracies in the OIG analysis that rendered its findings incorrect.

First, the OIG report estimated the system's value on the basis of gross system revenue rather than free net cash flow. The OIG report assumed $500,000 in annual capital expenditures for the parking meter system beginning in year three which, according to the Blair report, dramatically understated the cost of capital expenditures by $4 million annually over the life of the 75-year deal and overstated the amount of free cash flow for each year. In addition, Blair found that the OIG report also failed to account for $5 million each year in system operations costs.

Second, the Blair analysis found that the OIG used an inappropriately low discount rate (7.0 percent) in estimating the meter system's value, based on a faulty assumption that the parking meters are a "very low risk" enterprise. By contrast, in its own valuation analysis, the city used discount rates in the range of 10 to 14 percent to reflect a medium-to-high degree of risk. Blair notes that there are substantial risks associated with the operation and value of the system that were transferred from the city to the concessionaire in the deal, including system utilization risk, long-term operational risk and other risks associated with the potential for changes in population, economic activity, technology, public transit usage, fuel costs and numerous other factors that affect the long-term economic value of the system. These substantial risks were transferred to the concessionaire and according to Blair, the city would retain these risks if it were still operating the system itself, which the OIG report should have reflected by using a higher discount rate in its valuation analysis.

The Blair report analysis concludes that "by properly projecting [parking meter system] revenues and by applying a discount rate that appropriately reflects the relative risks….the conclusion that the city received full and fair value for the Concession of the [meter system] is clearly supported and affirmed."

The winning $1.156 billion bid "represented a very aggressive bid, reflecting the robust competitive bidding process, the trophy nature of the asset and the limited number of American public infrastructure investment opportunities," the Blair report concluded. "The winning bid was at the high-end of the estimated range of [the system's projected value.]"

3. Other Local Governments Look to Parking Asset Privatization

Inspired by Chicago's parking asset leases, other local governments are currently exploring similar transactions. In late April 2009, the Los Angeles City Council approved a $500,000 contract to study the feasibility of privatizing the city's 41,000 parking meters and six parking garages. The parking asset lease proposals were a key feature of Mayor Antonio Villaraigosa's plan to close a $530 million budget shortfall, prevent the layoff of 800 city workers and avoid furloughs in the Los Angeles Police Department, which a competing council budget plan had proposed. Villaraigosa included $80 million of lease proceeds in his 2009-10 budget, though administration officials expect that a well-structured deal could generate a substantially larger value.

Officials in Allegheny County, PA are considering a lease of parking facilities at Pittsburgh International Airport (PIT) to retire $475 million in bonds used to finance a new midfield terminal in the 1990s. Allegheny County Chief Executive Dan Onorato is proposing a long-term lease of the airport's parking facilities—13,200 spaces between garages and lots—to a private operator to generate $500 million or more in an up-front payment to defease the bonds. Debt service on those bonds is running $62 million per year, compared with about $22 million in annual parking revenue. Thus, under a lease, the Airport Authority could for many years save a lot more in debt service expense than it would be losing in parking revenue.

An article in the Pittsburgh Post-Gazette quotes Merrill Stabile, president of parking operator Grant Oliver Corp., as saying that investment groups have recently paid 15 to 20 times earnings for parking facilities; he estimated parking at PIT could be worth up to $440 million. Two factors that would influence that value are the length of the lease and what controls on parking rate increases would be included in the deal. At press time, the proposal had not yet come up for discussion in an Allegheny County Airport Authority formal board meeting.

In neighboring Pittsburgh, the city council adopted a new five-year fiscal recovery plan for the city in June 2009—required under state law since Pittsburgh's designation as a "distressed municipality" in 2003—that includes a plan to privatize city parking garages. The plan was subsequently approved by Mayor Luke Ravenstahl, who initially proposed the initiative in a set of options designed to boost the coffers of the city's underfunded pension fund. Officials in two other Pennsylvania cities—Philadelphia and Harrisburg—also floated parking asset lease proposals. In Harrisburg, the city council rejected an unsolicited bid for a 75-year lease of its 8,500 public parking spaces, including nine city parking garages, in exchange for a $215 million up-front payment.

At press time, officials in Indianapolis were considering several proposals to enhance the revenues from its roughly 4,000 parking meters, including the possibility of a long-term, Chicago-style lease. The city's Director of Enterprise Development, Michael Huber, told the Indianapolis Business Journal in July 2009 that the city would use any meter system modernization revenues to fund sewer and road infrastructure projects.

Eight firms responded to a request for parking meter revenue enhancement proposals issued by Mayor Greg Ballard's administration, including Denison/Walker Parking Consultants, IMG Capital, Affiliated Computer Services Inc., Verrus Mobile Technologies Inc., MobileNow, KPMG, Carl Walker Parking and Energy Systems Group. Proposals ranged from technological and system overhauls to long-term leases to private sector operators.

One proposal estimated the value of a long-term parking meter system lease in Indianapolis at over $100 million. A new city Infrastructure Advisory Commission formed in early 2009 would be responsible for setting spending priorities for any new parking meter revenue. The city also is seeking similar private sector proposals to maximize revenues from more than 10,000 off-street parking spaces in city-owned parking garages and surface lots.

4. Parking Meters in the Context of Chicago's Asset Leases

Despite the high-profile collapse of a $2.5 billion long-term lease of Midway Airport in early 2009 (detailed in the Air Transportation section of this report), the parking meter concession demonstrates that Chicago continues to break new ground in strategic municipal asset leasing. Over the last four years, the city has tapped over $3.5 billion through long-term partnerships with private infrastructure operators, allowing the city to shore up its budget, upgrade infrastructure, pay down city debt, establish "rainy day" funds, transfer revenue and operational risks to private partners and turn government liabilities into revenue-generating assets.

The proceeds from the Skyway, parking garages and parking meter system leases were used to establish long-term reserve funds of more than $1 billion, retire $925 million in debt, reserve over $700 million for mid-term budget relief and invest more than $322 million in neighborhoods, parks and other community programs. The Chicago Tribune recognized the benefits of the Skyway lease in an October 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, the city's ability to use lease proceeds to reduce city debt and establish long-term reserves prompted all three major credit rating firms to raise the city's bond rating, lowering the city's borrowing costs. In fact, Moody's Investor Service upgraded Chicago's bond rating to its highest level in 25 years, citing the "vital infusion" of lease proceeds as a key factor. Daley's recent privatization deals have certainly not spared the city fiscal troubles in the current recession, but strategically investing lease proceeds in a combination of short-, mid- and long-term investments has cushioned the fiscal blow and placed the city in a far better position to weather the storm.

Leonard C. Gilroy is director of government reform at Reason Foundation. This article was originally published in Reason's Annual Privatization Report 2009, available at reason.org/apr2009.


Leonard Gilroy is Director of Government Reform


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