A November 17, 2009 article in The New York Times ("Company Piles Up Profits From City's Parking Meter Deal") suggested that Chicago Parking Meters, LLC—the Morgan Stanley Infrastructure Fund/LAZ Parking-led consortium in the first year of a 75-year, $1.15 billion lease of Chicago's downtown parking meter system—was "piling up profits" from the deal and that the city may have received less than the system is actually worth (echoing similar claims discussed here).
I recently interviewed Chicago Chief Financial Officer Gene Saffold to get his perspective on the Times article and debates over whether or not the city valued the parking meter system properly.
Leonard Gilroy, Reason Foundation: The New York Times recently ran a story by reporter Dan Milahopoulos that suggested Chicago may not have received a good value for the parking meter concession. What's your perception of the story?
Gene Saffold, CFO, City of Chicago: The City of Chicago competitively bid the metered parking system, and the high bid was $1.156 billion. That amount was on the high side of our projections. As such, it was more than just a good bid; it was an economic boon to the City.
There have been a few contrarian valuations offered to date, but they've generally failed to fully factor annual operating expenses and recurring costs, like capital expenditures, or failed to allocate the appropriate level of risk. Risk discounts future cash flow. Let's be honest, there are some very real risks associated with the metered parking system, like labor costs, fuel costs, expanded use of public transportation, and changes in driver behavior. The City has shifted those risks, however, from the taxpayers to the concessionaire.
I found the newspaper story irresponsible for those reasons and more. The analyses in the story are based on an internal concessionaire document, a draft 2010 pro forma budget dated September 30th. That's just not a way to properly value an asset.
Gilroy: Why isn't that a way to calculate value?
Saffold: First, we talked to the concessionaire, and they have yet to finalize their 2010 budget. Milahopoulos based his story on a draft budget, and an early one at that. As such, it does not properly account for costs or revenues.
For instance, pay boxes are going to have to be replaced every seven years at a cost of between $40 and $50 million. That recurring capital expenditure, however, cannot be gleaned from the 2010 pro forma budget. Further, the concessionaire had the benefit of just six months of revenue and expense data when preparing this draft. It doesn't correct the assumptions made for later months by applying actual performance data.
Any valuation that fails to properly and fully factor expenses and recurring capital investment, seasonality of revenues, or assign the appropriate discount rate is going to be inaccurate. So any valuation based on a draft budget will be premature, misleading, and erroneous. It would be like trying to determine the future value of a home by only looking at the first payment on a 30-year mortgage.
Gilroy: The reporter cited two sources as having different ideas on the valuation. Did you review their analyses?
Saffold: No, unfortunately we were not provided that opportunity. It also troubles me that the sources the reporter relied upon for the valuation estimates have been critics of asset privatization efforts in other states.
Dennis Enright is a municipal bonds banker. He has produced several analyses that have been critical of public-private partnership transactions while recommending that local governments instead issue large volume of municipal bonds against these assets as an alternative.
Roger Skurski was published by the Union for Radical Political Economics which prides itself in creating "socialist alternatives." His argument is one that flies in the face of capitalism: if a company is willing to pay for an asset, it must mean that the government is not charging enough. "Fair" value in Mr. Skurski's opinion is the value at which a company will no longer pay for an asset.
The truth is that Mr. Mihalopoulos did not ask the City for thoughts on the matter of valuation until late in the evening before the story was published, and just prior to his appearances on local television.
Gilroy: Assume for a moment that the 2010 pro forma draft represents a best case scenario for the concessionaire. Assume too that at the end of 2010 the concessionaire's draft predictions for revenue and costs are accurate. Would you still say the City got a good value?
Saffold: Yes. Allowing for those best case assumptions, the City got an excellent deal. If the figures used by the Times held true for 2010, the estimated value of the metered parking system would still be between $839 million and $1.372 billion, assuming discount rates of 10% to 14%. The bid received by the City would still be on the high side of those estimates.
The concessionaire won't realize much of a return in 2010 though. Assuming that best case scenario, the return on their investment would be somewhere in the neighborhood of 5%. The concessionaire could have done as well—with significantly less risk, I might add—by investing in medium to long-term treasury bonds or high-rated corporate securities.
Gilroy: I recently read a criticism of the Times article online by Reuters blogger Felix Salmon. It suggested that the Times article ignored the benefits that flowed from the concession. Can you speak to that for a moment?
Saffold: As one who spent 25 years as a municipal finance banker, I have found many of the Times reporter's assumptions to be flawed. His source's conclusion carries a heavy bias in favor of the municipal bond product that is his area of expertise.
I don't think the whole story is told unless one notes the benefits that flowed from the metered parking concession. For example, prior to this year, hourly rates had not been increased in nearly 20 years at 75% of Chicago's parking meters. Under-priced meters lead to congestion, increased travel times, and pollution. Today, however, Chicago's hourly parking meter rates are comparable, even less, than a number of cities throughout the Unites States. They create turnover and availability, making businesses and institutions served by meters more attractive.
The technology side has improved as well. The concessionaire has installed more than 4200 pay boxes, replacing about 32,000 single space parking meters. The pay boxes take credit cards and notify the concessionaire when they are broken or need collection. As a result, there are now fewer broken meters. Those meters that are broken are repaired in a couple of hours. It used to take the City days.
Moreover, as I mentioned earlier the concession has allowed the City to shift, to the private sector, many of the long-term risks associated with the parking meter system.
Finally, the concession agreement allowed the City to establish reserve funds. Because of these funds, the City has been able to avoid raising property taxes, fines, and fees during the worst recession the nation has seen in our lifetime. Further, critical services that may have otherwise been cut have been maintained.
For more on Chicago's parking meter privatization, see Reason Foundation's Annual Privatization Report 2009, available at reason.org/apr2009.