Chicago Raises the Bar in Privatization, Again

Parking meter system franchise nets $1.1 billion; will bring modern meters, improve downtown traffic

Mr. Jones is coming into the city circa 2011. He has several quick stops to make. In past years he would have had to search fruitlessly for a rare, metered parking space near his destinations or paid $15-$20 at each of his three stops to park in a lot or structure. Not today, because Mr. Jones has his GPS and cell phone connected to Chicago’s new EasyPark system. It sends alerts and guides him directly to available metered parking spots within a few blocks of each of his destinations. No more circling, no more tickets for illegal parking and no more hunting for higher cost lots and structures.

Is this a bit of fanciful thinking? While EasyPark may be fiction today, it could be reality soon for Chicago-all thanks to the use of privatization to improve services for taxpayers and residents.

In recent years, Chicago Mayor Richard Daley has set himself apart from urban leaders by implementing a groundbreaking privatization strategy relying on long-term leases of city assets, generating billions of dollars to boost the city’s fiscal health. So it should come as no surprise that even in the midst of the current economic crunch, Chicago Mayor Richard Daley has been able to turn parking meters into an attractive private sector investment.

On December 2nd he announced the winning bid for a 75-year, long-term franchise for the city’s downtown parking meter system. In exchange for an upfront $1.15 billion payment, the agreement will grant the operator-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 make significant investments in the system itself, replacing the antiquated coin-based meter system with a high-tech, multi-space/multi-pay meter system that will facilitate payment via cash, credit card, and other pay systems.

The deal follows right on the heels of the $2.5 billion bid for Midway Airport-announced in September and currently awaiting federal approval–as well as 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). These initiatives have allowed Chicago to significantly improve fiscal conditions, upgrade infrastructure, pay down city debt and unfunded pension obligations, establish “rainy day” funds, and turn government liabilities into revenue-generating assets.

The parking meter agreement represents the first urban parking meter system in the United States to be privatized under a long-term franchise. Indeed, with over 36,000 parking meters generating roughly $19 million per year, Chicago’s is among the largest parking meter operations in the country and could thus serve as a model for other city systems.

Under the terms of the contract, the city retains full responsibility for rate setting, parking regulation enforcement and fine collection remains with the city. The deal also preserves the City Council’s decision-making authority over rate setting, the number of meters and the length of time customers 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.

Similar to what we’ve seen in the city’s other leases, parking rates will be allowed to rise each year for the first five years of the contract. The reason is simple-Daley made a policy decision to structure the deal to get more cash upfront, and the allowed rate increases were critical to making that happen. After the first five years, any subsequent rate increases over the remainder of the contract term will be subject to City Council approval, and increases in any given year would likely be capped to some standard measure of inflation.

Further, the contract requires the operator to replace and upgrade the entire meter system-at their own expense, separate from the $1.1 billion upfront payment-removing tremendous future operations, maintenance, and capital expenditure costs from the city’s books for decades to come.

Consumers and businesses will also benefit from the parking meter system modernization. In return for rate increases, consumers will benefit from a 21st century parking meter system that offers more payment options and more efficient use of the spaces, with the spillover benefit of traffic flow improvements as drivers avoid the need for multiple “trips around the block” to search for available spaces. The increased turnover in parking spaces should also benefit restaurants and other downtown businesses, as the improved availability and reliability of spots will likely be an attractive draw for those who might normally be deterred from visiting downtown due to the difficulty of parking.

Like Daley’s other recent privatization initiatives, the proceeds from the parking meter system deal are not going to be used as a “silver bullet” to spare the city from an estimated FY2009 $469 million budget gap. Rather, Daley is investing the proceeds from these deals into a combination of near- and long-term investments that will help the city cushion the fiscal blow and put it in a far better position to weather the economic storm.

The proceeds from the parking meter agreement will be split four ways. The city will put $400 million into a long-term reserve fund; $325 million into city budgets through 2012; $324 million into a budget stabilization (i.e., “rainy day”) fund; and $100 million for low-income assistance programs.

As local governments everywhere 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 the city’s investments in non-core enterprises-such as running a parking meter business-and apply the proceeds to shore up the city’s fiscal health, expanding the boundaries of what is possible when governments think creatively about how to best mine their balance sheets.

This column was originally published by the Illinois Policy Institute.