Parking Meter Privatization in the Spotlight, Part I

Los Angeles is currently taking steps to advance a major parking asset privatization program, and Damien Newton at L.A. Streetsblog is doing a multi-part feature on this subject that figures to be an interesting read. I’m in agreement with Newton that this is a complex issue not easily packaged in a soundbite, so I’ll borrow a page from him and offer my own series of posts on the subject of parking meter privatization.

Newton’s first post yesterday points to a report prepared by the L.A. City Administrative Officer outlining some preliminary findings and recommendations of a working group Mayor Villaraigosa established to explore the potential privatization of the City’s parking meters and garages, along the lines of Chicago’s recent deals. The report is available here, and from a quick scan it appears to be a very thorough and worthwhile read for those interested in this issue.

The CAO report is timely, as it notes that Chicago—now just a few months into its privatization effort—is experiencing some hiccups in its early rollout. A review of recent media reports and blogs (here’s one good summary) will quickly reveal that the main implementation challenges thus far in Chicago really boil down to two key issues—rate increases and system operations & maintenance.

Today I’ll focus on rate increases and revenues. As Newton notes in his post today:

The biggest complaint that a privatization plan has is that such a plan almost always costs residents money in the long-run as the companies who sign the contract recoup their investment and then make millions or even billions over the course of the contract. That’s a big price tag to plug a budget hole and outsource the political will to raise parking costs. The Chicago Tribune estimates that if Chicago pols had shown the guts to just raise parking fees at the same rates as Morgan Stanley, that the city would have brought in $1.5 billion over the life of the contract, over $300 million more than the initial payment the city received.

And, those rate hikes were pretty steep, all things considered. Assuming that Los Angeles follows the same model as Chicago, the first thing Angelenos are going to have to accept is that the cost of parking on the street is going to go up by a lot, and go up quickly.

There are actually multiple issues here worth unravelling. First, let’s be realistic. Whether run by government or private companies, no one actually likes to pay to park, and they like it even less when fees go up, regardless whether or not there are compelling policy reasons to do so. With the rate increases in Chicago, I’d wager that you’d have had people complaining and doing dumb things like vandalizing parking meters even if they had remained under fully public operation.

And as I discussed here, responsibility for rate setting, parking regulation enforcement and fine collection remains with the city under the lease. In other words, rate increases in Chicago were a policy decision made by elected officials and will continue to be so (in fact, the state Constitution requires it). Policymakers in Los Angeles and other cities evaluating similar lease deals will have to make those same decisions and evaluate the related trade-offs. These aren’t cookie cutter, one-size-fits-all deals—policymakers need to tailor each initiative to the specific context in their jurisdictions.

As far as the claim that the city could have raised more by keeping the system in-house, I’m extremely dubious. History is littered with wild claims about how government can do as much or more than the private sector, and they inevitably break down at a very fundamental level. Whether you’re talking about a turnpike, a water system, or a parking meter system, any conclusion that government could outperform the private sector automatically presupposes that governments operate in similar ways to businesses and face similar incentive structures, which is clearly ludicrous.

Instead, what we tend to see in many government-run infrastructure operations is what might be referred to as a “death spiral” produced by chronic underinvestment in the system. What produces this chronic underinvestment? Simple—the political pressure to keep rates low tends to lead to deferred maintenance and subpar operations that cascade over time and drag the system down under its own weight.

Then you’re stuck with huge rate increases, large tax subsidies, or major new debt obligations as your least-bad options to avoid a system breakdown. This happens in rural water systems in Africa just like it happens with public sector toll roads and parking systems in America. As just one example, before its recent privatization, toll rates on the Indiana Toll Road had stayed constant for nearly two decades, reaching the point that it cost the state more to collect each toll than the toll amount itself.

What’s usually missing from the government’s equation is market-based pricing that keeps pace with demand and system investment needs. As my colleague Bob Poole noted here, privatization is an important tool to help bridge that gap and escape the death spiral:

Chicago’s chief financial officer told the media that 70% of the meter rates have been the same for 20 years, and that “Charging market rates makes great sense in terms of making available spaces for small businesses.” A reporter asked Mayor Richard Daley, “If charging market rates makes such good sense, why didn’t the city do that itself?” His answer speaks volumes: “Well, many times, people were afraid to do it.” Critics of privatizing toll roads have disparaged this as “the outsourcing of political will,” but in my view that is one of the real strengths of such deals. A city council or state legislature needs to have political courage just once, to approve legally enforceable lease terms. And thereafter, pricing will be driven by the market.

I also doubt that the analysis reported in the aforementioned Chicago Tribune article comes anywhere close to a true apples-to-apples comparison. Even assuming that politicians could somehow magically muster the will to adopt and stick to a long-term, market-based rate setting regime under public sector operation, wouldn’t you also have to factor in the costs of the total system modernization currently underway?

Under privatization, the contractor is bearing that cost, over and above the $1.2 billion upfront payment it made for the rights to operate the meter system. You’d have to add those susbtantial modernization costs to the $1.2 billion for a more accurate measure of the value of the deal on the private sector side; likewise, you’d have to revise downward any estimate of government’s potential revenues by that same amount under public sector operation. The same thing goes for maintenance costs. You’d also have to adjust for the effects of employee pension and benefit obligations under public operation as well.

Simply put, policymakers should be dubious of any sort of analysis that doesn’t account for the “all in” costs under public sector operation. You can’t make a credible statement about potential revenues under government operation if you don’t factor in all of the potential costs and, more importantly, risks. City officials noted as such in the Trib piece:

Pete Scales, spokesman for the city’s Budget and Management Office, said [DePaul professor and former state legislator H. Woods] Bowman’s calculations don’t take into account the risk of such a lengthy lease. “Obviously, if the city believed we could achieve a better financial result by keeping the system in house, we would not have pursued this transaction or accepted the winning bid,” Scales said, noting the company also must pay for parking meter system upgrades.

Jonathan Peters, an associate professor of finance at City University of New York who studies public-private partnerships, said such a risk calculation is routine.

As I wrote here a few weeks ago, one of the most powerful benefits of public-private infrastructure partnerships is risk transfer, the notion that the private sector nearly always absorbs some important risks (i.e., revenue, maintenance, operations and/or system performance risks) in these deals, tranferring these risks away from taxpayers and to the contractor. And there’s a dollar value in risk transfer, so as Scales implies, any credible public vs. private analysis would have to include a fair breakdown of the risk implications.

In this case, adjustments for risk would certainly break the private sector’s way and completely undermine the argument that government could raise more on its own. In the end, policymakers need to understand that when governments retain risk, taxpayers retain risk—and when the private sector offers to unload some of that risk, it’s usually an idea well worth considering.

In Part Two tomorrow, I’ll explore operational issues in Chicago’s transition to parking meter privatization.