Last week, the New York City Department of Transportation formally launched a procurement for a potential long-term lease of the city’s nearly 90,000 parking spaces via a request for qualifications (RFQ) from interested bidders (see here and here for more, as well as my recent post here).
One of the aspects of NYC’s initiative that seems abundantly clear is that the Bloomberg administration is clearly trying to differentiate their efforts from Chicago’s controversial parking meter lease. One key point of differentiation lies in the administration’s statements that they are not looking for a large, upfront payment in a long-term lease arrangement (a la Chicago). Like many observers, I initially thought that this implied that the city was looking instead for a long-term lease that primarily involves a small (or no) upfront cash payment and shared revenues over time split between the city and the parking concessionaire. That’s the model that Indianapolis pursued, where the city received a small upfront payment of approximately $20 million and will get an annual slice of revenues over the life of the 50-year deal estimated to tally in the hundreds of millions.
However, after looking at the city’s RFQ more, I’ve come to the conclusion that the city isn’t necessarily even looking at a lease/concession structure that would transfer a parking revenue stream to a concessionaire over a multi-decade period. Rather, NYC appears to be seeking a private management agreement in which a private parking manager would essentially take over day-to-day operations while guaranteeing certain minimum levels of annual parking revenue to the city (in addition to deploying cutting edge parking technology, innovation, operational efficiencies, etc.). In other words, rather than leasing a parking revenue stream to the private sector, the city would be asking a private partner to help the city increase its own parking revenue, with the private sector presumably being compensated on a performance basis depending on its ability to hit its targets.
Hence, to my eyes the NYC parking concept seems to draw as much or more inspiration from Illinois’ private lottery management agreement and NYC’s own recently-announced water/wastewater management agreement as it does from Chicago or Indy’s long-term parking leases.
Important nuances like this appear to be getting lost in the public discourse, as if all parking deals were the same. A case in point is last week’s blog post by Matt Taibbi over at Rolling Stone. The post presumes that NYC wants to replicate Chicago’s parking meter transaction, suggesting that “[the Bloomberg administration is] expecting to get over $11 billion in upfront money from the deal,” which the administration “gets to use [â€¦] to patch current budget holes instead of making tough cuts or raising taxes.”
However, the administration has been clear from the outset that they are not looking to structure a Chicago-style deal with a massive upfront payment. In fact, this Bond Buyer article notes that even the RFQ itself issued by the city clearly states, “In contrast to certain precedent U.S. parking transactions, the city’s objective is not to structure an upfront payment [â€¦].”
Further, I’ve been reading about this initiative for weeks and have not seen anything suggesting an $11 billion valuation for NYC’s parking (taking aside the point that the city is not seeking a monetization). I must assume that Taibbi misread one of the articles he links to, confusing what investors hope to recoup over time from Chicago’s lease, not NYC. And if that’s the case, it’s my understanding that the $11 billion in hoped-for revenue from Chicago is in nominal dollars, not inflation adjusted and converted to a net present value covering the span of the 75 year lease. Further, it is derived from a Morgan Stanley prospectus, so it’s an aspirational number that they want to attract investors with but in real life may very well never reach. In all honesty, I’m skeptical that they’ll come even close to earning their desired return, if there’s even much of a return at all.
That’s mostly neither here nor there with regard to NYC, except for the fact that Taibbi talks about Chicago getting pennies for the dollar and “selling off” at a “steep discount.” For an alternative take, check out this interview I did with former Chicago CFO Gene Saffold and his Reason.org article, both from back when the bogus “Chicago got ripped off” meme started to propagate in the media. Sure, one might counter, “well he was the city’s CFO, of course he’s going to say they didn’t get ripped off.” But I have asked a wide range of subject matter (financial and industry) experts about claims that Chicago “got ripped off” over the years, and this notion is widely regarded as laughable and generally ignores basic finance principles and the way long-term leases actually work.
The blog post also confuses sales and leases. The post starts by assuming that NYC is pursuing a lease—again, something I do not believe to be the case at all. But even if it was a lease, then the city would take back full control of its parking assets, including revenue, at the end of the agreement. Yet, the tone then shifts to “selling off a valuable piece of city property,” “spending the proceeds of your sale,” and “selling off a critically valuable public revenue stream.” And then there’s perhaps the most far-reaching assertion in the post, namely that Chicago’s in a bind “because there’s no parking meter revenue anymore, ever.”
This is wrong on several fronts. First, and most obviously, a lease does not last forever. By definition, a commercial lease is for a set duration at which point the owner gets back full operational control of the asset. In a sale, something is literally sold from one party to another in perpetuity.
Beyond that, it’s still false to say that Chicago is no longer getting parking meter revenue anymore. First, the city set aside a pool of reserve meters outside of the concession that it still collects revenue from today. Second, the concessionaire does not get a penny of the city’s parking ticket/violation enforcement revenue today—this still goes to the city and tallies to tens of millions per year. That holds true for meters in the concession and outside of it. Last, revenues from any new meters installed by the city would flow to the city, not the concessionaire. (The city also still collects parking-related revenue from residential permit fees and parking permits as well.)
Finally, Taibbi makes this statement: “Meanwhile, whoever gets to own all of those meters will now be sitting on the ultimate investment. You get all the certainty of tax revenue, but you don’t have any of the accountability attached to public governance. It’s profit without risk, customers without responsibility.”
But it’s inaccurate to suggest there’s no risk in parking. How is parking revenue “certain”? What happens to parking revenues when fuel prices skyrocket in a few decades due to some international event? When gas goes up, people tend to drive less, and if they drive less they use less paid parking. Or, what happens if a city were to put in place a London-style congestion pricing system that creates a disincentive to driving downtown? Or, what happens if consumer preferences in that area turn more towards public transit usage and less driving? What happens when telecommuting and technology reduce the need to face-to-face downtown meetings? What happens in 30 years when flying cars perhaps become a reality? What happens if new private parking garages open up to draw users away from metered street parking? Or, what happens to parking revenues in a global financial meltdown and economic recession?
Some of these risks may sound overblown at first blush, but recent data on both public transit usage and urban congestion, while by no means indicative of massive long-term shifts, at least suggest that cities face very real financial risks and volatility related to long-term parking revenues. Chicago’s former CFO Gene Saffold touched on the subject of parking-related risk in my December 2009 interview with him:
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.
The bottom line is that the concessionaire holds those risks today in Chicago. And if those risks materialize in parking, then the concessionaire faces a very real risk that their hoped for profit at the end of the deal may not materialize whatsoever. For the private sector, here are no guaranteed profits in municipal parking leases, just guaranteed risks.
But Taibbi’s dismissal of risk was also paired with a statement that in a lease one would lose “accountability attached to public governance.” Again, this misunderstands the nature of these deals. Parking leases are governed by contracts written with governments sitting at the table across from the concessionaire. Controls on rates, hours of operation, etc.—key elements of public accountability—are addressed in the Chicago and Indy concessions as they would be in a future NYC contract. And if, for example, you want to make sure you can remove a block’s worth of parking meters on a whim as part of a new government streetscape project without triggering a lawsuit by the parking vendor over potential lost revenues, then policymakers could carve out that ability up front in the contract. The notion that for the private sector it’s all profit and no accountability is a major misstatement.
Suffice to say, I’d advise New Yorkers to take such prognostications with a big grain of salt. NYC seems much more interested in pursuing a management contract, not a Chicago-style long-term concession, for starters.
Deals like this should certainly be examined in their entirety. And I encourage taking a closer look at deals in Chicago—which fair-minded people can criticize, but which also offers a lot to learn from— as well as Indy, which pursued a different approach. For more on those examples and more, see Reason Foundation’s Annual Privatization Report 2011.