Chicago’s Parking Meter Privatization Breaks New Ground
City’s pioneering, and controversial, moves to get out of the parking meter business
By Leonard Gilroy
Not long ago, few industry observers would have predicted that municipal parking meter systems would become a hot investment opportunity for private equity and institutional investors looking to invest in public infrastructure projects. Then Chicago changed the game in February 2009, inking a blockbuster $1.15 billion, 75-year lease of its 36,000 downtown parking meters– a deal that a number of other cash-strapped cities are scrambling to emulate.
The city granted Chicago Parking Meters (CPM), a consortium of Morgan Stanley Infrastructure Partners and LAZ Parking, the right to operate, maintain and collect the revenue from the meters throughout the 75-year concession term. CPM must undertake a wholesale system overhaul (on its own dime), replacing the coin-based meter system with modern pay-and-display boxes and removing significant future operations, maintenance and capital expenditure costs from the city’s books for decades to come.
The city retains full responsibility for rate setting, parking regulation enforcement and fine collection. 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. The deal also preserves policymakers’ decision-making authority over the number of meters, hours of operation and length of time a customer can park.
CPM has the option of supplementing city ticketing staff if their performance wanes in the future. But since all parking fines still continue to be collected by and to the benefit of the city alone, the operator would 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.
While groundbreaking, the lease also has its share of controversy, primarily centered on two key issues: implementation and valuation.
On the operational side, Chicago Parking Meters CEO Dennis Pedrelli acknowledged in April 2009 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 citizen complaints over dysfunctional meters and unfair fines.
Mayor Daley later took responsibility for the implementation glitches, noting that the city should have undertaken the transition to privatization more gradually.
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.
The early transition to concessionaire operation saw a spike in average meter repair times. In March 2009, meters reported broken were repaired in about eight business days, far slower than the two-day repair time the city averaged before privatization. However, the addition of operational staff helped to decrease repair times significantly, and by December 2009, the average repair time had fallen to less than two hours.
There has been a significant reduction in jammed meters. In December 2009, the city reported that more than 99% of the meter system is operable on any given day, exceeding the operability percentages in several peer cities.
In less than a year, the concessionaire has nearly completed the overhaul of the entire parking meter system. By December 2009, it had replaced 31,328 meters with 4,127 new pay-and-display meters. By contrast, the city installed just 198 pay-and-display meters in a five-year period before the lease. The concessionaire will also make additional capital expenditures over the life of the deal, as pay-and-display meters are typically replaced every seven to 10 years.
As the operational issues subsided, claims that the city got a “bad deal” began to escalate. What raised perhaps the most public 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 and that the deal should have been worth at least $2.13 billion.
In testimony before the city council’s finance committee, Chicago’s chief financial officer Gene Saffold countered that “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.”
A report prepared for the committee by the city’s financial adviser on the parking meter concession, William Blair & Co., noted two significant inaccuracies in the OIG analysis that call into doubt its findings, the company said.
First, Blair said, the OIG study estimated the system’s value on the basis of gross system revenue rather than free net cash flow. According to the Blair report, the OIG 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 analysis failed to account for $5 million each year in system operations costs.
Second, Blair said, the OIG used an inappropriately low discount rate (7.0%) in estimating the meter system’s value, based on a faulty assumption that the parking meters are a “very low risk” enterprise. However, this ignores several substantial risks that were transferred from the city to the concessionaire in the deal, including system utilization risk, long-term operational risk, changes in population, economic activity, technology, public transit usage, fuel costs and numerous other factors that affect the system’s long-term economic value.
According to the Blair report, the city would retain these risks if it were still operating the system itself, which the OIG study should have reflected by using a higher discount rate. The city’s own valuation analysis used discount rates in the range of 10% to 14% to reflect a medium-to-high degree of risk.
The Blair report 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.”
Despite politics and controversies, Chicago’s groundbreaking lease has inspired other local governments – including Los Angeles, Indianapolis, Pittsburgh and Allegheny County, PA – to explore similar transactions to get government out of the parking meter business and extract value from their parking assets. Policymakers in those jurisdictions generally seem intent on avoiding the scale of rate increases that Chicago politicians approved as part of the deal. (“Windy City” officials quadrupled meter rates in some parts of downtown Chicago in tandem with the lease. )
But, like Chicago pols, policymakers elsewhere recognize that their parking enterprises are non-core assets that could be leveraged to help do more with less amid widespread government fiscal crises. As Mayor Daley told the Chicago Sun-Times, without the cash infusion from the parking meter concession, “you’re talking about a serious economic crisis for Chicago.”
Indeed, the city has relied extensively on proceeds from the parking meter transaction to close massive city budget deficits, nearly exhausting them in the latest budget. However, the parking meter lease is just one of three major asset leases that have netted Chicago more than $3 billion in recent years, and altogether the proceeds have been used for a variety of purposes, including paying down public debt, setting up “rainy day funds,” short- and long-term investments to augment city revenues, and short-term budget fixes. Chicago’s ability to use asset lease proceeds to reduce city debt and establish reserve funds prompted all three major credit rating firms to raise the city’s bond rating before the recession, lowering the city’s borrowing costs.
These are the results that have policymakers elsewhere wanting to follow suit. To be sure, these aren’t cookie-cutter, one-size-fits-all deals. Each parking system is different, each deal structure will be different, the policy considerations are going to be different, and so on.
But with the severe budget woes local governments are experiencing today, Chicago offers other cash-strapped cities something that couldn’t be more timely – a viable model for unlocking the value trapped in their parking assets to help solve their fiscal challenges.
Leonard C. Gilroy, AICP, is Director of Government Reform at Reason Foundation (reason.org).
Article Abstract from January, 2010