Tuesday, September 7th, 2010
Note: If anyone wants to republish this, feel free to do so.
I previously explained why signing a long term lease on parking meters was a bad public policy idea. Today I’ll show the practical dangers, using the Indianapolis example as a cautionary tale of how a parking meter lease can go wrong and turn into a civic fiasco. Even if you don’t live in Indy, this is relevant to you as your city is likely looking at privatizing parking or other services where these are things to look out for.
I’m not in Indy anymore, so perhaps this should be of no concern to me. But when I see something so terrible about to befall a place I care about, I have to say something. The deal Indy is signing with its vendor (ACS) is so bad and so one-sided, it almost defies comprehension.
Parking Meters Will Be a Cash Register That Never Stops Ringing for the Vendor
The first and most fundamental question is why the city needs to pay a third party vendor so much for something as basic as running a parking meter system. The city says it will get $400 million under this contract. The Indianapolis Business Journal estimated that the vendor would get between $724 million and $1.2 billion. How much of that is profit to the vendor? No one will ever know since according to the contract, the city is specifically barred from learning anything about the cost or profitability of the system, and any information it does get from the vendor has to be treated as confidential with the city’s people signing non-disclosure agreements, unless the law compels otherwise. The city has said the vendor’s profits are no concern of theirs.
But let’s do the math for ourselves to take a quick look. According to Schedule 9 of the concession contract, the operations of the parking system only costs the city $844K/year right now. That’s not very much, and shows that whatever efficiencies might be gained, they won’t be big dollars in the grand scheme of things. Let’s assume this remains constant in real dollars, and inflates at the same 2.5% rate used in the contract. According to this presentation from the city (slide 50), it will cost $7 million to upgrade the system to pay and display and such. So let’s also assume the vendor has to pay that $7 million in capital every ten years, also adjusted for inflation. That adds up to about $82M in operating expenses and $61M in capital expenses for a total cash outlay of $143M.
On a pre-tax basis, this deal is almost pure profit for the vendor, adding up to between ~$600 million and ~$1.1 billion, or a potential profit margin of almost 90% in the high scenario.
The totals would need to be discounted back to find the present value of the profits, but it is very clear that the city is giving away a huge chunk of the system profit. And for what? Collecting quarters out of meters? Doing basic maintenance? Writing tickets? These could easily be obtained on the open market on a simple service contract basis. Denison Parking does the job today in fact, and I haven’t heard complaints. The vendor is assuming Denison’s contract, so why is the city forking over all this money again?
The Timing and Approach Is Flawed
Indy is signing a 50 year deal in a terrible market. We are in the middle of the worst recession since the Great Depression. Are asset values likely to be high or low now? It’s obvious. Is now a good time to be selling a house? Clearly not, so why would be it a good time to do a 50 year sale of parking meters? The Toll Road lease was masterfully done at the peak of the bubble. The city is under no pressure to do a deal, but is selling at a time when it will only get fire sale prices.
Also, it does not appear the city engaged an independent financial advisor to look at the deal from the public’s perspective, repeating a key failure in the Chicago lease process. The Chicago Reader noted a Chicago Inspector General’s report critical of that city’s deal: “In its damning report on the agreement, the inspector general’s office concluded that the city may have leased the meters for $974 million less than they were worth. The reason, the report concluded, was that William Blair’s calculations of the system’s value were all done from the perspective of an investor—they were based on what that investor might be willing and able to pay for the meters, not what their value was to the city.”
No financial advisor other than Morgan Stanley (which is in William Blair’s role on the Indy deal) was listed on the city’s parking web site or in a presentation (slide 58) listing the city’s team members. By contrast, Pittsburgh not only hired Morgan Stanley as an investment bank, they hired Scott Balice Strategies as an independent advisor to represent the city’s interests.
Incidentally, Morgan Stanley is the concession holder on the Chicago lease deal. They appear to have fleeced that city. Don’t take my word for it, read the independent financial press, such as this Bloomberg piece, “Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry” or in the New York Times: “Company [Morgan Stanley] Piles Up Profits from City’s Parking Meter Deal.” This should be raising major questions about their role in the Indy deal.
The Contract Is Unconscionably Awful for the City
I also read the entire concession agreement. While I’m not a lawyer, I’ve negotiated multi-million contracts on both sides of the table and actually used to work in the outsourcing business, so I’m extremely familiar with the issues from a corporate perspective. I would certainly encourage anyone to do their own due diligence and study this for themselves, but even if I’m wrong on a few of these, the overall thrust is almost surely accurate.
Among my findings:
1. This is the Chicago parking meter lease.The city has said this deal is very different from Chicago’s notorious parking meter lease. But what they didn’t tell you is that not only is this very much like Chicago’s, it’s literally the exact same contract. That’s right, Indy took the Chicago contract, did a Save As, and tweaked it. Check for yourself. Indy’s deal is here and Chicago’s is here. Given that Chicago’s deal is famously one-sided, this is mind-boggling. I estimate that the majority of the two contracts are word for word identical. This tidbit – “the foregoing sentence shall be interpreted and applied in a manner most favorable to the Concessionaire” – gives you a flavor of how the thing goes. And where Indy’s differs, it is often even worse. I never would have believed that possible.
2. The city has no right to terminate the agreement. The contract for this 50 year deal explicitly states: “The City hereby acknowledges and agrees that it may only terminate this Agreement in accordance with the express terms hereof and shall not, in any event, have the right to terminate this Agreement for convenience.” (Section 16.1). The city can only terminate the deal if the vendor defaults, which is virtually impossible. In a deal like Chicago’s meter lease or the Toll Road, where the only payment the government gets is a lump sum up front fee, perhaps there’s some logic in not allowing the deal to be terminated. But with a very modest $35 million up front fee (compared to a deal value of over $1 billion) and with a needed up front investment of only $7 million (according to the city), it’s unconscionable to not have the right to terminate. The citizens of Indianapolis with be irrevocably locked into a terrible deal for more than a generation – and for very little upfront cash.
3. Penalties are often higher than the actual meter value. One aspect of the Chicago deal that was heavily criticized is that when the city shuts down meters, it has to pay a penalty that assumes the meters were fully occupied at all times, regardless of how much they are normally occupied. Believe it or not, Indy even upped the game here. In two out of the four zones, the penalty for closing the meter is more than if the meter is 100% occupied. The closure fee is $15 for Zone 2 & 3, increasing with inflation. But fully increased rate for Zone 2 is $1 an hour for 13 hours a day – you do the math. It’s only $1 an hour for 11 hours a day in Zone 3. Those meters are literally worth more to the vendor bagged than they could ever be operational. These penalties have to be paid regardless of the actual average utilization of those meters. The penalty for the other two zones ($20) is just shy of the theoretical maximum, but still way too high. (See Definitions, “Temporary Closure Fee” and Schedule 5).
4. The vendor gets the rights to collect parking ticket revenue and sell advertising and naming rights. In the Chicago deal, the city gets all of the money for tickets, and retains all the rights and money for advertising and naming rights for itself. In the Indy deal, the vendor gets these rights, though the city has to approve the specifics of advertising. What is an advertising concession for thousands of locations downtown worth? It could easily be more than the meters themselves. This should have been bid to major outdoor advertising firms in an open process to maximize city revenue, not thrown into the parking meter deal, assuming festooning downtown with ads is something you want to do in the first place.
5. Residential permit parking is coming to Broad Ripple. The city says it plans to use the meter proceeds to build a new garage in Broad Ripple. Broad Ripple is Zone 4, and the contract says, “In the event the City builds a public parking garage in Zone 4 during the Term, the City will agree to institute a Residential Permit program for non-metered parking spaces in and around Zone 4 to be administered by the Concessionaire on terms mutually agreeable to the Parties.” Did you know that? The city is contractually obligating itself to specific permit parking policies in that neighborhood. Now perhaps permit parking’s not a terrible idea, but isn’t it something that should be vetted through the normal political process? And be subject to change over time, not locked in for 50 years?
Outside of Broad Ripple, the city has actually limited its ability to establish residential permit parking zones. Per the contract: “The City reserves the right to designate certain on-street parking that are not Metered Parking Spaces as residential parking requiring a Residential Permit, provided that such designation does not materially effect the Metered Parking System in the surrounding area.” How nice of the vendor to agree to this. If it does affect the vendor, they are entitled to compensation. Also, if the city does establish permit parking, the vendor gets to run that too – including getting the revenue from parking tickets.
6. The vendor even gets revenue from tickets written by IPD or other city agents. The vendor has the right to write tickets on the system, but the city also has the rights. And even if the city writes the tickets, the vendor still gets the money: “The Concessionaire shall have the exclusive right to collect and retain all Parking Violation Revenue during the Term in accordance with Enforcement Policies and Procedures, regardless of whether such Parking Violation Revenue resulted from Parking Enforcement conducted by the Enforcement Operator or the City’s designated law enforcement officers.”
The city retains the cost of adjudicating parking tickets, however. It does get to judge the validity of tickets, but disturbingly, the contract actually specifies the judicial outcomes it expects: “The City shall remain responsible for the adjudication related to the Parking Enforcement; provided that such adjudication shall be consistent with the historical practices of the City, including a consistent level of parking tickets that are dismissed or appealed.”
Incredibly, the city even owes money to the vendor if the public starts appealing tickets at a rate more than 30% more than currently, regardless of whether the appeals have merit or not (Section 7.8). It’s considered a “Compensation Event.”
Add this up and what it means is the vendor can write tickets, gets to have the revenue counted to it (minus the revenue share), and if the vendor just starts writing bogus tickets to inflate its own revenues, and the public protests them, the vendor gets even more money. That’s right, the vendor can literally print money for itself simply by writing as many tickets as it feels like.
Another hugely risky item. One other change from the Chicago deal is that the city is agreeing to indemnify the vendor against any court ruling that the vendor can’t write tickets or collect parking ticket revenue (Section 12.2). Someone is challenging the Chicago lease by saying that since the city transferred the meters by bill of sale (just like Indy), it’s a private business now and the city’s police powers can’t be used to enforce parking rules for the benefit of a private company. I believe this is still being litigated. I’m not sure what the law would be in Indiana, but if similar claims were raised and ended up being successful, the city could be on the hook for possibly hundreds of millions of dollars.
7. The vendor automatically gets the right to any new meters, but the city has to pay to remove any meters. In the Chicago deal, the city has to negotiate with the existing vendor for new meters outside the existing concession area, but is free to take its business elsewhere if the vendor won’t match what a competitor would offer. In Indy, any new meters are automatically enrolled in the new deal. (Section 7.7) I didn’t see where this was limited to the four specified zones, so it might in fact apply to any meter in the city.
However, if the city removes a meter, they have to pay a meter removal fee. In the first year, this is $15,400 per meter in Zone 1. I didn’t see any provision for offsetting adds and removes, meaning if the city adds three meters and removes one, the vendor gets the three new ones automatically and the city is still on the hook to pay for the one they removed. What’s more, the city is also on the hook for any lost parking ticket revenue the vendor would have gotten off that space too.
To show how one-sided this deal is, if the city adds more than 10% new meters, the vendor actually has the right to reject them. That doesn’t mean that the city can take its business elsewhere though. Rather, it puts them into a special category where the vendor runs them, but the city is responsible for the costs of setting them up (Section 7.7). That hardly sounds like what we’ve been told that all the risk is outsourced. By the way, Chicago has these types of meters too, but the vendor is only entitled to a 15% management fee for them, whereas in the Indy deal, they get a full revenue share. [ Correction 9/13: The vendor is only entitled to 25% of the revenue from these meters. ]
8. Temporary closure policies are worse than Chicago’s. There’s a cost associated with closing meters for more than a very small temporary closure allowance. The Indianapolis closure allowance is worse than Chicago’s. In Chicago’s system, closures of six hours or more are treated as an entire day while those less than six hours are ignored. In Indy, anything greater than four hours is treated as a full day closure. In Chicago, Central Business District meters can be closed under the contract for up to 8% of the days without penalty. In Indy it is only 6% (see Definitions, “Temporary Closure Allowance”).
9. Will festival and events organizers see new fees? Section 7.6 says, “the Concessionaire shall charge, collect and retain the applicable Temporary Closure Fee from any Person (other than the City), in advance, in respect of any Temporary Closure requested by such Person.” What this sounds like to me is that if anyone other than the city wants to shut down meters, they’ve got to pay the vendor, and pay in advance. Does this mean anyone who wants to hold a festival or event downtown – even on a Saturday, since meters need to be fed then under the new contract – will have to pay this parking fee? And since the city has a revenue share, is this a stealth tax on those events? It’s not clear to me, but the contract explicitly says valet parking operators have to pay up.
10. Even the city has to pay to use the spots. As part of this program, all city issued parking placards are cancelled (Section 3.19). Now clearly this program has been abused in the past, but it seems legitimate that city vehicles on official business should be able to park on the city’s own streets for free. But I couldn’t find any provision of the deal that allows city owned vehicles to be parked in these spots for free even on city business, other than emergency response vehicles during an actual emergency. The contract does talk about an “employee parking program”, but the city or the employees will be paying for it. This is even more revenue for the vendor.
I could go on and on, but these are the highlights and should establish pretty clearly how bad this contract is for the city. It’s one of the worst I’ve ever seen. Even the Force Majeure clause is one way and only provides an out for the vendor, not the city.
An All Around Bad Deal
I’ll again reiterate that this deal is simply bad public policy. Because none of the parameters of parking policy can be changed unless they make the vendor even richer, the city has de facto frozen its parking policy for 50 years. This even applies to areas people probably have no idea of, like requiring permit parking in Broad Ripple.
An example. Imagine the city wanted to take 20% of its metered spots and replace them with electric car charging stations, making them free and reserved for electric vehicles in order to encourage that transition? Can’t do it. (If the city did that, it might fall afoul of the even worse Adverse Action clause I didn’t get around to).
Another example: Maybe the city decides it wants to close Monument Circle (or any other street) to traffic after all. It can’t do it without paying a big fee, both for the directly impaired meters, and for obstructing access to other meters, which the contract forbids the city to do.
The list goes on and on. We have no idea what the world will be like in 10 years, much less 50. This isn’t something like a water system where all it is really useful for is delivering water and it is pretty reasonable to assume we’ll still want plenty of safe, clean water tomorrow. This is general purpose real estate. This is one of the most precious assets of any city – its public space – a policy area that is experiencing rapid innovation. In fact, Indy is on the forefront of that with the Cultural Trail – but perhaps no longer. No matter what the contract might say, this is a de facto ground lease on the streets of downtown and Broad Ripple.
But beyond bad policy, again, it would appear given even a casual analysis to be a terrible financial deal for the city. And the market timing couldn’t be worse in the teeth of the Great Recession. And the contract is an unmitigated disaster.
If the City County County votes to approve this deal, the city will regret it for decades to come, just like Chicago. I hope city leaders see this and change course before it’s too late.
Chicago vs. Indianapolis
Here is a summary of various aspects of the two cities’ deals, showing how Indy’s is actually worse than Chicago’s in many respects:
|Naming Rights||Retained by the City||Given to Vendor|
|Advertising Rights||Retained by the City||Given to Vendor|
|Parking Ticket Revenue||Vendor Can Write Tickets, City Gets 100%||Vendor Can Write Tickets, Vendor Gets 45-80%|
|Annual Closure Allowance (CBD)||8%||6%|
|Threshold for Considering a Day Closed||6 hours||4 hours|
|New Meters||Outside concession area, city can bid to others||Automatically given to concessionaire|
|Indemnity for Vendor Being Declared Ineligible for Parking Ticket Protection||None||Unlimited|
|Fee for Reserved Meters (ones the vendor didn’t want to install)||15% Management Fee to Vendor||Full 45-80% revenue share split [Correction: The correct value is 25% ]|
|Penalty Rate for Closures||Maximum Possible Meter Utilization for Day||Greater than the Maximum Possible Meter Utilization for Day in two zones|
IBJ: City Vendor May Get $1.2 Billion from Parking Privatization Deal
Bloomberg: Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry
NY Times: Company Piles Up Profits from Chicago’s Parking Meter Deal
Chicago Reader: FAIL: The Chicago Parking Meter Investigation
Chicago Inspector General: An Analysis of the Lease of the City’s Parking Meters