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Thursday, September 16th, 2010

There’s No Such Thing As Green Industry

I have always been skeptical of the idea of green industry. The bifurcation between green and non-green industry seems destined to be a temporary transitional state. In the future, probably less than a decade, there will only be industry, it will all be green, with only a few legacy exceptions winding down into the sunset.

This immediately begs the question, if America isn’t doing so well in non-green industrial development in an ever more competitive globalized world, why would we think that it will be any better for green industry? Why isn’t that going to move to China too?

Turns out, it is, as a recent story in the Washington Post illustrates.

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison’s innovations in the 1870s.

The remaining 200 workers at the plant here will lose their jobs. “Now what’re we going to do?” said Toby Savolainen, 49, who like many others worked for decades at the factory, making bulbs now deemed wasteful….Jobs at the plant have been prized locally for years: They pay about $30 an hour.

Congress slipped a provision into bill that will shortly ban incandescent light bulbs in the US. The result is that all those factories are going to go out of business. But what about replacements like compact fluorescents? Those, as it turns out, are made in China:

“For those who make incandescent bulbs the law was bad for business,” [Ellis] Yan said. “For people like us, it was very good.”

Yan’s Chinese factories, which will employ around 5,000 at years end, make half of all CFL light bulbs sold in the US. He talks about opening a US plant, to produce bulbs at 40-50 cents higher than his Chinese ones. But if there’s one thing we know, it is that America is a price-dominant culture. Those bulbs aren’t going to sell even if he does make an investment here, which I very much doubt.

In a very real way here, the shift to green technology has actually accelerated the move of industry offshore. So many people like to talk about “green jobs” saving the economy. But the reverse is likely to be the case. The faster we force a shift to new green tech, the faster our manufacturing base will get shipped offshore. It can be difficult to make the case to shutter a fully depreciated factory with skills labor and fully understood operational and quality metrics in favor of a new offshore plant. But if you are starting from scratch in any case, China starts to look even more attractive. In this case, not only could a legacy plant not compete with China, it is legally not possible for them to do so after 2014 even if they wanted to because incandescent light bulbs will be banned.

This is not necessarily to disparage the shift to green tech. But sustainability advocates have to face up to the fact that there are real costs and tradeoffs to be made. Sometimes you can have it all, but much of the time you don’t get to have stricter environmental policies, lower costs and more jobs. There’s a real cost, financial, industrial, and human involved.

The real challenge of leadership is to figure out the right balance of competing needs, sell it to the public, and then make it happen. I wish our leaders luck in making that happen. But in the meantime, I’d suggest cooling the rhetoric that green industry is somehow going to save our economy from the mess we’re in, because in the short term at least it’s probably only going to dig the hole deeper.

Tuesday, September 14th, 2010

Nuvo: A Mayor for the New Millennium

[ I've written extensively about Carmel, Indiana on this blog - see, for example, Next American Suburb. It's an Indianapolis suburb with a very aggressive agenda of suburban retrofit, and I believe a "secret weapon" for the region. David Hoppe of Nuvo, Indy's alt-weekly, is my favorite local writer on arts and culture. He interviewed Carmel Mayor Jim Brainard, creating an interview that is an absolute must read for urbanists everywhere. Brainard does an incredible job of laying out the case for a more progressive urban vision in a way that speaks to the average person. Nuvo graciously allowed me to run an extended excerpt, but there's much more where this came from so please read the entire interview at Nuvo's web site. You won't want to miss it - Aaron ]

The only mayor in Carmel history to be elected to four terms, Brainard has presided over a remarkable period of growth that has seen his community’s population grow from 25,000 to 85,000, with a median household income of $89,414, compared to $47,966 for the state as a whole.

Even more remarkable is that Brainard has achieved this growth and political popularity in one of America’s most conservative political strongholds (McCain carried Carmel with 61 percent of the vote in 2008; Bush received 74 percent in 2004) by championing policies that place the arts and environmental sustainability high on the civic priority list. While the rest of Indiana has been getting failing grades for air and water quality, Carmel took first place in the Climate Protection Awards presented by the U.S. Conference of Mayors in 2008. And while public funding for the arts in Indianapolis has been cut to pre-2000 levels, Carmel is investing $150 million in a new performing arts center, slated to open this coming January.

NUVO: How did the arts and environment become policy priorities in Carmel?

Brainard: I grew up in a household where my dad was a school music teacher. My mother was a piano teacher. So I suppose that had something to do with it.

But we’re in competition in central Indiana. This region is in competition with cities all over the world. Carmel’s not in competition with Indianapolis or vice versa. We’re in competition with cities across the globe. If I am the owner of a tech company, I can choose to put that tech company anywhere, so long as I can attract the top talent I need.

So how does central Indiana compete? We can compete by creating cities that are beautiful, sustainable cities with good public education. It’s important to remember that one of the things that’s distinguished America from every other country all over the earth is that we were the first to provide free public education. Maintaining that system is absolutely key to making cities successful.

From an economic standpoint, it makes a lot of sense for a city to invest in the arts. For every dollar of investment, six to eight dollars are returned to the taxpayer.

Last fall, a Kennedy School study at Harvard showed the average household in the U.S. drives 104 miles a day. That’s not sustainable from a lot of aspects. But it’s particularly not sustainable from a city financial standpoint because we’re building all these roads and maintaining these roads.

Have you gone for a romantic walk with your significant other recently, past the Walmart parking lot on one side and the six-lane road on the other? Probably not. And the reason you haven’t is because it’s not any fun! It’s not romantic. It’s not pleasing to the eye.

So we’re bringing the buildings back up to the street. Let’s go up a little higher. Let’s accommodate the car, but let’s accommodate them underground with garages. Let’s get people walking in the community. Let’s have options for people who don’t want to live on a big lot. That means apartments and condos and townhomes. And as we build this more walkable, sustainable community, one of the ways we make it beautiful is to have art. Public art.

We started a policy, as many other cities have across the country, of spending one percent of our general reserves for support of the arts about six years ago. Over time we’ve been able to buy a lot of public sculptures, support a lot of arts organizations.

NUVO: What would you say are some of the biggest misconceptions that critics of cultural policy have?

Brainard: We haven’t had that many critics in Carmel. We have a very well-educated group of citizens. I think the last census of folks with a college degree showed us fifth highest in the county. It makes a huge difference. People are willing to listen and analyze because they’re trained – not because they’re different people – because they’ve been trained through the university process not to make quick judgments until they get all the facts.

And we’ve cut their tax rates. I think that’s a large part of it. I’m in my fourth term and residential taxes are lower in Carmel today than they were in 1986. So I think we have confidence from a lot of people in town that we are careful when we make major decisions. They’re not done on a whim, but carefully thought out and part of an overall strategy to keep our taxes low and our quality of life high.

Strategic spending can be a good thing. It can actually keep your taxes down. If we spend on things that attract businesses here that pay the majority of taxes, it means our own taxes don’t have to be as high. So far our strategy’s worked out beautifully. We’ve attracted a tremendous amount of investment. Almost one-third of Carmel’s property tax revenue comes from business. Normally in a city, it’s 10-13 percent.

NUVO: People critical of public investment in the arts often say it’s an elitist enterprise.

Brainard: I think that, in some cases, can be valid. In our case, that’s why we’re focused on public sculpture in the downtown area that can be enjoyed by anybody who wants to walk down the street. You don’t have to pay a high-priced ticket to get in. That’s exactly one of the reasons we’re raising an endowment to support our performance venues – to hold ticket prices down.

I have a relative who was married in Costa Rica last summer. One of the buildings we went to see was their opera house. It was a copy of the Paris Opera House that was built, I think, in 1895. You think about San Jose, Costa Rica in 1895, it probably wasn’t a very developed place yet. I envision dirt streets and jungle. Yet they built this beautiful replica of the Paris Opera House. It’s as if you stepped into Europe. I was talking broken English with the cab driver that took us there and he said the best thing about it is that government supports it enough that people like him can afford to go. He said he was able to see Pavarotti for five U.S. dollars.

And I thought, “that cab driver’s right.” We need to have programs that make it affordable for families and hardworking folks that maybe don’t have a lot of money. I think everybody involved in the arts needs to remember that.

NUVO: It creates a higher level of aspiration in the community.

Brainard: It gives people hope. It allows them to dream and to think and learn. Everybody should be able to afford to go to a concert or see a play. That’s why we already do a lot of outdoor concerts, a lot of free events. We want to continue those. Now, granted, artists like to get paid and make lots of money, and so there will be some events priced higher than others.

NUVO: Are there other ways in which cultural policy informs the community?

Brainard: The arts have played a part for centuries, going back to the Greek playwrights, in forming public opinion and being a vital part of a representative democracy. If we’re going to have a representative democracy, the arts are a way of communicating and discussing ideas. I happened upon a conversation in one of our outdoor cafes in Old Town just a few days ago. I overheard a group of six adults who were having dinner together, discussing the expression on the face of one our sculptures, a statue of a woman carrying a bunch of groceries, whether she’s happy or unhappy. It was fascinating to eavesdrop and hear this discussion about the expression on her face and what it meant. I’m thinking this is good. This is what art’s supposed to do. It’s supposed to inspire conversation and thought. Flower baskets are nice, but they’re not going to create conversation.

NUVO: Don’t you think public transportation has to play a part in helping people understand what a greater Indianapolis metro area can be?

Brainard: Without question we need better pubic transportation in this region, to be connected and to be able to get around. People say it’s so expensive, but what I didn’t realize until I was mayor is that to rebuild just a mile of county road is $5-7 million dollars. And you have to maintain that forever. That’s why so many cities are bankrupt. They can’t maintain the infrastructure of a sprawling development pattern.

I was looking at a comparable city in California. They have 150 miles of roads and the same population we do. We have 400 and some miles of roads. So we’re spending three and half times more on our roads – probably more because they don’t have winter. Then you have to police further out. You need fire stations. Providing decent services to the public goes way up when you have sprawl.

We appreciate that some people prefer to live on big lots – I do, I’m guilty along with everybody else – but there are a lot of folks who don’t want that yard any more. So we’re trying to provide options. When you do that, it makes public transportation more economically feasible. It’s really hard when everybody’s sprawled out. But when you’ve got dense clusters in areas, public transportation makes a lot more sense.

We – I mean, the Indianapolis region – [are] the largest metropolitan region in the country without a light rail or some form of subway system in the country today. Mayor Ballard has been pushing it. I’ve been impressed with him. I think he saw great public transportation systems in his military career when he was stationed in Europe and he wants to do similar things here.

One of the things public transit will allow him to do within a quarter mile of the stations – those areas generally develop in a very dense way. That creates an opportunity for a tremendous amount of redevelopment of those cores around the train or subway station. You get a lot of private sector investment because you know you’re going to have “X” number of people leaving that train station every day.

NUVO: What do you say to people who claim adopting green ideas involves sacrifice?

Brainard: I don’t see it as a sacrifice. Building a city that works better, is more economical, more sustainable and more beautiful – I don’t see that as a sacrifice. I see that as an improvement. And I think it’s evidenced by the fact that as we build this new downtown area, the population is skyrocketing in comparison to other, comparable cities.

Somebody said to me, “I wish so many people wouldn’t move here. I liked it when it was small.” I said, “Well, I suppose we could do that. We could not pick up the trash. Let some chuckholes start. Have some really blighted neighborhoods. Instead of people wanting to come, they’d want to leave.”

If you build an attractive place, people are going to want to come. They vote with their feet. And they’re voting in favor of Carmel.

You can read the rest of this interview at Nuvo Newsweekly’s web site.

Sunday, September 12th, 2010

Indianapolis Parking Meters – The City’s Response

I hope my readers will indulge my writings on this issue, which might be irrelevant to those of you who aren’t in Indy. But this matter is of critical importance. Hopefully at least the principles of deal analysis are useful.

The city has issued a response to my parking meter post . By Deputy Mayor Michael Huber, it is titled “Parking Meter Modernization Will Improve Infrastructure and Spur Economic Activity” and that link will take you to the entire text. I hold Michael Huber and his capabilities in high regard, but I must disagree with him in this instance.

The first part of the response deals with the modernization plan. Let me be clear: I fully support modernizing meters, bringing parking rates in line with the market, and investing in infrastructure. That plan is a good one and Mayor Ballard should be applauded for addressing an area that has been ignored for too long. I believe this enjoys wide support in the community. My issue is with the privatization agreement that is proposed to implement the plan. The report also mentions the water transaction, which I’ll again note that I thought was a good one, even though there were many critics.

I should also acknowledge that the city did learn some important lessons from the Chicago fiasco. This is not a lump sum deal. Money is going to infrastructure, not papering over deficits. Rates won’t go up until the meters are upgraded. There was a limited exemption from bagging fees for a small number of mega-events like the Super Bowl. And they even made sure the receipts would work with motorcycles.

Unfortunately, the deal still contains fatal flaws that would make it a big mistake to implement.

The city’s response more or less acknowledges most of the points I made – the contract cannot be terminated for convenience, the contract is similar to Chicago’s, permit parking is required in Broad Ripple, bagging fees are $15, the placard program is being revoked, etc. They merely disagree on some of the specifics around them and the importance of them.

This is very positive since now the debate can be on those issues, which are the real critical parts of this deal. It has become clear that the majority of people had no idea about these items. The bulk of the discussion has been around the modernization aspects that are fairly uncontroversial. I will address some of the points the city makes. As always, I encourage everyone to investigate for themselves and draw their own conclusions.

Use of the Chicago Template

The financial structure of the Indianapolis deal is very different Chicago’s. But the contract is very similar. The city says, “Indianapolis and Chicago may be similar in certain provisions of the contract, but that is where the similarity ends.” I believe this understates the degree of similarity between the two contracts, of which large portions – I estimate a majority – are word for word identical.

There is no reason not to use tried and true templates. But the city should not have used the Chicago contract as a model. The Chicago contract is known to be bad for the public.

The city also says that other concession agreements such as the Indiana Toll Road are also similar. I have not reviewed that agreement, so it is certainly possible. However, the Toll Road, Chicago Skyway, and Chicago parking meter transactions all involved large, one-time lump sum payments in excess of one billion dollars. The Indianapolis agreement is not a lump sum deal, and so the use of a contract template built for lump sum deals is not appropriate.

The Indianapolis contract should have been structured as a partnership or joint venture, without the onerous and one-sided provisions of the Chicago contract. The majority of the defects in the transaction stem from the use of this template.

Termination for Convenience – The Most Critical Issue

The city notes that the contract does provide for termination by the city in select cases. As I myself noted, “The city can only terminate the deal if the vendor defaults, which is virtually impossible.” The conditions under which the city can terminate include things like the vendor filing bankruptcy. These are extremely unlikely to happen.

The city acknowledges that the contract cannot be terminated for convenience. This is what would give the city the right to cancel the deal if it decides that it is no longer in the public interest. The city says, “if the City could simply walk away at any point in the contract, there would no practical reason for ACS or any third party to make an up-front investment without substantial penalties to the City for termination.”

Obviously if a vendor gives you $35 million in cash, it would be unfair for to terminate it without penalty. But in this case, the city cannot terminate the agreement even if it gives the money back. This might not matter in the case of the Toll Road, since refunding $3.9 billion is not realistic for the state. But in this case it is very realistic.

Typical outsourcing contracts would provide for a termination for convenience with a pre-negotiated penalty that declines over time, decreasing to zero at a reasonable point (e.g., seven years). This figure should be set high enough to compensate the vendor for their investment and discourage gratuitous cancellation, but not so high as to be a de facto lock in.

Unlike with a Toll Road that is only about moving cars, the role of parking is not principally financial or even about transportation. Rather, it is about optimizing the use of a precious public resource. Rates should be set high enough so that there are spots available if someone wants to patronize a local business, but not so high that it keeps people away. Because neighborhoods change over time, and business conditions are dynamic, this isn’t a process that can be done all at once for 50 years. What if business on Mass Ave starts to suffer? What if Broad Ripple hits a rough patch? This might seem unlikely, but who could have predicted 50 years ago in 1960 what would happen to the city’s various neighborhoods? By the way, can anyone even remember who was mayor in 1960?

I’m a white kid who used to live in a trailer on a gravel road in Southern Indiana. That’s about as far removed from the urban African American experience as you can get. So it didn’t occur to me until after Amos Brown’s show was over that in 1960 Indianapolis was a segregated city. The Civil Rights Act wasn’t passed until 1964. Today we have a black President of the United States. That’s change. And the world is changing even faster by the minute. There is simply no way to predict what will happen even 10 years out. Setting parking rates far into the future, with significant penalties for reductions, unduly ties the city’s hands.

The city simply should not commit itself to a long term deal of this nature. There is nothing more important in this matter than obtaining a reasonable termination for convenience that the city could realistically exercise if conditions change. This is even more important than getting more money. Because if the current deal is executed, it will be game over for 50 years.

The Deal Financials

The city takes a different financial view of the deal that me, but I will demonstrate that even with the city’s numbers the deal still looks very profitable to the vendor, that costs should actually go down, not up, and that this transaction is really a form of high interest borrowing a la payday loans.

This Is a Very Profitable Deal
I tend to avoid marketing materials and look directly at raw financial statements. The parking meter financial statements are in Schedule 9 of the contract on page 151 of the PDF. It reports revenues of $3.7380M, expenses (personal services, contractual services, and “internal charges”) of $844.1K for a EBITDA (profits) of $2.8867M, or a profit margin of 77%.

The city’s response says that this does not include enforcement, indicating that actual expenses are $3.1M and only $750K in funds available “for infrastructure improvements or parking meter upgrades.” It is not clear to me if that is intended to indicate the total system profits, but let’s assume that it does. Even $750K a year is $750K more than the Toll Road made in 50 years, so this is a profitable asset.

I would be interested in seeing a detailed schedule of the other $2.26M expenses. Even at a fully loaded cost $100,000 per year, this is 22 FTE’s. That’s a lot of people to write parking tickets for meters.

I had previously used a $7M estimate for meter upgrades based on an August city presentation. The city’s response indicates that their current estimate is $10M. The city and I agree that potentially 3-4 technology refreshes would be required. The Indy Star reported this morning that the city has 3,669 metered spots. The contract requires the city to add 130 new meters for a total of 3,799. This equates to $2632 per spot for upgrades. Chicago has about 36,000 meters and a spokesman for the concessionaire says that they invested $40 million This equates to only ~$1100 per spot for upgrades. And this is based on actual investments already made.

However, using the city’s numbers, and factoring in inflation, I would estimate the vendor would incur approximately $300M in operating costs and $85M in capital costs. Based on the IBJ’s estimate of $724M-$1.2B in revenues for the vendor, this would mean total profits of $339M to $815M, or a potential profit margin of 68%. Obviously the total profits would have to be discounted to the present value, but so would any future city revenues.

Costs Should Go Down, Not Up
I assumed costs would remain constant on a real basis and increase only with inflation. The city says this does “not include millions of dollars in new expenses that would be incurred by the vendor, including the operation and maintenance of high-end technology systems (including new hardware and software), the additional personnel required to operate a stand-alone business, or the proposed extended hours of the parking system.”

I find it difficult to accept that putting in modern technology will actually raise costs by millions of dollars. People implement modern technology to reduce costs. That’s what modernization is all about. For example, each pay and display meter will serve up to 20 spaces. Even at lower densities, that is far few meters to empty, maintain, etc. With credit card payments, there will be less change to collect, etc.

Pay and display systems are basically special purpose computers like ATMs. We all know the cost of computer technology is plunging, so future purchases may be far less expensive. And each generation of technology gets better and cheaper. For example, we used to have to get paper tickets for airlines. Now we get e-tickets. You still had to stand in line to get a boarding pass, so the next generation replaced expensive agents with self-serve kiosks. Now the kiosks are likely to be eliminated as well since you can have your boarding pass texted to your cell phone – how much does that cost? This all happened within a decade or so. This has been repeated across almost every industry.

In the future, you might not even need machines. Maybe you’ll just text your license plate number to the system, and it will register your presence in the spot. Then an enforcement officer driving down the street could simply scan license plates electronically. Or even maybe future chips in cars will be picked up by a wireless network and they’ll text you a ticket, or let you refill the meter by text. This is all very realistic technology. Remember, we already have full body “x-ray vision” scanners at airports.

When I was managing technology systems, we were expected to reduce costs by at least 5-10% per year no questions asked, no excuses, even when we already benchmarked as best in class on costs. I expect that a well-run company like ACS/Xerox has similar expectations for its managers. While some debate this, I believe strong cost control is one reason the private sector really can do things more cheaply than government. That’s why I don’t object to hiring ACS to run the meters on some type of an annual contract. Though given that Denison parking already operates the system and will continue doing so, it’s not clear to me exactly what ACS will be doing other than being the city’s banker.

This Transaction Is Really a High Interest Loan
Speaking of which, unlike the Toll Road lease which should be thought of as a sale, the best way to look at this transaction is as a loan. The city is in effect borrowing $45 million from Xerox, and that company’s profits on the transaction represent the interest. So it is critical to understand how much profit they plan to make to understand if this is a good deal or not.

Is it better to borrow money from Xerox or some other way such as issuing bonds? There are several reasons to believe, even beyond analyzing the deal financials, that Xerox is more expensive.

1. Credit Ratings. Depending on the source, the city has a credit rating of AAA/AA+, the best there is. As of February this year, Xerox had a credit rating of BBB-, the lowest investment grade rating. Xerox can’t get money for free. It has to come from somewhere. It costs them more to get it than it would Indy directly, so that will be passed through, with margin, to the city. Indianapolis can issue debt directly at rock bottom rates.

2. Taxes. Municipal bonds issued by the city are tax exempt. Xerox is not. The US corporate income tax rate is 35%. This means a good chunk of that company’s share of the profits is likely to get sent to Washington. So they need to earn more profits to cover that.

3. Cost of Capital. Businesses can be funded with either debt or equity. Debt like bank loans or bonds are safer than equity. They get guaranteed interest and have first priority to be repaid. For equity like stocks, there’s no guaranteed return, the price might go down, and if the company goes bankrupt, you lose everything. So equity holders demand the prospect of higher returns for that risk. If the city issued debt, it would be a very safe investment, so it has a low risk premium. But Xerox is a publicly traded company. Beyond the debt it issued at BBB-, its stockholders have equity, and demand higher returns than what they can get on municipal bonds. If the stockholders wanted muni-bond rates, that’s what they would have bought, not stock. So Xerox’s CFO makes sure that whenever they take on a deal, it earns a high enough return to please stockholders, not just bond holders. This makes rates even higher.

Add it all up and Xerox is not a particularly good place to borrow money. They aren’t a bank. That’s not their business. They are a technology company – and a very good one. Incidentally, the concession holder on the Chicago agreement, Morgan Stanley, is literally a bank.

I again draw an analogy to a person who can’t get a regular bank to loan them money, and so has to go the check cashing store to get a payday loan. But the city is hardly a deadbeat and can get money even cheaper than Xerox can.

They city says it would probably have to use “the moral obligation of the City to sell bonds given the lack of detailed historical financial information regarding parking revenues.” This sounds to me like they mean they couldn’t issue revenue bonds, but would instead have to issue general obligation debt. The city previously said in the IBJ it would be able to issue about $20 million in revenue bonds. That leaves a $25 million gap to get the same upfront cash and pay for modernization.

Even general obligation debt would be cheaper than this transaction. Also, there may be other creative ways to access funds. Perhaps Citizens Energy could take this over too. They are a locally controlled non-profit that is a quality operation with a long track record of managing field service operations. And one that would probably do a true partnership model without all these fees.

Whatever the case, I believe there are better financial options for the city than privatization. While there would be more revenue risk to the city, given the 45-80% of the revenues being given away, it would take quite a collapse indeed for the city to be any worse off by owning the meters itself. And no doubt ACS/Xerox factored all the risk into their price up front, so the city is already paying for it.

Even Abdul Hakim-Shabazz wrote, “I think revenue bonds tied to the parking meter revenue will be a better way to go. You modernize the meter system, retain ownership, and still get your infrastructure fixed.”

Penalties, Etc.

The most important thing to understand is that the risk of having to pay penalties to the vendor is very real. This is not a theoretical or academic exercise. CBS-2 Chicago, in a story entitled, “Parking meter firm gets paid even when streets are closed,” revealed:

It’s the gift that just keeps giving, to the private company the city hired to operate city parking meters….Here’s the reason: There are street repairs, art fairs and block parties –- all events that prevent you from parking in normally legal spots. When those spots have parking meters along them, Chicago Parking Meter LLC, the company that got the billion-dollar deal with the city, can’t make money, right? Actually, it’s a great deal for the parking meter company. They usually make money because you have to plug the meter to park legally. When you can’t park at a metered spot because of street construction or other projects, they still get paid.
…
Records obtained by CBS 2 for the first quarter of 2009 of the contract lists street by street the lost income for February March and April of 2009 totaling more than $106,000. That amount will surely go up for the spring and summer — the seasons for street closings. “The city will be paying perhaps as much as $500,000 a year to protect the revenue stream for those guys,” Krislov said.

The question is how much the city might have to pay. The city says that the closure allowances need to be viewed in light of the larger hours Chicago’s meters are enforced, and “the recommended temporary closure threshold is about the same for both Indianapolis and Chicago.” This is a fair point. However, Chicago got a bad deal. Indianapolis could do better. Remember, Chicago is exceeding their allowances.

The city notes that events will not necessarily be charged a closure fee, saying “If the City deems that a specific event or organization will not be required to pay to temporary close meters, the City has the flexibility to close meters beyond its 6 percent allowance, and the vendor will withhold a proportionate amount of revenue share for that right.” Withholding revenue in this case means paying the vendor. It is true that the city could cover this fee itself. But it is not required to, and if it won’t, then the event will have to pay. The city says, “each program or request will be assessed on its merits (a continuation of the current policy).”

I think I may have been unclear in my original post on permanent removal fees. I only intended to say that the bagging fees assume more or less 100% occupancy, not the permanent removal fees. The city is correct that after year one, this is based on actual revenue reductions based on the formulas on pages 132 and 133 of the contract. I should note, however, that these formulas do not account for any corresponding reduction in cost from having fewer metered spots to manage. These fees will be significant in any case.

As with Chicago, it is actually better for the vendor if meters are shut down, such as during a long construction project. They get paid as if the meters were operational, but don’t have to do anything. To consider an extreme case, if the city decided to make parking free and remove all meters, the vendor could simply cease all operations except cashing the city’s checks and still make as much revenue as ever without any corresponding costs. This is very unlikely to happen, but it demonstrates the principle at work.

The city notes that even if the privatization transactions was not done, the city would still lose money if it removed meters permanently. That is correct. But it would only lose its own money. It would not be required to guarantee profits for a private company on that spot.

Permit Parking

The city says, “A residential parking permit in Broad Ripple and a parking garage have been considered a high priority long before this parking modernization effort began.” That’s true. And I have no issue with implementing a residential permit parking scheme. However, it is important to remember that the contract requires the city to have such a plan if it builds a parking garage in Broad Ripple: “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” (page 47). Establishing permit parking should not be done in a vendor contract, but through the normal public process. And it should remain free to be changed if conditions changed.

The city disagrees with me that it has limited its right to establish other zones. I will simply reprint the relevant passage from 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.” (page 38, emphasis added).

The city notes that the Concessionaire can only charge a nominal management fee for running these. That is true. But remember, the vendor will get the rights to the parking ticket revenue from enforcement, less the revenue share: “All fees collected for the issuance of Residential Permits shall be retained by the Concessionaire and all Parking Violations Revenue shall be retained by Concessionaire.” (page 38) That’s where the money is.

Miscellaneous

Reserved Meters: The city notes that the vendor is only entitled to a 25% share of these meters, not a full revenue share. They are right and that was my mistake. I will correct the original post.

Revenue Share: Several times the city points out that any funds that go to the concessionaire must be split with the city, so they do not all go to the vendor. That’s true, but it is still 45-80% of the money. It is not clear why the vendor should be entitled to anything from tickets written by IMPD, advertising, etc. Or why the vendor should receive this compensation when the city uses the spots for itself on official business.

Indemnification: If this is not a risk, then the vendor should have no objection to removing the clause. I found this particularly interesting because it was a clear change to what was otherwise the same text as Chicago, and one that served to create an even more iron-clad contract for the vendor. The success of the IVI-IPO lawsuit or similar suit might be the only way for Chicago to extract itself from that disaster. If the vendor considers it a risk, the city should consider it a risk.

Offsetting Adds and Removes: One thing I did not see the city address was the lack of any provision for offsetting adds and removes. I could not find that in the contract, but admittedly, it is long and complex. If the city adds 10 meters and removes 5, that should be treated as a net add of 5, not 10 adds + penalties for five removals.

Morgan Stanley and Timing

The city says that different Morgan Stanley groups worked on Indy and Chicago. I never said the exact same divisions worked on it. Morgan Stanley, like most large corporations, is a many-tentacled beast. But whether it is the left hand or the right hand, it is all a family, dedicated to making money across all of its groups.

Consensus is Morgan Stanley made a huge profit on Chicago’s deal. But that came at a cost. Privatizing parking meters got a well-deserved black eye, so they can’t repeat that coup. That market died. So now Morgan Stanley has an incentive to want to restart the market for privatizing parking. If Indianapolis leases its meters, other cities might start taking a serious look at meter privatization, then the other arms of Morgan Stanley can swoop in for another payday. As Am Law Daily noted of Pittsburgh consideration of leasing meters, this puts parking meters transactions “back in play.” Morgan Stanley has every incentive to want to restart that market.

Admittedly, so do all over investment banks. If there’s one thing we learned in the financial crisis, it’s that Wall Street is populated with sharks. And if you’re swimming with sharks, you need good protection – like setting another shark to watch. That’s why I recommended an independent analysis. That’s exactly what Pittsburgh has done. Their city council voted to do have someone else check Morgan Stanley’s math:

Ms. Hairston’s advice for council to take an active role came a day after the body’s preliminary vote for an outside valuation of parking authority assets.

Representatives of Morgan Stanley, Mr. Ravenstahl’s financial advisers, had discouraged the outside review, saying it could scare away investors. Morgan Stanley’s infrastructure investment group also is the leading investor in Chicago Parking Meters LLC, the consortium that received Chicago’s on-street parking lease.

On Thursday, with council members still fuming about the financiers’ efforts to shut down their inquiry, Ms. Hairston told them they had every right to demand a third-party study.

Despite Morgan Stanley’s warnings, bidders showed up in droves to Pittsburgh.

Interestingly, even Pittsburgh’s mayor doesn’t want to lease the meters:

Ravenstahl has said privatization is necessary to bolster Pittsburgh’s underfunded pension system. “Let’s be clear: The mayor doesn’t want to do this,” said mayoral spokeswoman Joanna Doven.

Pittsburgh’s pension fund is in awful shape. As the Pittsburgh City Paper reports: “That fund is in sad shape: It has only 30 cents of every dollar it will need to pay the pensions promised to city workers upon retirement. What’s more, the state legislature has given Pittsburgh until New Year’s Eve to raise the total to 50 cents. If the city fails, the state will take the pension over — and demand an extra $30 million from the city each year. That, warned Ravenstahl, translates into a 24 percent property-tax hike. Or a 44 percent hike in wage tax. Or laying off 400 cops.” That’s called being between a rock and a hard place.

There are also indications that the market for public assets may not be as robust as the city thinks. At the same time the Chicago leased its parking meters, it attempted to privatize Midway airport. That transaction failed because the winner bidder was unable to secure financing. Perhaps there is still money to invest, but only on particularly lucrative deals.

Conclusion

Again, I am very supportive of the modernization aspects of the mayor’s plan. But the privatization transaction should not be undertaken. There has to be a better way to make it happen. I believe the Council and the public are now aware of the material issues, and the right debates are going to happen, hopefully with the right outcome. I again applaud the mayor for seeking creative solutions to addressing long deferred problems, but this deal is not the right answer for the city.

Further reading:

Parking Meters and the Perils of Privatization
Indy’s “Son of Chicago” Parking Meter Lease to Be a Disaster for City

Friday, September 10th, 2010

Urbanoscope

I will be speaking at an upcoming Chicago Council on Global Affairs event on Thursday, September 23. The topic? What else – privatization. The program is called “No Free Money: Is Privatization of Infrastructure in the Public Interest?” The program is free, so for those who are in Chicago, I’d encourage you to attend. Also speaking are Michael Pagano, dean of the College of Urban Planning and Public Affairs at UIC, economist Charlie Wheelan at the University of Chicago Harris School of Public Affairs, and Zach Egan, an investment fund manager.

Kevin LeMaster, publisher of the wonderful Building Cincinnati, has decided to call it quits after the venture was not financially sustainable. Believe me, I can sympathize with that. I do know this, Kevin gave Building Cincinnati his all. Win, lose, or draw, the city is luck to have an entrepreneurial spirit like him. Best of luck to Kevin in his next endeavors.

Top Stories

1. Nuvo: Carmel, Indiana’s Jim Brainard Is a Mayor for the New Millennium – A fantastic interview by David Hoppe

2. NYT: As Stadiums Vanish, Their Debt Lives On

3. Washington City Paper: How 32 year old Google veteran David Alpert and his band of bloggers are shaping 21st century DC – A great profile of the very cool Washington, DC blog Greater Greater Washington. It’s sort of like a Streetsblog with a wider focus than livable streets.

4. The American Conservative: The Real Costs – A look at the exploding costs of rail transit systems: “Rail transit’s great enemy isn’t public support or political will but its enormous price tag….America’s rail infrastructure won’t be resurrected overnight. But history shows that we can build rail economically and on time. After all, we have been constructing systems of all sizes and complexities in this country for well over a hundred years. Recalling those past experiences today will give us the tools we need to build the trains of tomorrow.”

5. Federal Reserve Bank of San Francisco: The Effect of Immigrants on U.S. Employment and Productivity – “Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker.”

More Indy Parking Meters

I was honored to be on Amos Brown’s radio show for the first time yesterday talking about Indy’s parking meter deal. I don’t have embedded audio, but you can listen to the segment here. I must say, the role of activist is an new and uncomfortable one for me, but I feel compelled to step up.

A couple of additional points on the Indy meters:

• You might think that an almost 90% potential profit margin for the vendor is ludicrously unbelievable. Think again. This isn’t like the Toll Road. The Toll Road had never earned a nickel for Indiana in 50 years. By contrast, the parking meters are very profitable. The city already makes millions in profits every year off them. In fact, even with the existing inefficient system, the city itself is already generating a 77% profit margin. With higher rates, longer hours, penalties galore, and promised efficiencies, it is easy to see how that goes way up. Again, let’s review – Toll Road: a money loser turned into $3.9 billion. The parking meters: a lucrative business of which as much as 3/4 of the value is being given away for $35 million. In effect, ACS is loaning the city $35 million and is getting repaid with potentially a billion in interest. That’s like you or me borrowing $35,000 and paying back a million in interest. Even credit card companies aren’t that greedy. This is like taking out a 50 year payday loan from the worst check cashing store in town.

  As for the $400 million revenue share, that money already belongs to the city. Instead of giving away $724M to $1.2B, why not just raise rates yourself and keep it all for the public? Unlike with Chicago where rates went up to something like $8/hr and people were literally carrying around ziplocks full of quarters, these rates are only going up to $1 to $1.50/hr total. That will hardly provoke a riot. Everyone knows rates need to be raised – an action I fully support.

• Amos Brown asked me about MBE participation in the deal and I did not know the answer. But I looked it up. The Chicago contract requires 25% MBE participation, Indy requires 15%. Indy is higher for WBE at 8% vs. 5% in Chicago, and also has a 3% veteran owned business requirement Chicago does not. That’s 30% vs. 26% for total DBE target.

Since this deal was won by ACS, I should be sure to note that I used to work for an ACS competitor, though I never was in the public service practice and don’t ever remember competing against them. I don’t know who the others bidders all were, but to the best of my knowledge, my former employer was not one of them. I don’t have a financial interest in the deal, and if anything opposing it is a pure cost to me since I’ve doubtless made several new enemies in return for nothing.

I normally maintain a policy of not getting involved in current political disputes or criticizing elected officials. But when there is something with the potential for significant, long term, irrevocable harm, I have to speak out. I don’t hate Mayor Ballard. In fact, I think he’s done many good things ranging from the water deal that I think was a great one (and very creative too – Michael Huber did a fantastic job on that one), to endorsing IndyConnect, to his bike infrastructure initiative, SustainIndy, and re-establishing mayoral control over the police department. I appreciate his looking at creative ways to close an infrastructure deficit that he had no role in creating. But this is not the right way to do it. If I didn’t believe this deal was a serious, long term danger to downtown and the city, I never would have spoken up, no matter how bad the financials were. I beg the city to reconsider and not do this deal. Fifty years is an awful long time to have your hands tied.

Pedestrian Safety

In another progressive move, New York City has released a landmark Pedestrian Safety Study and Action Plan, a comprehensive look at accidents and how to reduce them.

One of the things that so impresses me about what New York is doing in the transportation space is that its isn’t just about looking pretty or saving the environment or supporting alternative transportation. Rather, NYC DOT is fixated first and foremost on safety. If you get to hear Commissioner Janette Sadik-Khan speak, you’ll hear her talk about how the changes they’ve implemented have made the streets of New York safer.

Typical state DOTs think about safety in terms of adding lanes and expanding intersections and such. But the NYC DOT is looking at it more comprehensively. According to this article, for example, streets with bike lanes are 40% less deadly for pedestrians than those without. Maybe this isn’t apples to apples, but the numbers are sure interesting. The city is also installing 1500 countdown pedestrian signals and, yes, improving intersections. This includes removing curb parking to improve visibility. Try that in Indianapolis after the meter lease is approved!

This study is worth checking out.

Mapping Racial Boundaries in Chicago

A site called Radical Cartography has an interesting map of race in Chicago, which is America’s most segregated city.

World and National Roundup

Richard Florida: The Power of Density

Lewis Lapham: Is the Myth of City Life More Significant Than the Real City Itself?

The Economist: Stop the Suburbs, I Want to Get Off

Foreign Policy: Miami Swoon – An interview with Saskia Sassen on global cities as a follow-up to the magazines special issue on cities.

Foreign Policy: Don’t try this at home – The failed attempts to recreate Silicon Valley.

WSJ: The Inconvenient Truth About Traffic Math

So often people complain about the government, but they don’t have any policy alternatives to present themselves. But here’s an exception. Economist Constantin Gurdgiev has laid out the start of a very detailed policy manifesto for Ireland. It doesn’t cover all policy areas yet, but it goes through quite a bit. Whatever you might think of it, here’s a guy who thought hard about the problem and put a stake in the ground for specific, tangible solutions.

Jim Russell: Not so Rust Belt Chic Baltimore – Among other things, Jim documents how Rust Belt Chic – a term I believe he coined – is now a rapidly spreading meme.

NYT: Detroit’s Midtown thrives by building on past

Chicago Sun-Times: Mayor Daley is not seeking another term – The headline says it all. I’m not saying much about this right now since I don’t have much to add and no doubt you’ve already heard about it.

A Chicago cop named John Andrews published a long essay on his personal blog called A City at War With Itself: Chicago – On the Fast Track to Anarchy that made a big splash as you can imagine. This has landed Lt. Andrews in hot water, and he is now under investigation by Internal Affairs for the matter.

Chicago Tribune: Community Supported Agriculture dropoffs almost plowed under by city rules

Human Transit: Chicago: A Draft Frequent Network Transit Map

Broken Sidewalk: New York construction fence shows world walk symbols – A very cool art project at a NYC construction site.

NYT: Above ground, 2nd Avenue subway attracts critics

Remember a post I did about the great grass roots Indy organization People for Urban Progress? Their first production shade made from recycled RCA Dome roof fabric is about to be installed

And remember Nikki Sutton, who I mentioned in a previous post about Portland? She just got a wonderful profile in Nuvo. Nikki is the real deal.

More Amazing Really Old Color Photos

The web site My Urbanist posts a delightful selection of mostly color photographs from very long ago. Here’s one sample of Melbourne, Australia in 1917:

More Cool City Videos

Here’s a cool time-lapse video of what I believe is Tokyo. (If the video doesn’t display, click here):

And of course, what would Urbanoscope be without a tilt-shift video, this time of traffic in Boston. (If the video doesn’t display, click here):

Post Script

The Gotthard Base Tunnel in Sedrun, Switzerland from the Subterranean Builder’s Guide on BLDGBLOG.

Thursday, September 9th, 2010

The Power of Brand Detroit

Detroit is one of America’s most powerful brands. I realize this is not what most people think. Many would say it is one of America’s most tarnished brands. That might be true, but that doesn’t diminish its power. There are lots of cities that are struggling right now, but how many of them have a stream of international reporters, film makers, artists, etc. coming to see it in person for themselves? How many of them have attracted random bloggers from all over the country to analyze the place and propose remedies? Why is this place thought to hold lessons for America while so many others do not?

Yes, Detroit is a brand with power. Yet too often its own residents feel the need to downplay it, euphemistically referring to the region as “Southeast Michigan” or to the city as “the D”, as if the brand has to be changed in order to attract people or investment. That might be true to some extent, but this is not what is going to attract the pioneers and early stage investors who are going to reverse the cycle of decline. Changing the brand will be the consequence, not the creator, of civic renewal. To attract those first people and businesses, you need to lure them in a different way – you need to inspire. So I say embrace Detroit, stand up and be proud of the city and what it is and what it could be. It is the only way to generate the inspirational motivation that can bring renewal.

Think about it. Did Jesus try to attract followers with gourmet meals, gallery openings, and rebranding Himself to be more approachable as “the J”? No, He did not. But with nothing but the promise of a Kingdom of Heaven that we’ll never see here on this earth, He kicked off a religious movement that echoes to this day. Indeed, few religious leaders had much tangible to offer in the here and now, but many of them managed to amass huge numbers of followers nevertheless.

You can convince people to get behind the rock and push if you give them a reason to. You can get people to enlist in your army in anticipation of a tough battle if you inspire them with your purpose.

Detroit can be an inspiration like this in a way “the D” never will. Perhaps as much as bean counters, economic developers, hipsters, etc., what Detroit really needs is a good dose of a tent revival preacher, calling the people forth to repentance and onward to greater glory tomorrow. That doesn’t come by being almost apologetic and embarrassed about who you are. Rather it comes from standing up tall, and being a true believer in your city and your cause.

Detroit is a great city in many ways. And “Detroit” is a great name for a city. Wear it with pride.

Tuesday, September 7th, 2010

Indy’s “Son of Chicago” Parking Meter Lease to Be a Disaster for City

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:

Recommended Reading

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

Thursday, September 2nd, 2010

Labor Day Open Thread: What Do Successful Lower Income Neighborhoods Look Like?

It’s Labor Day weekend in the United States, and I’ll be taking it off, returning next week. In the meantime, I’ll leave this open thread for your discussions on what successful low income and working class neighborhoods would look like in our cities.

This was a topic that came up during conversation over Asian food with Brendan Crain, the founder of the wonderful and sadly no longer published Where blog. Everyone has a idea of a what a successfully revitalized but gentrified neighborhood looks like: Starbucks, high end salons, shoppes, swank restaurants and bars, new condos, etc. But for more struggling lower income areas of our cities, what would successfully revitalized neighborhoods that didn’t end up displacing the current residents look like?

You hear people talk a lot about the surprising economic life in Mumbai’s slums and other places around the world. But I’m more thinking of mature cities in advanced countries.

Your thoughts?

Have a great weekend, everybody.

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