Thursday, February 3rd, 2011

Can Chicago Get Out of Its Parking Meter Lease?

Image via The Expired Meter

It’s almost surreal that the two year old parking meter lease remains politically potent in Chicago. At least two mayoral candidates have said they are in favor of undoing the deal. The others suggest it will be difficult, but haven’t said that it is undesirable. Could Chicago in fact get out of that deal? Possibly, though it’s a long shot. But it’s imperative that the next mayor at least take a run at it.

The reason to undo the lease is not that it was a bad financial deal, that rates went up, or the way it went down. Rather, it has to do with parking meters being a bad candidate for this type of transaction in the first place. As I explain in “Parking Meters and the Perils of Privatization,” parking meters are not a public service like garbage collection, nor a capital asset like a toll road. Rather, parking meters are an urban planning tool that we use to manage access to precious street real estate for the benefit of the neighborhood. Because neighborhood dynamics change over time, the management of the space needs to change with it. Heck, we might not even want to use that real estate for parking the future.

However, the parking meter turned this urban planning tool into a revenue generating mechanism. The lease locks Chicago into a particular policy on parking for 75 years – including setting rates decades into the future. In effect, the city sold off a 75 year ground lease on the streets of Chicago, that is to say in the most important component of the city’s public space, to a private company. This will clearly hurt our ability to implement livable streets type initiatives going forward – the types of projects that are key to attracting the talent Chicago needs to be competitive in the 21st century economy. Maybe they won’t be impossible, but you don’t want to be wearing ankle weights in a race with China – or even New York, which is killing Chicago on the transportation innovation front right now (see here, here, here, and here for examples).

What’s more, Chicago locked itself into an old-school “X quarters per hour” pricing structure just as we’re on the cusp of a revolution in parking management. San Francisco is already experimenting with dynamic pricing. Similar to congesting pricing for roads, this varies meter rates based on demand to most efficiently use the space. It also de-politicizes parking rates by letting the market decide what the price ought to be. Chicago’s lease is the parking equivalent of building the new Comiskey Park right before Camden Yards opened.

So we have to at least take a shot at. How then?

The lease cannot be cancelled. But there’s no reason it can’t be renegotiated. Private businesses renegotiate contracts all the time – all the time. I believe the city should engage with Morgan Stanley and the consortium in good faith negotiations to repurchase the meters at a fair value. I believe Morgan Stanley would be open to this. If not, perhaps the IVI-IPO lawsuit will succeed. And I believe there are other ways we can bring them to the table. But this is not about trying to get revenge or screw the banks. I’m talking a good faith negotiation and fair valuation.

But we already spent the money. So how would we give it back? Good question. Remember though, we would not only have to give the money back, but we would get back the revenue stream. After all, Morgan Stanley gave the city the money in the expectation the meter revenues would pay it back. Why wouldn’t that work for us? The city even has advantages here. It doesn’t need to turn a profit. It doesn’t have to pay taxes. And as a AA- rated borrower with no equity component in the deal, it has a lower cost of capital.

Conceptually, the city would create a parking authority that would issue revenue bonds backed by the meter revenues in order to pay back the money. Possibly this would have to be supplemented with general obligation debt or some type of contingent city guarantee. But the idea is that the meter revenues themselves would cover the payments. If not, then by definition the city overpaid.

You might argue that the city can’t take on any more debt. Well in effect it already did. Because the actual assets of the parking system are minimal, and this more or less just involves a monopoly franchise, another way to look at the meter lease is as a form a high interest off balance sheet financing. In effect, the city borrowed the $1.1 billion from Morgan Stanley to start with and is paying it back with the meter money. I say it’s time to look at refinancing that into a more conventional product. Note that there’s no reason why we can’t continue using a private company to run the system for us, as who cares who collects quarters out of the meters. I have no objection to private sector involvement and am a privatization fan generally – just not of this deal.

Now this isn’t without risk or pain. (It might affect the city’s credit rating, for example). Nor will it be easy. In fact, it’s probably a long shot. But because the price of staying in the deal is so high, it’s something the city has to give a serious look at. Because who knows what we might be able to make happen if we put as much effort behind getting out of the deal as we did to getting into it.

Unfortunately, because we need to use meter revenues to pay back the debt, getting out of the lease only solves half the problem. We’ll still be saddled with having turned an urban planning tool into a revenue raising mechanism. But at least we’ll be in a position to look at solving that problem ourselves. Without getting out of the lease first, there’s basically no hope for the next 73 years.

This article originally appeared in The Huffington Post.

Topics: Transportation
Cities: Chicago

6 Responses to “Can Chicago Get Out of Its Parking Meter Lease?”

  1. Well written article.

    I can support the privatization of parking; however the Chicago deal was poorly constructed. The mere closing of streets by neighborhood groups for small parades and picnics yields the need high compensation to the parking consortium. Plus, you bring up a great point in that it greatly limits Chicago’s ability to create more “livable streets”.

    The City failed in providing transparency in the parking meter buy-out process. The plan was hastily rushed through the Mayor’s office – and clearly, due diligence was lacking greatly.

    And, I’ll say it once again – great post!

  2. marko says:

    This is what happens when the mayors’ brother is a Wall Street insider. Morgan Stanley gets a sweet deal and the city gets a short term cash infusion. Its like the middle ages all over again. Back then you had to keep the pavers in front of your leased property in good repair by hiring the masons to lay them but at night the masons would dig them up to resell to someone else. Welcome to the Dark Ages 2.0, expect much more of this in every form nationally.

  3. JJJ says:

    Perhaps the city hopes that gas hits $6, people stop driving, the demand for parking plummets and they can buy back the contract at a lower value?

  4. Marty says:

    But if you pay back MS by selling revenue bonds backed by street parking revenues, you have still tied up the use of the City streets for the life of those bonds, and I thought freeing the City from that obligation was one of your goals in your 2d and 3d paragraphs. Let’s say that MS was amortizing its costs and hitting its capital return rate over the 75 year term of the lease, and with access to tax-advantaged debt and no need to make a profit, Chicago could use the same revenue stream and amortize the debt in what… 60 years?

    The street parking deal was/is not a bad deal and what people don’t like, after accounting for the rollout which was abysmal, using a 75-year revenue stream in 3 years, and the higher rates which generally just bring 1970s prices to a roughly market-clearing level, is that it makes the finances transparent and real. When you close a block of meters for a festival you have to recognize and deal with the revenue loss, which heretofore the City just ate and no one even was aware there was lost revenue.

  5. Marty,

    I said myself that getting out of the lease only solves half the problem because the revenue stream is still obligated elsewhere. But at least it puts us into a position to look at fixing it.

    I support rates going up, but the flat rate structure with very few zones makes almost no sense because it doesn’t match price to demand. Ultimately, congestion pricing for parking will be the solution.

  6. Marty says:

    You can fix the rate structure any old time, including congestion pricing–the rates are set by Council, the concessionnaire has no say, he just implements the rate table he is given. A 5-year table was included in the agreement, but that does not bind Council except as to the total revenue val;ue to be attained each year. If the total revenue value of the entire system, as computed under the contract, falls short of a CPI-adjusted value in any year of teh agreement, the City owes a true-up payment (and vice versa, but in that case it’s a credit rather than cash until contract close-out)… but the way that revenue value is reached (i.e., the rate level AND STRUCTURE) is determined by the City, not the concessionnaire. The true-up sections of the agreement are the financial driver of the entire relationship between the City and the concessionnaire–they are not peripheral, they are the essence of the agreement because it is the true-up that guarantees the revenue stream on which the upfront payment was based.

    This is pretty much unique in asset privatizations, which typically surrender pricing power. Whatever you know about othe privatizations does not apply to this one, which is sui generis. The City retained pricing power because under Ilinois law street parking charges are an exercise of the police power (regulating the use of the public ROW), not the taxing power, and the police power cannot be delegated.

    In late 2008 the City (unsuccessfully) applied to USDOT for a grant under the Congestion Pricing Pilot Program, to use congestioin pricing on parking (street and off-street) in and near downtown, and confirmed in writing to USDOT that there the street parking concession, being bid at the time, would not be an obstacle to implementing that proposal. If anything, a large concessionnaire would be MORE able to implement new technologies and structures by virtue of having vastly more and better resources available than the skeleton meter operation of the Revenue Dept.

    If a congestion pricing scheme required new hardware and systems, the City would have to bear the cost, which is only fair. But the concessionnaire would implement the congestion pricing rate table.

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