Thursday, May 10th, 2012

Will Yet Another Fiasco Finally Convince Rahm Emanuel to Cancel Chicago’s Parking Meter Lease?

Chicago’s parking meter lease is the gift that keeps on giving. Put aside for the moment the fact the parking meters are a bad type of asset for a long term lease in the first place. Even ignoring this, this deal continues to be Exhibit A in What Not to Do for privatization.

Recently the parking meter lessee claimed $13.5 million dollars in compensation for just one year’s worth of allowances for free handicapped parking. Over the course of the lease and with inflation at 3%, that would be over $3.3 billion paid to the vendor just for this!!! Figure in a discount rate of 12%* and that’s a net present value of $173 million. Rahm Emanuel is strongly disputing the payment, but the fact that he’s quietly pushed legislation in Springfield that would end free parking except for the most disabled is almost an implicit admission that the compensation claim is valid.

Now the Sun-Times reports that the vendor is demanding an additional $14 million in compensation for meter closures – and that just for the first nine months of 2011. Just as a refresher, whenever the city closes meters temporarily for construction, a street festival, or a NATO conference, it has to compensate the vendor for lost revenue if the duration exceeds the contractually agreed to closure allowance. Obviously the allowance wasn’t sufficient as this compensation on an annualized basis would be $18.6 million. With 3% inflation over the 72 years left on the contract, that would be $4.6 billion!!! Again, with a 12% discount rate that’s $238 million.

So if these compensation claims hold up, here’s the math for Chicago. The city took an asset that generated $23.8 million in revenue for the city and converted it into one where the city has to pay $32.1 million annual in compensation to the vendor. This is on top of the meter money the vendor gets to collect for the next 72 years.

In return for this, the city got $1.1 billion, which it promptly spent to paper over budget deficits. But even so, given the net present value of $411 million in compensation payments alone to the vendor, the city really only got about $740 million for the meters!

Now the compensation may be adjusted by legislation, arbitration, or negotiation. And these are back of the envelope calculations to be sure. You might prefer different assumptions around inflation and discount rates. But whatever the case, clearly this is a whole huge steaming pile of Bad News for the city.

The Sun-Times also reports that Rahm is talking tough on parking meters and plans to strongly dispute these payments. But they fail to ask the simple and obvious question: Why doesn’t Rahm unwind this disaster of a deal?

Yes, the parking meter deal can’t be cancelled under the terms of the contract. But I’m talking about a negotiated solution, which I’ve written about elsewhere. Whether my plan could work or not, I find it difficult to believe a guy like Rahm, a guy who doesn’t believe in the Can’t Do mindset, who actually is tackling structural problems like the deficit and pensions, couldn’t find a way to get out of this deal if he wanted to.

Why he doesn’t is a complete mystery to me. I’m assuming he must have at least looked at it. But I for one would like to know why he isn’t pursuing it. Especially since the alternative is dealing with the fallout from a disastrous deal for the next 72 years running. Hopefully this latest thorn in his side will convince Rahm to bite the bullet and do the right thing for Chicago by cancelling this lease.

Related:
Can Chicago Get Out of Its Parking Meter Lease?
Yet Another Privatization Debacle in Chicago
Three Years Down, 72 More Years to Go on Chicago’s Parking Meter Lease
Parking Meters and the Perils of Privatization

There is also lots of good parking meter coverage from the Parking Ticket Geek over at The Expired Meter.

* 12% is the mid-point of the range of discount rates suggested by William Blair, the city’s advisor on the parking meter lease, to be applied to meter revenues in valuing the system. So this is a very fair rate to use, though some have argued for a lower discount rate.

12 Comments
Topics: Public Policy, Transportation
Cities: Chicago

12 Responses to “Will Yet Another Fiasco Finally Convince Rahm Emanuel to Cancel Chicago’s Parking Meter Lease?”

  1. This bad lease deal is one of the reasons I think about leaving Chicago. It’s a lose-lose for the city.

  2. the urban politician says:

    Yeah, this parking meter deal really is a disaster.

    I actually wonder if Chicago can do one thing here to get some leverage on the lessee’s:

    Simply stop issuing parking tickets.

    Correct me if I’m wrong, but the way that it works is that the lessee gets the meter revenue, while the city gets the parking ticket revenue. However, if the city simply stops issuing parking tickets (ie announces a 1 month moratorium on any parking tickets), people can essentially park for free, and the lessee loses a ton of revenue. I’m curious if there is any phrasing in the deal that disallows the city from doing this.

  3. IIRC, there are provisions around parking fines and enforcement. Also, I believe the vendor has the right to write their own tickets, though the revenue goes to the city.

  4. the urban politician says:

    The city can simply declare that it will not collect revenue from any of the tickets for 30 days, even though it (or the lessee) continues to issue them.

    A lot of creative things can be done, and sure I’m sure it would prompt a lawsuit by the lessee that could last for months or years, costing a lot of money.

    But the bottom line is, the prospect of even dragging the lessee into such a time consuming and costly scenario could be enough to at least bring them to the bargaining table.

  5. James says:

    Rahm doesn’t want to do anything to directly challenge the meter deal. He needs to show the business and banking community that Chicago is business friendly and isn’t going to give the shaft to people and institutions who might invest in an infrastructure bank.

  6. royce76 says:

    many people need syringes w/ nitric acid inject the card reader and place a sticker NOTICE: meter disabled

  7. flavius says:

    “But they fail to ask the simple and obvious question: Why doesn’t Rahm unwind this disaster of a deal?” That would lead to the simple and obvious question of where he will get $1.1 billion to buy out of the deal. There’s always Midway!

  8. Ziggy says:

    “Rahm doesn’t want to do anything to directly challenge the meter deal. He needs to show the business and banking community that Chicago is business friendly…”

    James, one could argue that by not renegotiating the deal, Rahm is showing at least segment of the marketplace that Chicago is quite biz friendly – as in “heck yeah, come on in and pull up a chair at the ole public feeding trough – and don’t worry, we’re going to find some more of that sweet tasting stuff once we get done blowing up pensions and public salaries.” This is about the private sector gaining access to key markets where they enjoy nearly monopolistic status. It’s a strategy taken directly from the playbook of neo-liberal economists – get public resources into private hands and “Laissez les Bons Temps Rouler.”

  9. uffy says:

    This deal was absolutely and wholly bad for Chicago. Not only did the contract include incredibly favorable treatment for the vendor with regard to various guarantees leading to these never-ending additional fees, but it also made no sense financially even without them.

    There is absolutely nothing that any of the Daleys could have possibly done for the good of this city that is not completely offset by the badness of the meter deal. It’s an abomination that will haunt the city in perpetuity as we will never have the resources to buy out the contract.

  10. Michelle Stenzel says:

    The meter rates were set by mutual agreement of the parties for the first five years, and that extends until 12/31/13. After that, the city has the right to set the rates. The vendor keeps money collected at the meters, of course, but the contract requires the vendor to collect and hand over parking taxes that are set by the city and included in the charges to the customer. I’d suggest that the city freeze the “base rate” fee at the 2013 levels for the 70 years thereafter, and simply raise the parking tax each year. This wouldn’t address the fiasco of not being able to shape our streets as easily as we’d like to, but at least it would generate more revenue.

  11. david vartanoff says:

    if Michelle is correct, then Chicago should set the rates at a nickel an hour and congestion/parking taxes at several dollars thus bankrupting the lessee. If they balk, that’s what courts are for.

  12. Michelle Stenzel says:

    I’ve read the part in the contract about setting fees a few times, and it’s not entirely clear, but could be argued that the fifth-year fee that was agreed upon is the minimum that must be charged from then on. Otherwise, I absolutely agree that the fee should be lowered to a nickel, with the taxes making up the rest of the charges.

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