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.
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.