Chicago Pays the Price for Parking Privatization

It appears Chicago politicians who privatized city parking meter operations traded short-term political gain for long-term fiscal pain.

faillong.jpgPhoto: Best Recession Ever

Chicago may have left as much as $974 million on the table under the terms of last year’s agreement with Morgan Stanley. A June report from the city inspector general [PDF] blasted the deal for being rushed, secretive and vastly too expensive for taxpayers. The report’s revelations incensed motorists already antagonized by a ragged roll-out of meter rate hikes.

All in all, it wasn’t the money for nothing bargain the City Council seemed to think it was back in December when Morgan Stanley handed over a check for $1.157 billion. This manna from Wall Street plugged the city’s gaping budget hole and allowed the council to avoid painful tax hikes and service cuts. It also enticed lawmakers in Los Angeles and Philadelphia, where officials were considering their own parking privatization deals.

In return for the upfront cash, Chicago leased its 36,000 parking meters for the next 75 years to the Morgan-led consortium, and granted it the authority to double and triple meter rates. By 2013 downtown meters are slated to double to $6 per hour; neighborhood meter rates are to double to $2 per hour.

The deal was pushed hard by Mayor Richard Daley. The core of his privatization argument was that Chicago lacked the political will to raise meter rates and that desperate fiscal times demanded unlocking the value of public parking. He noted that city meters were only generating about $20 million a year, and because of neighborhood resistance, meter prices hadn’t gone up in 20 years. His conclusion was that Chicago had to outsource the political will to raise meter rates.

However, the inspector general’s report concludes that, "If Chicago were to keep control of the parking-meter system and operate it under the same terms as the private company, the system would be worth approximately $2.13 billion (in present dollars)," or $974 million more than the city received. Ironically, another cost of Chicago parking privatization was that it
quashed a number of neighborhood-supported parking improvement
districts, in which higher meter fees were to be invested in local
pedestrian, bicycle and transit improvements.

While public-private partnerships can be appealing because they require motorists to pay more of the actual cost of driving, are these deals really the only way to overcome political resistance to higher motoring fees?

  • rex

    Anytime you treat capital as income you are making a grave mistake. It is especially sad when that capital is public space.

  • I have to disagree with the general consensus. Chicago could make 2 billion, if things don’t change for the next 75 years. Who is to say people will still be parking their giant metal cages on the streets of Chicago in the year 2084?

    I think what Chicago did was a wise move, it removed a large amount of risk from the revenue equation and passed it off to a private company.

    I believe most readers here would hope and are working towards the situation of so many cars being different by 2084.

  • Shemp

    Based on what I’ve seen of the public reaction, the city is receiving political pain now because of the higher rates and the poor performance of the contractor, and people aren’t fooled about who is to blame. And the fiscal pain will pile on top of that.

  • Greg

    I also think this post was a little too critical. They may have left a lot of money on the table, sure, but the upside is they still got $1.157 billion up front, and now their parking will be more sensibly priced. Win win. When you factor in the political realities, it looks like the best they could do, and not so bad either.

  • Just more evidence that politicians don’t make economic decisions. They make political decisions that have economic consequences.

  • Based on what I have seen, the parking meter privatization is a really, really bad deal for Chicagoans and just makes for bad policy. Consider:

    – If the City of Chicago wants to remove metered street parking to install bike parking, bike lanes, BRT lanes, bump outs or any similar repurposing of the street anytime during the next 75 years, it will need to PAY the private firm for the loss of each meter. You think making these changes is tough in New York? Consider how much less incentive City officials in Chicago now have by attaching an additional price to these initiatives. From what I understand, the city must also pay the company to close the street for festivals and other activities when the meters cannot be used for revenue.

    – A private company now sets parking prices in Chicago with only their interests in mind. Think about this. Policy wonks know there is a science to setting parking lot pricing and that meters are an important urban planning tool. This firm now sets pricing only with their interests in mind, as any business would. As a result they will not consider maximum turnover to benefit local stores, parking availability to reduce congestion and emissions from cars endlessly driving around the block looking for spots, encouraging alternative forms of transportation, improving stormwater management, street safety, beautification or pedestrian enhancements. If a Chicago alderman wants to make any of these changes for their neighborhood, he/she must now wait until 2084 to touch any street with metered parking.

    As other cities continue to make progress reclaiming streets for people, Chicago;s toolbox is now significantly limited for the better part of this century. Chicago may have landed a chunk of upfront cash for this deal, but it will certainly suffer the long-term consequences.

  • Erik

    What Jack says is right — it’s going to be very difficult to repurpose these parking spots for BRT or dedicated bike infrastructure now.

    Not to mention that the city hurried the deal through without any concern for the devastating effect on bike parking when 36,000 parking meters are suddenly removed. They had zero plan for retrofitting the posts to work for bikes — instead they just yanked the meters. Now they’re scrambling to accommodate the already exploding need for bike parking.

    That’s what happens when you rush a $1-2 billion back door deal in two days of planning. Suffice it to say that you don’t think through every important issue.

  • Jack is correct about the implications. $1B might seem like a lot, but the meter revenue stream is worth much more — and, of course, 100 acres of prime public space, along miles of the city’s busiest and liveliest streets, is worth way more than that.

    Two things to add:
    1. The “outsourcing of political will” is overrated: it was none other than Mayor Daley who called a press conference to announce the higher rates, and it’s none other than the mayor and aldermen* who are taking the political heat.

    2. 60% of the revenue will be spent within the next four years of operating budgets, and ZERO has been earmarked for capital investments of any sort — much less capital investment in public space. This, even more so than the other city privatization deals, clearly shows that Chicago is mortgaging the house to pay the electric bill. Bond buyers beware!

    * around here, we use the strange expression “Mrs. Alderman.” none of this “councilmember” stuff.

  • So does this mean readers would rather have cities charge below-market rates for parking and in turn, encourage and subsidize driving? There are some negative aspects to the transaction, as detailed in the earlier posts, but as we New Yorkers saw with congestion pricing, to garner the political will to charge people more for anything (especially automobile-related) is a hard sell. Would you have accepted congestion pricing without receiving the full future revenue stream? Additionally, Jack’s and other’s assertions that the parking contract will be detrimental to livable streets initiatives is mostly unfounded, as long as the costs stipulated in the contract are similar to the discounted value of the future parking income (as discussed below).

    In regards to Jack’s comments, without knowing what the exact cost the city incurs would be for the loss of a parking space (either for a temporary loss due to a street closing where a parking space is located or for a permanent loss due to a street re-purposing), it is difficult to provide a definitive answer to whether this should discourage the city from closing the streets for events or from re-purposing streets. Therefore, if this cost is significantly more than the discounted value of the future parking income, Jack’s assertion would be right.

    Yet, assuming that the cost that the city has to pay for a temporary or permanent “parking spot unavailability” is near to or equal to the discounted value of the future income from the space, the city should not change its opinion of the worthiness of the parking loss because the city would also incur the same cost (the loss of the discounted value of the parking income) if it were to own the rights to the parking space.

    There are almost always negative unintended consequences for every policy. The question is, “Does the public benefit exceed the public cost?” As far as I can see, increasing the cost of parking will increase citizen’s desire to seek transportation alternatives and therefore will also bolster the political will to develop transportation alternatives. Additionally, market-rate parking metering will help discontinue the standard government policy of subsidizing automobile travel and instead will apply market forces to a carbon-intensive transportation option.

    Doesn’t sound like a bad deal to me.

  • John Kaehny

    There are clear upsides to the privatization deal. But it remains a bad deal — it cost too much. As readers point out, the terms are highly restrictive, the duration is more than twice as long as the 35 year toll concessions granted in most of the world, and the deal’s fundamental assumption, that meter rates could not be raised any other way, seems questionable. Mayor Daley never tried to sell Council a $2B meter one-shot without the Morgan Stanley middle-man. Would they really have said “no” to an extra billion dollars that could have been spent on neighborhood improvements to soothe the political pain? Among many other problems with the deal, none of the meter money is dedicated to transportation, including maintaining the streets the cars are parked on. Some share of transportation user fees usually go to transportation improvements. But none of this revenue went to transit or bike/ped improvements that could further encourage motorists not to drive.

  • Larry Littlefield

    The transportation policy aspect of this is a mere fig leaf. The real idea is taking money from the future. That, and deferring the cost to the future, is always the goal for Generation Greed.

    Ie. the tobacco settlement money, which was spent all at once by issuing bonds against it — if people stop smoking future citizens would have to pay for the bonds. Just another example. They said it was for health. That’s to get a few suckers on board.

  • To those who say this deal is win-win, I respectfully disagree.

    While cezar is correct in stating “who knows what the future will bring?” the point is that Morgan Stanley thinks it can draw revenue from these meters for 75 years… yet it only paid for about 40 years of value (a little over half of its estimated worth). When it comes to public assets, these deals need to be made with absolute taxpayer return in mind.

    $900 million is a LOT of money to simply give up (especially for a municipality) to cover ongoing operational costs without actually fixing the underlying budgetary problems.

    That’s why I hope this privatizing binge Villaraigosa is on dies a quick death. Unless it’s surplus property or can return a good deal for the taxpayers long-term, a public asset like street parking needs to remain in public control. I’m all for smart parking rates based on supply and demand; I just want the city government that’s subject to public opinion to raise those rates, not a private corporation.

  • Er, I thought this was LA Streetsblog. Disregard my last paragraph, though it’s still relevant.

  • In a 75-year time frame, peak oil makes the collapse of a car-based transportation system a certainty, and along with that comes the collapse of parking revenues. So it’s unlikely Chicago ever would have collected that extra $974 million. The real problem is that when Chicago tries to build its next-generation transit system, Morgan Stanley will control the curb.

  • Barnard

    Another downside to the Chicago deal is that anytime the city (or anyone else) wants to repurpose a metered parking space (permanently or temporarily), they have to reimburse Morgan Stanley for the lost revenue from the unavailable parking space.

    In the long-run, that means, if the city wants to replace a car parking space with, say, a wider sidewalk and on-street bike parking, they’ll have to pay Morgan Stanley 75 years worth of meter fees.

    In the short-term, this means if you want to have a block party or street fair and open a street to walkers for a day, you have to pay Morgan for all of the metered spaces for that day.

    Crazy!

    Makes you wonder if anyone in Daley’s office read the contract before signing on the line which is dotted.

  • zach

    Outsourcing of political will!

    Isn’t democracy another word for political will? Are we really looking for authority figures outside of our will to rule us? Oh, well, the American Experiment was worth a try.

  • Hi Keith (have we met at CNU?),

    “Would you have accepted congestion pricing without receiving the full future revenue stream?”

    The issue here is partly that “we” (public space advocates) are receiving NONE of the future revenue stream. My aldermen were willing to set up a PBD in my neighborhood, and we could have done some really cool public space interventions. Now, though, the revenue stream is gone, the flexibility to adapt the rate for particular public policy aims is gone, and the ability to use the space is gone.

    Another issue that several people have brought up: if, in the future, cars disappear, Chicago will owe Morgan Stanley the lost revenue. ALL of the downside risk is on the city. Risk-sharing is part and parcel of why PPPs work, and somehow it got entirely left out of this deal.

    Much of that is because the deal was strictly structured to maximize the initial payout. (I believe that the city could have received a much bigger payout by issuing bonds against a future revenue stream, thereby cutting out the middleman.) Any details after that initial big figure were evidently NOT scrutinized.

  • Albert

    This back door deal was a scam from the begging. Once again like many other “initiatives” – Mayor Daley and his cronies took upon themselves to screw the hardworking people of Chicago. I happen to live on one of those city streets that got the paybox makeover as part of this shady deal. There is a small restaurant on the corner and now all of a sudden we’re a commercial area with paid parking from 8am to 9pm – 7 days a week!!! So if you work from 9 to 5 you cannot even park in front of your own house without paying. And parking enforcement idiots always show up first thing in the morning and just before 9pm. I already received a $50 ticket @ 8:03am.
    Mr. Daley – we pay way too much in property taxes to be treated this way.

  • eric schmidt

    i agree with the second poster. also, the point is that the city lacked politcal will / it was a politically bad move.. this was a good solution to that problem. it’s silly that the article acknowledge the motivation of the lack of political will and then suggests, “oh but they shud have just had the will and then they wud be up the money”.. jese louise

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