Chicago’s good parking deal

By Felix Salmon
November 23, 2009
Gawker describing a newspaper article as being "real journalism" (their emphasis) and "what news alarmists say will be missing if and when we lose newspapers".


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File under “events which don’t happen every day”: Gawker describing a newspaper article as being “real journalism” (their emphasis) and “what news alarmists say will be missing if and when we lose newspapers”.

But the fact is that the article in question, an investigation into Chicago parking-meter revenues by Dan Mihalopoulos, is contentious, one-sided, and flawed.

A bit of background: in February, a company named Chicago Parking Meters LLC paid the city $1.15 billion for the right to parking fee revenues for the next 75 years. And now? Well, the headline seems unambiguous: “Company Piles Up Profits From City’s Parking Meter Deal”. But in fact the article only gives numbers for revenues and operating profits. There’s no indication of Chicago Parking Meters’s cost of funds, or whether, after paying the interest on its debt, it’s managing to make any profit at all.

The theme of the article is that selling the rights to parking fee revenues was a mistake:

“Had we done this ourselves, it could have made a lot more money,” said Alderman Scott Waguespack…

The economist Roger Skurski calculated the current value of the deal. Mr. Skurski said his conservative estimate was that “the city could have earned about $670 million more by keeping the asset.”

But this ignores the whole point of doing the deal in the first place: that the city was politically incapable of raising the parking-meter rate itself. This was clear as far back as December, when I wrote that “this parking-meter initiative is the municipal equivalent of a CEO hiring McKinsey to come in and recommend job cuts: it’s a way of doing what needs to be done while somehow managing to blame someone else”. When the deal went through, Chicago parking meters were charging just 25 cents per hour: all the proof you’d ever need that the city, on its own, was incapable of charging a market-clearing price for on-street parking.

Mihalopoulos also ignores the question of whether higher parking-meter rates might benefit the city of Chicago in other ways, by reducing the congestion from cars circling downtown streets at a crawl, desperately seeking a Spot.

And he also buries the news that in fact Chicago Parking Meters is making less money than it had expected:

According to the meter deal’s income statement for May 2009, revenues for the month were about 20 percent below projections. At the same time, expenses were far over budget, mostly for “supplemental staffing.”…

Because the company is not writing tickets, it seems many Chicagoans are getting away with parking for free. A company audit of a section of the North Side found 41 percent of occupied spaces filled by motorists who were not paying, according to the company records.

What’s more, at the end of the story we find this:

Before entering into the parking meter deal, the city hired a consultant whose confidential report suggested the lease could generate $650 million to $1.2 billion for the city.

The report was not disclosed to the public until after the check from the winning parking meter bidder cleared. Officials say revealing a consultant’s valuation analysis before a deal closes would hurt the city’s chances of getting the best possible deal.

This datapoint comes well over 1,000 words after Mihalopoulos tells us about the $1.15 billion deal value. If you don’t remember that number from the beginning of the article, the tone of the writing makes it seem as though the city was somehow hiding a report which showed it got a bad price. Instead, the report reveals that the city got a price at the very top of the expected range.

So far, Chicago Parking Meters has made rather less money than it had hoped out of this deal. Maybe its revenues will recover, as Mihalopoulos seems to think they will; on the other hand, maybe they won’t. The risk all belongs to the company, rather than the city. The city just gets to spend a whopping great big check, and also bring the price of on-street parking up to where it should have been for years. A good deal, not a bad one.

11 comments

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This was a terrible implementation of a rate hike, not a terrible privatization, at least for the city. Even the limited partners in Morgan Stanley’s infrastructure fund are probably not that angry. Look at the mess that Citi’s infrastructure fund made trying to buy Chicago Midway.

“The city just gets to spend a whopping great big check”

Except for about 70 of the 75 years, they’re going to be wishing they still had that meter income.

Posted by Jon H | Report as abusive

I agree that the article is poorly written.

It’s hard to figure out what is really going on, the value of the asset as-is and whether the City of Chicago got fair value? Other experts quotes said that it did not. I am not sure if one can tell from the facts of the article.

But I am dubious of a deal which violates the basic rule of capitalism: “Don’t spend the capital on current expenses.” The City appears to have used the sale proceeds of a capital asset so as to maintain current spending. That seems very short-sighted. Without any reference to the City of Chicago in particular, but do you trust the govt to spend the current value of a 75 year cash flow in a wise manner?

I am especially curious about this statement in the article:
‘ “The people own the asset to be used today for this generation of people and not for 2050,” Mr. Daley said soon after the Council’s parking meter vote last December. “Our responsibility is to help the generation right now.” ‘

Shouldn’t we be using existing assets and resources with an eye to future generations as well?

“When the deal went through, Chicago parking meters were charging just 25 cents per hour: all the proof you’d ever need that the city, on its own, was incapable of charging a market-clearing price for on-street parking.”

Not true: 25 cents/hour was the lowest rate for parking in the city, used primarily in low-congestion neighborhoods. Many areas, such as the Loop and Gold Coast, already had much higher meter rates before this deal went through.

Posted by Sara | Report as abusive

The consultant who estimated a value of $650 million to $1.2 billion was William Blair, a politically-connected firm who had much incentive to underestimate the value. See http://events.chicagoreader.com/chicago/ the-parking-meter-fiasco-part-iii/Conten t?oid=1127436 and other reports.

“Mihalopoulos also ignores the question of whether higher parking-meter rates might benefit the city of Chicago in other ways, by reducing the congestion from cars circling downtown streets at a crawl, desperately seeking a Spot.”

While minor city planning purposes might be inadvertently served by the policies of LAZ, overall city planners now have their hands tied because the city no longer has control over whether and where to install or remove meters. In my neighborhood, new street parking is being added with no meters, not because it makes sense, but because the city is afraid to make any changes to the number and location of meters because no one understands the repercussions with regard to the contract with LAZ.

Posted by Eli | Report as abusive

Sue:

According to the City’s own data, there were nearly 23,000 of the total 36,000 meters in Chicago at twenty-five cents per hour. The Loop went from three dollars to three-fifty per hour and the biggest hit was the commercial and upscale areas north of the loop where the meters went from one dollar to two dollars and hour.

Eli:

The City can add as many meters as it wants with the option of either including them in the lease for additional money or keep them off the lease for themselves with LAZ turning over 85% of gross revenues and purchasing/operating the pay boxes for the other 15%.

How exactly does this tie the City’s hands?

Posted by Whizzer | Report as abusive

Echoing Sara above, this post is incorrect about a central fact. The 25 cents an hour rate was for areas where few people wanted to park. High density areas were much more (though arguably still under-market).

Posted by Jason | Report as abusive

And Whizzer, the % of total meters at the 25 cent rate is a statistic of little import. You could have a million meters ten miles out of town at 1 cent a day, and it would do no one any good. Location is all.

The point about ‘adding meters’ is equally irrelevant. New parking spaces will not magically appear downtown.

This is all to one side of the question whether the new, higher rate is reasonable. I happen to think it is; indeed it might be in the public interest for it to be even higher.

Posted by Jason | Report as abusive

Jason.

Stall size is not an independent variable but a matter of policy; a city can decide to make one side of the street for compacts and the other side for sub-compacts, with larger cars having to pay for TWO spaces. (As just one example.) A city can increase/decrease size of “no parking to corner” or through “load zones.” etc etc Then there is matter of whether spaces are metered for 15 minutes, 30 minutes an hour etc etc. Lots of room for adjustment. A city can thus change the number of parking spaces up or down — unless it is prohibited by contract.

On-street parking can be an important tool of urban design.

Does Chicago’s contract with Morgan Stanley give them the right to make such adjustments over a 75 year period. (4 generations!) I hope so.

So many non-Chicagoans providing context-free analysis.

Unfortunately, Felix, you have based your current post on you last post, which was based on Barbara Kiviat’s spectacularly false blog post. She has absolutely no idea what she’s talking about. Parking meter rates in Chicago have been increased repeatedly over the last decade. In 2002, meters in the Loop, River North and Streeterville were raised to $3 from $1 (in some areas, $0.25). And there were zero political repercussions.

In fact, if you look at Mayoral and Aldermanic elections for the last, oh, 100 years, you’ll find that it’s nearly impossible to lose re-election in Chicago, no matter how spectacularly corrupt and mismanaged the government in which you serve.

This lease was yet another terrible idea in a long line of terrible ideas (leasing the Skyway, leasing the city-owned parking garages) which only serves to reinforce the shocking level of fiscal irresponsibility in Chicago government. Running through the list of leaseable municipal properties, after Midway and O’Hare, there’s not much left. With what do we pay our bills then?

Posted by Jamie | Report as abusive