Opinion

Felix Salmon

Chicago’s parking deal revisited

By Felix Salmon
November 24, 2009

After putting up a slightly hurried blog entry yesterday, I’ve spent a large part of this afternoon doing a deep dive into the sale of the license to run Chicago’s parking meters: many thank to the Parking Ticket Geek and Daniel Strauss of Gapers Block for prompting me to revisit the issue.

If you really want to get up to speed on all this, there are two main sources worth reading. The first is a long investigation by Ben Joravsky and Mick Dumke of the Chicago Reader, especially part two, which was published in May of this year. The second is a 46-page report by the Chicago Inspector General, David Hoffman, also looking at whether the city got a decent deal; it dates from June. Both of them are well-written and comprehensive examinations of the deal, which are invaluable when it comes to understanding it.

Daniel asks me a few questions, via email:

Where did the city go wrong? And why isn’t there a broader consensus on what should’ve been done? (Changing things is difficult in Chicago politics but hindsight is fairly easy to come to a consensus on.)

Boiled down, what the city of Chicago did was to rush a bill selling the parking-meter concession through the city legislature without allowing lawmakers to give it a detailed reading. The city claimed it got a good deal, basing that claim on a single valuation from its own advisor. But after the fact, a number of analysts, including the Inspector General, have concluded that actually the deal wasn’t very good at all.

The one claim in the IG’s report that I find the most compelling is that the term of the deal — 75 years — is far too long. Here’s their chart:

chicago.tiff

This is the IG’s best attempt to reverse-engineer the amount paid for the concession: in order to get to the final sum of $1.16 billion, they had to assume an 11% discount rate. (Which, yes, is pretty high.) When your discount rate is that high, there’s little point in selling off a 75-year concession: you can cut the life in half and still get 93% of the value.

It’s worth pointing out at this point that another critic of the deal, Scott Waguespack, uses a valuation methodology where the discount rate is 3% and the inflation rate is also 3% — in other words, the value of a real dollar in 75 years’ time is the same as the value of that dollar today. That’s just ludicrous.

But what isn’t ludicrous is that nobody has a clue what the parking-meter industry is going to look like in the 2080s: will there even be cars parking at meters then? If someone bought a franchise in 1934 in just about any industry — even if it was heavily regulated by the government — they’d have no ability to foresee what kind of revenues that franchise might be bringing in today. As far as the purchaser is concerned, the second half of the deal basically has option value: there’s a possibility that it might be hugely lucrative, but there’s also a possibility that it’ll beworth nothing. Looking at the price, it doesn’t seem that the buyers paid anything at all for the option, so it was silly of Chicago to just give it away.

But weirdly, the length of the deal is not one of the main points that the critics bring up. Instead, the point that they return to over and over again is that Chicago would make much more money, over time, if it kept all the parking-meter revenue for itself, rather than giving it to a private-sector contractor.

That’s true. But is it relevant? I’m a believer in what the IG report calls “the impossibility argument” — that even if Chicago did manage to raise meter rates on its own, pushback from constituents would surely force it to roll back those hikes sooner rather than later. As the Parking Geek himself says,

From every report I’ve read and every city hall insider I’ve spoken to, all 50 alderman, a full year after the deal was signed, are still receiving holy hell for the rate increases from their constituents.

The only way of baking in these price hikes was for the city government to tie its own hands — which is exactly what it did. And more broadly, it’s possible that the only way it could tie its hands in this manner was precisely by pushing the bill through in a rushed and bullying manner. (It’s not the first time that’s happened in Chicago, and it won’t be the last: it’s called politics.) Maybe doing the deal in this way was the only way a deal could be done at all.

But that still leaves the question of whether Chicago should have done this deal. I’ve already said that the tenor of the deal is too long: a 30-year concession would have made much more sense. But what is the value of the deal to the purchaser? Was Chicago ripped off? Let’s say I’m auctioning off a vintage Rolls Royce which I have no use for because I can’t drive and I think it’s ugly. Even if I sell it for $100, the cash will be worth more to me than the car. But I’d be stupid to do that, because there are people who would pay a lot more, and the market value of the car is many times greater.

So was Chicago stupid in this case? Did it leave money on the table in its negotiations to sell the parking-meter concession?

My feeling, after reading the IG report, is that Chicago got a good price for the concession, if not a very good price. There’s no doubt that the price would have been much higher had the auction taken place at the height of the credit bubble, when money was almost free, rather than at the height of the credit crunch, when persuading anybody to part with over a billion dollars for anything at all was quite an impressive achievement. What’s more, the critics of the deal generally ignore the tail risk involved: there were lots of things which might go wrong for any purchaser, and as a result the reasonable market price was lower than the revenue projections might suggest.

Indeed, after the parking meters were handed over to Chicago Parking Meters, lots of things did go wrong. And that brings me to the second part of Daniel’s question, where he asks about yesterday’s story, which came out of the Chicago News Cooperative, and which prompted my blog entry:

How does this reflect on the CNC? Many Chicagoans are curious/excited/nervous about the venture but it’s run by the same Tribune people that arguably ran it into the ground. Is this story prophetic of what the venture will be like in your opinion?

The simple answer to the last question is no: it would be ridiculous and invidious to judge an ambitious new news organization by its first story, and I wish the CNC all the best.

That said, after reading a great deal of material from this summer on the subject of the parking-meter deal, I’m even less impressed by the CNC story, whose conclusion was clearly foregone. The new news in the story is about the actual revenues that the private-sector parking meters have generated — and it turns out that those revenues were significantly lower than expected. Yet the CNC story largely skates over that fact, to paint a picture of a company “piling up the profits”, in the words of its headline. To the extent that the CNC story looks at the mechanics of the deal itself, it adds nothing to the Chicago Reader’s investigation, which of course it doesn’t mention.

Going forwards, I’m hopeful that the CNC will produce good work. But I stand by my original verdict that this particular story is flawed. I neither hope nor expect that someone in Chicago is going to write a long, contrarian article explaining why the deal was magnificently good after all. But it’s worth at least examining both sides of the argument.

Comments
23 comments so far | RSS Comments RSS

Felix,Here’s something I never heard anybody mention.This city is filled with derivatives experts who can work out the fair estimated value for the parking meter contract. The fact that Daley went ahead with this plan – pushing it through the legislature, and not bothering to consult with the derivatives industry will forever tarnish his legacy.Selling a futures contract on all parking meter income may be a good idea – I’m not knocking it. But to sell it for far less that it’s reasonable fair value is an act that shall live in infamy.Regards,

 

Don’t forget the third party kickbacks and relatives on payrollthis deal should be reversed for many reasons not to mention lack of due process. Does any citizen care anymore.

Posted by Max2205 | Report as abusive
 

Mayor Daley pushed through a 75 year deal. He got a bunch of future revenue upfront, which he’s spending now on debt acquired in the past. Curious to know what will fill the coffers when this money runs out.Parking meter rates (like the city’s sales tax) became the highest in the country after the deal went into effect. The rates quadrupled after the private company took over the franchise.The city council rubber-stamped a deal they didn’t even read. I’d love to know what Morgan Stanley raked in on the deal. Funny how when Wall Street is involved, the consumer gets screwed.Love the idea that hanging onto the concession and raising rates would have been worse for the city… but don’t believe it at all. The city hasn’t rolled back the sales tax yet, now has it?And the rates are scheduled to go up again – a 25% increase.Good deal for Chicago? Hardly. Just Daley doing his damnedest to ruin the city he loves.

 

As a Chicagoan -The city put some of the proceeds into a rainy day fund, and it sure is wet today. Probably will be tomorrow, too.Parking meter rates are not the highest in the country, and are now in line with most major cities. They were by far the cheapest of any major city before this deal.Actually the city portion if the sales taxes are not the reason we have the highest sales taxes, it’s the recent COUNTY increase that drove them to their current level.As an actual citizen who parks on city streets several days a week, I can say it is much more convenient to pay with a card, and there are many more spaces available at all times due to the elimination of pre-determined meter spots.And “fair value” is determined by the marketplace where bids were accepted for the deal, not in some wonderful theoretical world. A good price at the time the deal was made beats a great price that you never realize. I’d love to sell my house for what I “think” it’s worth, but that aint-a gonna happen. Witness the collapsed city deal to privatize Midway Airport.

Posted by Darian | Report as abusive
 

You are right Felix. I live in a congested part of the city and when visitors come from out of town we can find them a spot now. Parking is reasonably priced instead of underpriced.The deal also gave rainy day money up front that is going to be spent during a cash crunch. Most of the anger is misplaced. Just people that are mad that rates are not stupidly low and want to walk out of their office every few hours to feed the meter. Their subsidy is over. It costs as much at a lot as a meter now. Boo Hoo

Posted by oops | Report as abusive
 

Piece of trivia: a majority of current city alderman entered the city council when Daley appointed them to a vacancy.@Darian I think your definition of fair value is a good one in liquid markets with a fair amount of competition on both sides. I think there’s meaning to using the term in contrast to the price actually paid in this case.

 

One thing you seem to miss is Chicago Parking meters is GUARANTEED a minimum in parking revenues every year. The city can’t change or remove current meters without paying a hefty penalty. Also in 30 years if there are no cars Chicago will either have to pay out of its pocket revenue it used to collect, or buy its way out of the lease. Either way it loses and Morgan Stanley wins.BTW based on the latest projections Chicago Parking Meters will have recouped their whole investment within 18 years. At the current rate Chicago will have spent all their parking meter proceeds by 2011-12.

Posted by Sauce | Report as abusive
 

“BTW based on the latest projections Chicago Parking Meters will have recouped their whole investment within 18 years.”Oops, I meant initial investment not including interest.

Posted by Sauce | Report as abusive
 

“But that still leaves the question of whether Chicago should have done this deal.”And the answer is: of course not. Does it make sense for a city to sell tax revenue 60 years from now to plug today’s budget hole?

Posted by a | Report as abusive
 

Sauce:There is no minimum garantee to the concession from the city. There never was one and to suggest that one exists is ludicrous. The risk is all on the leaseholder.The city can’t spend all its parking meter proceeds. It can only spend the amount it placed in the rainy day fund. Nearly half of the proceeds are in an interest bearing account which generates more than the city was making on the meter system prior to the lease. It can’t be spent for the remainder of the lease.It’s apparent that you hate the deal and Daley but please don’t make stuff up to bolster your reasoning for that hatred.

Posted by RealtyKing | Report as abusive
 

Good investment? Maybe. Bad investment? Maybe. We’ll know for sure in 74 years. We’ll be dead, so who cares.Much of the resentment is on the administration strong-arming this deal (ie Miegs Field) and spending meter and Skyway proceeds on the operating budget deficits through 2012 or so. Then what?

Posted by Former Chicagoan | Report as abusive
 

RE: FormerChicagoan: Then what?Well, the budget deficits facing most cities and states can (mostly) be attributed to the country-wide economic decline and Chicago is no exception. Sales tax receipts are WAY down as are real estate transfer taxes and most other taxes that rely on people “doing business.” The presumption is that this tax revenue will (eventually) come back, plugging at least part of the budget hole. A reasonable expectation, I would think, though I’d hope–in vain, likely–that city budget planners are trying to make reasonable estimations about when that revenue would come back.Not that I think we couldn’t be doing more. IMO, we should be positioning ourselves as more competitive than our neighbors for when transactions start picking up in earnest. Getting rid of the recent county sales tax hike would help. Further, besides some government belt-tightening, I think we should be looking for less volatile sources of income for certain areas of local government. For example, even in an economic down turn, trains still need to run on time. Pegging transit funding to sales tax receipts creates a situation where funding for transit can basically disappear when the economy goes south. Not smart. Local government should be looking into creative solutions for these types of issues.

Posted by ChicagoCliff | Report as abusive
 

BTW, it really seems like many of the commenters didn’t actually bother to read the article. We get it, folks: you don’t like Mayor Daley and every action he takes is “obviously” shady. :rolleyes:While I’m no Daley cheerleader, I do like to look at all sides of a given issue before making up my mind. It is unfortunate that so few Chicagoans seem to do the same.And this extends to local columnists (like Joravsky and Kass). I know their job is to dig dirt and rabble rouse, but they are just so darn one sided. Rarely do you get a balanced look at whether a deal or action makes sense. The presumption is that EVERY deal is crooked and that their obviously biased point of view is the only valid one.I applaud Felix for at least trying to stay objective and asking questions of both sides of the debate. While I don’t think the parking deal was the deal of the century for Chicago, I have been similarly nonplussed with some of the arguments calling the deal a huge mistake.Keep up the good work!

Posted by ChicagoCliff | Report as abusive
 

RealtyKing, there most certainly is a penalty that the city has to pay to CPM if revenue is reduced by removing meters.You don’t know what you are talking about.

Posted by archie | Report as abusive
 

archie:Well no duh genius! Would you take out a lease on an apartment and allow the landlord to reduce the square footage but not your rent?I said there was no guarantee by the City on the revenue stream, which there isn’t. Now, if the City decides to reduce rates or remove meters they have to give back some of the 1.2 Billion they got paid up front. That is a lot different from a “guarantee”.Class dismissed.

Posted by RealtyKing | Report as abusive
 

Forget the Cash $$$ for getting the contract….Try looking at the commissions…..or better yet….Lets get to the SKIM… !!!!!!!!!!!!!!Why not just start a ” CLIMATE EXCHANGE” and set upanother bureaucracy to TRADE in these futures…?p.s. JUST LIKE HIS FATHER!

Posted by EP | Report as abusive
 

Look to the $$$ for the contrat…and legit commissions…then…look to the SKIM…..Then why not start a “Climate EXCHANGE” beuracracyso that all the insiders can make the $$$ on thefutures….?Thank you Mayor Daley Senior for your son… !

Posted by EP | Report as abusive
 

Reality King,The city is obligated to raise rates per the contract until 2013. The rates are based on the number of meters and are further separated into zones. Each zone is calculated separately. After 2013 the City must raise rates at the rate of inflation which is determined to be 3%. If the Chicago does not raise the rates they must pay the private company out of its own pocket. That my friend is a guarantee. That does not include removing or changing meters, which would also incur a penalty. Or even changing the time meters or required which under the contract went up to 9pm from 6pm in the outlying neighborhoods and 24/7 for the loop, and no more free holidays or Sundays.As far as the money received it will mostly be exhausted by 2012. If I feel like digging up the details I’ll post them but a simple google search will accomplish the same task.I suggest you do your research.

Posted by Sauce | Report as abusive
 

Felix edges on to what I see is the biggest issue: urban planning — “nobody has a clue what the parking-meter industry is going to look like in the 2080s: will there even be cars parking at meters then?”On-street parking is an essential tool of and response to urban planning.If the City can’t adjust the time, location, size of space, or even existence of parking meters without paying a penalty then it has dome something very stupid.Conversely, can the City even change the zoning of properties adjacent to meters without having to pay Morgan Stanley? For example, suppose the City wants to downzone a block from commercial to single-family. Such change will have an enormous impact on the revenues of the parking meters on the block. Does the contract allow that sort of change without agrement from Morgan? Will the City have to compensate Morgan for los of revenue? etc etcThe more I learn about this deal the more puzzled I am.

 

The parking meter fiasco was a bad deal for taxpayers today and for the next 75 years, but it’s important to understand WHY Mayor Daley is willing to hike rates dramatically today and throw generations under the bus and destroy the finances of the city.Mayor Daley banked everything on the Olympic Bid and these funds were going to be the “rainy day” to fund things like the Olympic Village and foolish $400 million temp stadium.Why need a temp stadium when we just spent $700 million to “renovate” Soldier Field? That goes to a much bigger question of why Mayor Daley went after the Olympic Bid when he failed to cooperate with the independent bid effort of the 1990′s by saying he would not sign the host city contract, something he flip-flopped about.If Daley was so “visionary” or cared about the Olympic Games, why would he spend $700 million to shrink Soldier Field’s dimensions to make another stadium necessary?The independent Olympic Bid effort from the 1990′s was actually visionary and would have transformed the city, region and state, but it was lacking one key thing. Control by Mayor Daley.When the bid process was being reinitiated in 2005, Daley quickly took control and once he did, it was suddenly the most important thing because he needed the Olympic Games to prop up the house of cards he built over 20 years that was failing and falling apart.With the real estate bust, who’s going to finance a couple billion dollar dorm development on the lakefront? Nobody stepped forward, so Daley knew that the city would have to front these costs, but from where?That’s why the parking meter fiasco was rushed through. Daley needed money in the bank and was more than willing to throw future generations under the bus for it.This is about Daley’s legacy, control and existence and NOTHING more. The parking meter fiasco is a large-scale mistake, but there are thousands of others that don’t get the attention, but cost taxpayers.If Mayor Daley were the CEO of a public company, he would be in prison for the frauds and exploitation of taxpayers.

Posted by Brian | Report as abusive
 

It looks like it’s reached its peak so now would be a good time to sell. It’s a good question to ask i we will even have parking meters in the future, and that is a good a reason as any to sell up now.

 

It’s worse than I thought. He’s blowing the money they got for the Skyway too.”Even more important to Allen was the fact that parking meter reserves billed as a “perpetual replacement fund” when Daley rammed the deal through would be virtually exhausted in just one year.”We haven’t made 12 months, and I guess we’ve reached eternity,” Allen said sarcastically, in a speech that sounded like a springboard to run for mayor.”You can’t break a contract in 12 months that’s supposed to last for 75 years. It’s unconscionable. It’s irresponsible. It’s disingenuous and intellectually dishonest. . . . The decision to raid this fundamental asset is mind boggling.”In exchange for a combined $3 billion, private contractors got the right to pocket Chicago Skyway tolls for the next 99 years and parking meter revenues for the next 75 years.Now that the City Council has gone along with the mayor’s plan, those reserves will be down to just $730 million by Dec. 31, 2010.”Like I said, after next years budget it will be all gone.

Posted by Sauce | Report as abusive
 
 

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