Opinion

Felix Salmon

How New York will improve its on-street parking

By Felix Salmon
June 15, 2012

My latest video, above, is a reprisal of my blog post about variable pricing, and why it’s a great thing. The insight here is that pricing for a product like Broadway tickets is not the zero-sum game that it might seem at first glance. Yes, the more money that theatergoers spend, the less money they’re left with, and the more cash flowing into the pockets of New York’s performers and producers. (Which, incidentally, is quite the racket: one day I want to write a post about how theater producers get to effectively charge their investors 4-and-50, way more than the 2-and-20 we see in the finance world.)

But if you look beyond that initial dynamic, there’s much more going on here. By perfecting the art of variable pricing, Broadway manages to minimize the number of ticket scalpers, and therefore keep more money in its ecosystem. It manages to sell out every show, which just feels great. And it a means that there’s nearly always a ticket available for any show you want to see. That convenience alone is worth a lot.

The masters of variable pricing, of course, are the airlines, and while people are often resentful that they paid five times more for their ticket than the person sitting next to them did, the fact is that they would be much more resentful if they regularly tried to buy air tickets and found that all the flights were sold out. And conversely, of course, the airlines would lose even more money if they regularly wound up flying half-empty planes. Without variable pricing, one or the other would certainly happen.

In New York, as we’ve seen, Broadway is great at variable pricing, while the Yankees and the Metropolitan Opera are still in the pricing dark ages. But there’s one much more important area of New York life which is in desperate need of variable pricing: on-street parking.

San Francisco recently introduced variable pricing for on-street parking, and it’s an idea which ought to have been implemented in New York years ago. The basic idea is incredibly simple: you just price parking meters so that there’s always one empty parking spot on every block. The effect is electric, for two reasons. Firstly, drivers no longer have to pad their journeys by some unknowable amount of time to account for the time spent looking for a spot. And secondly, the whole city speeds up, since a huge proportion of congestion is caused by cars driving around in circles, looking for one of those precious spots.

Which brings me to Matt Taibbi’s latest tirade, complaining about the idea that New York could raise as much as $11 billion by selling off its parking-meter rights. Anybody who wins this contract will have a contractual obligation to implement smart variable-pricing technologies, which will have to include apps showing where the spots are, the ability to pay by phone, and other ways of making everybody’s life easier. How is this not a good thing? Well, Taibbi’s upset that prices will rise:

Meter rates in some New York neighborhoods are already at $5 an hour. A Chicago-style price hike for fat-cat investors might leave us paying thirty bucks an hour to oil barons in Qatar and Saudi Arabia in order to park for dinner in the West Village.

I hate to break this to Matt, but has he seen the pricing at New York’s garages recently? Drivers would kill for the opportunity to pay $5 an hour. Matt lives in Westchester Jersey and therefore doesn’t pay New York City taxes, but he still seems to think that New York City should subsidize the cost of his jaunts in to the West Village for dinner. But even if Matt were somehow deserving of such a subsidy, which he isn’t, it’s a false economy: it might feel good to be able park for cheap, but it feels much worse to be stuck in traffic all the time. And the overwhelming majority of West Village diners manage to find a way of eating there which doesn’t involve a parking spot. Why should they subsidize Matt’s parasitical suburban lifestyle?

New York is not Chicago, where the mayor was forced to give up all control of the parking meters in order that prices might be able to rise to their optimal level. Instead, the city will retain control of pricing philosophy, holidays, and the like, while also receiving an enormous check.

A huge amount of good could be done with that $11 billion, both in the West Village and in the rest of New York. Even Matt, if he puts his mind to it, could probably think of quite a few areas where New York needs to beef up its infrastructure, both in terms of transportation and in terms of everything else. These are investments, which will pay off over the long term, and the rate of return on these investments is almost certainly going to be higher than the discount rate which the private sector is willing to pay right now for parking-meter revenues.

The fact is that right now is the best possible time for New York to sell off its parking meters. Matt says, with no backing whatsoever, that the meters will be sold “at a steep discount”, and that New York will only get “pennies on the dollar”. The truth of the matter is much more likely to be exactly the other way around: that by doing the deal now, when interest rates are at all-time lows, New York will be able to capture an impressive premium for these future revenues — while at the same time outsourcing all of the risks and difficulties associated with bringing parking meters into the 21st Century.

It’s not easy for New York City to borrow money, for various reasons. The city should be borrowing and investing right now, for all the same reasons that we need a second stimulus nationally. You don’t want to invest during a boom, because that’s expensive and pro-cyclical. You want to invest when interest rates are low and labor is more readily available. And by selling off its parking meters now, New York will have access to billions of dollars at extremely low interest rates.

If those oil barons in Qatar and Saudi Arabia are willing to send $11 billion to New York in return for future parking-meter revenues, I’d be inclined to take their offer with no little alacrity. $11 billion, if you do the math, works out at more than $120,000 per meter. Taibbi really thinks that’s a discount to the meter’s real value? How much would he pay for a parking meter?

The fact is that New York, like most cities, is bad at monetizing the value of its on-street parking. This deal gives the city the opportunity to change that, and at the same time to introduce technology which could reduce congestion substantially, while also raising billions of dollars for investment in the city’s future. It’s a win-win-win. Except, maybe, for commuters in Westchester Jersey.

Update: Matt responds, explaining that he actually lives in Jersey, not in Westchester. Sorry. He also says:

If prices do rise, some conglomerate of private investors, and not the citizens of New York, will see the benefit. The city might get $11 billion in the deal, but if that’s even a dime less than the real present value of these parking meters (to say nothing of the actual amount of revenue that will be collected over the life of this arrangement), then to me that’s bad and shortsighted public policy.

By this logic, then if $11 billion is a dime more than the real present value of the parking meters, then the privatization would be a good idea. And with interest rates where they are, and the way that cities are evolving, I’d guess that the present value of New York’s parking meters is more likely to fall from $11 billion than it is to rise.

Comments
31 comments so far | RSS Comments RSS

I like how you even used the Thompson-esque “parasitical suburban lifestyle” to inaugurate the first Taibbi-Salmon smackdown, although Thompson probably would have anthropomorphized that a little more.

*grabbing popcorn*

Posted by JuvenalRedd | Report as abusive
 

The problem with NYC selling parking rights is that it will likely sell for much less than the present value of parking rights. It will then use this long-term asset (parking revenue) for a short term budget problem, hurting the future for a one time benefit.

The complaint is not variable pricing (which NYC could do on its own), its bad budgeting.

Posted by 3oosion | Report as abusive
 

While I agree that Taibbi’s presentation is a bit alarmist and basically reactionary, it’s important to remember how uniformly negative the reaction was to Mayor Daley’s sale of parking meter rights. Chicagoans viewed it as a single (virtually unelected) city official selling off 75 years of revenue rights for a pittance. Most voters in Chicago will no longer be alive at the conclusion of the deal. While there is also a great deal of unhappiness with the lack of control over holidays and so forth, the length of the contract was a critical gripe for the electorate.

So while it’s easy to say that “New York is not Chicago,” it still sounds a lot like they’re talking about selling off a long term public asset to plug a hole in the budget. Whether or not Bloomberg can ink a shorter contract with more opt-outs (like the one struck by Indianapolis) will be an important factor in how the deal is received by taxpayers, aside from any issues related to control over a public good.

All that being said, people from Westchester should most definitely be charged at least double to park on my street in the East Village.

Posted by ahduth | Report as abusive
 

” . . . parasitical suburban lifestyle.”

I might even agree with you on the topic, but you really went off the deep end with this invective. Were you frothing at the mouth as you wrote it?

Posted by Curmudgeon | Report as abusive
 

It’s rather the sort of friendly welcome that New Yorkers are renowned for.

Posted by Curmudgeon | Report as abusive
 

And so, with little fanfare in an obscure backwater of the worldwide interweb, the opening shots in the legendary Bridge and Tunnel War of 2012 were heard.

Posted by EpicureanDeal | Report as abusive
 

Matt Taibbi and John Cassidy should form a support group for people whose car trips into the West Village are disrupted by good public policy.

Posted by minderbender | Report as abusive
 
 

I think I would prefer that the term be 25 years or so rather than 75.

Worth noting that, in the long run, by keeping more money in the theater ecosystem (as you call it), that makes more plays worth their cost. Some marginal plays might not get enough investors if they were expected to use dumb pricing, but will go on if investors know they can extract higher prices from price-insensitive payers on popular nights.

Posted by dWj | Report as abusive
 

Taibbi is clearly a sensationalistic moron – in his Rolling Stone piece on this topic, he’s seemingly oblivious to the concept of discount rates and appears t compare undiscounted future revenue streams to a current sale price – but calling him a suburban parasite is a bit over the top.

As for the wisdom of this move, I agree with 3oosion’s 2nd paragraph. The biggest problem in Chicago is that proceeds from selling long-term revenue streams such as parking meters and toll roads were used for short-term budget fixes. I’m skeptical that the same will happen in New York. It’s great to say that these funds will be used for infrastructure improvements, but the greater likelihood is that they’ll pay for continued overstaffing, pay increases for municipal employees, and putting off increasing municipal employee retirement ages.

I would prefer to see government privatize assets with more complicated operations and a significant number of employees – airports, for example. In those instances, I see a stronger case for improvements in service and/or increases in efficiency, particularly in places like Chicago with a tradition of patronage in awarding government contracts and jobs.

Posted by realist50 | Report as abusive
 

A monthly rate in a west village parking garage is about $400-700. Assuming the low end, over 75 years, that’s 360k for a parking space, without any inflation.

Locking in $1600/yr for a personal 24hr outdoor parking space in manhattan seems like a deal many, many people would jump on, no?

Posted by thispaceforsale | Report as abusive
 

It’s also quite possible that NYC has too much on street parking. Today, the city can remove parking spaces without paying compensation to a 3rd party. How easy will it be to remove parking spaces once a private company is lobbying to maintain its economic interests?

Posted by leg | Report as abusive
 

So if the city thinks it can do the job as efficiently and cost-effectively as the private sector, and its cost of capital is less than the 8-10% weighted average cost of funds (60% debt, 40% equity) on a leveraged infrastructure acquisition could it avoid selling the assets altogether?

Posted by gringcorp | Report as abusive
 

@realist50: Be careful what you wish for – the airport in Sydney has been given the privatisation treatment (Macquarie Bank). It has the second most expensive airport parking on Earth. Highest? Budapest’s Ferenc Liszt International Airport. Owner? Macquarie.

Posted by crocodilechuck | Report as abusive
 

@realist50: Be careful what you wish for – the airport in Sydney has been given the privatisation treatment (Macquarie Bank). It has the second most expensive airport parking on Earth. Highest? Budapest’s Ferenc Liszt International Airport. Owner? Macquarie.

Posted by crocodilechuck | Report as abusive
 

I agree that pricing is a fine mechanism for allocating scarce resources. But it has no necessity of being just; merely those with the most resources already can monopolize the scarce resources. Given how individualistic parking intrinsically is, I doubt that greater social goods will emerge. So I’m not really a big fan, simply on fairness grounds; parking will be for wealthy people, and wealthy people alone.

Felix’s frothing likely comes from how pro-bicycle he is. Myself, I’m not a big fan of bikes; just indifferent. I am, however, pro-scooter. They’re much faster than bicycles in moving traffic and about as fast as them in stopped traffic, when filtering is allowed. If cyclists stop for red lights, then scooters beat them in stopped traffic too. And it only takes a small fraction of drivers to convert to two wheels to substantially reduce congestion for everyone – http://www.telegraph.co.uk/motoring/moto rbikes/9272532/Why-commuting-by-motorcyc le-is-good-for-everyone.html – again, assuming that filtering is allowed, which in the US is only California, alas. Around 7 scooters can park in the same space as needed for a single car.

Scooters are the almost inevitable future of dense urban transport.

Posted by BarryKelly | Report as abusive
 

A rough calculation for 90,000 parking meters yields around $4,000 per meter-year at $1 per meter hour 12 hours a day after discounting for people who don’t pay their meter. That’s roughly $360 MM per investment-year. Assuming a 2% inflation rate on parking rates, yearly income rises to over $1.5 BB by year 75.

The present value of that income stream is exactly the same as the present value of the $360 MM per year at a zero discount rate. In that scenario, roughly $27 billion is the current PV for 90,000 NYC parking meters on a total income of approximately $66 billion over 75 years. That assumes you can raise rates to keep up with inflation.

But, there’s a kicker. As the buyer, you have been ordered to maximize your revenue as described in the article. That’s what variable pricing does – optimize revenue.

What is the maximum revenue possible? At least double, and probably triple what it is now with fixed-rate parking. Let’s choose 2.5X and figure that after an investment of $1 BB and three years, the buyer multiplies revenue from its year 3 level by 2.5.

That problem is a 3 year annuity at zero discount plus a 72 year annuity at zero discount. But in year 4 (year 1 of the 72 year annuity) you multiply the income of year 3 by 2.5X. Working that out, I get PV of approximately $1.08BB + $64.799 BB.

So for the investors who are buying NYC’s 90,000 parking meters for $11 BB, their median case scenario has a PV of around $66 billion.

What’s their downside risk? They could go to zero because of war, global warming flooding the city, etc. NYC could outlaw automobiles. Seventy-five years is a long time. But is that likely? No.

What’s their upside potential? They could find that optimum revenue to meet their curbside parking availability targets is 10X current revenue. Working that out, the PV of those meters is $260 billion.

Posted by BrPH | Report as abusive
 

In other words, Felix, unless I seriously screwed up my calculations, that $11 billion price for 90,000 NYC parking meters is a solid 6 banger, and could easily be a 23 banger. Downside risk is so miniscule you may as well forget it.

The people of NYC deserve more money for their meters – a lot more.

Posted by BrPH | Report as abusive
 

Oh, yeah. The total 75 year gross revenue off all those meters in the optimum return scenario of 10X current pricing is $600 billion. The final year revenue in that scenario is $15 billion.

Posted by BrPH | Report as abusive
 
 

I think you’re confusing two issues here. The first has to do with the use of variable pricing. I agree that it’s a good thing though I’m sensitive to the charge of it favoring the wealthy.

The second is the issue of privatizing public assets, getting up front cash now to plug budget holes by selling off long term income streams. Here, I think you’re way off base.

There is no good reason that NYC cannot institute variable pricing by itself and keep the increased revenue streams. There is every reason to think that if they do sell it off, it will be at a major discount. If it were not a great deal for investors, why would they be interested? And there is no reason to think that Bloomberg will use the money for long-term investments. It’s the worst kind of short-termism there is. I hope the plan falls apart.

In the meantime, keep biking.

Posted by f.fursty | Report as abusive
 

I would be careful Simon – you may be a lot smarter, but not only is Taibbi no slouch, he’s a dangerously talented rhetorician. I would venture to say more talented than you.

So while you may be right and all, sticking to the facts probably would have been wiser (not to mention more classy).

In the mean time I fear you have brought a knife to a journalistic gunfight. Hang on – you may have earned a wild ride.

Posted by CarlWeetabix | Report as abusive
 

LOL! A NYC denizen calling the suburbanites “parasitical”? The entire CITY is a parasite, taking its 2% annually from the wealth of the nation. **frothing at the mouth as I type**

Posted by TFF | Report as abusive
 

BrPH, according to the BBG article, parking revenue was 156mm in 2011, with net earnings of 93mm. Also real discount rates over 75-year horizons for uncertain earnings tend to be positive, not zero.

Posted by niveditas | Report as abusive
 

Its also not clear where this 11bn number came from in the first place, unless Taibbi misread the article he was referring to, which says Chicago motorists might pay 11bn in parking fees to the private operator.

The NYC proposal does NOT involve any upfront payment, nor does it involve giving up future revenues. Rather its supposed to be about the private manager operating the system more efficiently than the city anticipates, and receiving some percentage of the improvements as incentive payments.

Posted by niveditas | Report as abusive
 

@ crocodilechuck – the LT lot at BUD costs the equivalent of $13 per day. You think that’s the most expensive airport parking in the world? Please don’t comment any more on NYC-related posts. thanks

http://www.bud.hu/english/passengers/acc ess_and_parking/parking/parking-terminal -2-1082.html#long

Posted by johnhhaskell | Report as abusive
 

Nice piece. Agree on this.

Posted by Sechel | Report as abusive
 

BrPH – as long as you don’t work in finance, don’t give up the day job.
– Have you heard of costs?
– WACC is not = inflation.
– Revenue is not = income.

Given your calculations above – would you like to buy some GRPN or FB?

Posted by TinyTim1 | Report as abusive
 

Regardless, it doesn’t sound like there is anywhere near to enough public input on whether the city should sell off this asset.
Also, re: “apps showing where the spots are” Umm, yeah wonderful, so now we’ll have tourists checking for spots on their phones while trying to drive. Great idea. Does the city get to keep the moving violation fines from drivers checking phones while driving (currently illegal), or do you advocate privatizing that as well?

Posted by goldenbp | Report as abusive
 

I think Taibbi makes the more convincing argument. Salmon is dismissive of the short-term pressures on the city for revenue. If those short term pressures did not exist, this would simply be a matter of the city believing it would come out ahead in the long term, but it’s hard to believe that’s the case, considering the political expedience associated with Bloomberg’s term limit (cough cough).

Posted by BiffOmney | Report as abusive
 

I just want to chime in here supporting the Chicago parking deal, well, halfheartedly. Mostly, I don’t care how much drivers have to pay for parking since I ride a bike everywhere. When I do care about parking, it’s when my parents from the suburbs visit, and they need to find a parking space, and boy howdy it’s been a lot easier since parking rates went up. And municipal governments will always find ways of making ridiculously bad loans at shockingly poor implied interest rates. People just notice the parking because they encounter it day to day.

Posted by JamesLiu | Report as abusive
 

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