Opinion

Felix Salmon

The case of the $400 million bike lane

Felix Salmon
Mar 26, 2012 07:24 UTC

Everybody’s favorite transportation geek, Charles Komanoff, has a fascinating new paper out on the economics of New York’s new Tappan Zee Bridge. The old bridge is decrepit, and needs to be replaced — everybody agrees on that. And the replacement is now in the works, at a cost of $5.2 billion. But does it need to cost that much? Komanoff makes a strong case that it doesn’t.

I won’t try to summarize Komanoff’s paper here. Instead, I’ll just point to one fact which is buried there. The new bridge comes with a combined bike/pedestrian lane, 12 feet wide. And the cost of building that lane — the amount that the cost of the bridge would decrease if you simply built it without that lane — is an astonishing $400 million.

To put that number in perspective, Komanoff tells me it would cost roughly $40 million, in the same 2015 dollars, to build two bike/pedestrian lanes on the Verrazano Narrows bridge — lanes which would get vastly more traffic than the one lane on the new Tappan Zee.

As for the cost of the first three years of New York City’s ambitious bike program under transportation commissioner Janette Sadik-Khan, that was just $8.8 million, 80% of which was paid by the federal government.

In other words, for the $400 million which governor Andrew Cuomo is planning to spend on a white-elephant bike lane almost nobody is going to use, you could utterly transform the bicycling infrastructure for millions of New Yorkers in all five boroughs.

Oh, and I almost forgot — it looks as if the old Tappan Zee bridge is going to be converted into a bike/pedestrian walkway anyway, making such a facility on the new bridge even more superfluous.

But this is how big projects always work: it’s weirdly easier to raise billions for something huge than it is to add millions to an annual budget somewhere. “Gridlock” Sam Schwartz, for instance, in his clever new congestion-pricing plan, is proposing three new massive bike/pedestrian bridges: one from Jersey City and Hoboken, in New Jersey, would span the Hudson River and land just north of Chelsea Piers. A second would go from Long Island City and Hunter’s Point, in Queens, and would cross the East River to midtown Manhattan. And the third, and most ambitious, would start in Red Hook, in Brooklyn, head over to Governor’s Island, and then continue on to the Financial District.

These are utterly wonderful ideas. If beautiful new pedestrian bridges can be built by Santiago Calatrava in Venice or by Norman Foster in London, there’s no reason New York can’t follow suit. Still, it’s a bit depressing that we don’t seem to have the mechanisms to take the billions available for vanity projects, and use some small fraction of that money for things which would make a huge difference to the daily lives of millions of New Yorkers.

This phenomenon isn’t confined to government, of course: anybody working in a big corporation has seen some huge acquisition made, using money which was never available for smaller projects from existing teams which had much clearer benefits. And there are hundreds of museums around the world which never have money for important things like conservation, but which somehow manage to find enormous sums for glossy new starchitectural projects. Basically, people want to be able to see where their money is going, in the form of something large and grand and headline-grabbing. Even if there are much more sensible uses for it elsewhere.

COMMENT

What the lane looks like is only half the story?

Whether car drivers drive like steroid-charged idiots,
and whether bikers cycle like methamphetamine-charged teenagers and terrorize pedestrians — those are common realities why responsible cyclists avoid certain streets in cities.

I know a bike lane which abruptly ends half a block before a busy intersection, and where the pedestrian sidewalks narrow to half its size. The result: cyclists go up the sidewalk and literally terrorize pedestrians,
and the police turn a blind eye. As a result, some residents of that block have to resort to driving, instead of walking, even for just a few short blocks, to avoid getting run over by bikes! Now tell me, does that save gasoline, or the environment. Worse, how many more anxiety stricken residents have to talk to their doctors for medications or lack of exercise because they don’t feel safe enough to walk to the park!

Posted by Janeallen | Report as abusive

A bipartisan proposal for more government spending

Felix Salmon
Nov 11, 2011 15:54 UTC

Now here’s a pair of strange bedfellows: Robert Frank and PJ O’Rourke. They have a bipartisan op-ed in USA Today making the obvious and compelling case for infrastructure investment. Not grand schemes like new high-speed rail lines, but just basic maintenance on which the country has fallen massively behind:

The American Society of Civil Engineershas identified $2.2 trillion worth of repairs needed on bridges, roads, dams, schools and water and sewage systems. And that’s just overdue maintenance, never mind addition or replacement.

Be it stimulus to the good, or deficit to the ill, the case for undertaking these projects immediately is compelling. Postponement is dangerous and expensive. Falling bridges, crumbling roads, bursting dams, moldy schools, contaminated water and leaking sewage are on no one’s agenda for cutting government costs or increasing government benefits.

And to delay infrastructure expenditure is to inflate it. For example, take a badly worn stretch of Interstate 80 in Nevada. The state’s Department of Transportation says fixing it today would cost $6 million, but waiting two years would cause the roadbed to be so degraded by traffic and weather that the price would rise fivefold, to $30 million.

Here’s my question: how did we miss this the first time round?

Here is our proposal: Have Congress create a 12-person bipartisan jury of eminent — or even half-bright — citizens. Give this panel authority to decide which of the American Society of Civil Engineers’ projects should not be begun right away. Greenlight all the rest, and with luck most will get done before the Chinese decide they’re tired of buying our 10-year T-bills at 1.7%. In contrast to the desperately overdue maintenance projects that our proposed committee would identify, the stimulus bill passed in 2009 actually didn’t have all that much infrastructure in it, and a lot of what it did have was new pork projects that were far from shovel-ready.

I have to admit that by now I expected to be able to see the real-world effects of the stimulus spending which began in 2009. But America’s infrastructure is just as crumbling as it’s always been, and the National Infrastructure Bank that I expected to see stood up as part of the 2009 stimulus never came close to being created.

We’re living in a world where the NYT writes long articles about how BNDES, the Brazilian national development bank, is so ambitious and powerful — and overspilling Brazil’s borders — that it’s causing demonstrations in Bolivia. But meanwhile, the USA seems to be incapable of corralling funding for urgently-needed domestic repairs, record-low interest rates notwithstanding.

This is a clear market failure, but one driven by the fact that the costs of infrastructure spending fall on the government, while the benefits accrue to private businesses and individuals. Since the government represents private businesses and individuals, such a set-up makes perfect sense in the rest of the world — we all group together to work on projects which benefit everybody. And America used to be great at this: the interstate highway system, the Tennessee Valley Authority, the Hoover Dam.

Now, however, there’s this bipartisan idea that government spending is a Bad Thing which needs to be cut back. Frank and O’Rourke are a rare example of bipartisan consensus in the other direction. I hope we see more of it. But I’m not holding my breath.

COMMENT

I have a family member about to go bankrupt! I’ll tell them to step up their spending as a solution!

Posted by DrJJJJ | Report as abusive

Cutting municipal tax deductibility won’t hurt infrastructure investment

Felix Salmon
Sep 13, 2011 04:03 UTC

I’m normally a big fan of Bond Girl, but today is obviously the official day when bankers talk their book with no particular logic. In this case, the proposal which has attracted her ire is the idea that part of the jobs bill will be paid for by capping itemized deductions for individuals earning more than $200,000 a year and married couples earning more than $250,000. Basically, you can deduct away to your heart’s content — until your tax rate reaches 28%. At that point, you can’t deduct any more.

Amazingly, this simple and pretty modest proposal would raise a whopping $400 billion — pretty much the entire cost of the jobs bill, right there. And it doesn’t go nearly as far as I would: I’d abolish all deductions altogether, in an attempt to radically simplify the tax code.

But Bond Girl finds a lot to hate, all the same.

This would likely reduce demand for municipal bonds substantially – you know, the primary vehicle for infrastructure investment in this country. According to the Bond Buyer, “Internal Revenue Service data from 2009 shows that 58% of all of the tax-exempt interest reported to the IRS was from individuals with incomes of $200,000 or higher.” Prices for outstanding municipal bonds will decline and borrowing costs for state and local governments will increase going forward. This means state and local governments will have to levy more taxes to construct projects as planned, postpone projects, or cut spending elsewhere.

I’m happy to grant, here, that demand for munis might well decline if this proposal goes through. But would that really hurt infrastructure investment, or mean higher local taxes? Unless and until I see some hard numbers, I’m going to be very skeptical, given the existing ultra-low interest-rate environment. Sure, it’s nice for individual muni investors right now that they don’t need to pay income tax on the puny interest payments they’re getting. But the reason those interest payments are so puny is mostly a function of interest rates, rather than tax-deductibility.

In the absolute worst-case scenario here, all individual investors would shun the muni market entirely, and municipals would have to fund themselves in the institutional market, with taxable bonds. What’s the difference in yield between taxable and tax-free bonds? Right now, it’s not very much.

Realistically, then, how much would municipalities’ cost of funds rise if tax-deductibility were curbed in this way? 20 basis points? 30? 40? We’re not talking, here, about the kind of numbers which change the economics of an infrastructure project. And we’re certainly not talking about the kind of numbers which would necessitate local tax hikes to pay for suddenly-higher construction costs.

Whenever you close a tax loophole, you’ll have a series of consequences. Some will be intended, and some will be unintended. Some will be positive, and some will be negative. But closing loopholes in and of itself is a good thing — and when doing so gets you an extra $400 billion, it’s a no-brainer. If necessary, calculate the added interest expense that municipalities will have to pay, take it out of the $400 billion saved, and just give it to those municipalities as an outright grant. I doubt it would amount to very much money.

And it’s certainly no reason not to go along with this very welcome idea to start cracking down on deductions in the tax code.

COMMENT

@Curmudgeon frankly it was shocking that my earnings power less taxes, insurance, school loans, and retirement savings approximated the various support programs that are available to someone ambitious enough to sign up for them.

While I am a vocal supporter of a strong safetynet every effort must be made to structure support and incentives to move to a higher level of self sufficency. Of all the major assistance programs I think the best is the earned income tax credit… but I do think collecting it should be contingent on the annual completion of some kind of personal finance course offered by some approved non-profit. Entry level retail or food service jobs will never pay much more than minimum wage. Every day I see bright people working at jobs clearly below their obvious potential. That’s better by far than not working, but society does need to guide those people towards increasing their value per labor hour rather than trying to moderate income inequality through assistance programs.

@Felix good point that the poverty line for a two person family 7 years ago was much lower than the current amount for 4. I got that $16,000 figure for 2004 off her annual social security statement so I know it’s accuarte. I will counter your very valid point that she was above the poverty line with the idea the safety net in my state is then infact so strong that minimal cost healthcare, dental care, and housing assistance were avalible to someone at 128% of the poverty line.

Posted by y2kurtus | Report as abusive

How to create jobs: bike lanes

Felix Salmon
Jun 22, 2011 21:29 UTC

We know that infrastructure spending is a good way of creating jobs. But what kind of infrastructure spending? Heidi Gerrett-Peltier looked at pedestrian, bicycle, and road projects in Anchorage, Austin, Baltimore, Bloomington, Concord, Eugene, Houston, Lexington, Madison, Santa Cruz, and Seattle — and came to a pretty clear conclusion:

Bicycling infrastructure creates the most jobs for a given level of spending: For each $1 million, the cycling projects in this study create a total of 11.4 jobs within the state where the project is located. Pedestrian-only projects create an average of about 10 jobs per $1 million and multi-use trails create nearly as many, at 9.6 jobs per $1 million. Infrastructure that combines road construction with pedestrian and bicycle facilities creates slightly fewer jobs for the same amount of spending, and road-only projects create the least, with a total of 7.8 jobs per $1 million.

This finding isn’t new, but it’s worth remembering as signs of detente start to appear in the war on bikes. It’s hot out there, people: no one wants or needs to ride fast. You get to a red light, stop at it. Take the opportunity to catch your breath and minimize your sweatiness upon arrival. And while you’re waiting, you can ponder the idea that every bike lane represents badly needed jobs in a recovery which is going much less well than expected.

COMMENT

nice post friend

Cycle saddle

Posted by maddy58 | Report as abusive

How to prevent misguided privatizations

Felix Salmon
Jun 22, 2011 13:39 UTC

The problem with talking about federal infrastructure expenditures as “investments” is that someone like Dick Durbin is likely to take the term literally. He’s now introduced legislation which says that any time a state or city wants to privatize a transportation asset, it has to repay the federal government first. So if the government sunk a few hundred million dollars into a highway project, for instance, and then the state decided it wanted to sell off the right to collect tolls on that highway, then the toll operator or the state would first have to repay all the money that the feds spent.

Durbin explained to HuffPo’s Dave Jamieson what he was worried about:

As states and cities across the country face grim budgets, more and more are looking to stem their shortfalls by leasing existing assets, such as roads, lotteries or government buildings. The City of Harrisburg, Pa., may soon lease its parking meters to a private investors, as Chicago has already done for a 75-year period starting in 2008. Durbin remarked that he’s already watched the cost of parking soar in Chicago since that city’s deal was inked.

“It’s a caution to all of us,” Durbin said. “When we look at privatization, we have to look at the long-term.”

This is all a bit incoherent. For one thing, parking meters in Chicago and Harrisburg are a bad example here, because it’s hard to make a case that the federal government has a huge investment in them. And while Durbin is right that the 75-year contract in Chicago is far too long, he’s wrong to consider the rise in the cost of parking to be a bad thing: in fact, it’s the whole reason that the parking meters were privatized in the first place. Parking in dense urban neighborhoods should be expensive, but politicians are loathe to raise meter rates, so privatization is a way that they tie their hands and get to blame someone else.

The bigger picture here is that when the federal government invests in transportation infrastructure, it’s investing in a public good, and insofar as there’s a return on that investment, it’s seen in marginally higher tax revenues from the entire region. If some kind of private-sector involvement can improve the way that those assets are operated, so much the better. Remember that Durbin doesn’t have a problem with tolling roads, or charging for on-street parking: he only has a problem with the private sector having a contract allowing it to do such things. If local government does it, that’s fine — even if local governments are often hobbled by political constraints.

Somewhere in the Durbin bill is the germ of a good idea: preventing local governments from selling off valuable franchises for multi-decade terms in sweetheart deals at a fraction of their net present value, just to fill a yawning budget gap. Transportation privatization is hard to do well, and there’s precious little indication that most local goverments are any good at it. Wall Street can often make a fortune in such deals.

But that’s an entirely separate issue to the question of whether the project received federal funding in the first place, or how much money the feds spent. That’s a sunk cost: the federal government should in principle be happy if the private sector is now willing to pick up some of the tab.

A much more sensible way of doing things would be to set up the national infrastructure bank which the Obama Administration has been talking about since before it was even elected. The bank could be given oversight of public-private partnerships, could put together a set of best practices with regard to privatization contracts, and could generally professionalize an area which to date has been rather chaotic, politicized, and ad hoc. What’s needed here isn’t new legislation: rather, it’s the passage of old legislation which has been gathering dust for years. The infrastructure bank is a great idea, and someone should resuscitate it.

COMMENT

Foppe,there is a perfectly good “reason” Brown chose this way. So he pretend he was not upping the debt whilst going on a spending binge. As for sweethearts deals how is metrorail doing?

Posted by Danny_Black | Report as abusive

How important are gleaming airports?

Felix Salmon
Oct 1, 2010 04:17 UTC

Greg Lindsay knows a lot about airports: in fact he’s just written a whole book about them, called Aerotropolis. So I thought I’d ask him whether my uninformed ramblings about airports and infrastructure made any sense.

Specifically, I asked him about freight, which is where a huge amount of the real value in airports lies. How do freight airports compare to what we air passengers are used to? What’s their architecture like? Are the most modern and efficient freight airports just as beautiful, or even more so, than passenger airports, or are they just big ugly concrete sheds? How do they compare to the great resorts of America? (That one for Larry Summers.) And how important are they, from an infrastructure perspective?

He replied:

In many cases (especially overseas), the busiest cargo airports are also some of the busiest passenger hubs. Maybe the best example is Hong Kong, which cost $20 billion to build (still the most expensive ever) and boasts a passenger terminal which is both one of the nicest shopping malls and biggest buildings in the world. That’s what Larry Summers probably has in mind. But maybe more important is the airport’s cargo terminal, which is the second busiest in the world (after the FedEx hub in Memphis) and has all the ambience of the Port Authority Bus Terminal — it’s basically a giant loading dock hundred of feet tall. But you can’t have one without the other. The gleaming terminal isn’t a loss leader — it rakes in millions from duty free and other sources — and it attracts the passenger traffic which makes being a cargo hub possible. Eighty percent of the Apple iPods in the U.S. were made at the giant Foxconn plant in Shenzhen and flown to LAX in the bellies of Cathay Pacific passenger flights. Hong Kong’s airport is what makes it possible for Apple to manufacture nearly all of its products in a single factory on the other side of the world. So yes, sometimes it pays to have a gleaming airport.

I had one follow-up: How important is the “gleaming” bit? If Hong Kong’s new airport had all the atmosphere of Newark International, but still had the same capacity, what difference would that make? Here’s what I got back:

Bling doesn’t matter. Size matters. Speed and efficiency matter. Being able to move 50 million people a year in and out quickly and painlessly is the point. America’s airports can barely do that. Summers was wrong to compare airports and resorts; what makes Hong Kong’s or Beijing’s or Dubai’s super-sized terminals important is the fact that they’re super-efficient and haven’t outlived their lifespans by a good 20 years — not because they resemble a dragon or are filled with palm trees. Newark is a perfectly fine airport (the Continental piece of it, anyway), but an even better example is JetBlue’s Terminal 5 at JFK. It’s a big, cheap steel box with some nice restaurants and free WiFi inside, which distracts you from the fact that it was engineered to turn planes around in record time, which directly affects the airline’s bottom line. If all of our airports were that good, we’d be fine. And it cost a fraction of the airport resorts in Asia.

So I’m still not convinced that a major investment in airports is the best — or even a modestly good — use of federal infrastructure-investment funds. Yes, America’s airports are miserable places to travel through. But if what we want to do is boost long-term GDP, then there are better places for the government to spend its money. As and when airports get replaced and upgraded, they will naturally become more modern and efficient. Sadly, however, that’ll take time — and it might not make the passenger experience much better.

COMMENT

I completely agree that a gleaming airport for passengers is an attraction that brings in traffic, and therefore allows the airport to function as a money-making venture. My problem is that the government should have little or no part in funding said airports and I’m shocked that they actually do. If an airport can’t afford to cover it’s operating and construction costs why is it being built in the first place?

Mathieu
http://www.cocoonbarcelona.com/

Posted by MathieuBCN | Report as abusive

The Larry Summers view of airports

Felix Salmon
Sep 29, 2010 20:48 UTC

It doesn’t matter whether you fly private or whether you fly commercial: you still have to fly from an airport. Which clearly annoys the Obama administration’s top plutocrat, Larry Summers. Justin Fox was in Washington on Tuesday to hear Summers give a speech on the inadequacies of US infrastructure. And he came up with a truly classic example to make his point:

“Compare the quality of our great resorts with the quality of the airports you take off from to visit those great resorts.”

It’s clearly not easy, being Larry Summers. For all his millions, he still needs to travel from A to B, and keeps on finding himself stymied. First of all he lost his Harvard town car and chauffeur when he moved to Washington, and stood out there for demanding a similar car and driver in recompense for not getting the job of Fed chairman.

And now, it seems, the poor chap has to navigate airports fit only for the masses, while making his way to luxury resorts designed to pamper the every whim of the gilded elite.

As an economist, Summers should know that it makes perfect sense for great resorts to spend enormous amounts of energy on the kind of quality he’s talking about: that’s their comparative advantage, the very heart of what they’re selling. Meanwhile, Summers isn’t really even the customer of the airports he’s passing through: the airlines are the customers, and the passengers are the goods being transported. So the airport doesn’t have much in the way of economic incentives to ease Summers’s way.

I’m sure that Summers has encountered lots of shiny new airports in his travels around the world, in comparison to which US airports look decidedly crumbly. But a lot of that is simply a function of age: it’s easy for Chinese airports to be super-modern and efficient, just because they’re brand new. (And have the advantage of very low construction costs.) It’s much harder for Delta’s Marine Air Terminal to be as Summers-friendly: it was built in 1939, long before anybody ever so much as imagined the TSA. (Indeed, it was before the planes which landed there even landed on solid ground: it was designed to service sea planes.) But because the terminal is one end of the Delta Shuttle from National Airport, I’m sure Summers knows it well.

More to the point, a lot of the money spent on shiny new airports around the world is simply wasted, from an economic perspective. National governments, especially in developing countries, like to show off when it comes to the airports where luminaries like Summers arrive. But all that expense isn’t really necessary for the smooth functioning of the airport.

Summers has been a vocal proponent of infrastructure investment, but if his idea of good infrastructure investment is cosmetic airport revamps which give him plusher lounges and colder drinks, then that’s just depressing. The really crucial infrastructure investment is in things like the national electricity grid, or NYC’s Water Tunnel 3 — expensive, yes, but decidedly unglamorous.

So let’s leave the provision of luxury to America’s great resorts, and maybe to the airlines trying to upsell Summers to a first-class seat. When it comes to infrastructure investments, there are much more important priorities.

COMMENT

So, you are a snob and an elitist if you prefer to spend hours and hours of your life in a functioning, 21st century facility instead of a dysfunctional shithole where nothing is done well?

It is like American airlines themselves. Are they crappy because they are old? No, they’re crappy because they are not run for the benefit of their consumers. The superiority of Asian carriers is about attitude; ditto their airports.

If there’s no edible food at JFK and there’s acres of sushi and champagne bars in Bangkok’s Suvarnabhumi it has nothing to do with how old JFK is. It’s because Americans don’t give a damn and Thais do. And to say that hub airports – by being opulent – don’t attract billions in revenue on many levels is highly questionable. I bet they do, and I’m sure they make money for their countries too.

But aside from that it’s also a question of pride. So American carriers and airlines are getting to feel distinctly third world. What’s the upside?

Posted by gamlet | Report as abusive

Chicago’s parking deal revisited

Felix Salmon
Nov 24, 2009 22:54 UTC

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.

Chicago’s good parking deal

Felix Salmon
Nov 23, 2009 21:00 UTC

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.

COMMENT

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?

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