Chicago mayor to privatize city assets
Chicago Mayor Rahm Emanuel announced the Chicago Infrastructure Trust yesterday, which was described this way by the Chicago Sun-Times:
A bus-rapid transit system with higher fares for faster rides. A CTA Red Line extension to 130th Street with distance-based fares. High-speed Internet service with a fee paid by businesses and individuals.
Those are just a few of the “transformational” projects that might be bankrolled by the “Infrastructure Trust” unveiled Thursday by Mayor Rahm Emanuel and former President Bill Clinton.
Five financing giants have made preliminary commitments to provide as much as $1.7 billion in “initial investment capacity.”
The largest investment — anywhere from $200 million to $1 billion — is expected to be made by Macquarie Infrastructure and Real Assets Inc. That’s the Spanish-Australian consortium that paid $1.83 billion to lease the Chicago Skyway for 99 years in exchange for pocketing tolls and continuing to raise them.
Other major investors include: Citibank N.A.; Citi Infrastructure Investors; J.P. Morgan Asset Management Infrastructure Investment Group and the Union Labor Life Insurance Co.
Chicago has a terrible history of giving away the store when it has privatized public assets in the past. It’s widely known that when the former mayor privatized the parking meter system to plug a budget hole, a lot of money was left on the table for private investors to snap up:
Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.
Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue.
The deal was “dubious” for Chicago, its Office of the Inspector General said last year, because the city’s chief financial officer, who negotiated the agreement, failed to calculate how much the system would be worth over 75 years. The present value of the contract was $2.13 billion, more than the $1.15 billion the city received, it said.
Chicago is barely holding on to its fiscal solvency and is chained to crippling collective bargaining agreements with the city’s employees. Chicago’s unionized employees are a formidable obstacle to making substantial budget reductions. From the city’s 2011 Annual Financial Analysis (PDF; via Chicago Magazine):
The City has steadily decreased its workforce across funds from more than 42,000 in 2003 to 36,500 total positions in 2011, a decrease of approximately 13 percent.
One segment of the City workforce that has not experienced reductions during this period is the sworn public safety workforce. This group has increased both in number and as a percentage of the total workforce, and now comprises more than 50 percent of total City employees and 51 percent of the unionized workforce.
Among many good proposals in Emanuel’s infrastructure announcement was the idea of retrofitting 127 government buildings in an attempt to save the city $20 million of its annual $170 million energy bill. But because ideas like this one don’t provide direct cash flows, they don’t get investment firms salivating. Likewise, the rapid transit and Wi-Fi projects mentioned by the Sun-Times are small beans in bankers’ eyes. I’ll bet anyone that what Wall Street really wants is to get its hands on the two airports owned by the city (O’Hare and Midway). When I looked at the city’s latest bond offering documents (pages 54-55), I saw that leases for both airports expire within the next eight years or so and would give investors cash flows from a critical infrastructure asset.
Emanuel, who earned $16 million in two-and-a-half years as an investment banker, looked at the fiscal options for his city and decided that selling off the public assets was easier than facing off against the police and fire unions. The mayor is choosing to sell the family silver in return for a short-term revenue gain that will fill budget gaps. By the time this fiscal magic wears off, he’ll likely be gone from office. Chicago citizens need to decide between having so many highly paid police and fire employees and selling off their most important assets.