Boston funds publicly, while Chicago goes private
Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America’s urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.
Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago’s Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city’s parking meters were leased out to private investors for a tiny sum:
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.
Chicago, with a population of 2.7 million, is over four times larger than Boston, with 617,000 residents. But Boston will be spending about $2,900 per resident compared with Chicago’s $2,597 without privatizing any of the work. Boston does have lower funding costs because it is viewed more favorably by bond markets, with a rating of Aaa from Moody’s, its highest rating. Chicago comes in three notches lower at Aa3, or what Moody’s terms “high quality and very low credit risk.” Bond markets do make Chicago pay more, and its bond* due 2024 traded at 3.32 percent Thursday, while a comparable Boston bond,** due 2024, traded at 2.28 percent, according to the Municipal Securities Rulemaking Board’s EMMA system.
The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel’s proposed infrastructure trust. America’s urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city’s rebuilding to private investors. Boston Mayor Menino has the right approach and should be a model for Chicago Mayor Emanuel.
* Chicago Refunding and Project Series C bond due 2024 CUSIP 167486DC0
** Boston Series A bond due 2024 CUSIP 100853PT1
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