Local Government and City-County Council and Government & Economic Development and Government and Government services and Privatization

Chicago's experience causes other cities to redo parking deals

November 15, 2010

Chicago’s agreement for a Morgan Stanley partnership to run its parking meters for 75 years, expected to cost drivers $11.6 billion, has Indianapolis, Pittsburgh and Los Angeles rethinking their own deals.

Indianapolis' City-County Council could vote Monday night on its proposed 50-year agreement with Xerox Co.’s Affiliated Computer Services, which would collect less money up front in favor of more total fees over the life of the deal. It also includes something Chicago didn’t get: exit clauses that let the city end the lease.

“We have terms that are not in Chicago’s deal,” said Deputy Mayor Michael Huber, who negotiated with Affiliated Computer. “We’ve built in a lot of flexibility.”

City officials introduced the current version of the agreement Oct. 20, after public outcry over the original plan to lease the roughly 3,650 metered spaces to Dallas-based ACS. The initial proposal was closer to Chicago's much-maligned pact.

Chicago’s agreement may earn the Morgan Stanley group 10 times the $1.15 billion lump sum Mayor Richard Daley got when he forced the City Council to consider the deal on a few days notice in 2008, according to documents for a planned private note sale by the Chicago Parking Meters LLC venture. The experience shows the pitfalls of a hasty process that doesn’t weigh all the costs, said former Chicago Inspector General David Hoffman.

“It’s a mistake to rush into a deal for such a long period of time without a full public accounting of the pros and cons,” Hoffman told Bloomberg.

Among the cons for Chicago was that the city was unable to take advantage of falling interest rates by borrowing against parking-meter revenue, said Hoffman. Chicago Parking Meters, the partnership of Morgan Stanley, Alliance Capital Partners GmbH and Abu Dhabi Investment Authority, did.

It recovered part of its upfront costs when it sold $600 million of 10-year notes on Nov. 4, the day investment-grade corporate debt yields fell to 3.53 percent, the lowest on record, according to Bank of America Merrill Lynch index data.

Mayor Daley had reason to push for the parking lease with his city facing deficits. He’s since spent about $792 million of the Morgan Stanley money over three years for fiscal needs including balancing budgets, according to city reports.

The longest recession since the Great Depression cut U.S. cities’ general-fund revenue in the budget year that ended June 30 by the most since at least 1986, according to the National League of Cities. That’s prompted many to seek lower costs in partnerships with private companies to run everything from airports to zoos.

Los Angeles, facing a projected $550 million budget deficit by 2014, will spend the proceeds of its parking-meter agreement to help pay off building loans, meet current expenses and add to reserves. Pittsburgh needs the money for city pensions.

Indianapolis has taken its time considering a parking deal—originally proposed in August—because it wasn’t seeking funds for its budget, Huber said. State law requires the proceeds be used to repair streets adjacent to the meters, he said.

The city wants a private company to take over the system because it needs an upgrade, Huber said. Some meters haven’t been replaced and rates haven’t been raised for 35 years.

Modifications to proposal cut the city's upfront payment to $20 million from $35 million, but also increased the amount it would receive over the contract to $620 million from $400 million.

The changes also added the ability to terminate the contract every 10 years. Chicago can’t get its system back for 75 years unless Morgan Stanley and its partners default, according to documents for a bond sale planned in August that was delayed until November.

 Indianapolis' arrangement still favors the contractor, said Phineas Baxandall, a senior analyst for tax and budget policy in Boston with U.S. PIRG, a federation of state public-interest research groups.

The city’s total income of about $640 million over the life of the arrangement is less than half the $1.5 billion the private group could make in the period, he said.

“The cost is way out of line,” said Baxandall. Private deals can be tax increases in disguise, he said.

Contractors are better managers of parking systems than municipalities, said David Cummins, vice president of parking at Affiliated Computer in Germantown, Maryland.

“We can double and triple the revenue a city can generate on its own,” he said. “It’s a little ludicrous for a city to think it can build a parking system on its own and see the same results our concession envisions. They should leave it to the experts.”

The Pittsburgh City Council rejected a $451 million agreement with a JPMorgan Chase & Co. group last month amid concerns about its length and the possibility of rate increases.

“Pittsburgh’s City Council stood up and said the city doesn’t have to take a bad deal,” Baxandall said.

Mayor Luke Ravenstahl wants to revive the proposal to help Pittsburgh meet a Jan. 1 deadline to make a $225 million payment to the city’s pension, said his spokeswoman, Joanna Doven. The state may take over the pension if the city misses the contribution, she said.

“We believe it’s the best thing for the city,” said Doven.

Los Angeles city administrator Miguel Santana is seeking private companies to run municipal parking garages, possibly earning upfront payments of as much as $300 million for a 50- year agreement. He plans to present final bids to the City Council by February, he said in an interview last month.

Santana recommended the city reject language similar to Chicago’s agreement that gave up control of parking rates, according to a Jan. 28 report. The Morgan Stanley group raised some central Chicago meter rates to $4.25 an hour from $3 since January 2009, and they will go to $6.25 in 2013, documents for its bond sale said.

Los Angeles, which may get a larger initial payment by giving up control over rates, decided to set a fee schedule for the first five years to shield residents from higher costs. Increases after that would be limited by the Consumer Price Index.

“We want to make sure there’s a value for the city,” Eric Garcetti, the council president, said in a telephone interview, “but not cede control in ways that residents would be hurt.”

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