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atization BreaksNewGround


December 2009, the city reported that more than 99% of the meter system is operable on any given day, exceeding the oper- ability percentages in several peer cities. In less than a year, the concessionaire has nearly completed


the overhaul of the entire parking meter system. By December 2009, it had replaced 31,328 meters with 4,127 new pay-and- display meters. By contrast, the city installed just 198 pay-and- displaymeters in a five-year period before the lease.The conces- sionaire will also make additional capital expenditures over the life of the deal, as pay-and-display meters are typically replaced every seven to 10 years. As the operational issues subsided, claims that the city got a


“bad deal” began to escalate.What raised perhaps the most pub- lic scrutiny was a June 2009 report, issued by the city’s Office of


risks if it were still operating the system itself, which the OIG study should have reflected by using a higher discount rate. The city’s own valuation analysis used discount rates in the range of 10%to 14%to reflect amedium-to-high degree of risk. The Blair report concludes that “by properly projecting


[parking meter system] revenues and by applying a discount rate that appropriately reflects the relative risks…the conclusion that the city received full and fair value for the Concession of the [meter system] is clearly supported and affirmed.” Despite politics and controversies, Chicago’s groundbreak-


Mayor Daley later took responsibility for the implementation glitches, noting that the city should have undertaken the transition to privatization more gradually.


the InspectorGeneral (OIG), arguing that the city did not proper- ly estimate the value of its parkingmeter systemand that the deal should have been worth at least $2.13 billion. In testimony before the city council’s finance committee,


Chicago’s chief financial officer Gene Saffold countered that “it is misguided to compare a theoretical value with an actual mar- ket value – one that was reached through taking an asset to mar- ket, using a competitive process.Readers of these academic exer- cises are left with the mistaken impression that the city received less thanmarket value.That is not the case.” A report prepared for the committee by the city’s financial


adviser on the parking meter concession,William Blair & Co., noted two significant inaccuracies in the OIG analysis that call into doubt its findings, the company said. First, Blair said, the OIG study estimated the system’s value


on the basis of gross system revenue rather than free net cash flow.According to the Blair report, the OIG dramatically under- stated the cost of capital expenditures by $4 million annually over the life of the 75-year deal and overstated the amount of free cash flow for each year. In addition, Blair found that the OIG analysis failed to account for $5 million each year in sys- temoperations costs. Second, Blair said, the OIG used an inappropriately low dis-


count rate (7.0%) in estimating the meter system’s value, based on a faulty assumption that the parking meters are a “very low risk” enterprise. However, this ignores several substantial risks that were transferred from the city to the concessionaire in the deal, including systemutilization risk, long-termoperational risk, changes in population, economic activity, technology, public transit usage, fuel costs and numerous other factors that affect the system’s long-termeconomic value. According to the Blair report, the city would retain these


ing lease has inspired other local governments – including Los Angeles, Indianapolis, Pittsburgh andAllegheny County, PA – to explore similar transactions to get government out of the parking meter business and extract value from their parking assets. Policymakers in those jurisdic- tions generally seem intent on avoid- ing the scale of rate increases that Chicago politicians approved as part of the deal. (“Windy City” officials quadrupled meter rates in some parts of downtown Chicago in tandem with the lease. ) But, like Chicago pols, policy-


makers elsewhere recognize that their parking enterprises are non-core assets that could be leveraged to help do


more with less amid widespread government fiscal crises. As MayorDaley told theChicago Sun-Times,without the cash infu- sion from the parking meter concession, “you’re talking about a serious economic crisis for Chicago.” Indeed, the city has relied extensively on proceeds from the


parking meter transaction to close massive city budget deficits, nearly exhausting themin the latest budget.However, the parking meter lease is just one of threemajor asset leases that have netted Chicago more than $3 billion in recent years, and altogether the proceeds have been used for a variety of purposes, including pay- ing down public debt, setting up “rainy day funds,” short- and long-term investments to augment city revenues, and short-term budget fixes. Chicago’s ability to use asset lease proceeds to reduce city debt and establish reserve funds prompted all three major credit rating firms to raise the city’s bond rating before the recession, lowering the city’s borrowing costs. These are the results that have policymakers elsewherewant-


ing to followsuit.To be sure, these aren’t cookie-cutter, one-size- fits-all deals. Each parking system is different, each deal struc- ture will be different, the policy considerations are going to be different, and so on. But with the severe budget woes local governments are


experiencing today, Chicago offers other cash-strapped cities something that couldn’t be more timely – a viable model for unlocking the value trapped in their parking assets to help solve their fiscal challenges.


Leonard C. Gilroy, AICP, is Director of Government Reform at Reason Foundation (reason.org).


PT JANUARY 2010 • PARKING TODAY • www.parkingtoday.com 17


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