Mayor Richard Daley reaped a windfall and avoided further budget cuts when he secured fast-track City Council approval of a 75-year lease of the parking-meter system, but an economist’s analysis concludes he also gave up hundreds of millions down the line.
The complex agreement, the first of its kind in the United States, nets the city a one-time cash payment of nearly $1.2 billion when the deal is closed this month.
But the city could have earned $1.5 billion—in today’s dollars—if it kept the meters and simply raised rates to the same levels it granted the winning bidder, according to H. Woods Bowman, a professor of public service at DePaul University. That’s nearly $300 million more than Chicago Parking Meters, a limited liability corporation formed by Morgan Stanley to operate the meters, will pay upfront, Bowman said.
“There’s nothing that would prevent the city from doing what the private sector is doing,” Bowman said, noting aldermen already took heat for approving the rate increases in the deal.
“So, why are they doing it?” said Bowman, a former state legislator and Cook County chief financial officer who is researching Chicago‘s unprecedented privatization efforts. “They would get an awful lot of money over 75 years. The reason they are doing it is because they can get the money now and close their budget gap.”
Pete Scales, spokesman for the city’s Budget and Management Office, said Bowman’s calculations don’t take into account the risk of such a lengthy lease.
“Obviously, if the city believed we could achieve a better financial result by keeping the system in house, we would not have pursued this transaction or accepted the winning bid,” Scales said, noting the company also must pay for parking meter system upgrades.
Jonathan Peters, an associate professor of finance at City University of New York who studies public-private partnerships, said such a risk calculation is routine.
Though many aldermen griped about being given just 48 hours to review the deal—with administration officials saying it was time to pounce before interest rates went up and lowered the city payment—all but five voted for it.
Most viewed the deal as “a silver bullet” to the revenue shortfalls in these tough economic times, said Ald. Rey Colon (35th), who voted against it and said the city should have maintained control of the meters. ”
When the deal closes, the city will get a check for $1.2 billion. Of that, at least $325 million—and as much as $649 million—will be used to pay daily city operating expenses between now and 2012. Another $100 million would go into a “human infrastructure fund” to finance programs for the poor.
Bowman said that when governments lease major assets, they should put the bulk of the revenue in reserve funds to generate income or spend it for one-time expenses, like major infrastructure projects.
Peters agreed. “You don’t sell your house to buy lunch,” he said. “You sell it to change your lifestyle. It’s a long-term asset.”
