Chicago's Meter 'Fiasco'

It should have been a relatively straightforward public-private partnership. In exchange for a lump sum, the city of Chicago would turn over the operation and...
by | January 20, 2010

It should have been a relatively straightforward public-private partnership. In exchange for a lump sum, the city of Chicago would turn over the operation and revenue stream of its 36,000 parking meters to a private operator.

This isn't rocket science. Most citizens couldn't care less who takes the coins out of their parking meters. But some missteps turned what was basically a successful privatization into a political sore point for the city and a cause célèbre for opponents of privatization nationwide.

The idea made sense. The deal brought in a lump sum of $1.15 billion to the cash-strapped city and relieved it of the responsibility of maintaining the meters -- something it wasn't very good at. In fact, the contract required a high-tech upgrade replacing the unsightly, old meters with new "pay-and-display" machines that accept cash, credit or debit cards, a nice service enhancement paid for by the operator in addition to the $1.15 billion. The city used a competitive bidding process with two qualified bidders participating in a last-best-offer runoff, bringing in the most the market would bear.

So far, so good. But mistakes were made, and critics capitalized on them.

Mistake #1 -- Simultaneous Rate Hike. Prior to the privatization, Chicago's metered parking rates were way below market. Some meters cost just 25 cents an hour, while nearby parking lots charged $15 an hour. Many folks who worked downtown found it well worth it to dash outside and feed the meter. In essence, Chicago taxpayers were subsidizing parkers from the suburbs.

Seeing that its rates were out of whack, the city decided to increase parking rates to a market level of $2 to $4 per hour -- a move that increased the amount potential bidders were willing to pay.

The problem was the timing. The new rates went into effect at the same time as the new operator started, so in the public's mind the rate hikes were the contractor's doing. It was city officials who set the rates and it was city coffers that benefited. No matter. These highly unpopular price increases -- more are scheduled -- were determined by elected officials rather than being a consequence of the outsourcing.

Mistake #2 -- Broken Meters, Broken Transition. In any outsourcing, the initial public experience is crucial. Expectations are that quality of service will improve, and if it doesn't, critics attribute the problems to the outsourcing.

Transitions are difficult by nature, and early problems plagued this outsourcing. The biggest flaw was that neither the city or operator realized that the meters would need to be emptied much more frequently in light of the sizable rate increase. Overstuffed meters wouldn't accept quarters, leading to broken meters and tickets for the parkers who tried to use them.

In the early days of the contract, many meters became inoperable. Frustrated parkers took out their anger on the city, pushing the story to the front page of the papers. The vendor quickly recovered, however, installing new equipment at a record pace. As of December 2009, more than 31,000 meters had been replaced, and just over 4,000 of them were the new pay-and-display boxes. Downtime for meters plummeted. In fact, meter downtime has dropped to a mere couple hours under the vendor, compared to an average of 2.5 days per month under the city. Working through the vendor, the city worked to void tickets issued due to broken meters and more recently, Mayor Richard Daley has instituted a ticket forgiveness policy for close calls. This hiccup endured for about four weeks of a 75-year deal, but the damage has been done. First impressions are hard to shake.

Mistake #3 -- How the Money was Spent. How the money from the meter deal got spent doesn't have anything to do with the public-private partnership per se, but, like the rate hike, the two are indelibly linked in the public's mind.

Initially, much of the proceeds from the meter deal were targeted to benefit Chicago over the long term -- in capital infrastructure projects, rainy day funds and so forth. Shortly after the deal was signed, however, Daley found himself with an unexpected $400 million shortfall, and -- not wanting to raise taxes or cut services in a recession -- filled the budget hole with parking meter money. Whenever the capitalization of an asset occurs, citizens should be wary if city hall devotes proceeds to filling operating deficits. After all, the structural deficits do not vanish, but the ability to monetize the asset again does.

This decision to use long-term asset value to cover an operating gap is understandable, but it made the deal's financial purpose questionable since at the same time parking rates were being raised and new meters were malfunctioning. It became politically difficult to defend the parking meter deal and many council members who had approved it came to decry it -- even though it allowed them to avoid making tax hikes and service cuts.

Like any change, privatization can trigger criticism. In this case, the parking meter transaction suffered from second-guessing. Although the city had run an open and competitive tendering process, Chicago's Inspector General David Hoffman issued a report claiming that the $1.15 billion Chicago received was $974 million less than the system was worth.

Hoffman's analysis, however, has been criticized for understating vendor costs and misunderstanding the risks. Chicago CFO Gene Saffold has defended the deal, and as he put it, "Many critics from the outside have used academic exercises in an attempt to determine the quote-unquote 'value.'" Guessing a price basically becomes a political, not an economic, endeavor. Ideological opponents of privatization have used the report and the mistakes of execution to discredit the deal.

Privatization of parking meters worked in Chicago. The city exchanged a revenue stream for a lump-sum payment, and rid itself of an operational headache to boot. The meters are more modern, more attractive, and even the much-derided rate hikes -- only tangentially linked to the outsourcing -- make economic sense.

To residents of the Windy City, however, the whole thing will likely always be known as the "parking meter fiasco." Ironically, this "fiasco" actually represented a significant privatization success, and is now being considered as a model for other city governments including Pittsburg, Los Angeles and Indianapolis.

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