More on Chicago Parking Meters

Over the last five years no city in the United States has more experience in large infrastructure public private partnerships than Chicago, including major deals...
by | January 19, 2010

Over the last five years no city in the United States has more experience in large infrastructure public private partnerships than Chicago, including major deals on the Skyway and parking garages. But as described elsewhere, the unevenly implemented parking meter privatization sent shock waves across through both public officials and private companies. If Chicago couldn't get it right, critics wondered, who could?

Chicago did in fact get it mostly right. and Chicago officials we interviewed provided the following insights into the rationale and process involved. In conjunction with a Governing column on the same subject, we conducted interviews with Chicago officials in order to provide more insight into their thinking on the process. Their responses are summarized below.

Why did Mayor Daley choose to privatize parking?

Chicago sought to privatize the parking meter system for three basic reasons.

1) It fit their profile of assets amenable to long term transaction which could provide substantial financial benefit to taxpayers; 2) Management of meters was, according to Mayor Daley, not one of the core competencies of city government, while at the same time experienced, professional private operators existed who could improve efficiency and quality of service. 3) The city could secure private capital for important investments into an outdated system and eliminate long-term risks like operating and capital expenditures, as well as encourage changes to driver behavior.

How did Chicago end up using a capital transaction to plug an operating deficit?

Mayor Daley did not start out to monetize the metered parking asset for the purpose of addressing a budget shortfall. In fact, the City of Chicago began conducting preliminary due diligence on the potential metered parking concession in June 2007, long before a recessionary trend had developed.

The city's goals with the metered parking concession were inline with prior concessions: establish a long-term reserve fund to replace revenue, retire debt, and shift risk. As a result of the earlier privatization transactions involving the Chicago Skyway and downtown parking garages, which resulted in funding of a long-term reserve fund, the City of Chicago enjoys its highest credit rating since 1978.

Monies from those transactions were also used retire $925 million in debt and invest more than $322 million in neighborhoods, parks, and programs that serve people most in need.

Given the size of the recession and its impact on the city's budget, the mayor decided late in the process to utilize the proceeds to mitigate the recessionary and use the funds for operating costs. The Mayor viewed his choices at that time as raising taxes, cutting services, or using the parking meter money, and he chose the latter.

Although the press focused on the troubled transition to the private operator and the anger over rate hikes, experts instead look at this decision to use long-term revenue to fill a short-term gap as raising the most provocative questions. City of Chicago CFO Gene Saffold points out that "The concession provided a harbor in the storm, allowing the city to continue providing critical services to residents that would otherwise be cut - or preserved only by substantially raising taxes."

Was the Price Right?

Taxpayers can best judge whether the price for a public asset is right by evaluating the process. A highly competitive and transparent process with clear quality requirements represented in a professionally prepared solicitation document will in fact produce the best possible market price. Chicago utilized experienced outside advisors to prepare a request for qualifications distributed to more than 150 infrastructure investors and parking operations. The city issued press releases in several trade publications and posted the RFQ on its website.

The city received qualifications statements from ten prospective bidders in March 2008. The technical and financial strength of the bidders was reviewed, and six were deemed qualified to bid on the concession package. Two submitted bids. The city selected the winner on a single determinant: who submitted the highest responsive bid.

At the same time, Chicago estimated valued the parking meter system prior to soliciting bids. In determining the value of the parking meter concession, the city discounted the value of future dollars because of risks such as costs and utilization. Whoever runs the system over its 75 year life faces very real risks that meters will be used less in the future because of population trends, economic activity, alternative modes of transportation and technology, and so forth. (Imagine bidding on the city's horsehoeing concession in 1890.) Further risks include rising labor costs and fuel costs. The city chose to shift those risks from the taxpayers to the concessionaire, but of course that risk shifting came at a price.

The city utilized discount rates of 10% (the approximate discount rate used to value parking garages and similar assets) to 14% in its calculation. Further, the city factored a range of other assumptions, including rates, utilization, and risk allocation, to determine a value that would fairly compensate the city for a 75-year concession. Ultimately, the city and its third party financial advisors determined the value of the asset to be between $650 million and $1.2 billion. Based on this analysis and the city's budgetary goals, a minimum threshold of $1 billion was established.

The city received two bids, one meeting the minimum threshold at $1.008 billion, and one that did not at $964 million. To ensure the greatest value from the transaction, the city called a best-and-final bid phase, a right under the bidding terms if two bids were with 10% of each other.

In the best-and-final round, the bids were $1.157 billion and $1.019 billion, respectively. This final round heightened competition and ensured the city received an addition $148 million, the absolute highest bid.

Despite the market bearing out the system's true value, some have speculated that the city could have received more for the metered parking system. Critics can always second guess value by moving assumptions especially by discounting future risks and/or by ignoring ongoing operational and capital costs. For example the now new pay boxes that took the place of the meters will need to be replaced every seven years at a cost of between $40 and $50 million, an expense often overlooked by critics.

What is the city's underlying policy concerning asset concessions?

While asset concessions have undoubtedly resulted in substantial financial benefit to the city, the city only privatizes areas that do not involve what it deems core competencies of government. Private operators can often bring experience and established management processes to bear, increasing capital investments, bettering efficiency, and improving quality of service. These were the tenants that guided the city during the metered parking concession.

(My experience while Mayor of Indianapolis is that one cannot easily determine current management efficiency in advance of a competitive process. Public systems often lack the activity based costing and performance measurements to allow a true determination in advance of a market test concerning what truly is a core competency. And determining what is core in terms of the city retaining control of price, quality, equity and access can lead to a different result then determining whether that same service is a core management talent of the public entity.)

Additionally, Chicago entered into these processes without an obligation to accept any or even the highest bid. It only determined to contract with the winning bidder after determining whether doing so was consistent with its goals of (1) maximizing the amount of the net present value of financial consideration received from a potential concession while (2) promoting the implementation of innovative parking technology and (3) maintaining and improving the service levels to users of the metered parking system.

Non Financial Benefits of the Metered Parking Concession

Prior to 2009, roughly 75% of the 36,000 hourly metered parking spaces had not seen a price increase in nearly 20 years. Under-priced meters lead to congestion, increased travel times, and pollution. Today, Chicago's hourly parking meter rates are comparable to, or even less than a number of cities throughout the Unites States. However, they are certainly priced at closer to market-based levels. The higher rates encourage turnover and enhance availability, making businesses and institutions served by meters more attractive.

From a driver's perspective, the concession has brought a number of new benefits, including greater availability of parking spaces, more convenient state-of-the-art equipment, multiple payment options, and much quicker service of broken equipment. The concessionaire has installed more than 4,200 pay boxes, replacing about 33,000 single space parking meters. The pay boxes take credit cards and notify the concessionaire when they are broken or need collection. As a result, there are now fewer broken meters. Those meters that are broken are repaired in a couple of hours. It used to take the city an average of 2.5 days.

Mayor Daley urged the concessionaire to meet with residents and businesses in each community so they could adjust the system to better meet the needs of motorists, businesses, and residents. As a result, the concessionaire recently announced a number of steps implemented to improve the parking meter system and add convenience for motorists, including:

· Portable time: Receipts purchased at pay boxes are good until expiration at any meter with the same or lower hourly rate, and they now are clearly printed with the rate so motorists can easily determine where they can use their receipt.

· Extended periods of stay: Chicago has changed pay boxes to provide extended time near theaters, concert halls, schools, hospitals, and other places where parkers require more than a two-hour stay.

· Automatic parking ticket dismissal: Information on meter malfunctions is captured in a database and shared with the City of Chicago which has automatically dismissed 92 tickets for inoperable meters since late summer.

· Discounted monthly parking in lots: In cooperation with the city, CPM is piloting a program at 11 commuter lots, offering motorists the option of monthly passes at considerable savings.

· Pre-payment: Pay boxes are programmed to offer pre-payment whenever possible. Motorists parking at 24-hour meters can generally pre-pay until 10:00 am unless rush hour restrictions are in place. At most other meters, motorists can pre-pay as early as 5:00 am until 10:00 am or later.

· Donated bicycle meters: Chicago Parking Meters LLC, the contractor, donated thousands of single space meter poles and housings to the City of Chicago, retrofitting them so that bicycle parking is protected.

24 x 7 customer service: Motorists can call 877.242.7901 to report a broken meter and repairs are made in less than one business day, usually in just a few hours.

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