City inspector general David Hoffman has released his office’s full report (PDF; press release) on the parking meter privatization deal. None of it’s terribly new if you’ve read our previous reports or Mick Dumke’s recent post on the just-passed review-period ordinance, but the argument is considerably fleshed out and no less damning; the recommendations are also pretty interesting. Here’s a semi-brief rundown of some of the highlights, aside from the headline-grabbing estimates.
Update: Greg Hinz wonders whether the city, if it kept the meters, would have had the guts to raise rates to levels like those in the lease. Something to keep in mind when reading stories or running the numbers for yourself; everything I flagged has more to do with procedure.
The report argues, however, that if trying to push the burden of fare increases onto a private company was part of the plan – which was my assumption all along – that really blew up in the city’s face, at least in the short term.
Update II: CFO Paul Volpe responds (PDF). Most of it’s of the “I’m rubber, you’re glue” and “we got paid” variety, but here’s where the real throwdown is:
“‘The basic driver in any transaction like this is the assumed discount rate, or the way you convert dollars of the future into dollars today. The report’s author calculates value using a discount rate of 5-7%,’ Volpe said. ‘However, using a discount of anything less than 10% for an asset of this type is simply not defendable.’
“The city’s third-party financial advisors estimated the discount rate to be between 10% and 14%. And their valuation – made in April 2008 – put the value of the asset between $650 million and $1.2 billion.
“Based on that valuation, the City established a floor of $1 billion – well on the high-side of the valuation.”
Personally, I dunno, but that’s where it looks like the real tension is between the two arguments.
Update III: Forgot that the city’s valuation comes up in the IG report:
“Once the future revenue stream was projected, the advisor discounted this future cash flow to its value today to a private concessionaire. ‘In the private sector the discount rate is based on the cost of capital for the activity in question, namely the weighted cost of the relevant debt and equity financing.’ The cost of debt is the interest rate that must be paid to the lenders, while the cost of equity is the return that investors expect to make on a given investment. Thus to estimate the value of the upfront payment, William Blair used a discount rate that was based on the likely capital structure, the combination of debt and equity, that would finance the upfront payment. The advisor estimated that a private concessionaire’s cost of capital and thus the discount rate for the future revenue would be between 10 and 14 percent.” (p. 17)
Still puzzling this out.
1. The city rushed the deal
“The city council gave itself no time to do a thorough, independent analysis of the value of the parking-meter system to the City. There was no public comment; no testimony from critics or experts; no presentation of recent studies such as the one from the GAO. And there was no discussion of alternative lease terms – such as a shorter lease, a lease with revenue sharing, or a lease with lower rate increases” (p. 6)
“One City Council Finance hearing and one full Council meeting were devoted to the lease’s discussion. There was no public hearing where City residents, civic organizations, or other interested parties could comment on the lease. The ordinance that approved the lease was not completed until one day before the City Council Finance Committee voted on it. The only documents the City Council received were the lease itself, the ordinance enacting the lease, an 10 page PowerPoint presentation that provided a general overview of the lease, and a flow chart detailing the corporate structure of Chicago Parking Meters, LLC.” (p. 32)
“This short time period between announcement and approval of both the Midway and parking meter leases came despite a February 2008 GAO report that called for more rigorous analysis of long-term lease agreements. The report specifically pointed out that Chicago had not employed any public interest evaluation of the Skyway lease and that this may have resulted in the public interest being overlooked.” (p. 33)
2. Financial due diligence was minimal
“the report concludes that the City office principally in charge of this deal, the Office of the Chief Financial Officer, failed to calculate how much the parking-meter system would be worth to the City over 75 years if it retained the system rather than leasing it. The CFO’s Office therefore failed to take into consideration whether this was a good financial deal for the City in light of the value to the City of the parking-meter system.” (p. 4)
“Although the administration did not yet know how much it would receive from the lease of the parking meters, the budget it presented to the City Council on October 15, 2008 was balanced with $150 million in projected parking meter lease proceeds. One hundred million dollars in proceeds was dedicated to 2008 and $50 million was allocated to 2009. Despite the fact that the terms of lease agreement were finalized by this time, the administration did not reveal the details of the lease agreement to the City Council during the following month of budget negotiations. Just before the bids were submitted, the City Council adopted the 2009 budget with a reliance on $150 million in lease proceeds. ” (p. 13)
“CFO Volpe was asked to produce numbers that demonstrated that the upfront payment was sufficient compensation for the parking meters. He provided the City’s conclusion that the payment was sufficient but did not provide documentation to support this conclusion. The CFO also pointed out that if the Council did not approve the lease agreement, there would be an $150 million shortfall in the budget that would likely need to be filled with tax increases.” (p. 13-14)
[Ed. note: read those last two again, see if anything stands out]
3. City Council got worked like a rented goalie
“The failure to conduct this analysis strongly suggests that the decision had already been made that the City was going to lease the meters for the best-available price on the market, and that this decision was driven purely by the need to raise revenue for the short-term budget problem. This is precisely the type of pre-ordained, revenue-focused, outcome criticized by recent, comprehensive studies of PPP decision-making by the General Accountability Office (GAO) (‘More Rigorous Up-front Analysis could Better Secure Potential Benefits and Protect the Public Interest’) and the Texas State Legislature (‘upfront payments may not be in the public’s interest’ because there is an ‘ever-present temptation for officials to grab a big headline generating number today at the expense of long-term value’).” (p. 26)
4. We might have been able to cover the budget gap and get a better deal, if we’d tried
“Under ‘revenue sharing’ provisions, a lease is given to a private operator, not solely in exchange for an upfront payment, but rather the government also shares in the profits over the long-term. An alternative lease of the parking meters that included revenue sharing would have likely generated an upfront payment that would have allowed the City to address its budget shortfalls. At the same time, it would strengthen the City’s long-term financial outlook by producing a larger annual revenue stream than the City currently receives from the parking meters. Finally, a lease with revenue sharing would have meant that the City would not have given up as much present value as it did in the actual lease. Because it provides both short-term and long-term benefits, revenue sharing is a more balanced approach to financing PPPs.” (p. 29)
5. Ironically, even the ass-covering elements of it failed
“Finally, much of the recent anger over the increase in parking meter rates as been directed at City government which indicates that the parking meter lease has done little to insulate the City’s elected officials from the political implications of raising meter rates.” (p. 27)
“As to capital improvements that would make the parking-meter system more efficient, the administration believes that ‘the implementation of improvements in meter equipment and technology that the private operator will provide to positively impact system utilization could not likely be made by the city.’ This is because the City has ‘more pressing capital needs’ and ‘because government is not motivated like business to increase profitability, government does not (and often cannot) make the substantial investments needed to improve revenues and customer service over the long-term.
“However, over the last several years, the City has shown its ability to implement capital improvements (and its ‘motivation’ to ‘improve customer service’) by adopting innovative technologies such as solar-powered pay-and-display meters and in-car payment devices. And after Chicago Parking Meters, LLC took control of the system, it was so ill-equipped to handle the maintenance of the meters that City personnel had to step in and address mechanical failures.” (p. 27-28)
6. That last ass-covering thing you just tried isn’t going to work either
“The City Council is scheduled to take up a proposed ordinance that would provide for a 15-day review period (originally 30 days) once the winning bidder has been chosen. We agree that there is a legitimate need for the City Council to have an extensive review period to determine whether it is appropriate to lease public assets under certain terms. However, the problem with mandating an extensive review period after a private company has agreed to a particular price is that it may be important for the City to move quickly to accept that price. In addition, this review period comes too late, because it will be more difficult for the City Council to change the terms of the lease – much less to reject the decision about whether to lease the asset in the first place – once a winning bid for the lease has already been made.” (p. 7)
Read the whole thing if you get a chance, it’s surprisingly lucid and accessible.