[This article was originally featured in Innovators in Action 2009.]
The City of Chicago, under the leadership of Mayor Richard M. Daley, has led the nation as the first local government to pursue and successfully close innovative leases of a toll road and an underground parking system. Most recently, the City of Chicago entered into an agreement for Chicago Parking Meters, LLC, to operate, maintain, and collect its parking meters. Together, these transactions have provided nearly $3.6 billion for Chicago residents and taxpayers.
Mayor Daley has prudently and responsibly used the proceeds of these concession agreements to protect taxpayers over both the short and long term, improving the quality of life for Chicago residents.
The Chicago Skyway, downtown parking garages, and citywide metered parking assets generated money used to establish a perpetual long-term reserve fund of $900 million to replace revenue generated by the Skyway and parking meters, retire $925 million in debt, reserve more than $700 million for mid-term budget relief, and invest more than $322 million in neighborhoods, parks, and programs that serve people most in need.
Each of these transactions eliminates long-term risks like operating and capital expenditures and changes in driver behavior.
After the $1.83 billion Chicago Skyway transaction closed and a long-term reserve was established, all three rating agencies upgraded the City's credit. Today, the City of Chicago enjoys its highest credit rating since 1978.
The $563 million lease of the downtown parking garage paid off the City's debt used to build Millennium Park, a world-class attraction. The transaction also allowed for $122 million to be invested in Chicago's neighborhood parks.
While asset concessions have undoubtedly resulted in substantial financial benefit to the City, the City only privatizes areas that are not 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 tenets that guided the City during the metered parking concession.
The Metered Parking Concession
In June of 2007, the City of Chicago began conducting preliminary due diligence on the potential metered parking concession. A request for qualifications was distributed to more than 150 infrastructure investors and parking operations. True to its ongoing commitment to provide transparency and competition in the bidding process, 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. They provided presentations regarding their technical and financial experience. Six were deemed qualified and were offered an opportunity to bid on the same concession package. Two placed bids. One bidder was ultimately selected based on a single determinant: who submitted the highest responsive bid.
The City was not under obligation to accept 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. Using these factors as a baseline, the metered parking concession has been a success.
Maximizing Value and Use of Proceeds
The City valued the parking meter system prior to soliciting qualifications and bids. In determining the future value of the parking meters, the City discounted the value of future dollars because of risks like costs and utilization. There's a very real risk that meters will be used less in the future because of population trends, economic activity, alternative modes of transportation, and technology. To illustrate, the Model T is less than 100 years old, and Chicago did not have parking meters just 50 years ago. Technology will change how motorists park (if they continue to do so) in seismic and unforeseen ways.
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.
The Mayor allocated the proceeds with an eye toward the future:
- $400 million in a long-term reserve/revenue replacement fund to offset the $19 million in parking meter revenues that were brought into the corporate fund in the year preceeding the transaction. This addition brought the City's reserves to $900 million and provided a financial cushion most cities do not have;
- $325 million in a mid-term budget relief fund to help balance budgets through 2012;
- $100 million toward projects helping those most in need through meals programs, heating assistance, emergency home repairs, and ex-offender and jobs programs; and
- The balance, nearly $320 million, in a budget stabilization fund to help bridge the recessionary period. Approximately $150 million of this fund was used to help balance the 2009 budget, avoiding tax increases (a 19% increase in property taxes, a 60% increase in sales tax, or a tripling of the vehicle fuel tax) and cuts (a 15% cut in police, a 30% cut in the fire department, or a 50% cut in garbage collection and snow removal services).
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. Unfortunately, those assertions did not utilize accepted financial valuation methods for infrastructure assets. They did not properly account for discount rates, risk, or for ongoing operational and capital costs. Further, they fail to recognize the money the revenue replacement fund will generate.
Innovative Parking Technology
The concession agreement calls for the replacement of all single space meters with a cashless option by 2011. The concessionaire began adding new multi-space, "pay-and-display" meters (or "pay boxes") to the street at an unprecedented rate in April 2009.
The pay boxes have a number of benefits:
- They provide more payment options for motorists, including coin, credit card or debit card.
- Motorists can pre-pay for time when there are no posted restrictions.
- Meters can be programmed for variable timetables and rates and can track utilization.
- Receipts can be used for business and tax purposes.
- Pay boxes reduce clutter on sidewalks and add to neighborhood beautification efforts.
Pay boxes are "green." They notify operators wirelessly when they require collection or are broken. Consequently, collection and maintenance crews need to visit meters less often. Travel reductions shrink the carbon footprint of collectors and mechanics and reduce congestion. Further, the devices are solar-powered, eliminating the need to dispose of more than 45,000 lithium and 9 volt batteries each year. The pay and display receipts are biodegradable.
Pay boxes allow motorists to take unused time with them. For example, if a motorist parks in a neighborhood parking spot ($1 per hour), he or she may use that pay and display receipt to park in another $1 per hour space at a pay and display anywhere in the City as long as the receipt has not expired.
To date the concessionaire had already replaced 24,000 meters with 3,500 new pay boxes. By the end of 2009two years ahead of schedulethe concessionaire expects to finish the replacement of 30,000 meters at an overall expense of between $40 and $50 million. The concessionaire is prepared to make additional capital expenditures over the life of the deal, as pay-and-display meters are typically replaced every seven to 10 years. By contrast, the City was only able to fund and install 198 pay-and-display meters in a five-year period prior to 2009. Those pay boxes have already been replaced with 207 newer models.
Service Levels to Consumers
During the initial transition, the operator experienced some difficulties that caused motorists pain. Namely, the concessionaire misjudged necessary collections, leading to jammed and broken meters. The Mayor and the concessionaire have apologized for the transition, noting that it should have taken place gradually over several months so that the concessionaire's performance could be better monitored and problems addressed.
That said, the concessionaire's performance has improved immensely. In March, it took the concessionaire approximately 8 days to fix a meter. By April, it was addressing problems in just 1.6 days, better than the City was able to perform when it operated the system. Performance has steadily improved since. Today, the concessionaire repairs meters in just 2/10ths of a day.
The City has audited the system and has seen marked improvement. During the City's last audit, it only found 8 jammed meters out of 36,000 spaces. System operability is at better than 96%, a significant improvement over the City's past performance.
The City's parking meter division operated between 9 a.m. and 5 p.m. on business days. The concessionaire also operates a 24 hour call center to assist motorists.
The parking meter system today is a vastly different system than that provided to the concessionaire in February. Today, the changes implemented by the concessionaire provide parkers more convenience. These changes would have been difficult, if not impossible, to fund for the City.
Further, technology improvements ensure that the system will evolve with the needs of businesses and motorists. Traditional parking meters could not do that. The pay boxes provide the City with a myriad of options to creatively add or remove meters, modify hours of operation, vary period of stay, and adjust rates. These improvements afford the City the tools to make and implement decisions promoting meter turnover and availability, making businesses served by meters more popular, and reducing congestion and pollution.
Gene Saffold was appointed Chief Financial Officer of the City of Chicago by Mayor Richard M. Daley in March 2009. Prior to his appointment, Saffold was Managing DirectorNational Accounts for JP Morgan Chase & Co. and previously served as Head of Public Finance Investment Banking for J.P. Morgan Securities, Inc. He has served as Trustee of the Chicago Board of Education and of the Teachers Pension and Retirement Fund of Chicago, and has been honored for his public service by organizations such as the Chicago Youth Centers, National Conference for Community and Justice and the Urban Financial Services Coalition of Chicago.