What Chicago can't do

Chicago, striving to become a “green” city, has just made it very difficult to deliver green transportation options. By selling off -- I mean “leasing” – every single one of its 36,000 parking meters for some fast cash, Chicago can no longer do what other forward-thinking cities have done.

While it might be buried in the fine print of hundreds of pages of the lease contact, it would appear that for the next 75 years, the city cannot remove metered parking to:

• Create dedicated bus lanes (see New York City plans), or trolley lines (Charlotte NC).
• Allocate spaces for car sharing vehicles (see Washington DC and Boston) or bicycle parking (see Portland, Oregon, New York City plans, Paris)
• Create bike lanes (Paris, Portland, New York)
• Make pedestrian-only retail districts

Here is what the deal means for parkers (My comments are in italics):

• Quadrupling of meter costs in two-thirds of the city's meters over the next five years, from 25 cents/hour to $2/hour by 2013.

• Meter rates in the downtown Loop will rise from $3/hour to $6.50/hour over that same time period. Parking meters are generally underpriced across the country so I agree that these likely should be raised.

• Future rate increases (in years 5 through 75) will need to be approved by the city. It would seem that the city alderman needed to hide behind this lease, in order to get these first price increases done. What is the likelihood that they will be able to approve price increases in those later years when they aren’t shielded by the big bolus of cash upfront? nor get a piece of the increased revenue stream?

Here is how the city intends to spend the $1.16b it will receive in cash for the deal:

• $325m to balance the budget over the next 4 years ($50m 2009; $100m 2010)
• $324m for budget “stabilization” for budget gaps. These two added together mean that $649m of the money will be spent almost immediately, leaving the remaining 70 years of this lease without any benefit to the residents of Chicago.

• $400m will be put into a long-term account generating $20m in revenues annually, to “cover” the usual amount of revenues generated by the parking meters. Do we really believe that $20m/year will equal the expected annual revenue from parking meters 15 years from now? How about 30, 45, or 75 years from now?

• $100m in human infrastructure. Not clear what this is. Note that none of the money raised from this parking sale went toward improving transportation infrastructure in the city.

There are several things that really bother me about these deals:

1. Can’t we produce politicians or a public that can accept rises in parking rates without having to hide behind a privatization deal? In both cases there is an increase in fees, but in the privatization deals we lose flexibility over the asset and the management fee that goes to the private sector company, a much worse deal for citizens.

2. Assuming the city is desperate for an upfront lump of cash, isn’t it common for banks to loan money on the back of a guaranteed future revenue stream that is collateralized by an asset? Why the 75 year leases? It just doesn’t seem right to mortgage future generations for our quick fix today – politically easier yes, but not right.

3. And most egregious, is the loss of network control and flexibility over the asset. This parking deal has effectively locked up street use for the entire city of Chicago for the next 75 years! Forget about closing some streets to traffic (as has been done in cities the world over). Forget about changing the use of specific streets and traffic flows (just this last year New York city has changed city streets to accommodate bicycles, pedestrians, chairs and tables, dedicated bus lanes; in Washington DC they have changed some parking spaces into shared car parking; in Portland, Oregon, bicycle parking is substituted for some previously metered spaces). All of these options will be closed for the city of Chicago. And closed for 75 years.

Sources:
http://www.bondbuyer.com/article.html?id=200812021PTMA2E7
http://ohmygov.com/blogs/general_news/archive/2008/12/24/chicago-sells-right-to-city-parking-meters-for-1-2-billion.aspx

Some quotes:

"I wish we had other options at our disposal to help balance this budget without entering this 75-year concession agreement with one of our most valuable public assets, but we're in the situation we're in, with not many options" Alderman Brendan Reilly told the Tribune.

Alderman Richard Mell described the deal as being a "once-in-a-lifetime shot to grab this pool of money.

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Privatized roads are like casinos

Privatized roads are like casinos because we know that the owners will take their cut, meaning that it is not an even deal.

I learn from an article in the March 17, Wall Street Journal "Letting the Market Drive Transportation, Bush Officials Criticized for Privatization" that:

"the Government Accountability Office warned that tolls on privatized roads are typically higher than if the roads remain under public control, because of the need to generate steady profits for private investors. The report said the federal government needs to better protect the public interest."

Exactly. Read the GAO report that came out in January (which I couldn't find in my internet search) or my earlier scintillating blog on this topic.

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99 years: the Road to Financial Wellville?

Over the last thirty years, it feels like the worst of our political system has driven our financing of transportation infrastructure. No one has had the political will to raise gas taxes, established in 1993, and therefore grotesquely inadequate. [Who among us would be satisfied with a 1993 budget for our own households?] And many of the significant infrastructure projects that have been financed by Federal funds have risen to the top based on politics rather than merit.

The result is that every state’s transportation infrastructure is in financial crisis. One of the proposed – pushed – solutions coming out of Washington is to privatize public highways and bridges. This is a solution that ducks the fundamental problem of a broken financing system, and gives states another few years to avoid the central problem.

[Quick definition: road privatization is when a section of road is transferred to a private company for a term of contract, typically in exchange for an up-front payment and a fraction of future toll revenues. The private company is responsible for all road maintenance and repair and has prescribed abilities to increase tolls over the years.]

I’m told by a colleague who does this sort of thing (Henry Lee at Harvard) that my issues could be solved with the right contracts. Perhaps. If that is the case, here are the major problems with privatizing public roads as it is now practiced (Indiana and Chicago) and hopefully these snakepits can be avoided:

• Term of Contracts Too Long. These privatization contracts have enormously long terms – 75 and 99 years. That is just too long in the extremely dynamic world in which we live. One of the bankers brokering these deals told me his primary job was to make sure the contract could accommodate any eventuality. Then he went on to deride me that he couldn’t “predict the future.” Exactly. So don’t make the contracts so long. How about 15-20 years?

• Loss of Network Integrity. One of the beautiful things about all networks is that they are connected. When you put a chunk of it under someone else’s control – even 2% -- the system as a whole is devalued and the network loses future flexibility. For example, over the course of 99 years, you might decide to take advantage of the extended rights of way to run fiber optic cables, or decide that certain sections would make great wind farms (NIMBYism wouldn’t be an issue). Implementation of these ideas would be dramatically complicated by having a separate owner for a piece of the ROW.

• Private ROI trumps Public Good. Over the course of 99 years (yes, I’ll repeat that clause again and again), it may turn out that it is in the public interest to find a higher user for the ROW than the contracted revenue stream it gets from the private company. For example, it might be in the public’s interest to convert a lane to a high speed bus lane or light rail in order to maximize people throughput per vehicle or lane, or to minimize CO2 emissions per person. This desire would run counter to the private owner’s focus solely on vehicle count.

• Valuation of Assets too Low. In a 99-year contract, you’ve basically discounted the future down to nothing, meaning you have basically sold the asset (yes, yes, I know the state gets it back after 99 years). But the lump up front sum -- that is so incredibly appealing to states ($3.85b in Indiana; $1.8b in Chicago) -- is nothing like what it would cost to actually build these stretches of highways or bridges from scratch. The costs of amassing the land and the rights of way alone, would be cost as much, even before we add in construction costs. These deals are selling off – sorry, “leasing” – our public assets at a fraction of their value. See commentary re Indiana.

One of the very sad facts about road privatization, is that the public is ill-informed about what it means. The carrot of the large sum of cash upfront is tantalizing (and programmed to be spent in usually less than 10 years leaving 89 years without the carrot), and the rising tolls is presented as a non-issue over a short fixed period of time. But as residents of Toronto discovered after they privatized a highway, tolls were eventually raised and so they complained. It should be interesting for politicians to note that they can't hide behind the private sector company doing the dirty work: most Torontoans put the blame squarely on the government that cut the deal. In a January 2008 article in Governing magazine, the same is said of the Governor of Indiana, who privatized a significant part of that state’s highway system and lost control of his state house in a subsequent election.

At the end of the day, we have to and will pay more to drive. The private companies will increase the tolls, or the government can do it. The path of doing nothing is what we have followed for the last few decades. The question for the public, and for states contemplating privatization: What serves the public interest in the long-term? Say, over the next 99 years.

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