Chicago official blasts parking meters as ‘dubious financial deal’(3)

Chicago leased its 36,000 parking meters for nearly $1 billion less than what they’re worth in a “dubious financial deal” marked by a lack of transparency and hasty decision-making, according to a scathing report on the deal published by Chicago Inspector General David Hoffman.

David Hoffman

Hoffman’s report found that had the city kept control of the parking meter system and operated it under the same terms as the private-sector operator, it would be worth approximately $2.13 billion to the city. That’s $974 million, or 85 percent more than the $1.15 billion that Chicago Parking Meters LLC, the Morgan Stanley-backed operating company, paid for the lease.

“At a certain point in time, you can only get what the market brings you, but the point is that there should have been greater study given to several things, including what the actual worth was to the city of the parking meter system if it had kept them,” Hoffman said during a recent interview with Chicago’s WLS radio.

Aaron Feinstein, special assistant to Hoffman, arrived at the valuation gap by creating a range of worst-case and best-case outcomes for the parking system’s cashflows over the next 75 years and discounting those cashflows at “the appropriate, conservative” rate of 7 percent, according to the report. The $2.13 billion represented the mid-point of those discounted valuations.

Some aldermen cited the lack of such an analysis as a reason why they voted against the transaction in December.

“I voted against it . . . none of the math had been done for me in terms of how much the city would stand to make if we implemented the same [operational] changes,” said Leslie Hairston, alderman for Chicago’s fifth ward.

She also complained that aldermen were only given 72 hours to consider the deal. The general inspector agreed, calling the review process “rushed” and “hasty”.

The inspector general also criticised the mayor’s office for not giving aldermen the opportunity to comment on and review the lease agreement prior to the bidding, calling it a “lack of transparency” on the part of the mayor’s office.

“The essential problem with the process is that the city council and the public don’t get to see what the terms of the agreements are before they go out to bid and the numbers overwhelm the process,”
Aaron Feinstein, the author of the report, told InfrastructureInvestor.

Paul Volpe

Paul Volpe, chief of staff to Mayor Richard Daley, vigorously disagreed with the inspector general’s report.

“While he calls the parking meter transaction a ‘dubious financial deal,’ I would suggest that many of the report’s central claims are dubious,” Volpe said in a statement.

Chief among those 'dubious' claims was the discount rate used in the report, Volpe said.

“The report’s author calculates value using a discount rate of 5-7 percent. However, using a discount of anything less than 10 percent for an asset of this type is simply not defendable,” Volpe said.

He added the parking meter system is not a low-risk asset because there is “substantial risk” associated with population changes, economic activity and technology over the life of the lease.

In light of this, the city’s financial advisor on the transaction – William Blair and Company – estimated the discount rate to be between 10 percent and 14 percent. Higher interest rates result in lower valuations because the present value of future cashflows is inversely related to discount rates. The resulting valuation range was between $650 million and $1.2 billion.

Still, the city settled on a “high-side” price floor of $1 billion, according to the statement.

A review of the first round bids submitted to the city reveals that the bidders barely got over that threshold. On 21 November, 2008, Morgan Stanley offered $1,008,500,000, while a Macquarie-led bidding group offered $964,226,025.

However, because the two bids were within 10 percent of each other, the city held a best and final offer round of bidding. On 1 December, 2008, Morgan Stanley offered $1,156,500,000 and Macquarie upped its bid to $1,019,022,803, according to bid documents obtained by the Chicago Reader pursuant to a Freedom of Information Act request.

Volpe hailed the second round of bidding as “a process that served to extract the greatest possible value from the asset for Chicago taxpayers”. Volpe described a wide variety of tax increases and budget cuts that would have been necessary had the transaction not gone through.

He also defended the city’s process for the transaction as “robust, open, transparent and competitive”.

Aldermen have already acted on the report by introducing legislation that implements some of the recommendations made by the inspector general. Last week, first ward alderman Manuel Flores and two other aldermen introduced a measure that would establish a minimum 60-day review period to allow the council to asses asset lease or sales agreements and adjust them prior to the solicitation of bids. Hoffman recommended the same in his report.

Alderman Flores also plans on holding hearings with William Blair and Company and the inspector general’s office to find out how they arrived at their vastly different conclusions on the valuation range for the city’s parking meters.

“We want to know. I think people deserve to know and I want to know – my interest has been piqued,” Flores told InfrastructureInvestor.