Taxes and tears

It’s the kind of headline bound to leave somebody crying. “Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry”, declared Bloomberg in a 9 August story about the Windy City’s lease of its parking meters.

A bond offering document from the lessee, Morgan Stanley-backed Chicago Parking Meters, showed the firm will collect $11.6 billion from parkers over the 75 years of the lease, or “10 times what Mayor Richard Daley got when he leased the system to investors in 2008,” Bloomberg reported.

It may not be taxpayers who shed a tear so much as investors and advisors who’ve been trying to explain the mechanics of these deals to the public. The idea isn’t to pay a city 75 years’ worth of parking revenues all at once (that would be quite some deal). Instead, investors bid on the right to collect those revenues in exchange for an upfront payment of what they’re worth in today’s dollars. Hence the term ‘monetisation’ that’s frequently applied to these deals.

Chicago monetised its meters for $1.15 billion and its underground parking garages for $563 million; Pittsburgh and Indianapolis, two other cities that recently concluded auctions for 50-year leases of their parking systems, received bids of $452 million and $35 million, respectively. And New Haven, Connecticut, home of Yale University, recently received a $50 million offer for a 25-year lease of its parking assets.

With five precedent transactions in hand, and several others on the way – Los Angeles and Hartford, Connecticut are also working on similar deals – it’s clear US municipalities are slowly giving birth to a market for public parking assets. And investors of all stripes, from traditional private equity firms to real estate investors and infrastructure funds, have indicated interest in participating.

With that in mind, Infrastructure Investor surveyed the precedent transactions to come up with key trends likely to drive the growth of this still-embryonic market.

Budget woes

The main factor behind all these deals isn’t to make taxpayers cry; instead, city leaders are trying to prevent taxpayers from crying. A page from the city of New Haven’s 2010 to 2011 budget lays this out clearly.

Like many states, Connecticut faces a budget shortfall of 20 percent over the next few years. “As a result, the City anticipates that state aid will likely be cut by a commensurate amount,” or $36 million in total. The shortfall would force New Haven to increase property taxes “beyond the ability of residents to pay”, New Haven officials concluded in their budget.

So they came up with an alternate plan: monetise New Haven’s parking meters and use the proceeds to seed a “Property Tax Stabilisation Trust Fund”. The deal has yet to win approval from the city's aldermen. But the idea is to use a portion of the money in “each of the years of the projected state shortfalls to stabilise taxes until the economy improves”, according to the city’s budget.

Connecticut is far from alone: fiscal year 2011 budget gaps totaled $121 billion, or 19 percent of budgets in 46 states, according to the Center on Budget and Policy Priorities, a Washington DC-based think tank. And that total is likely to continue to soar to $140 billion. So states are likely to keep slashing their budgets, including aid they give to cash-strapped municipalities.  

Those municipalities, in turn, are likely to look for ways to mitigate the impact by monetising assets. And parking meters and garages, thanks to their near-universal presence in cities across the US, are likely to be one of the top candidates for monetisation.

Independence

But there is a difference between wanting to monetise assets and being able to do so. In the US, that’s reflected by something called “home rule”. It’s a legal term that defines how much freedom cities have to take actions without prior approval from their states’ legislatures. A city with a home rule charter would be able to lease its parking assets if it chose to do so; a city without such a charter would have to get the state’s permission to do so.

“That was very important for us,” Chicago Mayor Richard Daley told Infrastructure Investor in a recent interview (to be included in next month’s issue). Without it, asset monetisations like the three deals closed by Chicago “would never get done”.

“Bureaucracy would stop it,” Daley said.

Pittsburgh and Indianapolis, the two other cities that recently announced winning bidders on their parking assets, also have home rule charters in hand.

Luckily for investors, there are 27 states that have authorised “meaningful” levels of home rule, according to a study conducted last year by law firm Allen & Overy. By examining where budget woes are worst and home rule charters strongest, investors can identify “jurisdictions of opportunity” for asset monetisations, Allen & Overy advised.

Scrutiny

Wherever the deals happen, though, they are sure to encounter rigorous scrutiny. Just a day after Indianapolis unveiled outsourcing company Affiliated Computer Services as the winning bidder on its parking monetisation, Infrastructure Investor got a call from a local business reporter writing an investigative feature about whether the deal was short-changing taxpayers.

City councils are also more likely to do their own due diligence. In Pittsburgh, the city’s nine council members actually hired an outside consultant, Texas-based Finance Scholars Group, to run a model that would tell them what their parking assets were worth before they vote on whether to lease them. The result? Scarcely four days after the city received a winning bid of $452 million, the city council had a report in hand showing the parking assets were worth up to $470 million.

In short, if you don’t like dealing with investigative reporters and skeptical city councils, public parking is definitely not the asset class for you.

Stability with a kick

It is, however, a good fit for your portfolio if you’re looking to get exposure to more cyclical assets that are likely to have their fortunes rise and fall with the fate of the economy.

For JPMorgan Asset Management, the winning bidder in Pittsburgh’s auction, this was one of the things that made the deal attractive to the firm’s infrastructure investment team. JPMorgan has already invested in six regulated utilities but has recently been looking to diversify its portfolio toward more economically sensitive assets.

“Parking assets do have greater economic sensitivity than regulated utility assets”, says Mark Weisdorf, chief investment officer of JPMorgan Asset Management’s infrastructure investments group. That made them a good fit for his portfolio because “as we’ve moved through the worst part of the recession and are starting to see signs of economic recovery, it now may be time to [invest in] assets that have more economic sensitivity,” he adds.

This is not to say that parking runs afoul of the master thesis championed by infrastructure investors everywhere: income stability. Because parking meters are frequently located in heavily trafficked business districts with captive markets and limited room for competition, their income tends to be fairly stable and predictable. But if the economy tanks or higher rates drive away customers, that stability can take a hit. So think of public parking as stability, but with a kick. In a recovering economy, it could prove quite popular with investors, giving fund managers additional reason to examine the asset class.

Openness

Another element that JPMorgan’s Weisdorf liked about Pittsburgh was the openness with which the city crafted the concession agreement for the parking assets.

It was an unprecedented endeavor: Pittsburgh Mayor Luke Ravenstahl published a draft of the agreement on the city’s website in late June, marking the first time such a commercially sensitive document had been published in the middle of a bidding process. A series of public meetings followed, as well as city council meetings in which feedback was solicited on the final version of the agreement.

“We’ve opened up the books,” says Joanna Doven, a spokesperson for Mayor Ravenstahl, adding “we were worried it would scare investors.”

Judging by the winning bidder’s reaction, though, it seems to have had the opposite effect.

“We think it was a healthy process that increases the likelihood that in the end when the process comes to an end and the preferred bidder is named that . . . the concession agreement will be approved and the transaction will come to financial close,” Weisdorf says.

If the deal does indeed reach financial close, the city’s open approach to managing the process may set the stage for how other municipalities carry out their monetisations.

Open or closed, though, this is one segment of the infrastructure market that is likely to keep investors busy in the coming years.