There’s a long queue in room 507 of Chicago’s City Hall one Thursday afternoon in September. Even Ed Burke, the city’s longest-serving alderman, is standing waiting. He passes the time by pointing to a wall lined with dozens of former Chicago Mayors and telling stories to his guests. Gene Saffold, the city’s chief financial officer, joins up and the group heads to an adjoining room to talk money with the one Mayor missing from the wall: Richard M. Daley.
An hour later, the group disperses and Mayor Daley emerges from the room. He casts a curious glance at one of his three personal assistants and asks: “infrastructure?”
Yes, indeed – the time had come for his next appointment.
These days, infrastructure talk and money talk are closely related. Faced with the largest budget gap in its 177-year history, Chicago reached for proceeds it set aside from one of its famous infrastructure deals: the 75-year lease of its parking meters. If Burke and the rest of the city council agree to Daley’s budget, only $76 million of the $1.16 billion the city got from the 2009 lease will remain by the end of next year.
But in return, Chicago will be able to preserve a host of critical services, including hiring two new police classes and preserving social welfare programmes such as meals for seniors, youth job schemes and training for ex-offenders.
“Just think – we had the money for these things. Most of these social programmes have been cut out at other cities. And we keep them going,” Daley says.
It’s all part of what the six-term mayor of 21 years calls “benefits for the community”: a key driver behind each of his storied infrastructure deals. Chicago has completed three of these transactions, collectively worth around $3.5 billion – more than any other city in the US. Add in the $2.5 billion the city could have had if its failed attempt to lease Midway Airport had gone through and it becomes pretty clear why Mayor Daley is a steadfast supporter of what’s come to be called “asset monetisations”.
“The community benefits are enormous from these transactions,” he says.
Keeping the family jewels
Not all city assets are targets for monetisation or outright privatisation. There are certain functions – “fire and police and emergencies and all that” – which Daley says are core to government. But for almost everything else, he believes governments should question their ability to run things efficiently.
“Government doesn’t have management experience to do much,” he says. “You see it in the post office, Amtrak, all these things.” Daley saw it in the city’s 7.8-mile Skyway toll bridge.
“It was a liability,” he says. “It was a liability too long and then, when I became Mayor, I had to make the liability into an asset.” So in the 1990s the city repaid the Skyway’s existing debt and issued new bonds to improve its operations. “Appropriately, at that time, we decided to lease it,” he recalls. The lease netted the city a $1.83 billion upfront payment from a private consortium of Cintra and Macquarie Group in 2005.
The controversial deal raised questions about whether Chicago and governments attempting similar deals were giving away prized possessions. As the Chicago Council on Global Affairs put it in a recent policy brief, divesting government assets can often spark debate about “family jewels” being turned over to private hands.
But don’t call the Skyway a “family jewel” in front of Daley.
“It was not a jewel – it was a liability,” he says. “A lot of these things are over-stated that in some way they’re a great asset. They’re not a great asset.”
Daley’s father, Richard J. Daley – who governed Chicago from 1955 to 1976 – knew this all too well. On 23 July 1963, the elder Daley traveled to Washington DC to ask the feds to take the Skyway off its books. “The revenues of the toll bridge have fallen far short of what is necessary,” he told Congress that day. “The skyway is now in default.” Congress bargained him down from a buyout at $87 million to $76.8 million, according to a record of the proceedings. But Richard J. Daley still came back home empty-handed.
“He knew finances better than I did,” Daley says of his father. In this case, though, Daley clearly succeeded where his father stumbled.
Recipe for success
Daley didn’t succeed just once: the Skyway was followed in 2006 by a similar deal for the city’s underground parking system, which raised $563 million, and then in 2009 by the $1.16 billion parking meters deal. Other governments struggle to just get one deal done, some never hire an advisor or even get as far as considering the idea. So interested parties in both public and private spheres rightly wonder: what’s Daley’s recipe for success?
Part of it simply has to do with leadership style. Daley admits to not micro-managing the transaction process. “You don’t say, ‘ok, this is mine, I’m going to work on it,’” he says. “You go and say, ‘ok I have this idea, this concept, what do you think?’ Go to people and then, when they’re ready to go, let’s move forward and let’s work on this as quickly as possible [with] the private sector, financial people, lawyers.” In other words, “you delegate and let those people do the work which is necessary”, Daley says. In Chicago’s case, “they’ve done a tremendous job”, he believes.
A second, more important part of his success is getting political support for the deal. This is where the idea of community benefits comes in. Daley is a steadfast believer that net proceeds from any deal should be split into two pieces, which he calls “short-term and long-term investment”.
“You realise you need a long-term and short-term investment fund so that people can see in [the] short-term what we’re doing [with the proceeds],” he explains.
He accomplished this in the case of the Skyway and meter deals by dedicating $100 million of the upfront monies from each deal to a “human infrastructure fund”. The fund is dedicated to a variety of social programmes that support people’s needs, such as homeless shelters, after-school programmes for teenagers and meals for senior citizens.
Other short-term proceeds went toward annual payments that helped the city fund capital projects. This way, “the aldermen can see infrastructure, you know, like alley lights and streetlights”, Daley says. (Not to mention voting for the deal).
Then there’s the long-term investment funds: $500 million from the Skyway deal and $400 million from the meters. The goal is for the city “to keep that on the side for long-term investments”, explains Daley.
So far though, investments from the $400 million meters reserve haven’t been very long term at all. Chicago’s city council knew going into the deal that if they voted for it in December 2008, they’d get an immediate $150 million infusion for their 2009 budget. But budget gaps in 2010 and 2011 only got worse.
To understand why, consider the following: in April 2007, Jamie Dimon, the chief executive officer of banking giant JPMorgan Chase, listed his Chicago home for sale at $13.5 million. Had the sale happened at that price, the city would have reaped $141,750 in real estate property transfer taxes – a major source of its general fund revenue. In 2010, Dimon finally found a buyer for his home: at $6.95 million. The likely proceeds to the city? $72,950.
Add up thousands of real estate transactions each year in Chicago and it’s easy to see why revenues are hurting. Decreased proceeds from depressed real estate transactions and other so-called “economically sensitive” revenues have prevented $1 billion of income from reaching Chicago’s coffers since 2007, according to Daley’s latest budget.
So Daley has proposed making up the difference in part by borrowing from the $400 million meters reserve fund. His latest budget would leave just $54 million remaining in the reserve by the end of 2011.
Borrowing from long-term reserves to plug budget gaps isn’t the best use of proceeds from asset monetisations, according to Richard Little
, an infrastructure policy expert at the University of Southern California’s Keston Institute.
“Ideally, if you’re selling a transportation asset you ought to plow that back into more transportation,” Little says.
For Daley, though, realpolitik trumps ideological considerations.
“We don’t print money,” he says. “Federal government prints money – that’s all they do is print money. They never run out of money. And that’s your problem. They don’t have to balance their budget. They don’t have to balance – if you don’t have to balance your budget, you can live in fairy land forever. La-la land. And that’s what’s taking place.”
(For those curious what the six-term Mayor will do once he leaves office next year, Daley’s next statement may provide a clue: “The best job in America is being budget director for the federal government,” he jokes, because balancing the budget is not a concern).
As a local government, of course, Chicago doesn’t have that option. By law, it must balance its books. Historically, that requirement has left cities with two options: cut services or raise taxes. The latter, Daley insists, is not an option.
“People cannot pay more taxes. I don’t care where you go – some people can – but most people can’t,” he says, “I think they’re stretched out with this deep recession. It’s hurting their families, it’s hurting their future. And I think they’re saying, ‘please, be more creative’ in regards to what we have to do in government.”
In that regard, the meter revenues have been a lifesaver. “If we did not have that money we would not be balanc[ing] our budgets,” he says.
Judging by some recent statements, there may be a limit to how creative Daley can get. In August, he said the city is “not considering any further asset leases to balance next year’s budget”.
Daley anticipates where the question is going.
“We didn’t want to say we had to depend on Midway,” he says, referring the city-owned airport on Chicago’s south side. In 2008, the airport attracted a $2.5 billion bid but the buyer couldn’t come up with the money needed to close on the deal, leaving Chicago with the option of re-bidding it at its leisure.
“A lot of people [say], ‘oh, you better move Midway’. You don’t move, you don’t do something because someone says you have to do it. Because if you did that then what you would do is you would not get the value of that out. Someone would low-bid it,” he says. So the city will continue to wait for the right time to re-bid the airport.
There’s a very practical consideration at stake: “We have to get above” the 2009 bid, Daley says. “The value is going to grow on there. If it’s $2.5 [billion], it could be higher than that.”
For now, though, it’s precisely a lack of confidence in the city’s ability to get a comparable price that has sidelined the transaction. “We can’t go ahead with the Midway deal because we don’t think the value can come up more,” Daley adds at another point in the conversation.
Mind the roll-out
Daley’s deal-making has prompted other cities to make similar moves. Four other cities are now in various stages of leasing out their airports to private operators. And this year alone, five cities – Pittsburgh, Indianapolis, Los Angeles, Hartford and New Haven, Connecticut – took varying steps toward parking deals similar to Chicago’s.
Daley would like to offer some words of caution for all the cities following in his footsteps. The meters lease was a “very successful financial transaction” he says, glancing for the first and only time at a list of talking points his press secretary gave him to look up the winning bid amount. “But . . . the problem with that transaction is that you had to have an eight-month management change.”
Lack of a management transition from the city to the winning bidder created considerable headaches for Daley last year. The bidder, Morgan Stanley-backed Chicago Parking Meters, raised rates on the meters without realising that meters with different coin capacities and calibration technologies were scattered throughout the city. When rates went up, many coin-operated meters couldn’t hold all the extra change and malfunctioned, while others gave customers less time than they’d paid for. A flurry of parking tickets ensued, fueling public anger and vandalism of the meters.
“That was the mistake and I told all the other cities that are now doing the same thing…you have to have a six-month to eight-month roll-out on meters,” he says.
But the future of infrastructure investment in the US isn’t all in asset monetisations. Cities and states are increasingly looking to the private sector not to monetise existing assets but to bankroll the construction of new facilities – including Chicago.
Daley envisions a high-speed train connecting the city’s large international airport, O’Hare, with downtown Chicago. “That will revolutionise our commercial market,” he says, because it would give O’Hare passengers a way to get to the heart of Chicago in 20 minutes.
“We have investors from China, Japan, the Middle East looking at it,” he says.
Another project being procured by the Chicago Transit Authority would upgrade the agency’s fare collection system. This would also be done with the help of private financing – not the federal government.
For Daley, that’s a welcome change he hopes will catch on all over the country.
“America has to get away from dependence upon the federal government,” he says. “They don’t have enough money. You have to go to the private sector.”
Daley would like to see America give birth to a whole industry of “private infrastructure funds” that would help rebuild the country. That, he believes, would give Chicago and cities all around the US the choice they need in providing their infrastructure needs.
“I don’t think we should be going to Congress and the [state] general assembly and we wait for five or ten years to fix a road. We should do private investment funds with a decent return and tax credits to the investors to rebuild America – not to rebuild their companies – but to rebuild America,” he says.
Coming from a mayor who’s already helped rebuild his city with the help of private capital, this is not wishful thinking. Daley is living proof of what’s possible.