Today, the Pittsburgh City Council decisively voted to kill a proposed privatization of its parking meters and public garages, a quick fix that would have created larger financial problems and public interest concerns down the line. In Pittsburgh, the deal is dead (for now), but the experience of residents in Chicago with a similarly bad deal shows why the public needs to stay on the look-out for more misguided privatization proposals in the future.
An independent report released recently by the Finance Scholars Group (FSG) showed the financial pitfalls associated with privatization deals like the one considered by the City of Pittsburgh. "While leasing the Assets would provide a short-term relief," the report states, "there would be considerable costs associated with exercising this option, potentially much greater than the costs of borrowing."
The deal looks even worse when you read the details of the proposed contract and look at the City of Chicago's recent experience with parking privatization using the same proposed concessionaire, LAZ Parking. Privatization in Chicago made headlines last year as residents were outraged with LAZ for skyrocketing meter rates that rose in some places to four times their previous level. There were also problems with malfunctioning and improperly labeled machines, and expanded hours that residents were required to pay meters.
As the new rates and rules drew protest in Chicago, the Inspector General took a closer look. Its report estimates the value of Chicago's leased parking meters comes to about $2.13 billion, while the city received only $1.15 billion for the deal, representing a loss to Chicago taxpayers of almost $1 billion. The FSG Report similarly cautioned, "unless the concessionaire has the ability to generate significantly more cash flow from the Assets than the City can generate, it is unlikely that the City will realize its full value of the Assets through a long-term lease." Similarly, Pittsburgh's Controller has shown that rather than privatizing their meters, the city could generate a better upfront payoff by transferring the meters and garages to the public Parking Authority, which can raise capital at lower interest rates than the private sector using tax-free bonds.
The proposed Pittsburgh contract with LAZ contains many other hidden costs, as did the Chicago deal. Both contain non-compete clauses restricting the city from creating or improving additional parking facilities in the future. Both put the city on the hook to pay LAZ phantom meter revenues in the cases of "compensation events." The company in these cases would demand compensation if the city closes streets for repairs, reconfigures roads in ways that reduce meter use, hold a street festival, or otherwise infringed on meter revenues.
These hidden costs undermine the chief arguments behind privatizing the city's parking system. Proponents tout privatization as reducing the city's future financial risk, but these clauses do exactly the opposite. They shift risk from the concessionaire back onto the city. Proponents similarly assert that a private operator will inject market competition that will bring efficiencies. But the proposed contract would explicitly prohibit any competition until 2060.
In both cities, the process has not adequately protected the public. Pittsburgh's earliest mistake was to pay Morgan Stanley as its adviser. The company is one of the primary investors in the Chicago deal and stands to gain from the deals they advise on. That is a clear conflict of interest. The financial arrangements and assumptions set out between LAZ and its financiers in both cities could provide vital information about their expected costs, profits, and respective legal obligations. The information, however, remains off limits under the guise of "propriety" business secrets.
The timing of both proposals favors short-term politicking over long-term regard for the public's interest. The Chicago deal was rammed through at the 11th hour, leaving aldermen with no alternatives or time to understand the proposal.
Local lawmakers should learn from mistakes made in Chicago's recent experience with LAZ Parking, which has had tremendous costs for the city and residents, and be sure not to repeat them in other privatization proposals in the future.
As the saying goes, unless we learn from history's mistakes, we are bound to repeat them.