Morgan Stanley Chicago Parking Makes Cities Redo Deals
Chicago’s agreement for a Morgan Stanley partnership to run its parking meters for 75 years, expected to cost drivers $11.6 billion, has Indianapolis, Pittsburgh and Los Angeles rethinking their own deals.
Indianapolis, whose city council plans to vote tonight on a proposal with Xerox Co.’s Affiliated Computer Services, would rather take less money up front in favor of more total fees in its 50-year transaction. It also wants something Chicago didn’t get: exit clauses that let the city end the lease.
“We have terms that are not in Chicago’s deal,” Deputy Mayor Michael Huber, who negotiated with Affiliated Computer, said in an interview. “We’ve built in a lot of flexibility.”
Bloomberg News reported in August that Chicago’s agreement may earn the Morgan Stanley group 10 times the $1.15 billion lump sum Mayor Richard Daley got when he forced the City Council to consider the deal on a few days notice in 2008, according to documents for a planned private note sale by the Chicago Parking Meters LLC venture. The experience shows the pitfalls of a hasty process that doesn’t weigh all the costs, said former Chicago Inspector General David Hoffman.
“It’s a mistake to rush into a deal for such a long period of time without a full public accounting of the pros and cons,” Hoffman said in an interview.
Among the cons for Chicago was that the city was unable to take advantage of falling interest rates by borrowing against parking-meter revenue, Hoffman said. Chicago Parking Meters, the partnership of Morgan Stanley, Allianz SE’s Allianz Capital Partners and the Abu Dhabi Investment Authority, did.
It recovered part of its upfront costs when it sold $600 million of 10-year notes on Nov. 4, the day investment-grade corporate-debt yields fell to 3.53 percent, the lowest on record, according to Bank of America Merrill Lynch index data.
Mayor Daley had reason to push for the parking lease with his city facing deficits. He’s since spent about $792 million of the Morgan Stanley money over three years for fiscal needs including balancing budgets, according to city reports.
The longest recession since the Great Depression cut U.S. cities’ general-fund revenue in the budget year that ended June 30 by the most since at least 1986, according to the National League of Cities. That’s prompted many to seek lower costs in partnerships with private companies to run everything from airports to zoos.
Los Angeles, facing a projected $550 million budget deficit by 2014, will spend the proceeds of its parking-meter agreement to help pay off building loans, meet current expenses and add to reserves. Pittsburgh needs the money for city pensions.
Indianapolis took its time considering a parking deal because it wasn’t seeking funds for its budget, Deputy Mayor Huber said. State law requires the proceeds be used to repair streets adjacent to the meters, he said.
The city wants a private company to take over the system because it needs an upgrade, Huber said. Some meters haven’t been replaced and rates haven’t been raised for 35 years, he said.
After the deal was proposed in August, it was modified, he said. The city cut the upfront payment to $20 million from $35 million while it increased the amount it would receive over the contract to $620 million from $400 million.
It also added the ability to terminate the contract every 10 years. Chicago can’t get its system back for 75 years unless Morgan Stanley and its partners default, according to bond-sale documents issued in July.
The Morgan Stanley group may earn a profit of $9.58 billion before interest, taxes and depreciation, according to bond documents. That’s equivalent to 80 cents per dollar of projected revenue. Standard Parking Corp., which runs 30,000 spaces at Chicago’s O’Hare and Midway airports, earned 4.84 cents on that basis last year, data compiled by Bloomberg show.
Profit estimates in the bond offering documents were “in line” with projections when the city established the value of the contract between $700 million and $1.1 billion, Gene Saffold, Chicago’s chief financial officer, said in August. He said the net present value of the $11.6 billion over 75 years was consistent with the $1.15 billion the city received.
In Indianapolis, the arrangement still favors the contractor, said Phineas Baxandall, a senior analyst for tax and budget policy in Boston with U.S. Public Interest Research Group, a federation of state advocacy groups.
The city’s income of about $640 million over the life of the arrangement is less than half the $1.5 billion the private group could make in the period, he said.
‘Out of Line’
“The cost is way out of line,” said Baxandall. Private deals can be tax increases in disguise, he said.
Contractors are better managers of parking systems than municipalities, said David Cummins, vice president of parking at Affiliated Computer in Germantown, Maryland. Indianapolis’s system made a profit of $715,000 in 2009, Cummins said.
“We can double and triple the revenue a city can generate on its own,” he said. “It’s a little ludicrous for a city to think it can build a parking system on its own and see the same results our concession envisions. They should leave it to the experts.”
The Pittsburgh City Council rejected a $451 million agreement with a JPMorgan Chase & Co. group last month amid concerns about its length and the possibility of rate increases.
“Pittsburgh’s City Council stood up and said the city doesn’t have to take a bad deal,” Baxandall said.
Mayor Luke Ravenstahl wants to revive the proposal to help Pittsburgh meet a Jan. 1 deadline to make a $225 million payment to the city’s pension, said his spokeswoman, Joanna Doven. The state may take over the pension if the city misses the contribution, she said.
“We believe it’s the best thing for the city,” Doven said.
Los Angeles City Administrative Officer Miguel Santana is seeking private companies to run municipal parking garages, possibly earning upfront payments of as much as $300 million for a 50-year agreement. He plans to present final bids to the City Council by February, he said in an interview last month.
Santana recommended the city reject language similar to Chicago’s agreement that gave up control of parking rates, according to a Jan. 28 report. The Morgan Stanley group has raised some central Chicago meter rates to $4.25 an hour from $3 since January 2009, and they will go to $6.25 in 2013, documents for its bond sale said.
Los Angeles, which may get a larger initial payment by giving up control over rates, decided to set a fee schedule for the first five years to shield residents from higher costs. Increases after that would be limited by the Consumer Price Index.
“We want to make sure there’s a value for the city,” Eric Garcetti, the council president, said in a telephone interview, “but not cede control in ways that residents would be hurt.”
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