A Windfall for Investors, a Loss for Chicago

Here's a cautionary tale for city officials considering whether to sell off government properties to raise cash in these lean times. Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years—10 times what Mayor Richard Daley received when he leased the system for a one-time sum of $1.15 billion in 2008. The investors—Morgan Stanley, Abu Dhabi Investment Authority, and Allianz Capital Partners—may earn a profit of $9.58 billion before interest, taxes, and depreciation, according to documents for the group's $500 million private note sale.

Helped along by some aggressive parking-fee hikes, the group is making a profit (before earnings, taxes, and depreciation) equivalent to 80 cents per dollar of projected revenue. Standard Parking (STAN), a publicly traded company that runs the parking concession at the city's O'Hare and Midway airports, earned only 4.84 cents per dollar of revenue last year.

Chicago's deal illustrates the extent to which Wall Street banks are profiting from helping states and cities close budget deficits by leasing taxpayer-owned properties. The city gave up billions of dollars in revenue when it sold the Morgan Stanley-led group, called Chicago Parking Meters, the right to run its 36,000 meters, says Alderman Scott Waguespack. Unless the Morgan Stanley partnership defaults on its obligations, the contract runs until 2084. "The next couple of generations will pay the price," said Waguespack, 40, a Democrat from the 32nd Ward and one of only five aldermen among 50 who voted against the lease. When Daley, also a Democrat, announced the parking deal on Dec. 2, 2008, two days before the council's vote, Waguespack's staff estimated the city would give up $4 billion to $5 billion of future revenue in exchange for the upfront sum. Now, according to the partners' debt-sale memorandum, the lost revenue over the life of the 75-year lease is more likely to be $11.6 billion.

"These deals are rarely done under the bright light of public scrutiny," says Richard G. Little, director of the Keston Institute for Public Finance & Infrastructure Policy at the University of Southern California in Los Angeles. "Often the facts come out long after the deal is done."

The private note sale, scheduled for last month to help cover costs of acquiring the contract, has been delayed because of market conditions, says Alyson Barnes, a Morgan Stanley spokeswoman in New York. She wouldn't comment on profit or revenue projections. Allianz Capital and the Abu Dhabi Investment Authority declined to comment.

"The concession agreement was absolutely the best deal for Chicagoans," Gene Saffold, Chicago's chief financial officer, said in an e-mail. The profit estimates in the bond-offering documents are "fairly optimistic," but in line with our projections of the system's current value at between $700 million and $1.1 billion, he said. "The net present value of $11.6 billion in revenue over the life of the 75-year agreement is consistent with $1.15 billion" the city got, he said.

Morgan Stanley's partnership has raised parking rates twice since the lease began. Fees at some central business district meters rose to $4.25 an hour from $3 since January 2009 and are scheduled to increase to $6.25 in 2013. In midtown Manhattan, hourly rates run as high as $2.50 at meters. Chicago Parking Meters also plans to increase revenue by fitting more cars into spaces by eliminating marking lines, raising the number of metered slots and increasing the hours requiring fees, according to the debt-sale filing.

The deal was "dubious," the city's Office of the Inspector General said last year, because it didn't factor in how much the system would be worth over 75 years. The inspector general's office put the contract's value at $2.13 billion.

William Blair & Co., an adviser for Chicago on the parking lease, told the inspector general last summer that the city estimated revenue over the life of the contract and applied a discount rate to determine a bottom-line price. It said the $1.15 billion figure exceeded the minimum by more than 15 percent. Blair said the agreement shields Chicago from economic uncertainties, such as reduced parking revenue if drivers switch to mass transit. Thomas Lanctot, a William Blair principal who handled the contract, didn't respond to phone and e-mail messages seeking additional comments.

Earlier this month, as Laura Hunter, a political consultant, paid to park her car at a kiosk on South Wacker Drive, she said: "The city did have a budget hole to fill, but parking-meter fees aren't normally predicated on balancing a budget."

The bottom line: Chicago may have forgone billions in revenues with a 2008 sale of its parking meter business to private investors.

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