Privatization – a good deal or not?

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Privatization – a good deal or not?

Reason Foundations Leonard Gilroy wrote about Chicago in PT in January:

Indeed, the city has relied extensively on proceeds from the parking meter transaction to close massive city budget deficits, nearly exhausting them in the latest budget. However, the parking meter lease is just one of three major asset leases that have netted Chicago more than $3 billion in recent years, and altogether the proceeds have been used for a variety of purposes, including paying down public debt, setting up “rainy day funds,” short- and long-term investments to augment city revenues, and short-term budget fixes. Chicago’s ability to use asset lease proceeds to reduce city debt and establish reserve funds prompted all three major credit rating firms to raise the city’s bond rating before the recession, lowering the city’s borrowing costs.

These are the results that have policymakers elsewhere wanting to follow suit. To be sure, these aren’t cookie-cutter, one-size-fits-all deals. Each parking system is different, each deal structure will be different, the policy considerations are going to be different, and so on.

But with the severe budget woes local governments are experiencing today, Chicago offers other cash-strapped cities something that couldn’t be more timely – a viable model for unlocking the value trapped in their parking assets to help solve their fiscal challenges.

But has this turned out to be the case – as I reported below just over a year after the contract went into effect, the money is virtually all gone, there are no “rainy day funds,” No short and long term investments to augment city revenues, and no long term reserves. 90%of the money was used to fill gaps in the 2009/2010 budget. It’s gone, never to be seen again. Leonard sees their credit rating going up and borrowing costs becoming lower, but will that continue after all the city’s assets are basically sold off (Midway airport is next on the block) and its spending continues unabated.

So this asset, which was generating tens of millions of revenue a year is gone, the money paid for it is gone, and now what? They were paid a bit over $1 billion for the on street meter program. If it was bringing in just $30,000,000 a year that’s $2.25 billion over 75 years. And one assumes that rates are going up (they already have) and if one assumes that the city was doing an average job of running the program at least a third of the money was never collected (another ¾ of a billion)…well you get the picture. Was it a bad deal? Did Morgan Stanley, the successful bidder, under pay? Who is to say. From Morgan Stanley’s point of view, it was a good business transaction. If they can run it efficiently (and it’s hard to believe the private sector can’t do a better job), they should do well.

It seemed like a great deal from the point of view of the cash strapped city. It did solve a short term problem painlessly. But I think it just moved the fiscal disaster a bit further down the road.

There is no evidence that Chicago, or for that matter any city that has sold its assets, has at the same time gotten its fiscal house in order. No major cuts, no real reduction in expenses, no change in fiscal management. Oh sure, they close a library or two and lay off a few cops or firefighters. But in the end, nothing changes.

So is privatization good public policy? I have to disagree with Leonard. Structured the way it was in Chicago, I can’t see it as a benefit to the citizens of the Windy City. Having private companies run parking in cities, with the right contracts, incentives, and guarantees, makes a lot of sense. Parking as a utility like a cable company that pays fees and percentages to the city may make more sense.

He’s right, Pittsburgh, LA, and others a looking to this technique to close budget gaps and may structure the deals differently. But are they simply moving down the same path, gorging the municipal beast today, only to have it turn on them tomorrow.

You will have to convince me that simply turning over an asset like on street parking to the private sector for a lump sum payment is reasonable. A long term payback, that can be factored into future budgets, seems to me to be a better approach.

JVH

 

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John Van Horn

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