There’s a lot of talk right now about plugging the City of Memphis budget hole by “monetizing” parking meters. There are City Council members who are concerned about using one-time revenue opportunities to solve this year’s budget challenges while setting up a similar problem for the next fiscal year. The Center City Commission is interested in taking responsibility for the meters and apparently thinks that city government is on the wrong track with the recommendations in the Wharton Administration budget that deal with parking meters.
That said, there is monetizing and there is monetizing. City of Chicago pioneered the monetizing of garages, a toll road, and more. But the city’s chief financial officer at the time, Dana Levenson, essentially cautions cities about eating all your seed corn. In Chicago, some of the revenues from monetizing city assets were spent on neighborhoods and other capital needs, but the bulk of the proceeds were put in the bank to generate substantial yearly interest payments to be dedicated for public services.
Here’s the post we first put up in September 27, 2007:
Cities – including Memphis – are sitting on assets that can be leased to pay for crumbling infrastructure, to improve maintenance and to improve bond ratings.
At least that’s the opinion of Dana Levenson, former Chief Financial Officer for the City of Chicago and architect of the leases of the Chicago Skyway and the city-owned parking garages that brought $2.5 billion into his city’s coffers.
Speaking to this week’s CEOs for Cities meeting in Chicago, Mr. Levenson said the leases not only infused much-needed money into the city budget, but they improved service and operations. “There’s no question that they are better run than when they were under city control,” he said. “In other words, users are getting more value and taxpayers are getting more help.”
Chicago Fire
Borrowing a leasing concept popular in Europe for years, Levenson spearheaded what was called by some critics a “fire sale” of city assets. Except for one thing: there was no sale. Instead, Chicago entered into a long-term leases, retaining ownership and setting our terms for future operations.
For the Skyway – about eight miles of elevated highway – Chicago entered into a 99-year lease for $1.83 billion. Five groups vied for the Skyway concession contract, and the winning amount was paid by a consortium of Australian and Spanish investors.
When the parking garages came up for lease, 13 companies fought for the right to manage them, and eventually, Chicago signed a contract with Morgan Stanley for $563 million.
Public Policy Innovation
It didn’t take long for some governors to join the new movement. Indiana signed a 75-year lease with the same group that leased the Chicago Skyway and it paid $3.85 billion to manage the Indiana Toll Highway. Virginia inked a 99-year contract for Pocahontas Parkways for $603 million, and Pennsylvania Governor Ed Rendell has the Pennsylvania Turnpike out to bid.
Back in Chicago, although Mr. Levenson left to work for the Royal Bank of Scotland, the momentum continues with Mayor Richard Daley’s interest in leasing Midway Airport.
The big question is whether this interest in leasing public assets is just an momentary aberration in public policy or whether it signals things to come. Regardless, cities looking to get on board should do it now, Mr. Levenson advised.
Asphalt Jewels
“The beauty is that cities can unlock capital from dead assets, and we’re not talking about the ‘crown jewels’ unless your idea of ‘crown jewels’ is asphalt. Best of all, the asset stays in place, because no one is going to move the Chicago Skyway or the garages to Australia,” he said. “In other words, the assets remain here, they are better run and future risk is transferred to the private sector.”
Pension funds – like the powerful one for California teachers – are driving the interest in the leases, because private management of public assets can generate 10-12 percent yearly gains. So far, only about $7.4 billion has been spent on these infrastructure leases, a small fraction of the $175 billion of funds in the global marketplace for them. When this amount is leveraged, Mr. Levenson said that the buying power is $700 billion.
While the former banker was motivated by the financial infusion, he said better operations was almost an equal draw. City officials simply aren’t equipped to manage operations like garages and toll roads.
Bean Counters
“Garage management by city government consisted of compiling numbers each month,” he said. “We didn’t do anything if the number went up or down. We just kept statistics. In the private sector, they act if the capacity goes down and they base payment on maximizing capacity. For the city, the garages just sit there as profits dip.”
He said the lesson was reinforced by the least of the toll road. “In three months from the time of the contract, the private sector had installed electronic tollways,” he said. “City government would still be thinking about it.”
In Chicago, the money from the leases wasn’t used to balance the operating budget. “You don’t use a windfall to plug a budget hole,” he said. Rather, the Daley Administration used the money to created a long-term reserve fund, paid off bond debt, created a mid-term annuity and used five percent of the total to fund 20 social programs in Chicago.
Complaints
Most of the opposition to the leasing of infrastructure is more philosophical than practical – complaints about paying tolls to a foreign company and a fear of escalating fees and tolls.
That’s why he said the contracts between City of Chicago and the lessees are so critical. It sets out strict conditions for the lease, including limits for the number and size of fee and toll increases, setting the standard for service and nailing down the fine print that in the end spells the difference between wise public policy and exploitation by the private sector.
And what are the kinds of public assets that should be considered for lease? Mr. Levenson’s list includes convention centers/stadiums, hospitals, prisons, harbors and waterways/ports. “It’s at least worth looking at the possibility,” he said. “It’s sure better than the options – asking the federal government for help, begging for state funds or increasing local taxes.”
Lease, Not Sell
While the terms of the leases in Chicago seem daunting, Mr. Levenson defends them against critics concerned that lawyers cannot now hammer out a contract that foresees all the changes that can take place over a century. And yet, if Chicago can close on the Midway Airport deal, what has largely been a curiosity in public policy may become a stampede.
Interestingly, no one in Chicago is suggesting a lease of the water system. “It’s the ultimate political landmine,” said Mr. Levinson, a conclusion already proven here when Memphis Mayor Willie W. Herenton laid out a proposal to sell Memphis Light, Gas and Water Division.
The public’s reaction to that idea was explosive and immediate, and while it probably created reticence in City Hall for similar proposals, it might be worth taking a thoughtful look at some of our undervalued infrastructure assets as sources for new revenue. And most of all, talk about leases, not sales.
Our Toll Road Candidate
Unfortunately, we’ve already missed the boat on the best opportunity that we had for a lease. From our point of view, we would have started with Tennessee Highway 385 that circles the outer borders of Shelby County – a $500 million gift to developers.
Now, there’s a road we’d have loved to put toll booths on.
Ordinarily, I’d be all for monetizing or outsourcing something like parking meters (or garages for that matter). The city has proven to be unable to manage this operation effectively. My evidence is simply that I and about a half dozen other people have been parking at the same broken meters on the same street every morning for over three years. And the same spent condom has been laying in a public garage stairwell for weeks without anyone noticing except thousands of tourists going to the Peabody. Being a political animal who has trouble enforcing simple signage regulations, the Center City Commission is probably not much of a choice either… although Shreveport has done really great things with funds their DDA collects from meters put under their control.
HOWEVER: I am hesitant to cut a deal for one time money. I like the idea of retiring the debt. I like the idea of getting a big check from an operator likely to do a better job. But something doesn’t feel right about doing this in haste.
I guess without a crisis, we’d never innovate. But a little informed debate wouldn’t hurt.
I’m feelin’ ya, John. The fact that our City Council can’t seem to apply any effective oversight to our City divisions, let alone onerous contracts with the likes of RDC and the FedEx forum, doesn’t give much hope to their overseeing the equitable privatization of any public services.
MLGW?
I know this may get me banned for life but… I think Smart City Memphis is the perfect forum for a renewed meaningful debate about the sale (monetization) of MLG&W.
Don’t know if I am ready to full-on advocate for it. But I sure would like to see some reasoned conversation about it.
Talk about possibly solving some budget/debt/unfunded liability problems! This might be a way to put alot of things behind us. Maybe?
John:
OK, we’ll see you one and raise you. How about the airport?
Why not put everything on the table and see what it looks like? It takes several years to vet and write a contract so we’d have plenty of time to look at each possibility, and say, nah, if we’re not willing.
The airport seems like a hard cat to skin. Beyond local politics, there are more Federal entanglements than anyone could imagine. BUT… not impossible. Check out this FAA Airport Privatization Pilot Program. http://www.faa.gov/airports/airport_compliance/privatization/
Appears to be moving slowly but there is interest.
NOW FOR A FUN EXERCISE
We are told that we can’t toll I-269 for various reasons including the fact that it hits two states and five counties. Plus it is critical to allow freight and tourist traffic not coming to Memphis a free flow around town so they don’t clog up our roads. Okay. So let’s toll the 240 Loop! Or at least the seven major arteries that flow into it. Our new booths go up on the Memphis side of each bridge. Also just outside the loop headed to Millington, on Austin Peay, I-40, 385 and I-55.
A total of 559,037 vehicles pass those points on average each day. Assuming we’ll only charge them as they enter and not on the way out too, we’ll half it to 279,519 cars. Assuming half of those take I-269 as promised for their convenience, our number is 139,759 cars. I say a fair fare is $1.
$139,759 minus expenses like annual road maintenance, booth operators, lobbying fees, graft, etc. we are left with $69,880 a day.
This leaves $25,500,000 for Memphians to use each year. Or, we could always Monetize it!
I am guessing this could give us a whopping payday of $300 million. We could pay off MCS and the Forum on the same day. Or we could use it figure out a way to get a bunch of retirees off our books. Or we leverage it 1 to 2 with a private developer to build two 70 story office buildings downtown and rent them to the coolest company we could find at a fraction of what it should cost. Or we leverage it 1 to 3 with private investment and build a true transit oriented village along the Madison Avenue Trolley line consisting of 12,000 apartments and completely change our city.
Monetization. It’s like magic. What am I missing?
John,
I really like the idea of tolling, but it might be difficult to construct the necessary facilities on existing area freeways but one could imagine it could be incorporated for the area’s major bridges. I am unsure as to why I-269 crossing state lines would impair the ability to place tolls along this freeway. I-276 was built as a bypass interstate and runs through both New Jersey and Pennsylvania and is a toll facility. A toll for I-294/I-80 begins/terminates at the Illinois/ Indiana state line as it forms an inner loop around Chicago. Many interstates have tolls that are only in place across the duration of that state’s portion of the roadway including I-95, I-80, I-90, I-35 and I-77.
It would be difficult to direct funds created by such tolls to anything that is not transportation related. However, tolls would be an excellent source of dedicated funding for MATA.
A third crossing over the Mississippi River was listed by TDOT as one of two toll-feasible projects in the state.
Missing?
Who is going to move into those apartments? With so much vacant property downtown and the weirdness north of Madison, I don’t know.
Maybe with two new businesses moving into town someone will bite, especially if we can get the crime, not just the stats, down.
It is against federal law to add a toll to an existing interstate. The only way to add a toll is to build something new or re-build something old, and then the toll can be put in place to pay for the construction.
Most smart people here in Portland want to toll the bridges over the Columbia River into Washington but we can’t because that law…
Stupid law.
And as far as airports go, I thought the parent article said Chicago was about to privatize Midway? So it seems like it is possible…
I don’t mind privatized services if they have SUPER SUPER STRICT rules. Because it is one thing to make an operating profit – but another thing to rape the populace.
Privatized water wouldn’t be any dirtier than public water if the rules are done right. But water has all kinds of federal rules too (We in Portland learned that with our open-air reservoirs and our natural water filtration systems – the Feds like to stick their noses in water too).
In the end – it is all about the rules and the contracts.
Port- I wonder if one could place a toll on an “existing” interstate should said facility undergo a major overhaul? For example, you might argue that the large sum being invested in the I-40 (Hernando DeSoto) bridge here essentially mitigates the requirement for a new seismic resistant structure and is thus in itself similar to building a new bridge. A toll could be placed to recoup the cost of said construction. Arkansas recently rebuilt its portion of in state interstates down to the bed work. Before entering the process, there was much discussion about placing a toll on the states interstates to recoup the enormous costs associated with the project- a proposal that was ultimately rejected.
There are a few cases where the Feds and States have allowed tolling on existing highways. There are a couple of loopholes that make it possible. But it is certainly not encouraged.
But BACK TO MONETIZING. So far we have:
MLGW
Airport
Parking
Sanitation
Toll Roads
I would like to throw in Public Office Buildings. Many State governments have found that leasing space in Downtown office buildings is financially prudent for the taxpayer, provides great flexibility as needs change and, in some cases, acts as an economic development tool at best and a profit driver for private inestors at least. Plus, the building is on the tax rolls.
Not sure how many cities really do this. But if I could arrange a Sale/Leaseback, do you think City Hall would go for this?
What other ideas are out there?
Words such as “monetization” and “unlocking equity” can be deceptive. There’s no such thing as free money.
Our on-street parking system absolutely needs to be modernized, and perhaps even managed privately. But it should not be monetized, which in this instance is just another word for a predatory loan.
The “monetization” plan on the table is to get a one-year injection of cash from a private equity firm in exchange for giving away twenty or tweny-five years of revenue from on-street parking. This lump sum payment will be used primarily to plug a one-year operating deficit. This plan is stealing from the future to avoid making tougher decisions today.
Next year, and for the next twenty or twenty-five years, we will have to balance the budget without this injection of cash and without the revenue stream that we’ve pawned off. What’s worse, if the parking revenue stream is not sufficient to pay back the loan, then the City is still on the hook to the predatory lender and will have to make up the difference from other operating revenue, i.e., taxes. In other words, this is a high-interest, recourse loan. It’s a great financial deal — for the private equity group — which is why they are proposing it!
We don’t have to monetize to modernize. There is a way to modernize our on-street parking system in a way that would generate an enhanced stream of revenue that we could use each and every year, without shifting any value to an out-of-state private equity firm whose business model is profiteering off of cities in desperate financial shape.
Paul: The kind of monetizing in Chicago was not another word for a predatory loan. It was based on criteria drawn up by the city, the contract set everything from costs to yearly increases to return on investment, etc.
We don’t disagree with you about the current monetization plan, but it’s not what we’re talking about when we talk about monetizing.
For example, following Chicago’s example, we could generate enough up-front revenue and the interest could be put in the bank to fund Center City Commission projects or incentives. God knows, you’ll never get downtown’s infrastructure fixed or have enough money for some innovative incentives if the CCC has to wait on the city to fund it.
The amount of interest generated by the kind of monetizing and securitizing of a city asset (a la Chicago) would result in modernized parking equipment and produce more than you’ll get from the enhanced stream of revenue that you’re hoping for.
These private equity firms aren’t “profiteering” off cities in desperate financial shape. In fact, budgetary problems has not been the impetus for them because it takes 3-4 years to even get one in place because of all the questions that have to be answered and the details of the contract to protect the property that remains the city’s.
As we said, there is monetizing like the one being discussed here and “real” monetizing that produces long-term revenues for a city that it would not otherwise realize on its own.
I agree with you that the word “monetization” is not precise and that there may be some forms of monetization that make financial sense. But the ambiguity of the word is why it can be misleading. My comments were directed solely at the form of “monetization” on the table right now in the City of Memphis.
In general, though, it is true that a private equity firm would not be interested in any transaction with a city that does not involve the private equity firm gaining a profit. Nothing wrong with profit! But I’d rather the transaction be structured in a way where the profit stays in Memphis.
There is no such thing as free money. If you get money now in a financial transaction, that generally means you give up more money later (time value of money and all).
Paul: We have no quarrel with your position at all, and we admire your willingness to say it.
PS: In Chicago, much of the profit came because the business interest improved the machinery and the percentage of people in its garages that were actually paying. The contract sets out the amount that the company can make so the city is directly involved in setting these standards. And, the thing that intrigued us about Chicago is that the city was paid in today’s money while giving the company future money.