Big cities cautious about privatizing parking after Chicago's effort

02/05/2012 12:00 AM

02/04/2012 11:20 PM

Sacramento doesn't have many role models to follow as it tries to auction off its parking garages and meters to help finance a new sports arena.

Just two major U.S. cities – Chicago and Indianapolis – have completed such privatization deals. And the biggest one, in Chicago in 2008, was a public relations nightmare.

Chicagoans were outraged when meter rates soared and the machines briefly malfunctioned. The city's inspector general said the $1.15 billion price the city received was way too low. While the operating company says citizen anger has abated, the deal is still viewed in political circles as a mistake.

That fallout has spread around the country. Pittsburgh and several other cities backed away from privatizing their parking, partly out of fear of duplicating Chicago's experience.

"At the end of the day, it didn't sit well," said Natalia Rudiak, a Pittsburgh city councilwoman. "There were concerns about loss of control of an important city asset."

Sacramento, though, is pushing ahead.

Indeed, after a decade of false starts and botched initiatives, city officials have settled on the parking program as the foundation of a new arena that would keep the Sacramento Kings from fleeing.

Facing a March deadline to assemble the outlines of an arena deal, the city believes it can raise as much as half or more of the $387 million price tag by unloading its parking operations to the private sector. Other funds would come from the Kings, a developer and other sources.

City officials saw what happened in Chicago and contend they can craft a deal that generates a lot of cash while protecting the interests of taxpayers, motorists and downtown businesses.

Among other things, officials say they will find a way to make up for the roughly $9 million a year the city currently gets in parking profits. One possible remedy is a surcharge on arena tickets.

"We're going to do everything we can to minimize exposure to the city," said Assistant City Manager John Dangberg.

Because only two other cities have ever leased their parking to a private vendor, Sacramento will have to be something of a pioneer. The city and its advisers will have to write a rulebook largely from scratch on how to govern a 50-year lease.

Lots of key issues will have to be settled. The city thinks its 7,200 garage spaces and 5,500 on-street meters are worth a one-time payment of at least $245 million. But because of a wrinkle in state law, it might not be able to include the meters in the deal. That would reduce the minimum bid to $185 million.

Another huge issue is rates. The city's garages generally charge $2.50 to $3 an hour; the meters charge $1.25 an hour. Dangberg said it's likely rates would rise with inflation, whether the city does a privatization deal or not.

A private investor probably would be more aggressive about rate hikes. If the city's lease language is too restrictive, investors would be less likely to bid on the deal – or would greatly reduce their offering price.

"Clearly that is one of the most fundamental provisions of a concession agreement," Dangberg said.

Los Angeles last year unwittingly killed its plan to privatize parking garages by putting severe limits on rate hikes. No one made an offer.

"Bidders were reluctant to come to the table," said Jerold Neuman, a lawyer for one of the potential bidders, Bainbridge Capital.

The lack of precedent will make Sacramento's job tough, said Steven Goldsmith, a former Indianapolis mayor and privatization expert at Harvard.

"Government is not very experienced at these transactions," he said. "These things can be very good or very bad. It all depends on how it's set up."

Indianapolis a model

Thirteen firms responded to Sacramento's "request for qualifications," the first stage in the bidding process. The group includes LAZ Parking and Morgan Stanley, the parties involved in the controversial Chicago effort. They submitted their responses separately, not as partners.

While the responses are nonbinding, they're a signal the firms are prepared to bid at least $185 million. The City Council is scheduled to receive a public briefing Feb. 14.

Although bidding wouldn't start for months, the privatization plan will become the basis of an arena "term sheet" the city expects to deliver to the NBA by the league-imposed March deadline.

Privatization is hardly a new idea. Britain's Gatwick Airport was sold to the private sector in the 1980s – California's state pension fund now owns a minority share. A smattering of toll roads, from Indiana to Puerto Rico, are in private hands. Investors owned an Orange County toll road for several years before the county bought it back.

In Indianapolis, considered a model of how privatization should work, the city got a fee of $20 million for its meters and a split of revenues. The lease runs 50 years.

Parking rates quickly doubled, to $1.50 an hour. But city residents seemed pleased that the vendor, Affiliated Computer Services of Dallas, has modernized the meters. For instance, a mobile phone app – of the sort that some bidders are contemplating for Sacramento – lets motorists feed their meters remotely.

"There's a lot of modern conveniences that people are really starting to use, and starting to like," said city spokesman Marc Lotter.

Still, privatization is a bold enough concept that many proposals die. Cities – even those badly strapped for cash – are often reluctant to go through with it. They're nervous about surrendering a public asset to the private sector for decades on end.

The private sector felt burned when, after months of deliberation, Pittsburgh scuttled an auction for its parking operations in 2010 by rejecting the top bid of $450 million.

"Because of the way Chicago played out, they were skeptical," said Chester Spatt, a professor at Pittsburgh's Carnegie Mellon University who studied the deal for the city.

The Chicago example

Preparing a bid costs hundreds of thousands of dollars. Neuman and others said companies won't bid on Sacramento's parking unless they're convinced the city is serious.

"You've got to have the political will," said Aaron Zeff of Priority Parking, which plans to bid on Sacramento's assets. His firm is partnering with Sacramento developer LDK Capital.

Zeff said Sacramento can develop a lease that works for both sides. "Chicago need not apply," he said, referring to the troubles with that city's meters. "We can do it better here."

Before leasing out its meters, Chicago had successfully privatized two other assets: its parking garages (for $560 million) and a toll road ($1.8 billion). But its parking meter deal, rushed through the City Council in December 2008, turned sour.

A partnership led by Morgan Stanley and LAZ Parking, a Connecticut parking operator, paid $1.15 billion for a 75-year lease.

With the City Council's approval, meter rates jumped overnight. Prime downtown spots rose 50 cents an hour, to $3.50. In outlying areas, rates rose 25 cents, to $1. Further increases have followed.

As rates shot up, meters became overstuffed with quarters and didn't function properly. The investor, Chicago Parking Meters LLC, quickly installed new pay boxes that take credit cards.

"Customer and business feedback has actually been quite positive," said company spokeswoman Liz Torrez. "The new system has enhanced benefits for customers and added multiple layers of convenience."

But the perception only worsened when Chicago's inspector general concluded that the meters were really worth more than $2 billion, about twice as much as the city received. City officials disputed that. But then-Mayor Richard Daley said the project could have been handled better.

Many say Chicago's biggest mistake was in how it used the proceeds. The city used most of the money to help balance its budget. It was a temporary fix that lasted two years.

"That is like selling your house to pay your credit card bill," said Goldsmith, the Harvard professor.

Goldsmith said Sacramento's plan makes more sense: spending the cash on a permanent asset that will yield economic benefit.

Sacramento officials said they'll give the public and City Council plenty of chances to review the deal.

In Chicago, "there was very little public review," said Dangberg, the assistant city manager. "Our process will be very different – it already is very different."

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