CHICAGO - Mayor Richard Daley yesterday announced a winning bid of $1.157 billion from a private consortium to lease Chicago's parking meter system for 75 years, with more than half of the proceeds earmarked to see the city through the current recession.
The City Council's Finance Committee will review the contract at a meeting today and the full council will cast its vote at a special meeting Thursday. The deal is expected to win approval as the $6 billion 2009 city budget approved last month relied on about $150 million from the transaction to help close a $469 million gap.
Chicago Parking Meters LLC - an investment group that includes Morgan Stanley Infrastructure Partners A Sub LP with 76% interest, Morgan Stanley Infrastructure Partners LP with 23%, and other entities holding 1% - submitted the winning bid to operate the city's 36,000 parking spots. LAZ Parking will manage the system.
The concession deal marks another first for the city that sparked the move to privatize existing assets for upfront, cash payments with its 2005 lease of the Chicago Skyway toll bridge. It is the first major publicly owned meter system that would be leased under a long-term agreement.
"This proposed agreement, which will provide the city with a one-time payment of just under $1.2 billion, comes at just the right time," Daley said at a news conference to announce the agreement with chief financial officer Paul Volpe and revenue director Bea Reyna-Hickey. "This use of metered parking proceeds will give us the flexibility to address our worsening economy, protect our city's finances and taxpayers, and keep investing in our city's human needs over the next few years."
Chicago will establish four accounts with the proceeds. A $400 million long-term reserve fund will be created with the investment earnings of roughly $20 million annually going to replace the revenue currently generated by the parking meters.
The city will use another $325 million to balance its budgets through 2012, including $50 million to close a shortfall in the current budget and $100 million next year. It took similar steps with proceeds of its $1.8 billion Skyway toll bridge lease in 2005, using $500 million for a permanent reserve and another $375 million for multi-year budget relief.
Chicago will use another $100 million to support "human infrastructure" programs aimed at the needy, and the final $324 million will go into an account dubbed a budget stabilization fund that the city could tap until the economy improves.
When he unveiled his 2009 budget in October, Daley warned that the city faced annual structural deficits of $200 million through 2012 due to growing personnel and other costs amid stagnant revenue growth.
The mayor yesterday warned that the meter deal might not fend off further budget cuts if the economy worsens. The budget approved by the council last month relied on a mix of tax increases, steep job cuts, debt restructuring, and the use of $40 million from the pending Midway Airport lease and another $150 million from the meter lease. It left the city's $500 million reserve intact along with the current property tax levy.
Rating agency analysts last month said the use of lease proceeds was a concern because it provides only a short-term fix to Chicago's structural budget problems, but said the city's decision to stretch out the use of lease proceeds over a few years helps ease some worries.
The establishment of a second long-term reserve also is a viewed as a significant positive.
"It's a prudent use of the proceeds to establish a fund and to ensure that the current revenues of the system are replaced," said Fitch Ratings' analyst Melanie Shaker. "The city is also taking other action in its budget that they need to, to address expenditures so they are not relying just on taking money from the asset leases."
Fitch rates Chicago's $6 billion of GOs AA, Moody's Investors Service rates them Aa3, and Standard & Poor's rates them AA-minus.
Under the agreement, parking meter rates will rise over the next five years with increases after that period being subject to City Council approval. The new operator will upgrade the system, shifting away from meters to centralized payment centers on a block that allow for the use of non-cash payments. The council retains the right to revise rates and the hours of operation, but must make the private operators whole if any revenues are lost.
The city opened the search for potential bidders earlier this year and 10 firms were pre-qualified to participate in bidding. It was not immediately known how many submitted bids that were opened by the city Monday.
The city and the Chicago Park District's parking system generated total operating revenue of $21.9 million in 2006 and $22.9 million last year. After paying operating expenses, the system generated $16.6 million in income in 2006 and $18.9 million last year.
"This asset has commanded a handsome price," said Dana Levenson, who resigned as the city's CFO in March 2007 to lead the Royal Bank of Scotland's U.S. efforts to capitalize on governments' growing interest in public-private infrastructure partnerships. "It's a good deal for the investor who can expect a reasonable rate of return and a good deal for the city."
The city launched the nationwide trend of establishing public-private partnerships involving existing assets with its groundbreaking 99-year lease of the Chicago Skyway toll bridge to a private consortium for $1.82 billion in early 2005. The city followed up that deal with another 99-year lease of four downtown parking garages to a private operator for $563 million in 2006.
Chicago is awaiting federal approval - expected by the end of the year - for its proposed 99-year lease of Midway Airport to a private group for $2.5 billion. The transaction would mark the first privatization of a major airport under a federal pilot program that permits up to five airports to shift to private from public hands. The city will use the majority of proceeds to pay off airport debt, fund infrastructure, and bring down its $9 billion in unfunded pension liabilities.
The city worked on the meter deal with William Blair & Co. as lead financial adviser and Gardner Rich & Co. and Samuel A. Ramirez & Co. as co-financial advisers. Legal advisers included Katten Muchin Rosenman LLP, Charity & Associates PC, Gonzalez Saggio & Harlan, and Burke Burns & Pinelli Ltd.