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Chicago's Self-Imposed Speed Bump

CHICAGO - The Chicago City Council yesterday approved an ordinance imposing a 15-day review period before voting on future asset-lease transactions in reaction to widespread criticism over the management of the city's parking meters by the private consortium that paid $1.15 billion to lease the system for 75 years.

Frustration over what even Mayor Richard Daley has acknowledged was a poorly handled turnover of the system to the private operators spurred the action. The winning bid on the lease was announced in early December and Daley sought shotgun approval of it just a few days later.

Some aldermen questioned the wisdom of the lease's timing and whether more money could be raised during better economic times, but then overwhelmingly endorsed it as a means to help address a looming $470 million budget deficit.

The council's vote yesterday, which affects leases worth more than $100 million, comes amid heightened scrutiny of the transaction and questions over the wisdom of the deal following the release on Tuesday of a scathing analysis from city inspector general David Hoffman.

Hoffman called the transaction a "dubious financial deal" for the city that was worth nearly $1 billion more and should have been subjected to more public scrutiny.

"There is simply no reason for these types of decisions to be rushed through the city's legislative body, with little time to digest and analyze a complicated transaction, with limited information provided, and with little opportunity for public input and reaction," he said. "This has the obvious effect of making informed deliberation, consideration of alternatives, and potential opposition less likely."

After the council meeting, Daley fired back at the report's findings.

"Like anything else, you can issue any type of report," he said. "I can criticize anything. Constructive criticism is accepted. But all of a sudden you're challenging all the financial people about this financial area. If you want to, so be it."

Illinois Attorney General Lisa Madigan said her office is conducting a consumer fraud investigation into the implementation of the new system due to widespread complaints over mislabeled, overstuffed, and broken meters as well as malfunctioning pay-and-display boxes. After Chicago closed on the deal in February, steep rate increases took effect, quadrupling in some areas of the city.

LAZ Parking, which operates the system for the consortium - Parking Meters LLC - has acknowledged it was ill-prepared to handle the system, which includes 36,000 metered spots. The consortium includes Morgan Stanley Infrastructure Partners A Sub LP, Morgan Stanley Infrastructure Partners LP, and several other entities.

Alderman Tom Allen, who is chairman of the council's Transportation and Public Way Committee, originally sought to impose a 30-day waiting period but the Daley administration opposed that length, so Allen reduced it to 15 days. The city argued against any review period because it could jeopardize transactions due to fast-changing market conditions, but found the 15-day change more acceptable.

"This guarantees the time to deliberate these" once-in-a-century deals, Allen said during council debate yesterday. "I think we need to get better feedback from our citizens and this would allow us time" to accomplish that.

During debate, aldermen weighed in on the inspector general report, some in support and others challenging it. Alderman Edward Burke, the chairman of the council's Finance Committee, read an editorial in a local business publication praising the lease deal when it was unveiled.

"It's easy to be a Monday-morning quarterback," he said. "This was not something that was done in the dark of night."

Chicago put about $325 of the deal in a midterm reserve to help support budgets in the coming years, including $150 million to help balance the 2008 and 2009 budgets. Another $400 million was placed in a permanent reserve with earnings going to replace the roughly $19 million in net income generated annually by the system, another $320 million was placed in a budget stabilization fund and $100 million was earmarked for human services programs.

The inspector general report concluded that the true worth of the system based on the ability to raise rates was $974 million more than the city received; there was no meaningful public review; and that the city should have considered alternatives, including a shorter lease term or the inclusion of a revenue-sharing provision.

The report recommends that the council enact a 60-day review period for the council once the lease terms are set but before pre-qualified bidders submit their final proposals, and that an independent review of the costs and benefits be provided to the council.

Mayoral chief of staff Paul Volpe challenged the inspector general report's calculations, saying they failed to account for substantial risks associated with collections in future years. "While he calls the parking meter transaction a dubious financial deal, I would suggest to you that many of the report's central claims are, in fact, dubious," he said.

The city's team financial and legal advisers included William Blair & Co., Gardner Rich & Co., Samuel A. Ramirez & Co., Katten Muchin Rosenman LLP, Charity & Associates PC, Gonzalez Saggio & Harlan, and Burke Burns & Pinelli Ltd.

"This was a good transaction that protected taxpayers both in the short and long term," Volpe added.

The parking meter uproar marks the first real stumble in Daley's parade of asset leases. The city in early 2005 collected $1.8 billion for a 99-year lease of the Chicago Skyway toll bridge. It raised $563 million in 2006 from the privatization of four downtown parking garages. Its proposed lease of Midway Airport for $2.5 billion fell through in April after the private consortium that won the bidding process failed to come up with financing.

The meter lease problems highlight the debate over the worth of privatizing assets. Daley has won praise for capitalizing on assets that are not part of core city operations, handing them off for a cash payment to private operators that many believe can manage them more efficiently. However, in the event of problems, the public and governments have limited recourse.

Fiscal analysts also generally agree local governments should not use lease proceeds for one-time expenses. Daley's record is mixed on that front. He has used hundreds of millions of dollars for near- and mid-term budget relief, but $900 million from the Skyway and meter leases sits in permanent budget reserves. The $500 million Skyway reserve won the city upgrades to its $6 billion of general obligation debt to AA from Fitch Ratings, Aa3 from Moody's Investors Service, and AA-minus from Standard & Poor's.

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