Pittsburgh could follow in Chicago’s footsteps and lease its parking spaces and city-owned garages to a private operator.
Pennsylvania’s second-largest city last week received a $451.6 million offer for its parking system. Pittsburgh Parking Partners LLC is the winning bidder in a plan to operate and maintain Pittsburgh’s 11 parking garages and nearly 9,000 metered spaces for 50 years.
Making up the consortium is P4 Partners — an affiliate of LAZ Parking, the same company involved in Chicago’s 2009 parking-meter deal — and JPMorgan Asset Management.
EQT Partners Inc., through Pittsburgh Parking Holders Ltd., offered the second-largest bid, $423.1 million.
All concession bids that the city received last week expire on Nov. 1.
In addition to the initial payment, the new operator would be required to replace or rehabilitate three downtown parking structures at a cost of $50 million and replace certain meters with new technology so customers can pay with credit cards and cell phones. Those meter upgrades would cost about $8 million.
The City Council will now hold public hearings in all nine city districts on the potential concession agreement, said council President Darlene Harris. She declined to say whether the council would support the long-term lease agreement.
Leasing the facilities would require defeasing $105 million of outstanding parking revenue bonds.
Mayor Luke Ravenstahl believes the parking lease initiative is the best way for the city to shore up a pension system that is only 30% funded.
The state, under Act 44 of 2009, will take over any municipal pension system that is not at least 50% funded by Dec. 31. Such a move would increase Pittsburgh’s minimum pension contributions by $30 million, according to Pittsburgh officials, as the state calculates a lower assumed rate of return for pension fund investments.
The mayor proposes directing $200 million of the up-front payment into the city’s pension system.
The City Council Friday received a list of potential solutions from Financial Scholars Group on how to restore the pension system’s funding level. Harris, who in the past has suggested issuing debt to address the problem, said the council will review those findings, including leasing parking assets.
“What we want to do is just make sure that we fully understand [our options] because this is probably going to be one of the most important pieces of legislation that this sitting council votes on and we want to do it right,” Harris said.
The Ravenstahl administration believes that after its research and analysis with outside financial consultants, including Scott Balice Strategies, entering its parking assets into a long-term lease contract is the best path toward strengthening the pension system.
Pittsburgh’s finance director, Scott Kunka, said the city already has $180 million of taxable pension bonds outstanding that it sold in 1998. Those bonds are noncallable and carry interest rates of 6.25% to 6.6%, according to the preliminary official statement. Final maturity for the pension bonds is 2024.
“All of the value of the bonds were lost in the stock market [in 2000], but the debt is still on our books,” Kunka said. “The results of issuing pension bonds just stare me in the face everyday when I look at the city’s balance sheet. And when someone’s willing to give you almost a half a billion dollars up front, I just don’t see the prudence in issuing more debt.”
Kunka said the administration has met with individual council members and in small groups to discuss the pension issue and the concession agreement. The mayor has not released an alternative strategy in the event that the City Council were to reject the concession agreement.
“There is no plan B,” Kunka said. “We have spent well over two years looking at the situation, trying to figure out what can be done and what can’t be done. And there really isn’t any other alternative.”
Still, parking rates and meter fees would increase if Pittsburgh Parking Partners were to operate and manage parking garages and metered spots throughout the city.
Current on-street meter fees, which were last increased in 1995, range from 50 cents to $2 per hour. The concession agreement calls for annual increases during the first five years, with rates on Jan. 1, 2015 ranging from 50 cents to $4.50.
The Pittsburgh Parking Authority last increased parking garage fees in 2004, Kunka said. The proposed contract includes boosting such fees by a weighted average increase of 20% in the first year.
After the first five years, meter and parking garage fees would increase based on inflation and would require City Council approval.
In addition, the operator cannot raise meter fees beyond $1.50 until it implements meterless technology, such as a pay-and-display service.
Chicago’s $1.12 billion parking-meter deal extends for 75 years. Residents and customers faced meter increases of 25 cents to $1 per hour and parking garage fees were set on what the operator believed the market could bear. Faulty meters led to an increase in parking fines, forcing Mayor Richard Daley to suspend parking tickets until the system could work out the kinks.
“One of the main things that we found in Chicago is that they had no cap on the rate increases,” Kunka said. “That was all under the authority of the new concessionaire. So that’s why we structured these rate increases so as to avoid those sticker shocks that they found in Chicago.”
In addition to customer-service issues, Chicago is fighting off a lawsuit over the privatization of its parking meter assets. The Independent Voters of Illinois-Independent Precinct Organization is suing city and state officials as public funds are being used to enforce the privately controlled parking-meter system, such as city police ticketing. The next court date for the case is Oct. 25.
Pittsburgh currently is in Pennsylvania’s Act 47 program, which helps distressed municipalities regain their fiscal strength. It has approximately $650 million of outstanding debt, according to Kunka.
Standard & Poor’s and Fitch Ratings rate the city BBB and A, respectively. Moody’s Investors Service rates the credit A1.
While the city has posted yearly surpluses since fiscal 2006, it continues to address its high debt levels, rising pension and health care costs, and stagnant population growth after years of declines. Pittsburgh’s 2009 population estimate is 311,647 compared to its 2000 population of 369,879, according to the U.S. Census.
Ravenstahl last week submitted a $453.4 million fiscal 2011 budget to the Intergovernmental Cooperation Authority.
The ICA provides fiscal oversight of Pittsburgh and weighs in on the city’s spending plans. The ICA has 30 days to request changes to the proposed fiscal 2011 budget before Ravenstahl presents the plan to the City Council on Nov. 8. Fiscal 2011 begins Jan. 1.
That $453.4 million budget plan includes $87.6 million for debt-service costs and $133 million for pension, health care, and worker compensation costs.
Pittsburgh’s last issuance was a refunding in 2008. The city has been supporting its capital improvement needs on a pay-as-you-go basis, but officials anticipate it will need to return to the market in 2011 or 2012 to help finance capital projects.
Kunka said Pittsburgh’s debt-service costs will drop to about $30 million in 2017 and 2018, which opens up some borrowing capacity in those years.
“We’ve worked very hard to whittle down our debt and not issue bonds, but we’re not naive that we can go forever without issuing bonds,” Kunka said.
The city could take advantage of the taxable Build America Bond program that offers issuers a 35% federal subsidy on interest costs.
The BAB program will expire on Dec. 31, unless Congress extends the program. Even if it extends the program, the subsidy rate could fall below 35%.
Like other issuers, Pittsburgh is considering taking advantage of the BAB program, depending upon what Congress decides.
“We want to be able to execute on an opportunity if it’s there, given the interest rate environment,” Kunka said. “But we’re not dead set to do something at this time.”
