Morgan Stanley’s $11 Billion Makes Chicago Taxpayers Cry
Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.
Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue. Standard Parking Corp., which runs 30,000 spaces at the city’s O’Hare and Midway airports, earned 4.84 cents on that basis last year, data compiled by Bloomberg show.
The deal illustrates how Wall Street banks, recipients of more than $300 billion in taxpayer bailouts in the worst credit collapse since the Great Depression, are profiting from helping states and cities close record recession-induced deficits by selling bonds and leasing public properties. Chicago gave up billions of dollars in revenue when it announced in 2008 that it leased Morgan Stanley its 36,000 parking meters, the third- largest U.S. system, for $1.15 billion to balance its budget, said Alderman Scott Waguespack.
While Chicago has the right to “repossess and assume operational control” of the meters if the Morgan Stanley partners default on their obligations, the bond document says, the contract doesn’t expire until 2084. “The next couple of generations will pay the price,” said Waguespack, 40, a Democrat from the 32nd Ward.
“It’s despicable, the way it went down,” said Waguespack, one of only five aldermen among 50 who voted against the lease.
Indianapolis, Las Vegas, Los Angeles, Pittsburgh and other cities may follow Chicago in selling future parking revenue for cash to help fill budget holes, according to the Reason Foundation, a Los Angeles-based researcher that advocates public-private partnerships. Chicago may also lease Midway International Airport, a regional hub 10 miles from downtown.
When Daley, a 68-year-old Democrat who took office in 1989, announced the parking deal on Dec. 2, 2008, two days before the council’s vote, Waguespack’s staff estimated the city would give up $4 billion to $5 billion of revenue in exchange for the upfront sum. Last month, the private partners’ debt-sale memorandum projected revenue over the 75-year lease would be $11.6 billion.
“These deals are rarely done under the bright light of public scrutiny,” said Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California in Los Angeles. “Often the facts come out long after the deal is done.”
The private note sale, scheduled for last month to help cover costs of acquiring the contract, was postponed due to market conditions, said Alyson Barnes, a Morgan Stanley spokeswoman in New York. She wouldn’t comment on profit or revenue projections.
Christian Kroos, a spokesman for Munich, Germany-based Allianz SE, Europe’s biggest insurer and parent of Allianz Capital, declined to comment in an e-mail. The Abu Dhabi Investment Authority didn’t respond to a request for comment.
“The concession agreement was absolutely the best deal for Chicagoans,” Gene Saffold, Chicago’s chief financial officer, said in an Aug. 5 e-mail.
While profit estimates in the bond-offering documents were “fairly optimistic,” they were also “relatively in line with our projections when we valued the system’s current value of between $700 million and $1.1 billion,” Saffold said.
“The net present value of $11.6 billion in revenue over the life of the 75-year agreement is consistent with $1.15 billion the city received,” he said.
Morgan Stanley’s infrastructure unit, which owns 50.1 percent of the parking partnership, has about $4 billion of equity investments under management, according to a press release. It has announced projects in the Middle East and Africa, with the Port of Montreal and for power generation in India.
Daley, son of former Mayor Richard J. Daley, who served from 1955 to 1976, spent about $792 million of the lease money in the last three years to balance budgets and for other needs, according to city reports including one from Saffold. That would leave $353 million of the upfront payment to put toward the 2011 budget, which is expected to have a $654.7 million deficit, according to estimates issued July 30.
Filling budget holes “is probably not the best use of these revenues,” said Little of the Keston Institute. Chicago officials will “have these budget problems again down the road, and they won’t have the parking meters to sell.”
Fitch Ratings cited budget gaps when it cut the rating on $6.8 billion of Chicago general-obligation bonds on Aug. 5 by one level to AA, its third-highest rank. It said unemployment, exposure to subprime mortgages and above-average home foreclosures have curtailed tax revenue. Moody’s Investors Service lowered the debt a day later, to Aa3, its fourth-highest level, from Aa2.
Morgan Stanley’s partnership raised parking rates twice since the lease began, and more are planned, the debt document says. Fees at some central business district meters rose to $4.25 an hour from $3 since January 2009 and will go to $6.25 in 2013. In midtown Manhattan, hourly rates are as much as $2.50, according to the New York City Department of Transportation.
Officials in the country’s third most-populous city should have managed finances better to prevent the fee increases, said Laura Hunter, 39, as she paid with a credit card at a parking kiosk on South Wacker Drive in downtown.
“The city did have a budget hole to fill, but parking- meter fees aren’t normally predicated on balancing a budget,” said Hunter, a political consultant who lives in Chicago.
The Morgan Stanley partners invested $40 million in the parking system, which will “greatly improve” operations and “enhance customer convenience,” Saffold said in his e-mail. The outlay was “something the city would not have been able to accomplish given other more-pressing capital needs,” he said.
In addition to boosting rates, Chicago Parking Meters plans to increase revenue by fitting more cars into spaces by eliminating marking lines, raising the number of metered slots and adding to the hours requiring fees, according to the debt- sale filing.
“We could have done that ourselves,” said Waguespack. “I don’t think the aldermen understood the long-term consequences of what they did.”
Chicago Parking Meters’ revenue rose 48 percent to $18.3 million in the quarter ended June 30 from the same period a year earlier, the debt-sale documents say.
The $11.6 billion in revenue foreseen over the lease’s life is based on $47 million generated in 2009, $1.43 billion projected from 2010 through 2020 and $10.14 billion over the rest of the contract, the debt document shows. The number could go higher because of rate increases tied to the Consumer Price Index, according to the filing.
The document’s estimate for profit excludes interest, taxes and depreciation, a common method of measuring earnings of companies with assets that need to be written down over long periods.
The deal was “dubious” for Chicago, its Office of the Inspector General said last year, because the city’s chief financial officer, who negotiated the agreement, failed to calculate how much the system would be worth over 75 years. The present value of the contract was $2.13 billion, more than the $1.15 billion the city received, it said.
William Blair & Co., an adviser for Chicago on the parking lease, told the inspector general in a June 30, 2009, response that the city estimated revenue over the life of the contract and applied a discount rate to determine an amount it would accept. It said the $1.15 billion it got exceeded the minimum by more than 15 percent.
“There is substantial potential financial benefit to Chicago taxpayers and residents,” Blair said in the response. It said the agreement also shields Chicago from economic uncertainties, such as reduced parking revenue if drivers switch to mass transit.
“All substantial risks have been transferred to the concessionaire,” Blair wrote. Thomas Lanctot, a William Blair principal who handled the contract, didn’t respond to telephone and e-mail messages seeking additional comments.
Jon Davey, a spokesman for the inspector general’s office, said in a July e-mail that Chicago’s experience may help in evaluating future public-private partnerships.
Of the parking lease, he said: “Nothing can be done to fix that deal at this juncture.”