A University of Chicago Law School professor is challenging the prevailing wisdom regarding the sorts of transportation privatization deals that have grown increasingly popular. The Minnesota Law Review last month published a critique by Julie A. Roin that argued such deals have more in common with the medieval practice of tax farming than true privatization. She cited as a primary example Chicago, Illinois Mayor Richard M. Daley’s 2008, lease of the city’s parking meters to Morgan Stanley for 75 years in return for an up-front payment of $1.2 billion.
"The agreement exchanges future public revenues for present public funds, just like debt," Roin explained. "And just like many debt arrangements, the parking meter deal will leave future ratepayers decidedly worse off… Future ratepayers will be doubly disfavored relative to current residents: they will have to pay higher taxes to maintain the same level of services, even as their disposable income is reduced by the extra parking fees mandated by the agreement."
By the time Daley left office, nearly all of the funds from the one-time payment had been spent, mostly to meet the city’s requirement to have a balanced budget. Roin argued that such deals are frequently used to avoid state constitutional restrictions that require voter approval of any substantial new governmental debt obligation.
"Many recent privatization deals have been motivated less by the possibility of achieving efficiency advantages than by politicians’ desire to surreptitiously borrow money," Roin wrote. "The upfront payments received by jurisdictions entering into privatization agreements… are, at best, the present value of what would have been future tax (fee) revenue. Rather than true privatization transactions, it is more accurate to describe these deals as loans repayable out of future governmental revenues."
The problem with the debt created by such deals is that they are less flexible and more expensive than conventional forms of debt, such as bonds. They are also significantly less transparent. Traditional debt in the form of publicly traded bonds harnesses market forces to ensure both sides get the best deal possible. Privatization arrangements inherently favor the corporate interest.
quot;Because of the scale of these transactions, relatively few potential buyers exist for any particular deal," Roin wrote. "This leaves opportunities for collusion or simple underpricing at the expense of the selling entity. In Chicago’s parking meter deal, for example, only two bidders vied for the project. Although one can certainly claim that there was a fair public auction of the Chicago parking meter system in that anyone could have entered the auction, the paucity of bidders can also be regarded as a symptom of a defective market, one susceptible to control by insiders or other elites and simply too thin to be trustworthy."
Cities and states also get the worse end of the deal from non-monetary arrangements such a "non-compete" clauses in privatization contracts. These protect private profit at the expense of flexibility in future public policy. Chicago’s deal, for example, guarantees the number of parking spaces and hours of operation that apply 75 years in the future. Roin suggested such deals might be discouraged by limiting the length of contract terms to, for example, no more than five years.
"Robbing Peter to pay Paul accomplishes very little when Peter and Paul are the same individual," Roin observed.
Such a simplistic limitation, however, would likely lead to governments not getting the best deals for certain long-term transactions. Roin suggested better legislation would protect future taxpayers by forcing any such deals to escrow funds equal to the amount of taxes or fees that would have been generated by the leased asset. These funds would be released year-by-year so that the present generation would not be borrowing from a future generation. Roin argued that without some limitation, such deals would grow more intrusive.
"In the not-so-eventual future, jurisdictions may even ‘sell’ the rights to collect property and income taxes to investors alleging better collection techniques and expressing a willingness to accept the risk that future revenues will fall," Roin wrote.
Source: Privatization and the Sale of Tax Revenues (Minnesota Law Review, 7/7/2011)
[Courtesy: Thenewspaper.com]
I would like to see a statute that requires such deals to be reopened, to see if they were 1) truely in the best interest of the citizens, 2) if they were really let under proper competitive bidding processes. I recall reading about the Chicago parking meter deal, and IIRC, Goldman made out pretty well.
they did! One article I read estimated Chicago should have gotten $900-something million more than they did.
At the same time the meters switched hands, the rates were more than doubled. Although this was done by the city, it’s timing made many Chicagoans think the new operator (Laz) was responsible. There have been hikes since then too. My understanding is that before the deal, our parking meters were under-priced and now, they are more at market value. I dont know.
What i do know is that this has been a very unpopular move. It’s fascinating, the things Daley did (beside having a construction crew at 2 am, destroy the runway at at Meigs Field, stranding planes that had to be moved with taxpayer expense) — in addition to the parking meter deal, he also sold a 99 year lease on a major highway (the Skyway). Here I thought privatization was not such a democrat thing to do… it certainly hints at some of the financial mess Emperor Daley presided over–I just wish the longterm finances of the city were not so negatively affected by a mayor who was in office for over 20 years before deciding he could no longer make things appear to be running smoothly and did not run for re-election.
America is the most anti-government nation in the world that relys so heavily on government. It’s paradoxical like most political statements. For a toll road, it all boils down to a simple question: who do you want maintaining the roads you and your kids ride; a trained professional engineer who fears for his career and/or pension if a bridge collapses, or a snot-nosed MBA looking to make points with the CFO by cutting back on bridge maintenance to bump the quarterly profit report? I’ll take the engineer, thankyouverymuch.
the flip side of the argument it that if the gov’t builds it, they overpay and there is no one (but the taxpayers) responsible for the quality or consequences of lack of quality. Plus, you make the false assumption that whoever gets the government contract isn’t going to make the same decisions to trade quality for profit, hardly a safe assumption.
This article is spot on and, unfortunately, describes many governments around the world. It was bad enough when governments robbed (taxed) some citizens to give the money to others. Now they are robbing people who are not yet born to give money to the current generation.
Which is why it so darned important to get it through to the public school indoctrinated progdrones the oppressors are so busy trying to turn future generations into, that the only individuals bound by a contract or agreement, are those who explicitly agreed to it in the first place.
Then they’ll hopefully have the common sense to vote into office, people who relish defaulting and reneging with reckless abandon, until the entirety of the kleptocratic edifice they were raised to toil for collapses; damn the consequences.
The full 521 page agreement is available for download at the City of Chicago website. It is worth perusing.
First, the parking system is now complete modern and very convenient. The cost of the modernization was the responsibility of the new operator above and beyond the amount paid to the city. One nice feature that many people don’t seem to have noticed is that when you pay for parking, you are paying to park at any space within the same or lower zone in the entire city for the amount of time you purchased. With the previous system, you bought time for one single space. If you didn’t use all your time the next guy get free parking at your expense. It’s great if you are running errands and are going to be parking at multiple locations.
Second, all of analyses that I have seen have used a discount rate of 3% in the present-value calculations. This agreement went into effect in 2009. For the past three years we haven’t had anything close to that in the real world. It’s not likely to happen again any time soon. This is a benefit for the city that is not accounted for.
Third, the agreement has plenty of little gotchas that the city and state can use against the operator. For example, they are required to follow city resident preference laws which no other private business is required to follow. At present, that means that at least 50% of their workers are required to be city residents. If they change the law, the operator has to follow the new law. The city is allowed to set the minimum salary that they pay the workers (and it is currently much higher than minimum wage). It goes on, but the city can certainly make it expensive for the operator.
Fourth, the city could simply stop writing parking tickets. If that happens, the operator can hire people to write parking tickets – at their own expense. But the parking ticket money goes to the city, not the operator!
Lastly, starting in 2013, no price increase can exceed the rate of inflation.
Anyway, a couple more years of low CPI increases and the city will have made out like bandits.
There are many valid criticisms of these privatization schemes. This does not appear to be one of them.
“The agreement exchanges future public revenues for present public funds, just like debt”
No, it isn’t just like debt. Debt creates a future obligation for repayment, with the possibility of default.
The Chicago parking deal is equivalent to a lease with a one-time upfront payment. There is no debt to service, so it isn’t like a bond. It does involve a loss of future revenue, but that is true with any lease or sale, and should have been accounted for in the amount of the payment.
“The upfront payments received by jurisdictions entering into privatization agreements… are, at best, the present value of what would have been future tax (fee) revenue.”
This qualifies as a Well, Duh comment. Obviously, nobody would want to lease the parking rights from the city without the expectation of earning a return, and the price that the lessee is willing to pay to the government would be based upon some expectations of future returns, which would account for the time value of money.
Cities and states also get the worse end of the deal from non-monetary arrangements such a “non-compete” clauses in privatization contracts
Non-compete language should add value to the deal, which in turn should raise the price paid to the government. The aforementioned present value calculation would be increased accordingly.
There are plenty of reasons to avoid privatization. For one, it is dangerous to provide private companies with the incentive to turn ordinary citizens into violators. Just as is the case with traffic cameras, we should expect the private operators to increase the violation rate so that they can benefit from the additional income from the fines.
For another, by renting out assets, governments are boxing themselves into a future financial corner. These programs allow them to avoid the hard choices of how to cover costs and maintain cash flow.
This points to a breakdown in the system. Our appetite for spending exceeds our willingness to pay taxes and fees that are sufficient to cover those expenses.
For years, state and local governments have relied heavily on bonds in order to conceal these deficiencies from the voters, but that effort may be hitting the wall. Unlike the federal government, they cannot print money, so their budgets need to balance over the long run.
Basically, they need to raise taxes or cut spending. These privatization schemes are short-term bandaids at best. Now we have government auctioning off the people’s property to companies that have a vest interest in turning them into lawbreakers. These companies are unaccountable to the voters, even though the property belongs to those voters. As a rule, we should generally avoid these programs, regardless of how they’re structured.
So the gov’t renting out parking spaces on streets is fine, but a private operator is not? You have no “right” to park there. If you don’t like the price, you move on and find another spot. The costs will stay competitive because they have competition – others will modify their prices to compete. I don’t even understand why this an issue – the city had something to sell, and they sold it. They owe no future obligations to maintain the meters, don’t pay employees, don’t get raped on future pension obligations…it’s a great idea, and I applaud Daley for doing it.
So the gov’t renting out parking spaces on streets is fine, but a private operator is not?
Yes, and no. The public paid for the roads, and there should a body that is accountable to them.
You have no “right” to park there.
It is supposed to be public property. The government can restrict the use if the restrictions are reasonable, but restrictions shouldn’t be arbitrary, either. The government’s assets are also our assets.
I don’t even understand why this an issue
I’m pretty sure that I explained why it is an issue.
They owe no future obligations to maintain the meters
Those are costs of doing business. If the revenues didn’t exceed the costs, then nobody would have wanted to buy them. Parking fees in a major city should generate net income.
Selling monopoly rights to parking meters is more akin to a Royal Charter than to ‘privatization.’ That money should have been returned to property tax payers that paid to have the land bought and developed, not the corrupt Daley Gang who squandered the money instantly.
What a crock.
Strange that this is happening in a country that became a country because its people does not want to be unfairly taxed without representation!
Dump the torn-out-of-the-ground meters into Lake Michigan while wearing Cleveland Indians uniforms?
Baseball needs scantily clad cheerleaders.