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Examining parking privatization as a fiscal solution: there are pros and cons for governments to consider when looking at leasing their parking assets in public-private partnerships.

Most cities are facing fiscal difficulties and significant budget deficits, and many are instituting hiring freezes or layoffs, delaying or canceling infrastructure projects, or implementing cuts across the board in an effort to improve their situations. Cities are also trying to raise revenues by increasing charges for services, property taxes, and sales taxes. These bailout methods either reduce a city's resources or place a greater financial burden on citizens. However, cities have also begun finding new, creative ways to generate money to finance projects, pay off debt, and secure employee pensions. This has led to numerous cities considering public-private partnerships that involve leasing their on-street or off-street parking assets.

A public-private partnership involves the long-term lease of a city's parking assets to a private operator in exchange for periodic payments, or an upfront lump sum. The private operator receives the revenue generated by the parking system over the course of the lease and is responsible for the management, capital repairs, and maintenance of the parking system. Public-private partnerships are not a new concept in the United States; cities have outsourced the operation and management of toll roads, wastewater management, urban development, utilities, financial management, and the operation of schools. But the United States has lagged Europe, Australia, and Canada in privatizing parking assets. This is not because of a lack of private investors--large financial investment firms have both available capital and interest in parking investments, viewing them as a safe spot in an otherwise risky market. The question for a city, then, is whether privatizing its parking systems is an effective solution to help raise capital and improve its financial situation.

MAKING THE DECISION

In a public-private partnership, a city still has some rights in the management of the parking system. To set the parameters and guidelines of the deal, a concession agreement is designed with input from both the seller (the city) and potential buyers (investment firms or a parking operator). The concession agreement is formulated to determine points including who will collect enforcement revenue, what happens if meters are removed, and how new meters are installed. Many issues need to be considered, and the city should have a plan that promotes development and allows for checks and balances. Some cities seek a parking consultant to assess future issues that need to be addressed in the concession agreement.

Other than assessing issues that might arise regarding the management of the system, the city should also understand the potential value of the asset before placing it on the auction block. The organization needs to perform the proper due diligence by assessing the system's revenue potential, future capital expenses, and necessary technology upgrades. This helps avoid selling the asset below its market value and shortchanging residents--a government needs to understand the full revenue potential of the parking system to insure that it is sold at a fair amount of money. The assessment should consider the following major factors: rate increases, future demand, capital expenses, new revenue collection equipment cost, and elasticity of demand.

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THE DOWNSIDE

Even after the value of the parking system has been estimated, a number of pros and cons need to be considered. Cities need to carefully weigh the disadvantages, as well as the advantages. Potential disadvantages of privatizing a city's parking system include: losing the existing parking management labor force, upsetting residents and parkers due to increased parking rates, and losing control of the parking system.

Staff. A private-sector operator might require that its staff operate the system. In that case, the city could require in the concession agreement that all current employees maintain their positions. This stipulation can reduce the overall value of the system, however, since the city employees might have more generous pay and benefits packages than those offered by the private vendor.

Citizens' Concerns. A market analysis of the parking system might reveal a potential to substantially increase the parking rates, in which case the government could experience a backlash from residents. If the parking system being considered for privatization has a monopoly on the market, the city needs to set a rate increase schedule to prevent the private operator from exploiting parkers.

Control. The city needs to feel comfortable with the experience and qualifications of the parking operator. The concession agreement should include language that addresses the city's role in overseeing management of the system and gives the city the power to intervene when necessary.

THE UPSIDE

There can also be a number of advantages to parking privatization. These include immediate revenue, the ability to free up capital, and the opportunity to get out of the parking business, which can allow a government to focus on more important issues.

Revenue. The city receives an upfront, lump sum payment that can be used for government projects and programs. This payment can also be used to address the city's current debt, although governments will want to be careful about using this money for a one-time budget fix. In addition, the buyer's bid will be based on an aggressive rate schedule; this proposed rate schedule may be unrealized revenue for the city, as it is can be difficult for a government to pass parking rate increases.

Freeing up Capital. The city can use a parking privatization agreement to free up capital and make the private operator responsible for capital repairs to the aging infrastructure (off-street facilities), and for installing a newer revenue collection technology (on-street and off-street parking). Updating the on-street revenue collection equipment to support multiple payment options is necessary once parking rates are increased to more than a dollar an hour, as single space meters become obsolete and inefficient. Once the lease has expired, the city then receives a parking system that has upgraded revenue collection technology and parking rates that are aggressively aligned with the market. The city has also hedged the risk involved with operating a revenue system that could potentially become obsolete or less-used due to increased public transportation ridership, high gas prices, or even the trend toward more free parking facilities.

Business Focus. Privatizing a city's parking system allows the government to get out of the parking business and instead allow a specialized private operator to handle the system. A private operator does not manage other public assets; it is specifically concerned with managing the parking system effectively and providing upgraded amenities and customer service. Freeing the city from managing the entire parking system will also allow it to concentrate on other programs and assets that might be of more strategic importance. Also, the monies they receive from privatization could be utilized in financing more vital programs.

THE CITY OF CHICAGO

The City of Chicago, Illinois, considered the benefits and disadvantages of privatizing parking and decided to lease both its 36,000 metered spaces and four Grant Park/Millennium Park garages. The city received $1.15 billion dollars for the 75-year lease of the meters and $563 million for a 99-year lease of the garages. The money received from these deals has been used to pay off debt associated with building Millennium Park, improving the infrastructure of neighborhood parks, funding programs for low-income residents, settling budget deficits, and establishing a long-term reserve fund.

Privatizing the Grant Park/Millennium Park garages allows Chicago to avoid capital repairs. Before bidding, the investment firms in the Chicago deal hired consultants to conduct a conditions assessment of the garages and determine future costs associated with maintaining the structural and architectural integrity and the mechanical, electrical, and fire protection maintenance costs. Based on the city's consultant, the estimated cost to renovate the East Monroe Garage alone would have been more than $63 million dollars. In addition, significant costs could be anticipated for ongoing maintenance and repair of the other parking facilities, even though they had been recently constructed or renovated. Underground garages typically require substantial capital expenses associated with replacement of the membranes and concrete slabs, and other recurring repairs over a 99-year period. Maintaining these garages would have become a significant financial burden on the city. Leasing the garages allowed Chicago to place the repair obligations on the private operator and free up capital for other projects.

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The main lesson learned from the privatization of the Chicago metered parking system was that governments must have an effective process in place to introduce users to new rates, hours of operation, and revenue collection technology. Also, the parking operators must have adequate revenue collection technology in place to support the new hourly rates. Chicago's parking meter rates were quickly increased from twenty-five cents an hour to a dollar an hour in many neighborhoods, but many of the single space meters could not effectively support the quantity of coins placed in them, and the operator underestimated the resources required to make timely collections. This led to jammed meters and people receiving tickets for parking at inoperable meters. There were also issues with the incorrect labeling of the hours of operation and parking rates. Overall, this gave residents a negative opinion of the privatization of the meters. These issues have mostly been corrected, but cities can avoid these problems by putting an effective implementation process in place before making changes.

CONCLUSION

Since Chicago has privatized its parking system, a number of other cities -- including Los Angeles, California; Harrisburg, Pennsylvania; Pittsburgh, Pennsylvania; San Francisco, California; and Indianapolis, Indiana--have started evaluating privatization of some or all of their on-street and off-street parking systems. It is a viable option to generate immediate capital, but cities need to weigh the pros and cons before making a decision.

DAVID TAXMAN is a parking and traffic planner at Desman Associates, which consulted in the Chicago privatization deal, and also with the Los Angeles parking system and the parking system in Harrisburg. He specializes in the financial analysis of parking privatization agreements. Taxman can be reached at dtaxman@desman.com.
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Title Annotation:Solutions
Author:Taxman, David
Publication:Government Finance Review
Geographic Code:1U3IL
Date:Jun 1, 2010
Words:1640
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