Privatization and the Public Interest: The Need for Transparency and Accountability in Chicago's Public Asset Lease Deals

2009-10-07

Executive Summary

Chicago has been the most aggressive city in the United States in the privatization of public infrastructure. Since 2004, the city has privatized the Chicago Skyway toll road, four downtown parking garages, and the city’s system of 36,000 parking meters, with only the recent financial crisis preventing the privatization of Midway Airport as well.

The recent privatization of city parking meters has drawn particularly harsh public criticism as a result of rate hikes, equipment malfunctions and questions about whether the city received fair value.

The problems resulting from parking meter privatization could have been avoided had Chicago followed common-sense principles regarding the privatization of public assets and provided the public with the ability to monitor and influence the privatization process. Chicago must adopt strong public interest protections and embrace greater government transparency before any further privatization of public assets takes place.

The $1.16 billion parking meter privatization deal violated principles of good government, could lose money for Chicago over the long term, and has already resulted in negative impacts to drivers and the city’s neighborhoods.

• • The idea for privatization of the city’s parking meters was originally conceived of behind closed doors and months of preparatory work took place before the idea became public. The lead consultant to the deal received a no-bid contract. The City Council, which had already included expected revenues from privatization in the city budget, took only two days to approve the plan, and had minimal time to review the key documents.
  
  • Analysis by the city’s Inspector General suggests that the meter system would have been worth more to Chicago had it remained in public hands. The Inspector General claims that the true value of the system to the city was greater than $2 billion using valuation procedures common to privatization proposals.
  
  • Since privatization of the city’s parking meters, meter rates have increased sharply, the meter system has malfunctioned several times, and drivers reportedly have shied away from using parking meters— resulting in greater congestion on non-metered side streets and traffic problems for businesses in the city’s neighborhoods.

The process used to privatize Chicago’s parking meters, like the city’s previous privatization efforts, contained serious shortcomings:

• • Contract terms that increase the concessionaire’s profits by shifting risk onto the public, such as contract provisions preventing the city from opening parking meters or garages nearby even if such facilities would be publicly beneficial.
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• • No formal evaluation of impacts on the public interest and failure to obtain an independent financial analysis of the value of the asset to the city.
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• • A closed-door process largely outside of the public eye, with no opportunity for public input and little outside scrutiny.
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• • High transaction costs that undermine value while enriching deal makers. For the three privatization deals competed to date, the city paid more than $26 million in fees to lawyers, accountants and other advisors, including investment banks such as Goldman Sachs.
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• • Multi-generational leases. The deals for the Skyway, Midway Airport and the parking garages involved 99-year leases, while the parking meter deal will last for 75 years. This time frame binds future generations of residents and city leaders far longer than future risks or problems can be anticipated.

 To prevent future bad privatization deals, the city of Chicago should embrace public interest principles for protecting the public, adopt rules and processes to ensure that privatization proposals receive a thorough vetting prior to a decision, and embrace a commitment to government transparency.

The city should ensure that any future privatization deals adhere to the following principles:

• • The public should retain control over decisions that affect the broader public interest.
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• • The public must receive full value so future revenues are not sold off at a discount.
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• • No deal should last longer than 30 years because of uncertainty over future conditions, because the risks of a bad deal grow exponentially over time, and because long contracts transfer unnecessary control to the concessionaire.
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• • Contracts should require state-of-the-art maintenance and safety standards instead of statewide minimums.
• • There must be complete transparency to ensure proper vetting of privatization proposals.
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• • There must be full accountability in which the elected legislative body must approve both the authority to negotiate a deal and any terms of a final deal.

 In addition, the city should adopt procedural safeguards for future privatization proposals that include the following:

• • A minimum waiting period of 30 days between publication of the final terms of a privatization agreement and a vote (45 days for privatization of assets or services valued at more than $50 million).
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• • Competitive, transparent bidding for all professional services provided during the privatization process and for the privatization contract itself.
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• • Disqualification of city councilors from voting on privatization proposals when they have received campaign contributions from companies that bid on a given asset or performed professional services related to privatization. The Mayor’s office should similarly reject contributions from such companies and publicize contributions received for a defined period prior to the decision to consider privatizing an asset.
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• • Thorough, independent analysis of the valuation of assets proposed for concession agreements along with a comparison of privatization with other alternatives (including the option of bonding against future revenues with the same schedule of user fee increases without a private lease or transfer of ownership).
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• • Prompt public disclosure of all documents related to privatization bids.
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• • Clear directions for how proceeds from the sale will be allocated, along with the development of tools to enable the public to track spending of proceeds from privatization over time. These tracking tools should be integrated into a city wide budget transparency Web site that would enable citizens to have “one-stop” access to all city expenditures.
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• • Timely public disclosure of all documents relevant to a privatization proposal, including posting of such documents on a publicly accessible Web site.

Finally, to bolster confidence, trust, and transparency in government, Chicago should follow the example of a growing number of cities and states that provide detailed and up-todate searchable information about government contracting and expenditures on-line.

Specifically, the city should create a one-stop, comprehensive, on-line database that would enable citizens to obtain information on contracts, the current status of city accounts, special tax breaks, fee services accrued, economic development subsidies and city budgets. The Web site should provide summary information and enable residents to drill down to detailed information on city payments, including the city’s check register. The Web site should also retain previous years’ data for comparison.