Is There a Smart Way for Cities to Privatize Parking?
The Sacramento City Council voted recently to approve a plan to build a new downtown arena to replace the current suburban home of the Sacramento Kings. It's seen as a major victory for Mayor Kevin Johnson – himself a former NBA player – and for the city's downtown. But with tight budgetary times facing the city, a $391 million arena project is also a particularly costly venture. To pay for it, the city's going to have to get creative.
The city's share of the project – roughly $255 million – is expected to come mostly from revenue generated by city-owned parking. But waiting for parking meters to collect $255 million in quarters would take far too long to enable the quick development of the new arena, which officials need to get moving in order to prevent the team from pulling the trigger on a long-brewing plan to leave town. They're hoping to have the new arena open for the 2015-16 season.
So the city is considering a plan to either partially or completely hand over its parking assets to a private company in exchange for some of that cash up front. Officials estimate such a deal could raise more than $200 million.
"Our objective is to take an asset that we own and that has value and leverage that asset and reinvest it in a leveraged manner where it can bring long term returns to the city," says John Dangberg, Sacramento's assistant city manager.
And he argues that it's worth the investment. Bringing the arena into downtown is hoped to spur development and revitalization – and to follow the path other NBA cities have already taken.
"All other NBA basketball facilities are located in an urban environment, except for Detroit, Oakland and Sacramento," Dangberg says. "If we are going to build a new facility and make that kind of public investment, it really needs to have additional returns. More than just entertainment and sports. It needs to help drive economic reinvestment and development in our city, and that can best be achieved with a downtown location."
Monetizing the city's parking assets is a critical element of funding the project, and officials like Dangberg are trying to figure out how best to undertake such an effort. If the parking privatization effort goes ahead, it would make Sacramento only the third major city to completely privatize its parking. The two others – Chicago and Indianapolis – have had wildly different experiences with their privatization schemes, paving an uncertain path for Sacramento.
Sacramento is undoubtedly hoping that things will work out as well as they have in Indianapolis. In 2010, the city council there approved a plan that allowed a private company, Affiliated Computer Services, to take over the city's parking. In exchange for an upfront fee of $20 million and a yearly revenue sharing agreement, the city effectively washed its hands of its entire inventory of parking spaces and meters.
With one full year under its belt, the plan, by most accounts, is working. In 2011, Indianapolis's parking-related revenue was an estimated $1.4 million, more than double the average of $600,000 it had pulled in on its own in recent years, according to Marc Lotter, communication director in the mayor's office.
"I think it's a win for the city in multiple areas. Not only is it going to be a win financially, but also it's going to be a win for consumers," Lotter says.
Much of the increase in city revenues has been due to new parking rates, which Affiliated Computer Services promptly raised. Lotter says it was the first rate increase since 1985. But he also argues that the company has made parking in the city much more convenient, with meters capable of processing credit and debit card payments in addition to coins, sensors to enable drivers to find open spots through web applications, and tools to add more time to an expiring meter via smartphone.
Indianapolis is expecting to see revenues in the range of $300 million to $600 million over the course of the 50-year contract, and has also included an opt-out clause in the deal that allows the city to reconsider the arrangement every 10 years.
And though they could have gotten more than $20 million upfront, the city wanted the returns to be more sustainable over the entire course of the contract.
"City leaders and Mayor Greg Ballard thought it was wise to not use this money to plug one-time budget holes," says Lotter. "We're looking at this for the long term."
"We believe that this is the best model," he says.
And some people in Chicago would likely agree. That city's own experience with privatized parking has famously taken a different, and, some would argue, more short-sighted approach.
Chicago's plan, approved in 2008 during the tenure of former Mayor Richard M. Daley, leased the city's parking meters to a private company for 75 years in exchange for a one-time payment of about $1.16 billion. All of that payoff was almost immediately used to fill budget gaps and pay for day-to-day needs, as opposed to some of the longer-term projects it was originally intended to fund. In just the first year, the private company (a consortium run by Morgan Stanley) now in control of parking revenue saw about $32 million in net operating profit.
And though there's definitely been some grumbling about whether the city should have asked for more money, University of Chicago Law School professor Julie Roin argues that the bigger problem is that the deal was made under false pretenses.
"Basically what the government was doing was taking out a loan secured by the parking meter revenues," Roin says. "And they were describing it as 'we're paying off our debts', which is the opposite of what they were doing. They were refinancing their loans and borrowing more money in the process."
The $1.16 billion has come and gone, as has Mayor Daley. The private company raking in parking revenue remains. Much of the problem, Roin argues, is that the city is now stuck in a 75-year contract with no clear potential to reshape the deal to better meet changing needs and times.
"I think there's a really substantial possibility that the world will change in the next 75 years and the parking policy will change along with it," Roin says. "I could be wrong, but, gee, 75 years is a long time."
Form his vantage point in Sacramento, Dangberg is trying to learn as much from Indianapolis' successes as from Chicago's missteps. The main thing to avoid, he says, is ignoring the long life span of whatever contract eventually takes shape.
"We're not interested in taking these assets and tying them up for a long time and then using the proceeds on budgetary holes where it fills a gap for a short period of time," Dangberg says.
Sacramento's decision will likely be ironed out over the next few months, finalized probably sometime next year when the arena project finishes its environmental review process. In the meantime, city officials have more time to look at the examples of Indianapolis and Chicago to figure out what steps they'd like to follow and which they'd be better off avoiding.
"We have no preferred approach at this point in time," Dangberg says. "We're looking for what the best model or combination of models might be for the city and for achieving our objectives."
Top image: Chicago's parking meters have been privatized since 2008. (John Gress/Reuters)