Losing Bidder: Privatize. Then Monetize

As New Haven prepares to make public details of a controversial $50 million parking monetization deal, a losing bidder is still hoping to convince the city to include him — and hand over control of parking garages.

The deal is a crucial part of Mayor John DeStefano’s proposed $476 million budget for the upcoming year. It calls for the city to hand over 25 years worth of meter revenue — worth an estimated $120 million — to a Mayfield, Ohio firm called Gates Capital Partners in return for a quick up-front $50 million to spend over five years. The mayor argues that the deal will enable New Haven to avoid more layoffs or tax increases.

New Haven is joining governments nationwide in looking to solve short-term budget problems by giving away decades worth of city revenues in return for up-front cash.

The deal has prompted a skeptical reaction among some New Haven aldermen and members of the public during budget hearings. But a bigger concern is that no one has known the details of the plan; officials had planned to have it ready weeks ago, but negotiations with Gates have dragged on. Now City Hall says it expects to finalize and release the fine print some time this week.

Meanwhile, LAZ Parking, a Boston-based firm that lost out to Gates in the competition to do the deal, is asking the city to still give it a part of the action.

LAZ Partner Larry Stubbs argues that New Haven should reconsider a major part of the deal: He says New Haven should give up management of its parking garages.

That’s not likely to happen, according to city Budget Director Larry Rusconi (pictured).

The city maintains control of parking meters, parking garages, and their management under the proposed deal with Gates. In letters to the city and in an Independent interview, Stubbs argued that that’s a mistake because it passes up money that could be saved through folding New Haven’s parking assets into a larger management system. He also argued that his alternative proposal for the deal would have better protected future city finances by sharing the risk if parking revenues drop and sharing the benefits if they rise.

Click here to view LAZ’s original proposal to the city.

Click here to read a letter LAZ sent to the city on March 15 suggesting it can still play a role in the deal by assuming control of garages and meters.

LAZ controls the most parking spaces of any private management company in the world, Stubb said. It manages 1,400 locations — government garages, airport lots, hospital lots — in 99 U.S. cities (including private lots in New Haven). The company is emerging as a major player in negotiating deals with budget-strapped cities looking to solve budget problems by turning over future parking revenues to plug current deficits.

Stubbs said New Haven should follow other cities’ leads in negotiating a revenue-sharing component into its deals. And it should stop managing its own garages and meters. For monetization to work — the process of getting short-term cash based on a future, long-term revenue stream — privatization has to come first, he argued.

“You don’t want to monetize a bad process,” he said. ​“You fix a process, then monetize it.”.

A company like LAZ can run garages and citywide parking systems more efficiently because it needs fewer employees and operates a larger overall system, Stubbs said.

“Even large cities, taken by themselves, have very small portfolios. In the case of New Haven, it’s four or five garages and 2,500 parking meters,” he said. ​“In the parking world, that’s a very small portfolio. And yet that portfolio is being run with all the infrastructure, all the overhead that’s required to run any parking company. For us to add five garages and a small number of meters, the overhead on that is almost zero. We’re already geared up to do that. There’s a managerial scale that’s way out of whack.”

In an interview, Rusconi responded that the city didn’t want to give up control of its parking system, for two reasons.

Reason one: Labor issues. There are 100 [unionized] employees over at the parking authority. There are another 15 or so in the meter operation with the city,” he said. ​“We would have had a labor [potential conflict] we didn’t want” to get into.

Reason two: Other cities have encountered unanticipated problems when handing over control of their parking policies. Especially in Chicago. Along with Morgan Stanley, LAZ bought a 99-year concession for four downtown Chicago parking garages for $563M, then won a $1.2 billion bid for a 75-year concession on that city’s 36,000 on-street parking meters. That deal has turned into a public relations disaster for Chicago. Read about that here.

Stubbs said LAZ learned from the experience in Chicago and structured the New Haven proposal more modestly, with a shorter time frame and shared risks and revenue-sharing.

“They [Chicago] deeded over control for [75 and 99] years. There’s just no way we could [get that approved in New Haven],” Rusconi (pictured) said. ​“We may not even be able to sell the deal we had with Gates. That’s a 25-year deal. We have total control over the operations. We maintain total control over the ancillary revenue. And we don’t have any labor issues to deal with. We also control the rate setting. In Chicago, right after the deal, the rates went through the roof. We’re proposing a modest progression of rates — 25 cents every fourth year.”

Finally, Rusconi said the city can’t change the rules at the end of a lengthy negotiating process to allow a losing bidder to step back into a deal. ​“If we were to do that with every contract process, we’d end up being sued. We had a process. It took almost a year. We took plenty of time to try to evaluate everything. For someone to come back … It’s too late. We’re already down the road. The integrity of the process would really be questioned.”

Sane? Or Insane?

As the city finalizes its deal with Gates, the Independent asked three parking experts to review the LAZ proposal and Gates deal outlines and the issues they raise about how the city should proceed with monetization, if at all; and submit written reviews for this article. The three experts are Paul Wessel, who used to run the city’s traffic and parking department and continues to consult to the industry; Matthew Nemerson, who chairs the city’s Parking Authority and runs the Connecticut Technology Council; and citizen budget watchdog David Cameron, who has been studying monetization deals in other cities.

Following are their submitted analyses:

Matthew Nemerson’s Take: There are many issues here – some cosmic, some very short term new Haven specific. At the risk of oversimplifying here is my take as chairman of the Parking Authority:

On the one hand:

One of the weak links in the American system right now is the sad fact that great cities are being financially abandoned by states and the federal government. In most places outside of North America cities receive the bulk of their funding from federal or provincial pools of money, collected through broad based taxes. Given the central role of cities – especially university oriented idea generating creative ones and transportation oriented strategically connected product creating ones – it is madness to leave them on their own. Today a city must collect regressive property taxes and fees from relatively small population bases in order to maintain the many systems that are required to be an attractive, modern globally relevant urban community. The value of which usually flows to the suburbs, state or country and not the city itself. 

Given this reality, however, cities, like land rich but cash poor English gentry of popular fiction and BBC shows, find themselves selling their heirlooms and china to keep the drafty old mansion in heating oil and with the roof intact. So we find ourselves needing to sell off the next 25 years of parking meter receipts (or using them to secure a loan of $50 million).

We know the mayor of New Haven is facing deficits of $10 million to $30 million over each of the next few years based on lower state aid and the inexorable increases in complex and frustratingly inflexible agreements and mandates.

Where can he get that kind of money? Most of the flows of municipal revenues are controlled by legal agreements. If you borrow against your taxes with General Obligation bonds you are restricted to public purpose spending, of which deficit mitigation is not allowed. If you borrow against flows of fees or taxes using a Revenue Bond you are limited to spending money on capital projects related to the source of the revenue (in most cases). So the need for lots of cash to keep the city’s budget from dragging the town’s image and budget into the ​“gutter” requires that we sell something of value and pay for a loan at for profit rates of 7% to 8% – not public borrowing interest levels of 3.5% to 4.5% — so that we can do what we want with the proceeds, i.e. pay off the deficit.

Focus on the cost of the money and the fact that we are borrowing a substantial sum for 25 years to pay for a deficit over two or three. Yes, this is sad, maddening and inexcusable as policy, except what is the alternative?

As a statement of our view of global competiveness and the way a great American city is being treated, this is insane. But it is not the Mayor’s fault that he has been forced into this financial ​“Sophie’s Choice,” it is mostly a combination of Federal and State policies.

On the other hand:

Rather than feeding the beast, borrowing $50 from the next 25 years and therefore appeasing a system gone mad, perhaps now is the time to not borrow against the future and look at Chapter 13 reorganization of New Haven or considering the South American solution of entertaining a general strike of all municipal workers by declaring work rules and pensions void. Just kidding. Contracts are not up for the most part; the courts have said that unwillingness to tax is not a reason to declare you cannot pay contractual obligations.

And, as the Governor of Florida showed us a few days with his veto of a ​“let them eat cake” educational bill sent to him by a tea party inspired legislature, we are not ready – even in the deep south— to change the public status quo.

However, there is no reason why agencies such as the New Haven Parking Authority and the City’s traffic meter and enforcement operations cannot use the current situation to bring management, union workers and organizational planners to the table to make sure we are maximizing all the revenues we can and to make the experience of the public using their cars in our cities be great, even with higher costs. 

If the lesson of the ​“Gates” deal is that New Haven is truly ​“on its own, baby!” then there is no reason not to make this the day that we start operating every part of the customer facing part of public entities at the same level of customer service and revenue maximization as the private sector groups who are roaming the country (and the world) building a business model off finding money that public sector groups are leaving ​“on the table.” 

Can we begin to look at best practices from other parking authorities around the world? Sure. Can we invest in systems and training so we begin to think about drivers as customers who need to get in and out of clean and well marked parking spaces quickly, using new technology, common sense time of day policies based on analytical and quick changing routines? I know we can. Can we begin to negotiate with our unions based on the realities of being in a ​“hospitality business” where productivity increases and service is the main currency and there will not be any new money on the table for a long time unless we can earn it? I truly hope so and look forward to it.

I have asked the capable staff of the New Haven Parking Authority to honor the mayor’s request that we double or triple our ​“profitability” (the money we don’t need for operations or capital reserves) that we can send to the city’s general fund each year by coming up with plans that will both increase revenues but also greatly improve the total customer experience of parking in one of our garages or lots. I also have asked the city to transfer to us any contracts that come up for renewal that we do not have and to consider allowing us to manage the parking meters a year from now once the ​“Gates” deal is completed.

The challenge of the sad new reality of much less money flowing to cities and towns from federal and state sources for needs other than debt service, entitlements, pensions and medical care is that public entities must operate at globally set benchmarks or places like New Haven we will lose their ability to compete.

The ​“Gates” deal is not what any of us would do in a sane world. But given the world we have, let’s make it the first day of a new way of thinking about cities and the systems and people who manage them.

Paul Wessel’s Take: Given the budget shortfall, the question is what is the least bad deal for the City.

Both the Gates deal (or what we know of it) and the LAZ proposals lock the City into long term relationships.  The Gates deal requires, I think, 25 years of payments in return for an upfront cash payment.

When the details of the Gates deal come, I think we’ll discover that it’s an accounting fiction in which parking meter revenue may be the identified revenue stream, something else ultimately insures the loan.  Someone is investing $50 million in City’s ability to make 25 years of payments.  The more certain those payments are, the lower the effective payback rate.

It’s clearly a bad idea long term to take a steady annual revenue stream and turn it in to upfront cash.  It’s just like running up your credit card for household expenses and then struggling every month to make the payments.  They’re always hanging over your head, and you are pressured to make them before you start dealing with your current expenses.

LAZ sees unrealized value on the streets.  It suggests that the market can bear higher parking rates, and it sees inefficiencies that it can correct.  In return for a long term deal allowing it to dominate the parking marketplace, it is willing to share the fruits of that domination, and the investment it allows, with the City.  You can expect them to pursue that value as the aggressively as the tow companies pursued Dorothy Johnson’s car.  (She was the Hamden resident who was towed 5 times for taxes she didn’t owe because her license plate was similar to someone who did owe taxes.)  The economics of the LAZ approach is better because they’re not just financing a revenue stream; LAZ actually creates value and shares that with the City.

The big question with the LAZ deal is that posed currently by the towers—is the City interested in and capable of managing them, of setting some limits and holding them to it?  By locking in a deal for 25 years, LAZ protects itself and the City relinquishes an extraordinary amount of control.  The forces—and benefits—of competition are lost; you can’t go “out to bid” keep them honest, to see what the competition brings, to get a reality check on your deal.

I tend to think the least bad deal for the City would a 5 year public-private partnership.  Let the private sector invest, let it demonstrate its market prowess and managerial efficiency. Can it generate $50 million up front?  I doubt it.  But it’s probably worth seeing what it could produce.

If I was an alderman, I would use my power to make everyone work a little more, to see if in fact this was the best deal.

I would assume the Gates proposal is the floor, and use my power to try and leverage the market for my revenue stream.

I would take the public position that my constituents were screaming at me about a 10% property tax increase and I needed to make sure we were taking advantage of all opportunities.

I would task the administration to go back to the 5 original bidders to the RFQ (it was not an RFP which is more limiting) and give them 7 days to put offers on the table.  I would say that a committee appointed by the President of the Board of Aldermen would review these “last best offers” along with Larry Rusconi and his team, and make an recommendation to the Board of Aldermen whether the Gates offer is the best alternative, or whether Larry should be charged with pursuing some of the alternatives.  Gates should have the opportunity to sweeten their deal, in the face of competition.  There should be at least two, or preferably 3 live offers on the table that Larry can use as leverage.

I think the “we don’t want to get into the fight with the unions’ argument is an abdication of management responsibility.  I doubt very much whether 884 would oppose a deal in which its incumbent members (the PEOs) were protected and new PEOs were the direct hires of a contractor under the protections of the living wage ordinance, which the unions fought for.  A handful of 3144 employees might be affected by an expanded public private partnership here (Parcxmart with its smart card program, the tow companies, and Complus, the collections vendor are already private partners in the city’s operation of its parking program) and, my guess is that the increased value of the deal would more than offset any costs of absorbing these 3144 employees.  Such a proposal would also put pressure on the unions to give up publicly something which (a) will cost them very little and (b) potentially produce a lot of new revenue to the city and thus diminish pressure on incumbent employees wages and benefits.  (I don’t know the new labor relations guy, but I do know this is a conversation Emmet Hibson is more than competent to have productively with the union leadership.)

If, in the end, the Gates deal is the only deal on the table, you’ve done your due (political) diligence and you can say, honestly, it may not be a perfect deal, but it is the best one available and what we need to do to shrink a $15 million hole to a $5 million hole.  On the other hand, if your squeezing makes something better happen, it would be great theater, great politics, and great policy.

(Some more general thoughts:)

1.  Pay and display stations (kiosks) generate more $$$ because they take credit cards and people tend to buy the maximum time when given that opportunity.  That’s the rap for them by the manufacturers.  It may be true, but there should be data that someone can produce to support that assertion.  That has to be balanced out with the purchase cost of the meters (they were $15,000 per block vs $5000 per block for the new single space meters we purchased under my regime), their operating cost (they need electricity by battery or solar power, and perhaps cell phone lines for the credit card transactions), and their ongoing maintenance (Can T&P staff maintain the things?  Is there an ongoing maintenance contract?)  As far as I am aware, none of that has been worked through, nor am I aware that there is any budget for it.  There may be, but it’s worth asking about.

2.  Based on the Mayor’s budget documents, ticket revenue was $5.2 million last year, budgeted for $6 million this year, and in the budget for $5.2 million next year.

If I was the Board of Aldermen, I’d create 40 unbudgeted positions for full time parking enforcement officers, ask the T&P Director how many can be filled with new ticket revenue produced by those positions, create an enterprise fund for funding those positions, pay back the fund with the ticket revenue (plus interest), and spill the additional $$$ over to the general fund.  When I was around (see the attached), a parking enforcement officer would generate in paid (not just issued) ticket revenue her or his annual cost in 4 months of ticketing.

Meters produced $4 million in 08-09, are in the budget for this year at $4 million, and in next year’s budget at $5.2 million.  All other things being equal, an 30% meter rate increase would to $1.60 per hour would produce this - assuming no change in demand.  That could be done with existing meters effective July 1.  They would need to be reprogrammed individually but have (or did have) the capacity to do that.  If there’s an alternative approach to increasing meter revenue, they should tell you what that is.

3.  An alternative approach on the officers is do a public private partnership where the private partner hires new parking enforcement officers - have them bear the risk.  I also continue to believe there is more value in those spaces than is realized by the current operation.

4.  If I were a member of the B of A, I would also charge for meters downtown at least on Thursday, Friday, and Saturday nights.  Essentially, you would tax the bar crowd for parking.  My guess is that you’d produce a lot of ticket revenue as well.  The meters which we installed back when I was there allowed for reprogramming to do that (I don’t know that you could restrict it to days of the week, but I do know you could change the hours of operation AND have variable rates - that is if you wanted a lower night time rate you could do that.)  Doing on street metering and enforcement would also drive parkers into the downtown parking garages (both public and private) producing more revenue for the NHPA.  Can you require (or would private operators agree voluntarily to) a night time surcharge if the city starting enforcing on Thursday, Friday, and Saturday nights?

David Cameron’s Take:

I came across a memo Morgan Stanley, the firm which arranged the $1.2 billion Chicago deal, prepared for another city.  The memo had some interesting data in it pertaining to the method by which the amount to be received by a city in exchange for its parking revenues is calculated.  The memo states that using previous transaction multiples is a common valuation technique.  The average acquisition multiple in the car park sector (meters and garages) has been in the region of 10-20 times the EBITDA (earnings before interest, taxes, depreciation, and amortization) in the last twelve months and the multiples paid in the most recent large deals averaged around 20.  The average prior to 2006 was about 12 and the overall average was about 15.5.

The EBITDA is basically the operating revenues minus the operating expenses associated with the collection of the receipts.  The 2010-11 budget gives a figure of $4 million this year and $5.2 million next year in receipts from parking meters.  The LAZ presentation (the document you sent in pdf) estimates the city’s revenue from parking meters as $4.1 million and its operating expenses as $170,000, resulting in a net operating income of $3.9 million.  Multiplying that figure by the average multiple for all deals of 15.5 gives a valuation of about $60 million.  Multiplying that figure by the multiple for large deals since 2006 gives a valuation of $78 million.  Obviously, New Haven is not Chicago, where there are something like 36,000 meters, and a multiple of 20 may be too high for New Haven.  But if one uses only the average multiple of 15.5 and a valuation of $60 million, it would appear that New Haven’s not receiving as much as other cities have in recent years.  (The implicit multiple in the Gates deal is 50/3.9 = 12.8.)

The real question for the city, of course, is how much it will pay back, in the form of revenues from parking meters, for the $50 million?  That obviously depends on the annual payments and the length of the payout period. The Chicago deal and other deals have had very long payouts—e.g., 75 years in the Chicago deal.  Largely because of the very long payout period, the city’s inspector general concluded the city will lose hundreds of millions on the deal.  Compared with that, the Gates deal looks better since it reportedly involves a payout over 25 years.  Nevertheless, if the city were to pay Gates an amount equal to next year’s revenues from parking meters ($5.2 million) for 25 years, it would end up paying out a huge amount—$125 million in current dollars.

Obviously, one would have to carry out a discounted cash flow analysis to calculate the present value of the annual payments to figure out exactly how much Gates will get in return for its $50 million.  But I would guess that, even after discounting the cash flow, the amount it will receive will greatly exceed the amount the city receives in the next five years.  Why?  Because if this deal is like most of the deals that have been struck, the agreement will stipulate that parking meter rates will be increased by a large amount in the first year or first several years and thereafter will be increased periodically to offset the rate of inflation.  In the Chicago deal, for example, the hourly rates were doubled on 10,000 spaces and quadrupled on 24,000 spaces over the first five years (2009-14) and thereafter are expected to increase at the rate of inflation.  The net effect of the initial increases in parking meter revenues, either by raising the rates or introducing new technology such as pay stations, coupled with agreed-upon subsequent increases (e.g., increases by the amount of inflation) would mean Gates, like the Chicago investors, may end up receiving $125 million and perhaps considerably more in present value dollars from this deal.  Which shouldn’t surprise us, I suppose; after all, they’re doing this to make money.

The bottom-line message for me is that the alders should not approve the budget, which assumes the Gates deal, or the deal itself until they have had a chance to scrutinize and analyze the entire agreement and determine 1) whether the city is getting as much in payments in 2010-15 as it should get in return for giving Gates the revenues from parking meters in 2010-35; 2) whether the terms of the agreement pertaining to initial rate increases and subsequent rate increases for parking are acceptable; and 3) precisely how much Gates will receive, in present value dollars, in exchange for its payments to the city in 2010-15.  For New Haven taxpayers and residents, the issue comes down to a trade-off between reducing services and/or raising taxes by $10 million in years 2010-15 vs. giving up the revenues generated by parking meters and paying substantially more to park in the city over the next 25 years.