Chicago Cannibalization: Mayor Daley's Budget Eats 75% of a 75 Year rainy Day fund in One Year

A year ago Mayor Daley rammed though a parking meter deal that was supposed to provide a "rainy day" fund for Chicago for the next 75 years.

In September, snags appeared prompting the Chicago Sun Times to write Daley losing confidence in parking meter company.

Mayor Daley demanded today that Chicago’s embattled parking meter operator synchronize the time on its pay-and-display boxes and void parking tickets tied to time discrepancies. “That’s unacceptable. They have to void those tickets,” he said.

Daley said the latest in a string of operational problems that have marred the transition to private control has prompted him to lose confidence in Chicago Parking Meters LLC.

“Slowly but sure, yes,” he said.

But, the mayor said he is not about to cancel the 75-year, $1.15 billion lease tied to a steep schedule of rate hikes that helped plug a gaping hole in the city’s 2009 budget.

“See that home over there? Go over there and ask them if they want their real estate taxes increased,” the mayor said after a ribbon-cutting at the new Jorge Prieto Math & Science Academy, 2231 N. Central.

“We have a rainy day fund. If it wasn’t for that, our financial crisis would be worse. ... That was sold at the highest time. You can’t even sell a public asset today. You can’t sell anything today.”

The Chicago Sun-Times and NBC5 reported this week that pay-and-display boxes touted as the high-tech solution to over-stuffed and improperly calibrated parking meters have a problem of their own: they’re out of synch.

A spot check of about 50 newly-installed boxes found the time they show varies from machine-to-machine — leaving motorists confused about when to return to their vehicles to avoid getting a ticket.

Times displayed by boxes along Lincoln, Fullerton and Armitage didn’t match, even though they’re on the same computer server.

Political fall-out from the parking meter fiasco is at least partly to blame for a precipitous drop in Daley’s approval rating — to 35 percent, the lowest of his 20-year reign, according to a Chicago Tribune poll.

Chicago’s parking deal revisited

In November, Felix Salmon posted an interesting chart showing just how flawed the lease deal is in Chicago’s parking deal revisited

Boiled down, what the city of Chicago did was to rush a bill selling the parking-meter concession through the city legislature without allowing lawmakers to give it a detailed reading. The city claimed it got a good deal, basing that claim on a single valuation from its own advisor. But after the fact, a number of analysts, including the Inspector General, have concluded that actually the deal wasn’t very good at all.

The one claim in the IG’s report that I find the most compelling is that the term of the deal — 75 years — is far too long. Here’s their chart:



In order to get to the final sum of $1.16 billion, they had to assume an 11% discount rate. (Which, yes, is pretty high.) When your discount rate is that high, there’s little point in selling off a 75-year concession: you can cut the life in half and still get 93% of the value.

It’s worth pointing out at this point that another critic of the deal, Scott Waguespack, uses a valuation methodology where the discount rate is 3% and the inflation rate is also 3% — in other words, the value of a real dollar in 75 years’ time is the same as the value of that dollar today. That’s just ludicrous.

But what isn’t ludicrous is that nobody has a clue what the parking-meter industry is going to look like in the 2080s: will there even be cars parking at meters then? If someone bought a franchise in 1934 in just about any industry — even if it was heavily regulated by the government — they’d have no ability to foresee what kind of revenues that franchise might be bringing in today. As far as the purchaser is concerned, the second half of the deal basically has option value: there’s a possibility that it might be hugely lucrative, but there’s also a possibility that it’ll be worth nothing. Looking at the price, it doesn’t seem that the buyers paid anything at all for the option, so it was silly of Chicago to just give it away.

Alderman Duel Over Parking Meters

With that backdrop inquiring minds are reading Aldermen duel over TIFs, parking meters, spending, and the brainwashing powers of the media.

Wed, Dec 2, 2009
As has become customary, aldermen bitched and moaned about Mayor Daley’s $6.1 billion budget before they passed it today. Nobody claimed to like it, though 38 aldermen voted in favor of it. But that number is smaller than it has been for most of Daley's reign. In years past the mayor viewed a single nay vote as an intolerable act of defiance; these days he’s lucky no one else has the clout to wield or goodies to hand out that he does, because his governing style is wearing thinner among an ever larger group of aldermen. As in a dozen.

Still, their arguments are getting more pointed. For evidence, consider the diatribe that 38th Ward alderman Tom Allen delivered to explain why he was casting his first vote against a Daley budget since the mayor appointed him to the City Council in 1993. “I have come to the conclusion that this 2010 budget is one that I have no confidence in,” Allen said.

He offered three reasons. “First and foremost,” he said, “the parking meter spending plan here I consider to be a breach of our fiduciary duties to the taxpayers that we represent.” Allen produced materials that Daley budget aides had distributed to aldermen a year ago when they rammed the 75-year parking meter privatization deal through the council in four days. He said aldermen were promised that the administration would save enough of the proceeds that the interest on them would equal or exceed the $20 million the city was accustomed to collecting from the meters. Instead, Daley’s budget will burn through two-thirds of the replacement fund in a single year.

“We have lost the replacement money,” Allen said. “You cannot break a contract in 12 months that is supposed to last for 75 years. It is unconscionable, irresponsible, and it is disingenuous.”

Allen predicted that some of his colleagues would counter-attack him, and he was right. A few minutes after he spoke the venerable 50th Ward alderman Berny Stone, a frequent Daley administration defender, responded point by point, in reverse order. ...
Stone isn’t worried about replenishing the meter funds at a date to be named later. He noted that the city owns all kinds of vacant land that it can sell when the markets are better.

“We’ll recover our money in no time!” Stone proclaimed. “This is a great city, a great body, and we will recover!”

Chicago "The City That Works"

To replace the rainy day fund, 75% used up in a year (supposedly to prevent tax hikes), Alderman Stone proposes selling city land, further cannibalizing Chicago's assets.

As for those tax hikes...

On July,1 2008 CBS News reported Taxes In Chicago Now 10.25 Percent, Highest In Nation.

To deal with budget shortfalls, property taxes went up by 4.2% in October of 2009. Please see Chicago Metro Area Sales-Tax Receipts Plunge, Property Taxes Rise for details.

Daley Calls Closed Door Meeting On Trade Show Exodus

Problems are coming at Chicago faster than Mayor Daley can stick his fingers in the dike.

Major conventions are ditching Chicago over outrageous costs for McCormick Place electricians as noted in Conventions Say Good Riddance to Chicago Over Costs and Union Work Rules.

Trade show cancellations prompted an Emergency meeting on convention show exodus.

Mayor Richard Daley called labor leaders and McCormick Place officials into his office for a closed-door meeting today to talk about stopping the exodus of high profile trade shows to other cities by lowering costs at the convention center.

The recent defections of a plastics industry trade show to Orlando, Fla., and the Healthcare Information and Management Systems Society to Las Vegas were heavy blows, Daley said.

"Sometimes you have to hit someone with a hammer," for them to realize there's a serious problem, the mayor said at an event earlier in the day.

But Dennis Gannon, president of the Chicago Federation of Labor, insisted officials need to look beyond union wages and work rules to bring costs at McCormick Place in line with those in other cities.

Union workers at McCormick Place have agreed to three changes to work rules in the past 15 years, Gannon said, arguing labor costs there are now comparable to those at convention centers around the country.

Three Rule Changes In 15 Years

The union agreed to three rule changes in 15 years. Wow. Were those impressive results achieved with or without the hammer? More importantly, does Daley even have a union card authorizing him to use that hammer?

There are some interesting comments along those lines.

Paula writes "Like all industries, jobs go where the unions aren't. Simple as that. Want to drive the local economy into the ground? Vote pro-union. Just ask Michigan.

Bill Writes: "The work rules and fees are out of sight, but so are the taxes for event goers. Look at all the greedy pile-on taxes that Chicago burdens travelers with. Chicago deserves to lose every single bit of business, including the auto show. I too am celebrating this implosion and hope it continues until there’s nothing left to tax or pillage."

That is the sad state of affairs in Chicago. Unfortunately, Chicago is likely to respond the way it always does - raise taxes to make up for the lost revenue that stems from the city raising taxes.

Some will suggest this argues against privatization, but the reality is that it argues against a no-bid process rammed through by one person. It also argues against using very long-term funding for short-term needs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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