Reversing into the Chicago Parking Deal

Chicago politics are full of controversy - especially when it comes to infrastructure and development.

The 2022 decision by Chicago mayor Lori Lightfoot to seemingly unilaterally pursue the Bally’s casino proposal and push to rush alders to approve (Mercado 2022). 

The 2019 decision by Chicago City Council to grant $1.3 billion in tax subsidies for the Lincoln Yards megadevelopment along the banks of the North Branch of the Chicago River (Alani 2019). 

Even the formation of the famous “Loop” in downtown Chicago was cast in controversy and the result of bribes, which for one section of the line cost almost twice as much as construction of the line itself (Young 1995).

In spite of the current controversies of today, there is one issue Chicagoans love to pick at, like a scab that won’t ever quite fully heal.

The 2009 lease of Chicago’s Parking Meter management and revenue to a private company for 75 years. For a one-time $1.156 billion dollars.

Chicagoans are reminded of this whenever street parking rates go up, or there is perennial reporting by the media on the current finances of the Chicago Parking Meter LLC (the company that owns the lease). 

At face value, considering that Chicago’s parking meters generated $136M in gross revenue in 2021, it is easy to draw the conclusion that selling 75 years worth of revenue for $1.156B, or roughly 8.5 years of revenue at a $136M run rate, was incredibly short sighted (KPMG 2022). 

The Washington Post included a snippet lambasting the Chicago parking meter deal in a recent article, stating “With 61 years left on the 75-year lease, Chicago Parking Meters LLC now has recouped its entire $1.16 billion investment and $502.5 million more” (Knox and Anders 2023).

However, this fairly simplistic view of the Chicago Parking Meter deal fails to truly analyze the economic value of the one time payment relative to the cash flows overtime. Besides solely focusing on gross revenue and not profits after taking expenses into account, it assumes a reality where the City of Chicago would have earned the same amount of revenue if they’d operated the system itself.

In 2009 there were two prominent public analyses of the deal released. One issued by the City of Chicago, and another by the Office of the Inspector General.

The City of Chicago analysis compared the expected revenue from continued city ownership and management of the system, as well as the net present value of the lease deal. The City came to the conclusion that the deal represented a valuation higher than the net present value both of if the City continued to operate street parking and of their initial calculation (William Blair & Company 2009).

The Inspector General’s report dove into The City’s analysis, both criticizing their valuation of the net present value of the lease deal, and suggesting alternative deal structures that could have maximized the value to the City.

The Inspector General’s report astutely calls out many flaws in the City’s valuation of the lease deal, but it fails to cover the likely alternative scenario of continued city management of the service. Further, both reports made assumptions regarding future revenue earnings of the lease deal to support their calculations.

Now - with hindsight on our side - we will do a proper analysis of the Chicago Parking Meter Deal. Focusing on:

1. A valuation of the system should the City have maintained running it; and,

2. The true valuation of the current deal for Chicago Parking Meter LLC utilizing recent years revenues and recognized expenses.

Street parking rates in Chicago are broken down into three categories - Loop pricing, “Central Business district” parking, and “Neighborhood” parking. 

The map below in Figure 1 shows the borders of the Loop (yellow) and “Central Business District” (green) street parking rate zones (WTTW News 2019). Everywhere else in the City falls under “Neighborhood” pricing. Table 1 below shows the change in pricing by zone from just before the lease initiated, through the most recent price increase in 2020. 

The fee increases per zone through 2013 were articulated in the initial agreement and corresponding Ordinance (City of Chicago 2008). However, the City was responsible for increasing parking meter revenue alongside inflation from 2013 levels. The City could either do this by raising parking meter rates, or adding additional meters to the system. 

Any negative delta between the rate of revenue increases and inflation as measured by the Consumer Price Index (CPI) is owed back to Chicago Parking LLC in the form of a “true-up” payment from the City. 

According to the Chicago Sun Times, these “True-Up” payments have cost the City over $78.8M through 2022 (Spielman 2022). These true-up payments were part of the rationale for increasing parking rates in 2020 for the first time in 7 years, alongside adding an additional 750 parking meters to the system by Montrose Harbor (City of Chicago 2020).

Prior to the lease of street parking, the City of Chicago rarely increased street parking rates. This was in part due to the political unfavorability of thrusting additional costs on individuals, as well as technological constraints.

As shown in Table 1, the City was able to raise rates from $1.50 to $3.00 per hour in the Loop in 2005, the first major rate in years. In the Neighborhood zones, the rate was $0.25 and had not been raised in over 20 years. This lack of rate increase in the neighborhoods was in part due to old meter technology which would have cost an estimated $50 million to upgrade to more modern and rate scalable “pay and display” (William Blair & Company 2009).

Utilizing data provided in the Office of the Inspector General’s report, we can summarize revenue earned by the system in 2008 in Table 2.

Notably - although rates for parking in the Neighborhood zones are 12 times less that of The Loop, they contributed 46.2% of all parking meter revenue in 2008. The Central Business district contributed 32.5% of parking meter revenue even though rates here were 3 times less than in the Loop. 

The Loop, where pricing increases would have been easiest for the City, only contributed 21.3% of parking meter revenue in 2008.

Based on this - we must devise two different scenarios for evaluating if the City should have retained operation of the street parking meter system:

1. The City pays $50M to update all non-Loop parking areas systemwide and the only impediment to raising rates are political / public opinion

2. The City pays ~$20M to update parking meters in the Central Business District but not in Neighborhood zones

3. The City chooses to not pay any of the extra $50M to raise Neighborhood rates, and thus can only raise rates in The Loop

Assumptions

1. Neighborhood rates in Scenario 1 will only occur every 7 years. Rate increases in the Central Business District for Scenarios 1 and 2 will occur every 5 years. Loop rate increases will occur every 5 years in all scenarios. 

2. Rate increases will begin in 2010, which is when any new meter upgrades ordered in 2009 may become operational

3. Rate increases in Neighborhood Zones will occur first as a doubling of the rate, and then in $0.50 increments thereafter. Rate increases in the Central Business District will first be doubled in 2010 then rise at $0.50 increments. Loop rate increases will always occur in $1.00 increments. 

4. Hours parked and paid for by zone will remain unchanged from 2008

Below in Table 3 is a summary of the gross revenues the City would have obtained under each of these three scenarios. Notably, Scenario 1 yields more gross revenue than the Lease deal actually facilitated, even though prices were lower. This suggests that over time the actual rate of either parking or paying for parking declined.

The above calculations are simplistic and do not go into the City’s ability to finance options 1 and 2, nor the impact of potentially having to finance those costs through debt over multiple years. 

Should the City have maintained control and managed price increases similar to how Chicago Parking Meter LLC, using conservative estimates, would have generated roughly as much revenue as it did privately

To analyze the net present value of these scenarios at the time deal was made, and to compare it to the valuation of the deal itself, I took these assumptions all the way out to the end of the 75 year lease. 

A reminder - the equation for net present value (below) represents the summation of revenue from a particular time period Rt divided by (1 plus the discount rate i) raised to power of the time interval it represents. 

This function thus values revenues that are closer to collection higher than those further in the future, and utilizes a discount rate to represent the “cost” of waiting for that future revenue. This is often expressed either in terms of opportunity cost (ie likely yield of safer alternative investments) or in terms of actual cost of funds.

For calculating the net present value I assumed a discount rate of 7% (as used by the Inspector General’s Office) and 10.4% (as used by the City of Chicago) with their respective calculations shown in the “Lease Actual” section.

The Net Present Value calculations for Scenarios 1 and 2 assume that the entire $50M and $20M costs of updating the systems were able to be paid at once, and not stretched out or increased due to costs of financing. 

Scenario 1 suggests a net present value greater than the assumptions the City made in their calculations, but both scenarios 2 and 3 fall below. Being able to raise rates in local neighborhood zones was critical to reaching the deal’s valuation.

We can debate what the appropriate discount rate to use would be, and both the Inspector General’s and the City of Chicago’s reports do so. The main message however is:

Unless the City was ready and willing to raise parking rates in local neighborhood zones and invest in the infrastructure to do so, they would have been unable to reach a net present value equivalent to the deal they struck.

Assuming a scenario where the City was able to raise rates similar to how Chicago Parking LLC did, and also assuming the used discount rate was adequate, then the deal the City made, compared to its other options at the time, was roughly fair.

When the deal to lease out Chicago parking meter revenues was constructed, William Blair and Company produced 5 different scenarios for annual revenue expectations in order to make the initial valuation assessment (William Blair & Company 2009). 

Scenario 1 was the least optimistic, assuming only $85M in revenue in 2013 and that between 2009-2021 the leasing company would only earn $1.1B in gross revenue. This scenario forecasted a Net Present Value of roughly $800M utilizing a 10.4% discount rate.

Scenario 5 was the most optimistic, forecasting $130M in gross revenue in 2013, and $1.7B in revenue between 2009-2021. This resulted in a Net Present Value calculation of $1.3B utilizing a discount rate of 10.4%.

According to audited financial statements of Chicago Parking LLC, actual 2013 revenues were $135.6M, above even the most optimistic of the initial City of Chicago formal revenue estimates. 

Total revenue in the first five years was also above the most optimistic estimate, $502.7M vs. $494.7M. However, revenue after 2013 were below the most optimistic estimate, with total 2009-2021 revenues coming in roughly around the 2nd most optimistic scenario at ~$1.5B.

Gross revenue from the first 5 years beat all valuation forecasts, however revenues since 2013 have lagged initial forecasts. Given declining post-2013 revenues the initial valuation continues to hold merit.

Revenue estimates after 2013 assumed an annual CPI of 3% that revenue increases would be anchored to - either through price increases or the City paying “True-Up” payments. However the average inflation rate from 2014-2021 was only 1.9%, and excluding 2021 it was only 1.5%. Thus, revenues from 2014 onwards grew slower than originally anticipated.

Comparing the valuation of the deal to reasonable alternatives the City could have managed directly, as well as revenues actually earned to date, the initial Net Present Valuation by the City of Chicago continues to hold up.

However - there is a saying in Statistics - which is that you can use data to tell any story you like. The City of Chicago’s valuation is fair mathematically if you assume the underlying conditions of the lease were all needed.

The 75 year time duration is arguably one aspect of the deal that was not needed.

The Inspector General’s Report calls out that the length of the deal did not need to be nearly as long to achieve almost the same net present value. The below chart from The Inspector General’s Report shows that the majority of the value of the lease could have been achieved within just a 37 year period, and that it was not necessary for the lease to go on for an additional 38 years.

(Office of the Inspector General 2009)

Why the City chose to lease out parking revenues for 75 years instead of only 37-40 years is a mathematical mystery and exposed them to extra risk and liability for little additional capital gain. At best it was done in duress to obtain additional cash to secure the City’s finances in a particularly turbulent time. At worst it was either unknowing or willful ignorance of the math behind the valuation itself.

Regardless, the gain of an additional 7-10% of the deal’s initial value cost the City not just 38 years of parking meter revenue, but also the autonomy to dictate its own parking landscape until the point that most of you reading this article are well into retirement or beyond the bounds of this mortal plane.

That autonomy not just means the ability to collect the revenue themselves or raise/lower rates or who they may lease revenues out to in the future, but also how many street parking spaces there are. This in turn means the City is handcuffed to its current street designs, as any redesign that may remove paid street parking spaces will necessitate the creation of more elsewhere and/or additional “True-Up” payments to cover the resulting shortfall.

The lease itself and its valuation are justifiable and fair - even in hindsight - given various assumptions of the deal, reasonable city run alternatives, and revenues garnered from the system to date. The City’s decision to offer a 75 year lease term instead of a much shorter one however was unnecessary but does serve as a lesson in the importance of understanding the ins and outs of any mathematical equations you are using to make an informed decision, and not just how to input the function into Excel.

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Office of the Inspector General. 2009. “REPORT OFINSPECTOR GENERAL'S FINDINGS AND RECOMMENDATIONS: AN ANALYSIS OF THE LEASE OF THE CITY'S PARKING METERS.” http://dig.abclocal.go.com/wls/documents/060209parkingmeter.pdf.

Spielman, Fran. 2022. “Parking meter deal gets even worse for Chicago taxpayers, annual audit shows.” Chicago Sun-Times, May 26, 2022. https://chicago.suntimes.com/city-hall/2022/5/26/23143356/chicago-parking-meters-75-year-lease-daley-city-council-audit-skyway-loop-garages-krislov.

William Blair & Company. 2009. “CHICAGO METERED PARKING SYSTEM TRANSACTION SUMMARY AND VALUATION ANALYSIS.” https://www.chicago.gov/dam/city/depts/rev/supp_info/ParkingMeter/ValueAnalysisByWilliamBlair.pdf.

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WTTW News. 2019. “Chicago Parking Fees Increasing, But City Set to Save Millions.” November 29, 2019. https://news.wttw.com/2019/11/29/chicago-parking-fees-increasing-city-set-save-millions.

Young, David. 1995. “A CHARACTER BUILDER – Chicago Tribune.” Chicago Tribune, October 1, 1995. https://www.chicagotribune.com/news/ct-xpm-1995-10-02-9510020028-story.html.