And Morgan Stanley wants it. The city of Chicago is on the cusp of signing a contract to let a Morgan Stanley-backed consortium collect money from its parking meters for the next 75 years. I’d love to make a quip about how the flailing bank must be really desperate for new sources of funding, but, alas, this is part of a much larger trend of economically strained cities and states wanting to hook up with investors craving predictable, if unglamorous, sources of cash flow.
Is this a good deal for Chicago? Well, let’s see. In exchange for giving up three generations of fairly dependable meter revenue, Chicago gets $1.157 billion today. The city, which has been on something of a privatization tear, having auctioned off Midway Airport last month, is planning to set aside $400 million of its meter money in a long-term reserve fund. Another $325 million will be put to use right away, to help balance the budget through 2012. Social services programs will get $100 million, and the rest, about $324 million, will go into a rainy-day fund for city spending in case the economy gets worse. Let’s say the city winds up tapping 50% of that rainy-day fund. We’re then looking at a situation where Chicago has spent roughly half of its money in the first four years of the lease.
I’m not feeling super-judgey today, maybe because I understand it’s bad out there, that cities are having to make some really tough cutbacks, but I do question why so much money from a long-term asset is going toward short-term uses. Back in 2004, when Chicago leased its Skyway toll road, some money went to fund the budget and social services, but a larger percentage went into a reserve fund, and a fair chunk went to pay down municipal debt.
The other question, of course, is why, if parking meter revenue wasn’t doing all that much for Chicago, Morgan Stanley would want it. The answer, naturally, is that Chicago hadn’t raised rates on some of its meters in 20 years—there’s a lot of value to be had by the person who doesn’t fear getting voted out of office. Chicagoans, used to paying 25 cents an hour downtown, will see the rate go up to $1 an hour next month, and to $2 an hour by 2013. That doesn’t make for a happy populace, but still, isn’t that something some brave Chicago politicians could have done all on their own, without giving up the rights to an asset that’s apparently worth $1.2 billion?
I’m just asking questions here. Because there’s reason to believe we’ve going to be seeing more of these sorts of deals.
UPDATE: Kevin Drum, over at Mother Jones, anticipates that Morgan Stanley might “package up the parking meter revenue, securitize it, roll it into an asset-backed CPMO (collateralized parking meter obligation), put the super-senior tranche into an off-balance-sheet vehicle, hedge the rest via a CDS-backed synthetic CDO, and then resell the whole thing within 12 months to a sovereign wealth fund in Dubai for $5 billion.” Clever, Kev. I like it.