July 27, 2011
The June 2011 edition of Government Finance Review features “The Chicago Experience: a P3 Checklist,” co-authored by Civic Federation President Laurence Msall and Program Manager Roland Calia. The article reviews the City of Chicago’s experiences with its three major public-private partnership (P3) asset lease transactions: the Skyway, the downtown parking garages and the parking meters and articulates lessons learned from those transactions for financial managers.
Government Finance Review is the magazine of the Government Finance Officers Association (GFOA), the leading professional organization in the U.S. and Canada for public sector budget and financial managers. It provides research, training and education programming and is a source for best practices in budgeting and financial reporting.
P3 implementation is a complex undertaking that requires careful planning and a complete evaluation of all costs and benefits. How can stakeholders assess whether a P3 proposal is a cost effective, efficient mechanism that protects the public interest? The Civic Federation presents an eight-point checklist in the article that financial managers, elected officials and other stakeholders can use to evaluate P3s. It assesses whether transactions leverage maximum benefits, mitigate potential problems, are accountable, include effective oversight and prudently use proceeds.
The checklist was previewed in a recent Civic Federation blog post – “Alternative Service Delivery Needs to Meet Stringent Criteria." This blog post summarizes the City of Chicago’s performance with regard to each point.
Does the government have a formal policy regarding P3s?
Chicago has not approved a formal P3 adoption or asset proceed use policy to provide a framework for evaluating and entering into these arrangements and how transaction proceeds will be used.
Have all potential costs been considered, including opportunity costs and political “costs”?
Chicago did not formally evaluate P3 opportunity costs. A recent study found that Chicago could have earned $1.5 billion instead of $1.2 billion if it had kept its parking meters and raised rates to the same levels as the concessionaire. The city’s Inspector General valued the parking meters at approximately $2.13 billion [http://chicagoinspectorgeneral.org/publications-and-press/program-and-policy-reviews/igo-report-closely-examines-parking-meter-lease-recommends-major-reforms/]. However, there are issues with these analyses. Revenues from rate increases may be received over a lengthy period of time, so they may not be sufficient to impact current financial situations. Most significantly, there might not be the political will to raise rates to the same degree.
The political costs of Chicago's P3 transactions have been high. Public unhappiness over steep fee hikes and service problems related to the parking meter transaction was a major issue in Chicago’s 2011 mayoral and council elections.
Does the asset under consideration for a P3 contract provide non-essential services?
What is considered a non-essential or non-core function will vary in different communities. The Skyway was considered a non-core asset by Chicago because it had only 130 employees, it was not organized as a transportation authority or taxing body and tolls were not set by market forces, but operated on a cost recovery system. The City considered the parking garages non-core assets because they were losing money and there are many qualified private sector operators. In contrast, in the case of the parking meters, a lawsuit has been filed alleging that the City unconstitutionally gave up control of its policing powers and the ability to set traffic and parking policies, both core public functions.
How will P3 proceeds be used?
The City appropriately used parking garage proceeds for non-recurring expenses. However, much of the proceeds from the Skyway and parking meter leases to date have been used to close deficits and fund operations. A total of $1.5 billion or 49.2% of proceeds will have been used for operations – $1.5 billion has been spent and $22.0 million is allocated for future spending. Remaining proceeds have been earmarked for long-term reserves ($554.0 million) or debt retirement ($1.0 billion).
Is there a competitive bidding process for operator selection?
Thirteen firms bid on Chicago’s parking garage leases, reflecting the large pool of private operators. Other P3s with more complex financing and expertise requirements had fewer qualified bidders. Three consortia submitted viable Skyway bids. Only two vendors met the City’s requirements for the parking meter transaction.
Are there contractual provisions for adequate management oversight?
The Skyway concession agreement requires that the City review financial statements and incident reports and that independent engineers be hired to oversee construction projects. The concessionaire reimburses the City for oversight expenses. The City regains control of the Skyway at no cost if the concessionaire is found to be in material breach of contract. When a subcontractor for the parking meters was unable to effectively reprogram and operate the meters or to handle writing parking tickets, the City had the contractual authority to move quickly and rectify the problems. The company was billed for the time spent by City workers.
Is there full public discussion and review of the P3 proposal?
The City Council approved the Skyway lease two weeks after the deal was announced. The metered public parking system lease was approved after approximately one hour of debate two days after the plan was unveiled. The Chicago Inspector General noted that no financial analysis of the parking meter system’s value was provided and no public comment or expert testimony was given, nor was there any presentation of comparable studies or alternative lease terms.
Are there requirements for the public reporting of P3 results?
The Chicago City Council approved an ordinance in June 2009 requiring that the City Finance Department website include information in a searchable format on all major lease agreement files for transactions valued over $10 million, lease asset ordinances and a financial report updated quarterly detailing lease proceed allocation and the identification of consultants and institutions involved in management or investment activities.
To read the full Government Finance Review article, click here.