The Parking Meter Fiasco, Part 2

Mike, “The Parking Meter Geek,” who maintains website interviews Jay about how Chicago taxpayers lost billions of dollars of parking meter revenue.

CPM’s’ Parking Meter Profit is 24 Times More than the Industry’s Gold Standard

New information reveals that Chicago will lose more parking meter revenue than the $2 to $4 billion Alderman Scott Waguespack (32nd) and Inspector General Joseph M. Ferguson initially estimated. Bloomberg News reported Chicago Parking Meters LLC (CPM), which is owned primarily by Morgan Stanley, estimates that it will earn over $9.58 billion dollars from its parking meter deal with the city. CPM’s $9.58 billion revenue is more than eight times what CPM paid Chicago for the parking meter rights.

One tool financial analysts use to measure a company’s profitability is called “return on investment,” or “ROI.” Experts consider a 20% return on investment an excellent ROI. For example, if ABC company invests $1 million in an asset and ABC’s profit on this investment 1s $200,000.00, its ROI for that particular asset is 20%. By using CPM’s ROI, we can see how the CPM company is making a profit 24 times more than the industry’s gold standard.

CPM expects the parking meter deal will cost the company $2.02 billion ($1.16 billion for the parking meter lease, plus another $.86 billion to fulfill the parking meter contract obligations). Let’s take a 20% ROI that experts consider excellent and apply it to the CPM’s parking meter deal. If CPM earns a very respectable 20% ROI, the company’s parking meter profits will be $404 million. Instead of touting $404 million in profits, CPM claims that it will earn more than $9.58 billion before interests, taxes, and depreciation from their Chicago parking meter deal. CPM’s claim that it will earn $9.58 billion is 24 times more than $404 million if the company achieved a very respectable 20% ROI.

Suppose we used the $9.58 billion profit figure that CPM recently released to calculate the value of Chicago’s parking meter lease. If CPM were to earn $9.58 billion profit at a 20% return on investment, Chicago would have leased its parking meters for $47.9 billion. The city leased our parking meters for $1.16 billion, not the $47.9 billion that it would have taken for CPM to earn $9.58 billion at a 20% ROI.

Return on investments are often viewed in percentages. CPM estimates it’s total parking meter deal revenue is $11.6 billion, it’s expenses, $ 2.02 billion, and it’s profits, $9.58 billion. According to CPM’s estimates, the company expects to make 474% return on its $2.02 billion investment. Recall experts consider a 20% ROI highly successful. CPM’s 474% ROI is nearly 24 times more than the 20% ROI that experts consider highly successful. CPM’s much higher than average return on its investment comes at the expense of the people who are feeding money into Chicago’s parking meters every day.

CPM’s parking meter contract with the city defies the laws of investment. CPM’s sensational 474% return on its investment comes with virtually no risk. The general rule is, the higher the risk of the investment, the greater the profit or loss. The parking meter contract favors CPM so much that the company harbors no financial risks. CPM’s parking meter lease allows the company to earn $9.58 billion in profits without assuming any of the risks associated with financial investments. For example, CPM can automatically raise the cost to park because its contract with the city ties parking rates to the Consumer Price Index. If the city removes parking meters, the city has to pay CPM money to offset CPM’s loss in revenue that comes with the elimination of each parking meter. Given that the city and CPM’s contract exposes CPM to no financial risks, CPM’s parking meter ROI should be 20% or less, not the whopping 474% ROI CPM expects to earn.

CPM’s 48 Year Cash Cow

Payback period is another measurement experts use to evaluate a financial investment. The payback period is the length of time it takes to repay the sum of the original investment. CPM original investment was $2.02 billion. CPM expects parking meter revenue of  $1.43 billion by 2020. Between 2020 to 2073, CPM estimates it will receive parking meter earnings of $10.18 billion. Given CPM’s revenue stream, CPM’s payback date is approximately 2025.

In 2008, CPM signed its 75 year parking meter lease. When CPM reaches its payback period in 2025, the company will be in year 27 of its 75 year contract. From 2025 to 2073, CPM will rake in more than $9 billion in profits from its Chicago parking meter lease. CPM will be making nearly all profit for 48 years out of its 75 year lease. CPM’s 48 year cash cow is more evidence of how Mayor Daley and 45 members of the city council undersold the lease of Chicago’s parking meters.

A Cost-Plus Parking Meter Contract

A cost-plus parking meter contract would have been a much better deal for Chicago. Companies would have jumped at the chance to earn a guaranteed 20% on Chicago’s parking meter costs. In this economy many companies are earning a 5% or 6% ROI. A cost-plus contract would have paid all of CPM’s expenses, plus guaranteed CPM a 20% profit. CPM said its parking meter costs are $2.02 billion. Suppose Chicago gave CPM a 20% cost-plus contract, which is very generous payment for this kind of contract. CPM’s cost, plus the additional 20% profit on $2.02 billion is $404 million. Chicago would have earned $8.32 billion of the $9.58 billion parking meter revenue on a cost-plus contract. Chicago receiving $8.32 billion is $7.16 billion more than the $1.16 billion that CPM paid the city for the parking meter lease.

Mayor Daley’s parking meter deal is allowing CPM to earn excessive profits without assuming any of the customary financial risks. Furthermore, CPM will continue to reap much higher than average profits for 48 years after the company pays back its initial investment. CPM is profiting from its risk-free parking meter lease longer than pharmaceutical companies who must assume the risks and costs of researching and developing each new drug. No company should have such a one-sided contract, let alone a contract in which a mayor holds its residents and guests financial hostages.

When Chicago residents complained about traffic congestion, Mayor Daley replied, “You’ll just have to take the bus.” Of course, Mayor Daley did not realize that in traffic jams, buses inch their way through traffic just like cars. Mayor Daley is as clueless about our city’s finances and parking meters as is he is about our traffic flow.

Alternative use of Capital

Mayor Daley leasing Chicago’s parking meters for billions less than that what they are worth started with Daley’s flawed financial planning system. The city should have evaluated other alternatives to the parking meter lease before it entered into a final agreement with CPM. For example, if Chicago kept the parking meters, Alderman Scott Waguespack pegged Chicago’s parking meter revenue at $4 or $5 billion, which is $3 to $4 billion more than the $1.16 Chicago received from CPM. Prior to signing the lease with CPM, the city failed to evaluate net parking meter revenue if the city continued to invest in and manage Chicago’s parking meters. As mentioned in the previous section, Mayor Daley failed to evaluate whether or not a cost-plus contract was capable of bringing in more parking meter revenue. Prior to finalizing any parking meter lease, if the city followed the accepted “alternate use of capital” business practice, the city would have compared at least three different types of parking meter income streams before it reached a decision.

Mayor Daley claims CPM’’s lease was the best deal for the city. Daley’s claim is only based on the proposals from companies interested in leasing Chicago parking meters. Bidders competed against one another for the parking meter rights, but bidders should have also competed against alternative financing methods. What Daley fails to mention is that his administration did not look at other parking meter options and compare the revenue from the alternatives with the revenue from CPM’s lease. Had Mayor Daley done his due diligence, he would have ample evidence to back up his decision to award the parking meter lease to CPM.

Jay Stone has an MBA degree from Loyola University of Chicago. Elect Jay Stone mayor of Chicago and he will make sure all financial possibilities are evaluated prior to the signing of each and every city contract. Jay will make sure that after all options are evaluated, the mayor and aldermen will choose only the best proposal for the citizens of Chicago.