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City for sale

The city has put a price tag on everything from parking meters to CTA stops, billboards to city departments. But what's the real cost of plastering our public space with ads?

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It would be fair to say that Ed Burke is a fixture in the Chicago City Council, except that he's been there longer than many of the fixtures—43 years, in fact, which makes him the longest-serving alderman in Chicago history. His presence is imperious and haughty—he manages to look down his nose on the meek favor-seekers who approach—and he commands top dollar as a private-sector attorney. Other aldermen frequently seek his advice.

On December 3, though, for the first time in collective memory, Burke admitted on the council floor that he was at a loss.

"I don't understand this," he said.

As he studied the sheet of complicated financial data in front of him, Burke further confessed, "The good Dominican nuns tried to teach me how to add and subtract, but I don't know that we ever got to distribution of revenue-sharing calculation illustrations."

The council dean wasn't alone. His comments came during a committee hearing on Mayor Rahm Emanuel's latest privatization plan, an agreement to rent public space to a private billboard company for a guaranteed $155 million over the next 20 years. City officials argued that the deal would create a desperately needed revenue stream at a time when traditional sources like real estate taxes and federal aid are shrinking.

But the contract was 250 pages of complicated legal and financial language, and many aldermen conceded that they didn't grasp all the terms of the deal. Nor did they have any idea whether the city was getting the best price it could. They also worried about the inconvenient fact that the deal had been brokered behind closed doors, without a structured bidding process.

After five hours of questions and concerns, Burke and his colleagues grew weary and signed off anyway.

What everyone understood, though, was that it won't be the last deal to exchange public space and public rights for private cash. In fact, for the last year the city's goal of pursuing such deals has been written into the municipal code. Mayor Emanuel, even more overtly than Mayor Richard Daley before him, has announced that the city is for sale, and no one seems willing or able to stop him.

Desperate for money, state and local governments around the country have explored all sorts of privatization deals, or public-private partnerships, as advocates prefer to call them. Florida, Arizona, and other states have sent inmates to private prisons. Detroit has considered outsourcing management of its street lighting system. The state of Ohio has launched a program seeking corporate sponsorship of roads, overpasses, and rest stops, prompting headlines like this one in Bloomberg: "Ohio to Monetize Bridges, Toilets with Naming Rights."

Chicago isn't just part of the trend. For more than two decades, it's been one of the privatization leaders.

"You could say they're at the head of the pack," says Leonard Gilroy, director of government reform at the libertarian Reason Foundation. "Chicago is reflective of the outsourcing that's been going on for years."

In his first budget in 1989, Mayor Daley privatized management of a south-side mental health clinic. Next he hired private firms to take over abandoned vehicle towing, parking ticket collections, tree stump removal, parking at O'Hare, and some janitorial services.

While claiming savings for taxpayers, Daley also benefited politically from the highly publicized moves. In the mid-90s the Washington Post and Toronto Globe and Mail wrote glowing stories about how the scion of the nation's biggest patronage operation was so devoted to efficiency that he was privatizing city jobs.

In 1993, a group of investors pitched an idea that wouldn't just save money but generate more of it: Daley could privatize the Skyway. Daley took a pass—for the time.

Twelve years later, though, the economy wasn't so strong. When officials with Goldman Sachs and Macquarie Infrastructure dusted off the Skyway proposal, Daley went for it. The result was a lease deal covering so many years—99—that it amounted to a property sale. Not coincidentally, Goldman Sachs was eventually paid $8.4 million to advise the city on the deal and Macquarie Infrastructure was one of the firms that teamed up to submit the winning bid.

It was the beginning of a wave of asset leases: the downtown parking garages were next, followed by Midway Airport (though the financing later fell through).

And then came the parking meter deal.

The city leased the meters for 75 years in return for a billion-dollar payout, which quickly resulted in a fivefold rate increase in some areas. The deal was quietly put together over the course of a year by a handpicked group of lawyers and investment bankers who were due to make millions of dollars off the transaction. No independent analysis was conducted before the deal was inked, but it's probable the contract was worth three to five times as much.

Daley presented the deal as a windfall for the city. But citizens were outraged, in no small part because they literally had to reach into their pockets for more money every time they parked in a metered space. To them it was just another tax, except that the profits were going to a group of investment bankers and the United Arab Emirates.

The deal attracted a lot of attention, even outside of Chicago. A number of government bodies explored leasing out their parking systems. Among them were Pittsburgh and the New Jersey Transit system, which both hired the Chicago-based investment firm Scott Balice Strategies as an adviser. "You had a couple years of other jurisdictions saying, 'Wow—what did they do?'" says Gilroy.

The New Jersey system is still exploring a deal for its parking facilities, while Pittsburgh officials never went through with one, in part because of concerns raised by Chicago's experience. But other cities did, and they also took note of how things had gone down in Chicago. Officials in Indianapolis, for example, decided they wanted a share of revenues over the 50 years of their agreement as well as the ability to opt out along the way. They also presented the deal for public comment before it was finalized, which reduced the blowback.

Rahm Emanuel was vague on the subject of privatization when he was running for mayor in late 2010 and early 2011. He took a few pot shots at the parking meter deal, saying it "offends" him and promising to pressure Morgan Stanley to renegotiate or even cancel it. Yet he refused to rule out other kinds of privatization agreements.

It wasn't until after he was elected that some of Emanuel's plans became evident. An early message was sent even before he was inaugurated, when he announced the top two members of his financial team. For chief financial officer he tapped Lois Scott, one of the founding partners of Scott Balice Strategies, the firm that had advised Pittsburgh and other governments around the country on privatization deals. And the city's new budget director was Alex Holt, who served as an attorney for the group of investors who won the bid to lease out Midway before their financing fell through.

Over the next few months, the mayor let it be known that he wanted to find new ways of bringing in money, including through "municipal marketing." Though it wasn't evident just what that meant, Emanuel said his goal was to reap at least $25 million a year from it.

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