On June 1, city inspector general David Hoffman joined the chorus slamming the $1.16 billion parking meter lease agreement as a loser for taxpayers. The next day Mayor Daley struck back, holding a press conference to offer an impassioned, occasionally coherent defense of the deal.
Gripping the podium like it was Hoffman's neck, Daley informed the City Hall press corps that he and his administration, including chief of staff Paul Volpe, would never, ever enter into a contract that wasn't great for the city. "My chief of staff detailed—detailed!—why we think this is a very, very responsible agreement," Daley said. "As mayor it is my job to be responsible."
When reporters asked about Hoffman's suggestion—endorsed by a growing number of aldermen—that any future sale of a public asset be subjected to "independent analysis" before being finalized, Daley snapped that the city had commissioned outside experts to do just that, most notably the Chicago-based investment firm William Blair & Company. "This agreement had the best professional people with regard to this agreement," he said.
When asked why that company had been selected, as opposed to any of the dozens of other investment firms around the country, Daley became indignant: "Those are good people!"
This testy exchange with reporters turned the spotlight, if only for an instant, on one element of the parking meter agreement that's so far received very little attention: the battery of well-connected, highly paid financial and legal consultants who executed the deal on the city's behalf—and who are immune from the regulations that govern most contractors doing business with the city.
In April the Reader published a cover story explaining how the deal went down: City officials worked on it for months, refusing to disclose to the public even basic information such as who had bid on the contract and how much. Then, two days after the first announcement about the agreement, and before aldermen had seen copies of it, the City Council voted to approve it. In May we published a second cover piece, revealing that the meters had been leased for a fraction of their actual worth. The taxpayers had been hosed. Why?
The implementation of the plan has been a mess: parking rates have doubled, mislabeled and malfunctioning meters have led to citations, and response from LAZ Parking, the firm contracted to run the system, has been less than acceptable. In the weeks since our first story was published, angry residents have been pelting their aldermen with complaints. The aldermen, in turn, have gotten outraged as well, ordering city lawyers to investigate whether the contract can be terminated and passing an ordinance requiring a 15-day waiting period before the sale of an asset can be approved. At the end of May a spokesman for Illinois attorney general Lisa Madigan announced that she had launched an investigation into the "transaction and implementation" of the parking meter deal. And then Hoffman, a mayoral appointee, released his scathing report, charging that the city had rushed into the "dubious" deal and estimating that it had handed off the meters for barely half their value.
Daley and other top administration officials now say the meter agreement was the result of more than a year and a half of study, legal work, and competitive pricing. "The city conducted a robust, open, transparent, and competitive bid process," Volpe said, in a prepared response to Hoffman's report. William Blair had determined that the meters could fetch between $650 million and $1.2 billion on the open market, he said, and the winning bid was at the upper end of that range.
But the sad fact is that city officials have avoided openness and transparency almost every step of the way. And they don't appear to be changing their tune now, as we attempt to determine exactly how William Blair was chosen to evaluate the deal and what its role was in pulling the agreement together. One thing they've conceded, however, is that there was no bidding process for the job: they say Blair was deemed to have expertise that made it particularly suitable for this kind of work. But our latest investigation—piecing together public documents, records of City Council hearings, interviews with elected officials and financial experts, company profiles, and previous news reports—reveals that there's a lot more to the story:
aNot only did William Blair advise the city on the deal—it came up with the idea in the first place. Then it provided the city with the only estimate it ever received of what the system was worth and coordinated the bidding process.
aTwo other financial services firms and three law firms were brought in to assist. All were given no-bid contracts for the work, and all appear to have political or personal ties to the Daley administration (which is not unusual for the way the city of Chicago does business).
aThe financial advisers were each paid a share of what the city made in cash on the lease deal. William Blair received 0.375 percent of the payout, or about $4.3 million, according to records obtained from the city through a FOIA request. The others, Gardner Rich and Ramirez & Company, each received 0.0625 percent, or $722,813. The attorneys' fees added up to another $1.3 million. All told, the city paid its legal and financial advisers more than $7 million for their work on the deal.
aAt the same time they were helping the city prepare and conduct the bidding process for the parking meter lease, all of the financial firms, including William Blair, were working on other multibillion-dollar deals with the company that emerged as the winning bidder, Morgan Stanley. The overlapping relationships are in violation of the city's own contracting rules.
aPartners in two of the three law firms hired to work on the deal had previously donated money to Mayor Daley's campaign. City rules ban contributions to the mayor from employees of city contractors but don't apply to law firms.
aTogether the lawyers and financial advisers—not anyone in city government—determined who would control the parking meter system for the next several generations and how much money they'd make off it. But as private entities, none of these firms are required by law to disclose to the public how they arrived at their plan. And none would talk to us for this story.
Needless to say, it's standard operating procedure for the city to hire financial firms to help with big-money transactions and outside attorneys for work on everything from defending against lawsuits to negotiating labor agreements. But city officials are bound by few rules in determining who gets these lucrative jobs and why, and thanks to a gaping loophole in city procurement rules, the contracts for them are rarely put up for bid.
Mark Hands, a managing deputy procurement officer for the city, said city contracts are competitively bid on except in those instances where certain firms demonstrate a "unique or exclusive capability" for goods or services the city needs. "The Illinois Municipal Code exempts contracts 'which by their very nature are not adapted to award by competitive bidding, such as but not limited to contracts for the services of individuals possessing a high degree of professional skill where the ability or fitness of the individual plays an important part,'" Hands explains.
The city brings on private-sector lawyers for three reasons, according to law department spokeswoman Jenny Hoyle: they have expertise city attorneys lack, an outside attorney is needed to avoid a conflict of interest, or the city doesn't have enough lawyers available. Private lawyers are selected by the city's top lawyer, the corporation counsel, "based on their expertise in the relevant areas of the law," Hoyle said.
Word that the city had plans for a "super secret" long-term lease for the parking meters first went public in a leak to Sun-Times columnist Michael Sneed. On October 17, 2007, she wrote, "Sneed is told Mayor Daley's fiscal advisers are working on a deal to privatize the city's parking meters, which could potentially reap 1 BILLION bucks for the cash-strapped city." She reported that the city had hired legal and financial advisers to help.
In fact, the advisers had been working on the deal for months. In his recent press conference, as he tried to ward off criticism that the deal had been rushed, Daley pointed to a placard showing a timeline of the meter privatization process. This was the first time reporters had been shown these dates, and they indicated that the city hired William Blair in June 2007, four months before Sneed tipped us off that something was afoot, to begin "preliminary due diligence."
"This wasn't an idea just picked out of a hat to do this," Daley said. "This had been talked about for two years!"
When pressed for details on how and why William Blair was hired, Daley turned to Volpe, who said the firm had specialized experience in municipal finance—as did the two other firms that had worked as financial consultants on the deal, Ramirez & Company and Gardner Rich. "There are very few firms that are qualified in this area," Volpe said.
The city has so far been unable or unwilling to provide more information on those qualifications.
Daley and Volpe have boasted that Chicago's long-term lease agreements have become a model that other municipalities are now seeking to emulate. But other cities have found other ways to do business.
For instance, in January Pittsburgh mayor Luke Ravenstahl announced that he wanted to explore leasing his city's public parking garages and meters in return for cash he could pour into the city's pension fund. A few weeks later the authority that oversees Pittsburgh's parking system invited firms to submit proposals for an analysis of the idea. It received nine responses and determined four were qualified. Next a committee made up of city officials, an authority attorney, an authority board member, and a union representative interviewed the firms before recommending a winner at a public meeting of the authority's board. Board members then approved up to $100,000 for the study.
The winner was Scott Balice Strategies, a woman-owned financial advisory firm based in Chicago.
As evidence of their commitment to "transparency," Daley administration officials often point to the city's Department of Procurement Services Web page, which includes a searchable database of city contracts, contractor records, and payment histories. But the site doesn't include any information about William Blair's work on the parking meter deal. Nor does it say anything about Gardner Rich or Ramirez & Company. Mark Hands said the information wasn't in the database because the firms were selected not through a procurement process but by the city's budget office.
On Friday, May 8, we requested an interview with Volpe to discuss the origin and terms of the deal, but budget department spokesman Pete Scales asked that we submit our questions in writing to him instead. Among those we sent in the following Monday: How was William Blair selected to consult on the meter lease agreement? How much was the company paid?
Scales hadn't responded to us by May 27, when we submitted Freedom of Information Act requests for copies of the agreement between the city and William Blair and all records generated by the firm during its work on the meter deal. The Illinois Freedom of Information Act requires a written response in seven working days, and Scales promised to get back to us. But he didn't respond to numerous follow-up calls and e-mails over the next couple of weeks. Finally, on Friday, June 12, just before 5 PM (not the first time we've heard back from the city at the end of the day on a Friday), he e-mailed us a copy of a "confidential" agreement between William Blair and the city outlining the company's responsibilities and pay rate on the parking meter deal. He also referred us to some documents, including the meter lease agreement and payment totals to William Blair, that had apparently just been posted on the Web site of the city's Department of Finance.
The agreement with William Blair that he forwarded us was dated January 7, 2008—a full six months after the date Daley gave for the commencement of the firm's work on the deal. Why was there a delay? Why didn't the city draw up a contract before the work began? Would the company possibly have worked for half a year without the compensation outlined in a contract? Scales didn't respond to e-mails asking those questions.
The agreement describes the company's work on the deal in the broadest terms: It was to "familiarize itself to the extent it deems appropriate" with the parking meter system, then "provide the City with financial advice and assistance" on a lease deal, such as conducting financial analysis and research, "developing and implementing" the solicitation of companies interested in bidding, and helping the city negotiate financial terms on the deal. It instructs the firm to work with Ramirez & Company and Gardner Rich as co-advisers and lays out what they'll be paid.
We've pieced together additional facts from documents the city provided in response to earlier questions we had about the value of the meter system. They suggest that William Blair oversaw nearly every aspect of the lease agreement. Companies interested in bidding on the meters were told to contact Tom Lanctot, a top official at the firm, and the official bids were opened at William Blair's headquarters under Lanctot's direction.
Blair's Web site notes that the company was the principal player in an earlier privatization effort: the leasing of the city's downtown parking garages, which in 2006 were turned over for 99 years to a partnership led by Morgan Stanley in return for $563 million in cash up front. "Our P3 team," for public-private partnership, "originated the idea for the long-term concession and lease of the 9,178 space Chicago Downtown Public Parking System," it says. Blair was paid $2.2 million for its work on that deal, according to the city.
The company's site also explains that the firm was even more deeply involved in the meter deal. "In our role as lead financial advisor, we managed a Request for Qualifications process to identify prospective bidders, developed a Confidential Information Memorandum, organized and presented bidder information meetings and system tours, structured the financial aspects of the concession, led the negotiation of the Concession Agreement, coordinated the bidder due diligence process and managed the competitive bidding process that involved North American and international bidders."
And there's one more thing: "William Blair & Company originated the idea for the transaction."
We called and then e-mailed Lanctot asking what that meant. Did someone at the company actually suggest to Mayor Daley that he lease the meters? If so, when?
Lanctot didn't respond, but a few minutes after our e-mail was sent, Tony Zimmer, Blair's spokesman, called. He referred us to Pete Scales.
The city has been no more forthcoming regarding Gardner Rich and Ramirez & Company. But both are minority-owned firms—a crucial political consideration, given that the city's low minority contracting numbers are a regular source of contention in the otherwise pliant City Council.
All three financial firms were well-known to administration officials—and to each other—before the meter deal was under way. Last fall the Sun-Times reported that William Blair had donated at least $104,500 over the previous two years to After School Matters, a charity founded and run by Mayor Daley's wife, Maggie. William Blair's chairman, Edgar D. Jannotta, serves on the board of directors of Aon, which was founded and led for years by Patrick Ryan. Ryan retired from Aon last year and now serves at Daley's behest as chairman and CEO of Chicago's Olympic bid committee.
Gardner Rich also has ties to the city's political establishment. The firm is led by CEO Christopher P. Gardner, whose rags-to-riches story was the basis of the 2006 movie The Pursuit of Happyness. In 1994 Mayor Daley appointed Gardner to the School Finance Authority, a board that at the time oversaw school-reform policy for the Chicago Public Schools. Over the last few years his firm has worked on more than $1 billion worth of bond issues for the city, schools, Park District, and Water Reclamation District. "The day Richie is no longer mayor is the day I move out of here," Gardner told the Sun-Times in 2006.
In September 2007 Volpe announced that Ramirez & Company would be one of the chief managers of a $2 billion bond issue, the city's biggest led by minority-owned firms. Aldermen were pleased at the news; Volpe said the council and administration both deserved credit. "Our joint efforts to help grow the size and capacity of minority-owned firms have resulted in a larger, stronger stable of firms from which we can choose when we seek to issue bond transactions."
The truth, though, is that in recent years the city and other local government entities have typically relied on the same small group of firms for their big financial deals. Gardner Rich received $252,080 from the city for helping lease the Skyway in 2005, and along with Morgan Stanley was hired to work with Ramirez on the 2007 city bond issue. Ramirez was paid $351,875 to assist Blair with leasing the parking garages, and last July it was hired to work on a $150 million bond issue for Cook County—a deal that caused a minor stir because Morgan Stanley was also employed to work on it not long after hiring William Daley Jr., nephew of both the mayor and his brother John, chairman of the county board's finance committee.
But what may have been just as notable about the county bond deal was the potential for conflicts of interest it created in the city's parking meter leasing process. At the same time Ramirez was advising the city on its "robust, open, transparent, and competitive bid process" for the meters, the firm was also working on a county bond issue with one of the bidders—the one, in fact, that ended up winning the contract.
And that's just one of several instances where the advisers on the meter deal were working alongside the winning bidder, Morgan Stanley, even as the bidding process was going on. In March 2008 Gardner Rich and Morgan Stanley helped the city issue up to $560 million in water revenue bonds. That same month Morgan Stanley, William Blair, and Ramirez & Company all worked on a $2 billion bond deal for the CTA.
Experts say there's no reason that a firm with a history of working successfully with the city shouldn't be hired again. But they stress that it's not smart for a government to simultaneously use the same firms as advisers and bond managers. "It is definitely inadvisable because it reduces independent judgment—which is what governments need when making investment decisions," says H. Woods Bowman, a professor of economics, finance, and ethics at DePaul who served as the county's chief financial officer in the 1990s.
But, he added, "I presume you will agree that what's weird elsewhere is sometimes normal in Chicago."
Normal or not, the overlapping relationships of the lease deal's top adviser and winning bidder appear to skirt the city's own contracting rules. The city's procurement law, posted on its Web site, says, "If the contracting parties assist the city in determining the advisability or feasibility of a project or in recommending, researching, preparing, drafting or issuing a request for proposals or bid specifications for a project, the Contracting Parties must not participate, directly or indirectly, as a prime, subcontractor or joint venturer in that project."
"The Contracting Parties may, however, assist the city in reviewing the proposals or bids for the project if none of the contracting parties have a relationship with the persons or entities that submitted the proposals or bids for that project."
Every big government financial deal also needs lawyers, and the meter lease was no exception. Among the firms who performed legal work for the deal were those who worked on the big CTA bond issue at the same time: Katten Muchin Rosenman and Gonzalez Saggio & Harlan. They were joined by a third, Charity & Associates.
Law department spokeswoman Jenny Hoyle said the firms were picked by corporation counsel Mara Georges and first deputy corporation counsel Jim McDonald, the primary city lawyer working on the meter deal. They were chosen for their expertise "and the fact that they met our diversity objectives in the retention of outside counsel," Hoyle said.
Work on the meter deal was divided up among the three firms. According to Hoyle, Katten wrote the lease agreement and researched state legal issues. Gonzalez Saggio wrote the ordinance authorizing the city to enter into the agreement—which the City Council passed by a 40-5 vote. And Charity "worked on operating standards and real estate aspects," Hoyle says.
The firms were paid $475 per lawyer per hour, according to letters the city sent the firms outlining the scope of their work. By the time the work was done Katten had been paid $662,759.64, Gonzalez Saggio $162,461.50, and Charity $522,485.50.
All three law firms have long-standing relationships with the mayor and his administration. Since the 2005 Hired Truck scandal, when the Sun-Times revealed that politically connected trucking firms were paid millions to do little or no work, the city has been sending a letter to contractors warning them that it "prohibits bidders, contractors and subcontractors from making political contributions to the Mayor or his fundraising committee." But law firms hired by the city aren't covered by these contracting rules, and according to state campaign finance records, since 2001 attorneys with Katten have written Daley checks adding up to more than $33,000. Meanwhile the city paid the firm a total of $160,000 for legal work on the leases of the Skyway and downtown parking garages.
But if Katten has a special connection to Mayor Daley, it's through partner Terry Newman. According to the Katten Web site, Newman's legal specialty is "real estate taxation," but he's known around town as one of the mayor's best friends. Before joining the firm he worked as a prosecutor under the mayor, then the Cook County state's attorney. Over the last 15 years, Newman has been mentioned frequently in local gossip columns as a regular at Daley's private parties. "As often as three nights a week Daley indulges in a 'boys' night out,'" Fran Spielman wrote in the Sun-Times in 1995. "Around the dinner table at Carlucci's, Marche or Parrinello's is what one friend calls a 'floating crap game of associates.' The list almost always includes Loop attorney Terry Newman, a jovial type considered one of the mayor's closet friends."
In 1992 the mayor appointed Newman to the board of trustees of the City Colleges of Chicago; he's now its secretary. He's also the chairman of the board of directors for After School Matters. In November 2006 Newman cohosted a $1,000-a-ticket fund-raiser for Daley.
The other firms have their own ties to the administration. Elvin Charity, one of the partners in Charity & Associates, has donated about $3,500 to Daley since 2001 and thousands of dollars more to the coffers of many aldermen, including Ed Burke, chairman of the City Council's finance committee, which held the hearings on the parking meter deal. In 1992 the mayor tapped Charity for the Community Development Commission, which oversees the tax increment financing program; he served until 2000. In 2006 the city paid Charity & Associates $420,000 for legal work on the lease of the downtown parking garages.
Gonzalez Saggio & Harlan has been paid thousands of dollars over the last three years for work related to the city's potential leasing of its garbage sorting centers. The partner who worked on the parking meter deal was Timothy Wright, who recently served as the attorney for his own former law partner, Senator Roland Burris, who's also donated to the mayor and numerous aldermen over the last several years. Another Gonzalez partner, Ferhan Hamid, worked as an assistant comptroller for the Daley administration, where, according to his bio, he was an "integral part" of the city finance team that worked out long-term lease deals for the Skyway, Midway airport, and the parking garages.
The company that won the rights to the parking garages? Morgan Stanley. In its damning report on the agreement, the inspector general's office concluded that the city may have leased the meters for $974 million less than they were worth. The reason, the report concluded, was that William Blair's calculations of the system's value were all done from the perspective of an investor—they were based on what that investor might be willing and able to pay for the meters, not what their value was to the city. "The City should have conducted this analysis so that its decision about whether to lease the parking-meter system now—and if so, under what terms—could be made in the most informed fashion possible," the report states. "The failure to conduct this analysis strongly suggests that the decision had already been made that the City was going to lease the meters for the best-available price on the market."
The report didn't address questions such as why that analysis wasn't conducted, who made the decisions to put the system on the market regardless of other factors, how it was determined which advisers would be brought in, how much decision-making power they would have, whether any conflict-of-interest safeguards were put into place, and just what communications occurred among all of the parties while the deal was being conceived, designed, and executed. The public doesn't have any of these answers. The companies involved aren't required to say. The mayor and his top aides say they're committed to transparency. But so far nobody's talking. v
Care to comment? See this story at chicagoreader.com, where you'll also find our previous reports on the parking meter lease deal and our blog, Clout City.