Update II: CFO Paul Volpe responds (PDF). Most of it’s of the “I’m rubber, you’re glue” and “we got paid” variety, but here’s where the real throwdown is:
Update III: Forgot that the city’s valuation comes up in the IG report:
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“Once the future revenue stream was projected, the advisor discounted this future cash flow to its value today to a private concessionaire. ‘In the private sector the discount rate is based on the cost of capital for the activity in question, namely the weighted cost of the relevant debt and equity financing.’ The cost of debt is the interest rate that must be paid to the lenders, while the cost of equity is the return that investors expect to make on a given investment. Thus to estimate the value of the upfront payment, William Blair used a discount rate that was based on the likely capital structure, the combination of debt and equity, that would finance the upfront payment. The advisor estimated that a private concessionaire’s cost of capital and thus the discount rate for the future revenue would be between 10 and 14 percent.” (p. 17)
“One City Council Finance hearing and one full Council meeting were devoted to the lease’s discussion. There was no public hearing where City residents, civic organizations, or other interested parties could comment on the lease. The ordinance that approved the lease was not completed until one day before the City Council Finance Committee voted on it. The only documents the City Council received were the lease itself, the ordinance enacting the lease, an 10 page PowerPoint presentation that provided a general overview of the lease, and a flow chart detailing the corporate structure of Chicago Parking Meters, LLC.” (p. 32)
“CFO Volpe was asked to produce numbers that demonstrated that the upfront payment was sufficient compensation for the parking meters. He provided the City’s conclusion that the payment was sufficient but did not provide documentation to support this conclusion. The CFO also pointed out that if the Council did not approve the lease agreement, there would be an $150 million shortfall in the budget that would likely need to be filled with tax increases.” (p. 13-14)
“Under ‘revenue sharing’ provisions, a lease is given to a private operator, not solely in exchange for an upfront payment, but rather the government also shares in the profits over the long-term. An alternative lease of the parking meters that included revenue sharing would have likely generated an upfront payment that would have allowed the City to address its budget shortfalls. At the same time, it would strengthen the City’s long-term financial outlook by producing a larger annual revenue stream than the City currently receives from the parking meters. Finally, a lease with revenue sharing would have meant that the City would not have given up as much present value as it did in the actual lease. Because it provides both short-term and long-term benefits, revenue sharing is a more balanced approach to financing PPPs.” (p. 29)
