It's not often that the L.A. City Council is praised for setting fire to $2 million of other people's money. But that's more or less what happened in February, when the council precipitously killed a deal to lease out nine city parking garages.
The decision to pull the plug was cheered by opponents, who argued the deal was a short-term solution to a long-term budget problem. But there is more to this story, newly uncovered facts that no one has reason to celebrate. Documents that were kept secret during negotiations over the deal but have since been released under the Public Records Act shed new light on what went on behind the scenes.
Effectively, the council squandered $2 million by hiring consultants and lawyers without doing political due diligence to see if the deal would fly with constituents. When opposition later emerged, that $2 million worth of work was tossed out.
Public-private partnerships have been commonplace in Australia and Europe for years, and recently infrastructure investors have worked to break into the U.S. market. With the recession, local governments also have shown an interest in leasing nonessential assets to raise quick cash.
In 2009, urged on by Mayor Antonio Villaraigosa, the L.A. City Council voted to hire a consultant to explore a 50-year lease of the city's parking garages. The deal would bring in money to address the city's cash crunch, while turning the garages over to professional operators who would upgrade them and automate the payment systems.
The consultant was tasked with assessing the garages, surveying the parking rates in surrounding private lots and estimating how much the city should get.
What the consultant did not do — because it wasn't the consultant's job — was gauge the level of public support for privatization. Staying in touch with constituents is the council's job, and it didn't do it.
"What's troubling is that they would proceed without involving or consulting with the local community first," says Leron Gubler, president of the Hollywood Chamber of Commerce. "It would have helped if they had contacted us earlier for some input or feedback."
If they had, they would have learned that local business groups were extremely worried about losing discounted parking at public garages.
The city subsidizes parking at its garages in Hollywood and Westwood. Under a lease, that subsidy would end. A private operator could jack up rates to market levels, which were based on the city-funded study. Merchants feared that would hurt business.
If the council had done that outreach, it could have decided up front whether to kill the deal or go forward in spite of opposition. Instead, it spent $2 million investigating the legal and financial feasibility of the deal without any idea of its political feasibility.
In August 2010, the council opened it up for bids. A dozen bidders would have to spend hundreds of thousands of dollars each evaluating the deal. Among a long list of other questions, one bidder asked: "Will the council really vote for this deal? Due diligence is expensive and a lot of work."
The answer from Miguel Santana, the city administrative officer, seems naive in retrospect: "The City Council and the mayor have shown their commitment to pursue a public/private partnership for the operation of the city's garages. ... All proposals that are financially and operationally beneficial to the city will be seriously considered."
At about the same time, business associations in Westwood and Hollywood were mobilizing against the deal. In December, representatives of the Hollywood business community sat down with their councilman, Eric Garcetti, and gave him an earful.
"He really did listen to the angst we were feeling about losing affordable parking," says Kerry Morrison, executive director of the Hollywood Property Owners Alliance.
"He definitely got it," says Steve Sann, chair of the Westwood Village Business Association. "It was a very potent, one-two knockout punch, hearing it from Westwood and Hollywood. ... Eric said, 'I've never loved this deal.' "
In January, the council met for several hours in closed session with Santana. The discussions were kept secret at the time, but newly released records show that the council made two major revisions to placate Westwood and Hollywood businesses.
The first was a cut in the rates. At the Hollywood & Highland garage, the original lease agreement would have allowed rates to rise from $3 per hour to $9.60 per hour over five years. Under the revised plan, the hourly rate was limited to $4 per hour, or $2 per hour with validation. The maximum rate for Cirque du Soleil events originally was set to rise from $10 to $30. It was capped at $15.
At the Broxton lot in Westwood, the city had planned to phase out free parking and charge $4.80 per hour by the fifth year of the contract. Under the revised plan, drivers would be charged just $1 per hour with validation.
The second major change was in the "noncompetition" zone around each garage. Under the original deal, the city agreed not to build any new garages within an eighth of a mile of the leased garages. That way, private operators would be assured they would not have to compete with below-market rates. In the revision, the council removed Hollywood Boulevard from the noncompetition zone, preserving the city's right to build garages there.
There was one other provision. The council wanted to know if the revised deal could bring in $230 million. It's not clear why it chose that figure, but it was effectively a poison pill. With the new restrictions, there was no chance that bids would go that high.
In February, Santana announced that the bidders had rejected the deal. But the bidders' written responses, since made public, show that several still were interested in getting a deal done.
The two most serious bidders — Morgan Stanley Infrastructure Partners and CIM/LAZ — were reluctant to put a hard number on the revised proposal. CIM/LAZ would say only that it "yields an up-front value substantially below $230 million."
But both wanted to keep talking. Interestingly, neither expressed any concern over the new rates. Both did have a problem with the revised noncompetition zone, and with other issues that were not part of the public debate, such as possessory interest tax and potential parking-tax increases.
Santana wanted to keep talking, too. He planned to go into closed session and determine whether the council would back off on any of its restrictions.
But it didn't get that far. Instead, the council voted unanimously to scrap the deal. "This is a terrible idea," Councilman Tony Cardenas said. "We should just kill it once and for all."
That's a defensible position. But the time to take such a stand would have been before Cardenas and the other council members voted to hire consultants and lawyers to investigate the concept.
Before voting to kill the deal, Garcetti says he had only supported exploring the idea to see if it made financial sense. But in the end, the council's decision was not based on any of the consultant work. It was based on a shift in the political winds.
Perhaps a deal could have been done for $200 million or more, with the reduced rates and a modified noncompetition zone. Perhaps not. After two years and $2 million, the council didn't bother to find out.
"I thought the policy objective was to maximize the value of the asset," Santana says. "It's not clear to me what the specific reason was for not moving forward. ... We never had an opportunity to discuss it."