City Hall's on-again, off-again plan to privatize its parking garages is faltering once more, and could collapse for good.
There are some sound reasons for skepticism about the idea, which has been kicking around for more than two years. The devil is in the details, and those have yet to be released. Conceptually, though, there is no reason it shouldn't work — at least from a financial perspective. But in order to go forward, the deal has to work financially and politically, and the latter is where the real problems lie.
For starters, there is the strained and mistrustful relationship between the L.A. City Council and Mayor Antonio Villaraigosa — who has championed the privatization deal as a way to spare some of the pain of slashing city services.
Second, with mounting pressure from affected retailers, some of the council members are getting cold feet. Prospective bidders have seen this play out before in Pittsburgh and Harrisburg, Penn., where political friction scuttled similar deals.
“The city has not done a terrific job of understanding their constituents,” said Larry Stubbs, a partner at LAZ Parking, which is considering a bid. “Without significant alignment ahead of time between all the various decision-making constituencies, these are very, very difficult transactions to get done.”
The council has tried to kill the idea a few times, only to see it return because the city's fiscal crisis isn't going away and there aren't that many options. But though the deal promises a relatively painless way to close a gaping deficit, it remains politically treacherous.
For the council, the deal doesn't have much upside if it works. But if it fails — or is perceived to have failed — there will be hell to pay.
“I'm going to invite you to be in my shoes for the next 10 seconds,” Councilman Tony Cárdenas told the consultants pitching the deal back in 2009. “We're the ones the public sees, and either throws tomatoes at, or maybe once every 10,000 years might want to throw a parade in their honor. But the bottom line is we tend to be the ones the public are looking at, and the press and everybody is saying, 'What terrible decisions. You don't know what you're doing.' ”
Under the plan, the city would get a lump-sum payment up front to help close its budget deficit and replenish its reserves. A private operator would get to run the garages for 50 years, and would be allowed to increase parking fees to market rates.
That's the part that sets people's blood to boiling, especially in L.A., where cheap, subsidized parking is almost a civil rights issue.
“This is an insane idea,” says Steven Sann, chairman of the Westwood Village Business Association. “To give away these irreplaceable public assets is to mortgage our future. … Where does it stop? Do you give away the family jewels until you have nothing left to give away?”
As a cautionary tale, the council members are all familiar with what happened in Chicago, where a private venture — including LAZ — took control of the city's parking meters. Rates that had been as low as 25 cents an hour abruptly rose to $1.25. Meters started jamming, drivers got tickets for parking at jammed meters, and there was a general civic revolt.
Financially, there is a case to be made that Chicago didn't get such a bad deal. But politically, it was poison.
L.A. has tried to learn from Chicago's mistakes. For one thing, it has taken parking meters off the table — at least for now. And subsidized rates at city-owned garages would rise more gradually. At Hollywood & Highland, where parking costs $3 an hour (or $2 for four hours with easy-to-come-by validation), rates would rise to $9.60 an hour in five years. At the Broxton structure in Westwood, free parking would be phased out and rates would rise to $4.80 an hour.
The city has a market survey that shows this is still less than what surrounding private lots charge right now. But that may be little comfort to a politician facing a neighborhood insurrection with no power to lower rates or undo the deal.
The latest challenge to the idea comes from merchants who fear that business will dry up without city-subsidized parking.
More than once, City Council President Eric Garcetti has shepherded the deal through the council budget process. But lately he has been getting an earful from retailers in Hollywood, and has become more of a skeptic himself.
“This wasn't my budget. The mayor put this in his budget, and the case has to be made,” Garcetti said. “I will only move forward if it does not add an additional burden to the Hollywood business community.”
In response, the city's top financial officer, Miguel Santana, announced last week that he would tweak the numbers to accommodate Hollywood's concerns. That will reduce the up-front payment to the city, if a deal can still be consummated at all, so Santana recommended moving forward with cuts on the assumption that the deal will not happen.
The turnabout has been head-spinning for potential investors, some of whom have already spent hundreds of thousands of dollars, if not millions, preparing to bid.
Jerry Neuman represents CIM Group, which partnered with LAZ to put together a bid. “The client is getting concerned that they're really not going to do it, and they're going to spend a bunch of money on something that isn't going to happen,” Neuman says.
Another lobbyist, Ken Spiker, represents Parking Concepts and its equity partner, Fortress Investment Group. Spiker says Fortress executives “don't think the city of L.A. is serious.”
“If they want free parking and subsidized parking, they're not going to get anywhere near the amount they were told they would get,” Spiker says.
At a minimum, the city should receive $200 million for a 50-year lease of nine garages. Once $95 million in debt is paid off, the city is left with at least $105 million.
Opponents of the deal argue that this is shortsighted and irresponsible, because over the next 50 years the garages will bring in far more than that in revenues. That's true as far as it goes. Accepting the assumptions in the city's financial analysis, the city should expect to receive $1.6 billion in net cash flow over 50 years. A private operator — unconstrained by city labor contracts and political demands to charge below-market rates — would net about $2.6 billion after taxes.
But that ignores the plain fact that a dollar today is worth more than a dollar a year from now, and a lot more than a dollar 50 years from now. Applying a reasonable discount rate, the garages are worth about $193 million to the city in present dollars — and about $262 million to a private operator, after taxes.
If the winning bid comes in around that level, there's nothing inherently stupid about accepting it. Ideally, the money would be put to one-time uses like capital improvements, and not used to plug an operating deficit. But realistically, that deficit will otherwise be paid with the city's dwindling reserves. Replenishing the reserve fund will help preserve the city's credit rating, which is a sound fiscal objective.
But to the extent that the bidders worry the city will walk away, they may drop out. A smaller pool of bidders means less competition and probably a lower price.
Some have argued that instead of leasing the garages to private companies, the city should raise the rates itself. (That's where things seem to be headed in Pittsburgh.) But there remains a question about how much political appetite there is to charge more for parking under any scenario — even during a fiscal emergency.
Add that to the city's inability to cut benefits for SEIU employees (unlike a private operator, which would cut positions and bring in Teamsters under a cheaper contract), and it's very hard to see how the city could achieve anything near the same profit margin that a private operator could.
But that assumes that something as sacred as cheap parking should be forsaken for something as grubby as profits.
“There's no such thing as free parking,” Santana says. “Somebody's paying for it, and in this case the taxpayers are paying for it.”
Say it ain't so.
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