Will Leased Parking Garages be a Tax Shelter?

Pittsburgh is contemplating a lease of its publicly owned parking to the high bidder for a sum of $452 million. The lease of nearly 18,000 spaces in garages or lots and on-street metered spots owned by the City of Pittsburgh and the Parking Authority, if consummated, will alter the concept of public property.


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Lamb Plan Falls Short

Controller Michael Lamb has proposed a plan to fund Pittsburgh pensions that would meet the requirement of reaching 50 percent funded by December 31st in order to avoid state takeover of the management of the City’s pensions. His plan is designed to keep the parking assets under government control as opposed to leasing to a private company as the Mayor is trying to do.

Under the Controller’s plan the Parking Authority would purchase the City’s parking meters and any City owned lots or garages for $150 million and dip into the City’s reserve funds for $60 million to reach the $200+ million the City will need to put into the pension funds by year’s end.

Sounds okay so far. The garages and meters remain under government control (although the Authority is not strictly City government, it does have City appointed directors) and the state takeover is avoided. But there are serious problems with the Controller’s plan.

How does the Authority raise the money necessary to service the $150 million in new debt? Under conservative terms and, given the fact that the Authority has $100 million in debt and has net assets of only $63 million, it is likely that borrowing costs for the $150 million will be at least $9 million per year for 30 years. To generate added revenues for the Authority, the plan calls for Authority parking rates to rise 3.5 percent per year for five years-far lower than the planned parking rate increases under the Mayor’s lease proposal.

The problem with the smaller rate increases is that after five years they provide only 19 percent more gross revenue per year than currently collected and that assumes no loss in usage levels stemming from higher rates. Unfortunately for the plan, a 19 percent hike will produce only $6 million to $7 million more in revenue by year five and, because of higher taxes and other expenses, will produce a net revenue gain of only $2 to $3 million. This is certainly insufficient to pay the debt service on $150 million. Indeed, under assumptions of modest inflation for parking rates and expenses, it will take about 15 years before annual net revenue is able to cover a $9 million debt service payment.

In short, it appears unlikely the Authority will be able to get $150 million in bond financing under this plan. And even if the Authority could get very favorable bond rates the gain in net revenue for the first ten years would be inadequate to cover the added debt service costs. A net present value calculation of the plan estimates the Authority’s 30 year net revenue stream under the Controller’s plan to be less than $90 million-well below the $150 million in new debt that is being sought.

Beyond the funding concern is the Controller’s plan to dip into reserves for $60 million to supplement the $150 million in order to meet the December 31st deadline. The plan calls for the City not to make its next payment to the pension fund in order to restore the reserve. But that would push the funding level back under 50 percent and is likely to cause the state to reject the plan. Clearly, the notion of withholding any future contribution to the pension fund has to be off the table.

All things considered, the Controller’s plan faces a very steep uphill battle. Even if it has a chance of working, there is virtually no possibility of getting it done by December 31st in light of all the questions bond underwriters will have and the time needed to draft the legal documents necessary to arrange the sale of parking facilities to the Authority. Many details would have to be worked out before drafting the legal documents can even get started.

How Many Bidders in the Mix?

Back in March of this year we wrote a Blog entry that discussed the initial pool of bidders interested in competing for the right to win a 50 year lease for the City’s parking system. Initially, 11 groups responded to the Parking Authority’s RFQ. A few weeks later 7 of those groups were deemed to have "the financial and operational wherewithal to compete for a long-term lease".

As of last Wednesday an unspecified number of those 7 groups submitted bids. What we know is that two of the bidders on the high side were within 10 percent of each other and that’s why the City and the Authority moved to the "final and best offer" phase where there is supposed to be a clear winner emerge today.

If and when we find out how many firms actually submitted bids (whether it was just the two that came close to each other or more) it seems as though the pattern here has almost followed the same as it did in Chicago: there the eventual winner came originally from a group of 10 that responded to an RFQ, a group of 6 that were invited to bid, and one other firm that moved to the "final and best offer" phase.

Parking Authority: A Shell of Itself?

If we connect the dots between two documents-the July 15th presentation made by the Mayor to members of the public on the parking lease and today’s official press release on the "final parking proposal"-the City’s Public Parking Authority would remain in place to monitor the lease but would be forbidden from building new parking facilities in a "no compete area" that constitutes much of the Golden Triangle.

Someone-either the Authority or the City-will own the garages according to the July presentation. Presumably that means the garages will continue to be exempt from real estate taxes. That same presentation assures Authority employees that they "are protected". The lessee is to honor collective bargaining agreements in place and those not offered employment with the Authority will be offered a job with the City. The July document also states that the authority will remain in place to monitor the lease.

The Parking Authority is prohibited from adding new parking in Downtown, but the door is open for the City’s development arm, the URA, to enter into the parking business (it presumably still owns garages at the South Side Works). The press release states "new parking can continue to be built in this area by private developers, the Urban Redevelopment Authority and the City/Authority for use by municipal buildings such as a courthouse, police station, fire station, government administrative building, correctional facility, public school, public library, public parking or recreational facilities". If there is a new garage built, the lessee has to prove it has been harmed in order to be awarded financially.

So what will the post-lease Parking Authority look like? It may or may not actually own any parking facilities, it may or may not be debt free depending on how much the lease nets, it will have minimal staff to monitor the lease, its other employees will either be working for the lessee or the City, and it won’t be permitted to add parking for the next five decades.

7 for 11

The title might be the calling card for the City’s parking lease plan: reportedly seven bidders for the eleven garages and possibly meters and attended lots, altogether comprising more than 17k spaces in Downtown and other parts of the City.

On March 19th-the day responses to the City’s Request for Qualifications were due-we wrote that when the City heard from eleven bidders that it was likely the number of bidders would fall by the time the City moved toward picking a winner. That was based on the experience of Chicago where the pool of interested parties was eventually reduced so that only two firms actually moved to the final bid stage. According to today’s published reports the seven moving to the next stage (due diligence is to take place from April to June according to the RFQ) "had the financial and operational wherewithal to compete for a long-term lease".

Two New York firms, two Chicago firms, one from Nashville, one from Hartford, and one international firm will move to the next stage and final proposals will be due in July.

Pool of Parking Bidders Could Shrink

By this past Friday parties interested in the proposal to lease parking garages, lots, and meters had to submit a response to an RFQ. Today’s news accounts show that eleven bids were received. The Mayor is very pleased, according to his spokeswoman with "not only by the number of responses, but, as you will see soon, the amount of expertise we’ve seen in the bidders."

Since the city on the cutting edge of leases and public-private partnerships of late has been Chicago, it is instructive to look at their level of response to a bid for a concession on parking meters. In a 2009 Reason Foundation piece, the CFO for the City of Chicago described the meter bid as such:

  • In March of 2008 the City received qualifications statements from ten bidders
  • Of those ten, six were deemed qualified and offered an opportunity to bid on the concession package
  • Two placed bids
  • One bidder, who submitted the highest responsible bid, was selected

The City of Chicago eventually netted $1.157 billion for the meters.

So while nearly a dozen bidders are showing their interest in Pittsburgh’s garages, if Chicago’s experience is any guide Pittsburgh won’t be choosing between eleven bids this coming November.

Legal Net Ensnares Alternate Garage Plan

This a key week for the debate over how the City will proceed with its garage plan: City Council is expected to vote today on whether to hire its own consultant to study the options on the table (a lease, a revenue bond, a transfer of ownership to the pension fund) and by Friday interested parties in the lease proposal are to submit responses to a RFQ handled by the Parking Authority.

Three legal opinions on the proposed alternative of transferring ownership to the pension fund have come forth, and have argued that there are major problems with the plan. Earlier this month we wrote a blog about questions that this alternative plan raised.

The legal objections? That the Authority cannot give up ownership without first satisfying its debt, that state law on pensions would prohibit it ("operation of a private business is not an investment security and would be a clear violation of the restrictions of the Municipal Pension Recovery Act") and that owning real estate would violate the commitment to investment diversity for the City’s Comprehensive Municipal Trust Fund (the CAFR says that an "allocation of 65% equity, 35% income with a variation of 10% above or below these targets for each classification").

Despite the objections the proponents for the alternative plan have indicated that they will continue to pursue the idea.

The Parking Lease: What’s Included?

The City will arrive at a critical juncture in the next ten days: that because parties interested in pursuing a lease of the City’s parking facilities have until 5 PM on March 19th to reply to the Request for Qualifications proposal. The lease (or concession, as it is described in the RFQ) will "grant certain operating management, and revenue collection rights for a certain period of time in exchange for an upfront, lump sum payment".

That lump sum payment is expected to be used to pay off the Parking Authority’s debt and the remainder for helping the City’s ailing pension funds. At least $200 million would be needed to bring the funds to a level of health necessary to avoid a state takeover of the pensions.

So what exactly is to be included in the lease?

  • 8,987 spaces in 11 garages and 1 attended lot in Downtown, Oakland, and Shadyside
  • 6,931 spaces served by on street meters
  • 1,776 spaces in metered surface lots

All in all, some 17,694 spaces are up for grabs, but the RFQ points out that "certain facilities, assets, and elements may be added or removed during the process and will be further detailed in the subsequent RFP". Much of that continues to play out as Council debates as to how the deal will be structured.

Lease Components Coalescing?

Here is a summary of the recommendations of an advisory task force on the proposed parking lease:

  • The prospective lease holder would not be constrained by rate caps, but would be guided by "market factors, industry standards, and regional inflation"
  • A 50 year lease term
  • The Parking Authority would continue to exist, but it might or might not be able to build new garages
  • Authority employees would get jobs with the lessee, the Authority, the City and would not lose existing pay and benefits

Since all of these recommendations are non-binding, it is anyone’s guess as to what would make it into an eventual executed lease. It is encouraging that the task force did not advocate for rate caps-perhaps it was because it was not their place to say, perhaps they realize that maybe the parking market forces can work to allocate the resource of parking, or perhaps they did not want to keep that condition going forward in the lease, realizing that the more conditions up front will lessen the take from the lease.

The recommendations do raise the important question about the Parking Authority’s place in the equation after a successful lease deal. For one, will they have any role other than managing the lease? Will they own other properties that will continue to operate as parking facilities? Or will they simply be monitoring the terms of the lease?

There is nothing in existing Commonwealth law that would prohibit the City from creating a new Parking Authority should the present one be dissolved (part of the up front lump sum is supposed to pay off the Authority’s debt) and likely some type of clause would have to be added to the lease that prohibited publicly owned parking. And if there are extensive and numerous lease details it is possible that the function could be moved to the City government proper.

Lastly, there has to be a realization that if Authority employees land jobs with the lessee and pay and benefits remain intact that rates will rise in order for the lessee to achieve an adequate return.

Authority Garages: How Much Impact?

For some time we have heard that the presence of Parking Authority garages-publicly owned and exempt from taxation-act as a check on the privately-owned garages in the City. The Authority garages (and lots) had lower rates and kept parking affordable for people wanting to come Downtown.

That’s why a consultant for the Downtown Partnership urged that if the Authority owned garages and lots are sold or leased to a private operator that rate controls become a condition of the deal so as to keep Downtown competitive. Citing his familiarity with the lease deal in Chicago (the deal from which Pittsburgh has taken inspiration), he feels that losing public-owned garages and lots would be a detriment to Downtown commerce.

The Mayor’s chief of staff responded that since "the city authority controls only about 25 percent of all parking Downtown" that moving the facilities into private hands will not be a big deal.

But it could have an impact, just not in the direction the Downtown crowd is thinking. A private interest might offer better service and better maintained garages, and possibly could compete with existing garages on parking rates. Sure, they would be keen to the bottom line, an action the consultant may not like, but in so doing the scarce resource of parking is allocated efficiently. The more controls built into the lease the less attractive the up-front offer the City is betting on will be.