Financial engineering for municipalities

Comes about through the sale and leaseback of various types of infrastructure, or signing long term contracts, such as 25 year contracts for street furniture, bus shelters, etc., in return for the contractee's exclusive privilege of selling advertising placed in the public space.

Many of the deals aren't that great because cities are desperate for cash.

One of the problems with these deals is that the contracts aren't usually written in a way that allows for innovation, or modifications based on new circumstances.

For example, many cities have signed contracts giving "outdoor" advertising companies exclusive right to sell ads on kiosks, billboards, and bus shelters in the public space, in return for the provision of various types of street furniture.

So when bikesharing comes along, and the financing model for bikesharing is based in part on the receipt of advertising revenues, unless the prime contractor is willing to allow advertising on bikesharing kiosks, it doesn't happen.

The City of New Haven is looking to do a sale and leaseback of its parking meters. I am not great at financing, but it basically looks like the city would get a $50 million payment, and then pay the company $111 million over the next 20 to 25 years for the privilege of receiving the upfront payment. See "Parking meter issue rages on; New Haven aldermen meet on issue Tuesday" from the New Haven Register. The link includes document links, although the alderman initiating the contract deleted all the emails between he and Gates Group Capital Partners, before replying to the newspaper's FOIA request.

The company looking to do the deal has "kindly" developed the various contracting documents for the City Council, which is considering the move, which had first been proposed by the mayor a couple years ago.

Generally, I think these kinds of deals are shortsighted. The best known example is the one in Chicago, where Mayor Daley did a 75 year "sale" of the parking meter system for an upfront payment of $1.2 billion. Morgan Stanley will gross ten times that amount, with a net return of about 80%--not a bad return.

See "Morgan Stanley Group’s $11 Billion Makes Chicago Taxpayers Cry" from Bloomberg and "FAIL, Part One: Chicago's Parking Meter Lease Deal:How Daley and his crew hid their process from the public, ignored their own rules, railroaded the City Council, and screwed the taxpayers on the parking meter lease deal" from the Chicago Reader. (Also see from the Reader, FAIL, Part Two: One BILLION Dollars! New evidence suggests Chicago leased out its parking meters for a fraction of what they’re worth" and "FAIL, Part Three: The Insiders: Who benefited from the parking meter fiasco.")

Local governments, for the most part dependent on property and sales tax revenues, have very few options open to them.

These types of deals indicate that there needs to be better financing options available to municipalities and other government organizations than currently exist.

The proposal for a National Infrastructure Bank could provide financing against these types of assets, but with a significantly greater return for the municipality.