Getting your time frame right

No parking zone

Like other major cities, Chicago has several areas with a dense and vital mix of urban features that attract lots of people. Combine this high demand with compact geography and the natural result is scarce on-street parking. This was managed by adding meters to charge for these spaces, both monetizing and regulating a limited resource. The system collectively generated tens of millions of dollars annually from normal fees plus the fines charged to drivers who overstay their allotted time, wittingly or not.1

In the mid-2000s the size and perpetual nature of this revenue stream proved too tempting for a government facing extreme financial pressures. With a history of politically beneficial but economically unsound decisions, leadership had dug a structural hole in the budget that could not plausibly be filled with increased taxes or other typical maneuvers.

So when the agents of financialization came calling, key Chicago leaders were very receptive to their pitch. Like lottery winners receiving regular payouts or recipients of structured legal settlements who want their money now, the city was offered a deal converting the next 75 years of total parking meter revenue into a single lump sum, which could be used to address immediate needs.2

The winning bid came in at a little over $1 billion in cash. Rushed through the municipal legislature with little opposition or even comprehension, the complex contract was signed in 2008. Being the rational capitalists they are, the new owners set about drastically increasing hourly rates to something closer to what the market would bear.3 Drivers accustomed to getting access to a public resource for much less than its value were naturally incensed, which was of minor concern to the entity now raking in substantially higher income.

The agreement entailed other restrictions whose implications were not fully grasped at the time. For instance, the usual process of temporarily closing streets for construction or festivals now meant the city was on the hook for making up foregone revenue. The new owners obviously also had a keen interest in the specific days and hours subject to metering, decisions previously made at the local level.

Most analysis indicates the city parted with an asset for much less than its true value, as little as half if not much worse. A bigger issue is how budgetary issues created by an earlier generation were being paid for with assets that should have theoretically remained available to support future ones. Costs were spread out drastically while the benefits were compressed into a small window.

Maturity mismatch

Chicago is not alone in this, as governments and private organizations alike struggle to keep the right time frame in view when making significant decisions. Costs are often deferred, ambiguous, or long-term—in any case there’s a good chance they will end up being someone else’s problem. Meanwhile the short-term ramifications are immediate, and leaders can be highly incentivized to respond to them.

Large employers might promise generous pension and healthcare benefits for employees still decades away from retirement, buying labor peace and winning short-term concessions, at the expense of future management and owners that must pay up on these claims.

Quarterly reporting practices for public companies encourage managerial gimmicks that generate those few critical cents of earnings per share to beat analyst estimates, goosing the stock price long enough for management to get their bonuses or strengthen their careers.4 The long-term trajectory of the business may be unchanged or even weakened, but those in charge will have decamped to their next jobs by the time it arrives.

In finance this is termed a maturity mismatch, which occurs when liabilities come due on a schedule that clashes with the availability of the assets needed to pay them. By the time the issue arises the necessary changes can be painful or impossible. Gaming it can be quite advantageous for those on the right side of the transaction.

Governments are uniquely situated to amplify this problem. The average for-profit corporation can only defy economic reality for so long before the implacable math of income statements and liquidity forces a rebalancing. In the case of companies that wrote post-dated checks in flush times that were cashed in lean ones, bankruptcy was often the outcome. Governments operate on a different timeframe, and unlike with Enron or Bethlehem Steel they don’t just disappear, and taxpayers can’t switch providers overnight like customers can.5

In their policy-making role governments make generational decisions, investing in the people that sustain a society and building the infrastructure on which the economy thrives. They may promise voters immediate benefits or tax relief, using assets that would otherwise produce income for the citizens that would have inherited stewardship over them. The bill may not be tallied up until the current players are long gone.

Getting this balance right in an environment of soundbite-driven democracy is hard and often ignored, which is why elected officials at all levels now have the difficult challenge of addressing these cumulative effects.

New horizons

The solution isn’t easy, but some paths are instructive.

First, expand your decision criteria, as goals that take years or decades can’t be achieved by choices that include only immediate concerns. Some governments have established entities tasked with stewarding national resources as long-term investments. (Ironically, it was one of these sovereign wealth funds flush with oil money that ended up buying a chunk of Chicago’s parking meters.)

Second, add the voice of the future employee, customer, or taxpayer into your processes. Organizations that relentlessly focus on the me, the here and the now can find themselves hollowed out from within by a mercenary culture. Politicians do what they need to get votes, executives follow the path of least resistance to hit their numbers, partners cash in the accumulated reputations of their firms to snag the next deal. In the process the interests of voiceless yet important stakeholders are excluded. Build in metrics that incorporate a fuller view of impact. For governments this is easier said than done, as electoral cycles can sway even the most civic minded of politicians.

As for Chicago, the city continues to operate within the constraints of the parking deal, set to expire in 2083. The meters’ current ownership group received over $132 million in 2018, compared to the $24 million received by the city in 2008 when the deal was signed. The consortium of investors is set to make back its full contribution by the mid-2020s, with 60 years left to enjoy continuing cash flows with an operating margin of 67%.6

In the meantime, the one-off influx of cash to the city’s coffers has been consumed with little to show for it, and the intervening years have seen the buildup of even more extreme financial pressure. $1 billion has barely postponed the inevitable reckoning, which will be quite painful unless the next Amazon suddenly springs up within city limits and starts throwing off massive tax revenues.

What time frame do you operate within? How are ensuring your decisions lead to the best outcomes over the right horizon?

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References

Matt Taibbi’s book Griftopia has a chapter covering the Chicago parking meter deal and the role of sovereign wealth funds in providing the cash.

The audited financial statements of Chicago’s parking meter concession holder are available on the city’s website.

The Chicago Sun-Times has periodically written about the parking meter deal over the years.