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Comment by mattmaroon | Hacker News Reader

"A report by Bloomberg Business said CPM stood to earn about 10 times what it paid over the life of the contract."

Umm, is that really that much over a 75 yr contract? $1 invested in the stock market 75 years ago would be worth $172 today and that's adjusted for inflation, which I don't think the 10x figure is. To get to where we end up with 11x after 75 years in nominal dollars we're looking at just north of 3.2% interest.

So basically Chicago got a 75 yr loan at just over 3.2%. Currently 30 yr muni bonds average almost 4%. They'd have been lower back then, and I'm not even aware of 75 yr bonds existing, but what works out to a 3.2% interest rate on a 75 year loan is far from a disaster.

This article was not written by someone who understands finance, so I may be taking too much from that one quote. But if all they're getting over 75 yrs is a 10x return, it's hardly abusive! The investors would have been much better off just buying ETFs.

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The thing that sticks people’s craw is that it has more or less solidified the current allocation of street space to parking, and any attempt to change it (bus lanes, bike lanes, a COVID outdoor eating area, etc.) now cost the city substantial amounts of money.

At least with a normal loan if your priorities change you can shuffle your budget accordingly.

Also, normally when you pay for street parking the blow is softened by the belief that - at least in theory - the money might go to infrastructure maintenance or some other publicly beneficial cause.

Not so in Chicago, it's just going to line the pockets of rent seekers.

Street parking in the US is almost universally, and massively, subsidized. The money doesn't "go toward" anything except an infinitesimal reduction in that subsidization.

To see this in action, stroll into a popular part of town, check the rate for parking on the street for a few hours, then check the rate for doing the same in a private lot on the same block.

Metering is purely in the interests of the business owners on the block, who don't want people parking for more than a few hours - ie anyone except their customers.

That's fine though. If building roads and paying for them with meters, even if not fully, helps cities generate significant economic activity, that could easily be worth it from the taxes and other benefits generated. There's a reason every city does it.

There's so much propaganda on all sides when it comes to automobiles in the US that it's hard to tease out reality, but I'd wager anything states and cities have hard numbers behind what they do.

When it comes to things like that, where solid data isn't public I just assume the world is not run by idiots who don't know more about their area of expertise than me. I feel reasonably certain that urban parking subsidization is done at least to a large extent because it makes money.

Cities are soft locked into car dependence in many areas so businesses need cheap street parking to remain viable meaning cities are massively incentivized to continue providing it even if it is a bad local maxima.

The problem is, obviously, the expertise of one field ("maximise car parking to deliver revenue") clashes with the expertise of another ("if we don't work to minimise car parking and dependence thereon, we'll all be breathing sulfur-infused atmosphere and praying we don't break through the wet bulb temperature").

As a biker on the central west coast I just had the 'opportunity' to revisit the midwest and can tell you we are screwed.

> There's so much propaganda on all sides when it comes to automobiles in the US that it's hard to tease out reality, but I'd wager anything states and cities have hard numbers behind what they do.

I would take the opposite side of that bet for most cities in the US. The smaller ones I have been involved in are shockingly captured by a minority of random business owners and retirees that bother to show up to meetings and demand their lifestyles be protected. I think parking subsidization is done largely because it's a visible cost to car owners who will oppose it strongly.

I know in my small city, the pandemic laid bare just how much paid parking meant to the budget. With almost nothing coming in from the city-owned garages and street meters, there was much handwringing about the shortfall.

Subsidy means govt spends more money on parking spaces than it takes out of parking spaces. In the city of Seattle rates for parking spaces are more than $3 / hour from 8:am until 8:pm, including Saturday (Sunday is still free). Most of the parking spaces are used at full capacity. This means that one parking space in Seattle would collect some fraction of $3 x 12 hr x 6 days / week x 52 week / year = $11,232 / year. Believe me - in Seattle these parking space have not been updated in decades. Govt spent no money and instead it got some fraction of $11,232 / year.

Parking spaces, in Seattle at least, are not subsidized. They are a massive source of revenue for the local govt.

> Street parking in the US is almost universally, and massively, subsidized

So are sidewalks and bike lanes. I'm not aware of a single toll sidewalk or bike lane.

Well, "the money" already went to the city, and has been spent. Whether it has been on "publicly beneficial cause" or not is for Chicago voters to decide, but the investors already put the money in, and Chicago already spent it. What the parking meters doing now is returning what Chicago has borrowed to the investors. While I'd argue that the model of borrowing massive amounts of money for long terms and hoping the next guy will deal with it is not exactly the healthy financial strategy, it is pretty common for various governments (including the US Federal Government as the most prolific offender) and it's not the investors' fault that Chicago city government chose to do so.

Right? People are "forgetting" that Chicago got $1.16 billion dollars up-front and worked out a scheme where they don't have to pay any interest on it unless they choose to do so. Now they're boo-hooing that they can't cut CPM's income opportunity without making them whole. The fact Chicago already blew that $1.16 billion dollars and apparently has nothing to show for it is neither here nor there.

I think the genius in this scheme is that it doesn't show up as debt anywhere in the papers, and they can whine that evil capitalists are gouging the poor citizens while enjoying the money that seemingly came out of nowhere. And simultaneously look for ways to maybe get out of it by some trick and then re-sell the same thing again. If they just borrowed it the usual way, the headlines would be "Chicago city is getting deeper and deeper in debt", but now it's "Chicago city has to deal with unmitigated greed of capitalists, aided by heartless courts".

Liability, including contractual liability, really ethically SHOULD show up among 'debts' (which are just monetary liability). Maybe accounting laws are too focused on money and not enough on value.

Well, if somebody ever reads properly made audited balance sheet of the city, it probably would be mentioned somewhere is there. But since it's not a classical debt, most casual observers wouldn't even realize it exists.

Even at 1.16 billion the city of Chicago got fleeced. What they sold was worth a lot more than that!

Nevermind the policy nightmare of not being able to freely reallocate street usage, and being obligated to maintain the spaces as sold for 75 years.

Even at 1.16 billion the city of Chicago got fleeced. What they sold was worth a lot more than that!

Upthread logic seems to indicate, no fleecing occurred.

> What they sold was worth a lot more than that!

Would you mind to walk us through your calculations, and share how did you discover that NPV of that income stream is a lot more than $1.6bn and what figure did you arrive at?

> being obligated to maintain the spaces as sold for 75 years

Technically - and as the court correctly pointed out - this is not the obligation. The obligation is to preserve the income stream. It is true that if the city gets rid of the spaces, it would be hard for it to preserve the income, but there could be options - like create more parking in different places, etc. Of course, when undertaking such an obligation, as with any loan, you sacrifice certain flexibility - if you take a mortgage, you have to pay $X per month no matter what, even if this month you'd rather spent it on a nice vacation. It's just that the city assumed that since the income stream comes from the citizens and not the city budget, they essentially got a billion dollars for free. But turns out it's not exactly so. It's not the fault of the investors though - it's the fault of those who made wrong assumptions on the deal. And those aren't some naive gullible simpletons, or at least those are not supposed to be in charge of billion-sized contracts in a megapolis like Chicago. One has to assume they were aware of the implications, and chose to get the cool $1.6 billion anyway.

Unfortunately, the implications were that the mayor involved joined the legal firm that negotiated this privatization shortly after his term ended.

It is worth noting that at no point was privatization of parking in his platform previously, and his approval rating dropped to record lows in large part to deals like this, but Chicago lacks a recall mechanism and he chose not to run.

We are also talking about a mayoral administration that operated with impunity. Despite contracts with the state and the FAA, the city used bulldozers to destroy the runways at a general aviation airport, stranding planes and its own fire department helicopters there. https://en.wikipedia.org/wiki/Meigs_Field

> Unfortunately, the implications were that the mayor involved joined the legal firm that negotiated this privatization shortly after his term ended.

This certainly looks very shady, but by itself doesn't change the financials on the deal. The claim above that this deal costs "a lot more" than a billion - I'd love to know how much and how did they know it.

Chicago is free to do whatever they want. Their only obligation is to make CPM whole, i.e. pay the interest on their $1.16 billion loan. That's the deal - either allow CPM to earn the interest on the loan, or pay them the interest outright. That's completely reasonable.

Blaming CPM for Chicago's inability to manage their finances is unreasonable, and no, I'm not a CPM investor.

Well, one can certainly blame the Daley administration, which shoved this deal through during its last term, and then coincidentally Daley became employed at the legal firm that wrote the deal.

Chicago unfortunately lacks a recall mechanism, and voters were unable to punish Daley for this plan that had not been part of his campaign, because he declined to run after his approval rating sank to record lows.

Instead of tidily blaming a specific politician and then moving on as if nothing can be done, this type of principle agent problem should be eliminated. Simply put, mayors and city councils should not have an unrestricted authority to legally bind cities.

I'd say that any contract longer than around 3 years (and/or larger than a certain dollar amount) should require direct approval by voters, or it shouldn't be considered as having been duly executed. Furthermore any terms of a contract that restrict/require a municipality to enact certain laws/ordinances (including through financial incentives) should be straight up illegal and thus unenforceable.

The problem is systemic. How would you enact such a change? Neither Chicago nor Illinois have mechanisms for citizen initiatives amending laws or the relevant charters and constitutions, so you'd need a three-fifths supermajority of politicians to agree to hobble themselves.

There are many comments in this thread assuming it's a legitimate agreement made by the "city". My main point is that in the abstract, we should not take this as an open and shut moral certainty. Rather we should view the "contract" in the same light as a real estate deed signed by someone under undue influence or otherwise incompetent.

As for practical reform, especially with this failure in court? It might still be possible to get a majority of state politicians to constrain the city politicians. More centralized government is unfortunately one of the few remaining checks in this day and age.

Unfortunately, the legal system does not work in the abstract, and particularly for anti-capitalist policies the courts don’t look kindly to making up legal theories out of thin air.

Illinois is even more corrupt than Chicago.

A prerequisite to any sort of reform is being able to criticize what is wrong in general principles. As I said, there are many comments in this thread just plainly assuming that it's legitimate to consider the city as being bound by this deal due to unilateral actions of the mayor. Pointing out that this is an opinionated assumption and that we could instead use other standards to mitigate the principle agent problem is my attempt at articulating what is wrong with the situation. I'd say it has much better explanatory power for what people intuitively feel is wrong here.

I wonder if the CPM can be bought out of the deal if bus/bikes lanes are so precious. And today's environment may be more conducive to such deals. Maybe CPM has some payments due in other parts of it business and City of Chicago could take advantage of this. Just speculating.

Here's more detailed breakdown of the original concession deal

https://reason.org/commentary/setting-the-record-straight-on...

The deal is lot more complex than just a lump sum in exchange for 75yr lease.

By the stated face-value, the $1.16b for 75 years splits to some $16m/yr. Previously, the city was reported to be making some $19m/yr from the parking fees. However, it seems that in present value terms such revenue stream should have been compounded to a larger present amount.

Reasonably, Chicago could choose to just raise the parking fees at any future point (with some political repercussions). This also would have changed the deal calculations. The fact that CPM raised the prices and the residents have no choice but pay them only proves this.

The deal is quite involved with some limit terms, infra expenditures, and other provisions. Each piece was likely evaluated in dollars to present it to both sides as fair value.

Is it really a fair deal to city residents? It seems that the popular sentiment is that it is not, even after so many years since it was signed.

I guess, no one has reasonably presented to the public an alternative to not having the deal. Or perhaps, other municipal fees like more speed cameras, zoning, and good old property tax increases have further muddied the fairness outlook.

Here’s the question: how much would you pay for an annuity that gave you whatever CPM is going to get out of this? If it’s more than $1.16b then you could say the city got a bad deal, but I just don’t think it is. I think it’s likely less, though that’s basing it on this article which is not well-written.

75 years is a long enough time horizon that you could consider the stock market “risk free”. It has never not performed way better than this annuity in that time period, and if it did, it would probably mean something so terrible happened that the money doesn’t matter (or maybe doesn’t exist) anymore.

Add to that the fact that Chicago very wall may go bankrupt and default on this. The city already got their billion. There’s a lot less risk the stock market (or take your pick of many alternative places to park a billion) goes to 0 and again if it does, we’re probably talking America having collapsed so the money doesn’t matter anymore anyway.

I just don’t see any reasonable set of mathematics where this wasn’t a good deal for the city.

And yeah, people don’t like it because it’s costing them more at the meter and 95% of people don’t understand finance or math and they’re really mad that their city is going a poor job of fiscal management. If it weren’t this problem, the city would have had to do something else to raise or save a billion and they’d be mad about that instead.

That's not a very good financial analysis.

This investment pays dividends. The original investment has already been paid back in cash, plus $500 million.

There is an opportunity cost to money.

I'm not sure if you mean mine or theirs. Theirs is definitely bad. Mine was not an analysis, just pointing out how bad theirs is. The original investment was in 2008. $1 billion invested in an S&P500 ETF would have returned the original investment plus a couple billion more. Even still where they are at in 15 year does not work out to a really high interest rate. It's still sub 4%.

As I posted upthread, the 2022 nominal return was more like 12%, 6-7% when inflation adjusted. Assuming parking demand doesn't collapse, which seems unlikely given ongoing gentrification and decreasing transit usage, that sub-4% rate is about to go up by quite a bit.

The cited 3% annual return should be seen as a floor, not a ceiling. Both nominal and real returns have crept upward significantly over the life of the contract.

The 2022 nominal rate of return was 12%, probably a 6-7% real rate of return, I'm not doing a precise calculation right now.

Numbers are here, 2022 revenue was $140.4 million: https://chicago.suntimes.com/city-hall/2023/6/11/23755615/ch...

Note it is in line with other similar schemes such as toll road leases...Indiana did the same scheme with their toll road leases..75 years and the firm that won got the same 10 times returns.

Toll roads are also panned in the United States for much the same reasons.

Selling of leases is a traditional way to pad budgets short-term, and then whoever did it retired and it becomes somebody else's problem. If you budget is leaking and you urgently need $BIG_BUCKS to plug it, just sell a 75-year lease and move on. Of course, if you eventually run out of leases to sell, it may be a bit of a problem, but it will be then, and now is now.

How do you consider this a loan by the city? They sold the management concessions for a (potentially) fixed fee and in 75 years they'll get the rights back but nothing more. Or you're saying, this concession is equivalent to $1.16 billion lent over 75 years not adjusted for inflation at a rate of 3.2% rate today?

Also, a rough calculation, but I came out with a 13% nominal return per year for the management company assuming they hit that 10x:

1,160,000,000.00 * 10 = 11,600,000,000.00 -> total earned

11,600,000,000.00 / 75 = 154,666,666.00 -> earnings per year

154,666,666.00 / 1,160,000,000.00 = 13% -> annual return

Which does seem like a very, very nice deal for the concessionaire.

Compound interest:

    >>> 11**(1/75)
    1.0324885301426248

Right, it's basically an annuity.

Slightly off topic, but

Math.

Data.

They need to be explained. Even then, people have to understand their fundamentals to understand the explanation. You can't make a soundbite out of math.

"Chicago got suckered!!!"

There, you see. No explanations necessary. You can fit it into a 20 second political commercial. You can plaster it on Social Media. Doesn't matter whether or not it's factually correct.

You math and data guys are just doomed to lose every argument if you insist on employing only well reasoned and data backed introspection in public discourse. That's just not how the average US citizen works. (Nor even the average HN User to be honest. Look at the comments on this thread.)

Best to try to find someway to put the analysis into a soundbite. I don't claim to know what that would look like, but it would work better in public discourse. Summarize all of what you just said, and then add in the cost of the city running the program fully on its own. (Seventy five years worth of utilities, maintenance, salaries, pensions, sick leave etc.) That way people compare cost to opportunity cost right away, and see the point you're making.

Right. "They're making 10x!" is a great soundbite for anyone who never took a finance class in college, which is probably most people. This is one of the few places where I'd post something mathematical publically and assume that the vast majority of the people who read it would understand it. The people on this site might not all undertand finance very well (hell I'm intermediate level at best) but they could at least understand time value of money and opportunity cost and probably have intuited those concepts even if they'd never heard of them. Unfortunately the same cannot be said of whoever wrote the article.

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