Thanks,

–Ian

The point that I was trying to make is that if you take 75 years of revenue and spend it all up front, then in 50 years time you will be (a) without infrastructure, as the stuff you built is all beyond its useful life, and (b) without revenue which you could use to build new infrastructure, because you spent it all 50 years previous. Thus, even if you spent all the money on infrastructure, it doesn’t make sense to grab money from 75 years in the future and spend it now. The only exception I can think of is if you are damned sure that the result of your investment today will result in future economic growth that you could then tax to build more infrastructure. But the risks of screwing that up are so great that its extremely rare such bets should not be left to the private sector.

The nature of compound interest, which you rightly point out, means that when you steal money from the future in order to spend it today, you are doubly screwed because tomorrow’s money is not worth nearly as much today as it would be tomorrow. In 75 years, a dollar of parking revenue will turn out to have bought just 5 cents of infrastructure.

And sure, “outsourcing political will” was accomplished here at a huge price (at least $1B), but do keep in mind that all the political blowback has fallen squarely on the mayor’s shoulders. Meanwhile, other cities have adopted market-rate parking pricing without mass citizen revolt. In fact, I was working with my city councilmen on a Parking Benefit District proposal for my neighborhood; they were so amenable that they even introduced legislation to start changing the rates, but all that quickly died when news of this deal hit. Market pricing was coming, and soon — and it would have been more locally responsive than what the flat-rate pricing that LAZ charges.

Do I need to point out that they aren’t your odds to decide?

You will be dead in 75 years, and therefore you have no natural sovereignty over the state of the airports in 75 years. You’re making decisions for the future, before the future is born; they have no recourse once if they are screwed.

I may think my neighbor is an idiot for spending 30% of his income on beer instead of savings; but it is not my money to decide-with. Similarly, maybe the airports will in fact be useless in 2090; it’s still not your call to make.

If it weren’t the case that a majority of the money would be used in the first two years, there wouldn’t have been any interest in doing the deal. That was the whole point. And it isn’t just this decision or the federal debt, it is almost every decision for nearly 30 years, getting particularly bad after 1992 in NY State and 2000 everywhere.

“The people own the asset to be used today for this generation of people and not for 2050.”

Those who are age 30 today will be age 80 in 2050, and in need. What’s going on isn’t a perpetual government policy to favor senior citizens over the young, who have other advantages. It is a disadvantaging of generations born later that will hit hardest when they themselves are old.

Look at this week’s issue of The Economist. What to do about the soaring cost of entitlements? You take anything from those at or near retirement, of course, so you have to take things from younger generations. How about raising the age of eligibility for Medicare, to “encourage people to work longer.” Doesn’t The Economist understand that no one will hire a 55-year-old because of their health care costs, but they will hire a 65 year old because they get Medicare?

I don’t think there is any infrastructure on offer with a 75-year lifetime, but please correct me if I’m wrong. Note that the NYC subway doesn’t count, as pretty much the entire system has been replaced at least once during its lifetime.

Cheers,

–Ian

Also, forgot to mention this before, but zero cost of capital is equally moronic to an infinitely high one. Hard to imagine, but there is such a thing as over investment and China is driving 100 MPH towards their own day of reckoning. You might enjoy this report (the China report):

http://www.pivotcapital.com/research.html

This is why I have no problems with governments leasing off the airports for long-term deals. No way will air travel be supported at its current levels in 75 years. That’s a bet against the future I’d gladly take.

But I largely agree with Larry. This quote is astonishing, if not welcome for its candor:

“The people own the asset to be used today for this generation of people and not for 2050″

Tell me, how much moral obligation do you feel toward New York’s “moral obligation bonds?”

The state constitution says all borrowing has to be approved by referendum; otherwise, future legislatures and people would be burdened by the past. So the judges appointed by the politicians came up with a ruse — money could be borrowed as long as the funds to pay the debts were appropriated annually by each state legislature, thus not being an actual long term liability. They called those moral obligation bonds.

I feel no moral obligation. Put them at the top of things to cut. Does that mean more can’t be borrowed without a referendum? Go ahead, make my day.

And speaking of which, I’m not sure we should be paying back the three bond issues that WERE passed by referendum with a promise of the Second Avenue Subway, until we actually get the subway.

What matters most of all is that this is yet another example of a generation that inherited the United States from those who came before selling it out from under those coming after. That was the real motivation, and the real decision. End of story.

In addition to paying the nearly 1.2 Billion, Morgan Stanley then invested another 40 Million in new technology which was implemented in less than a year. While everyone is harping about the unprecedented rate hikes, one needs to remember that parking rates at nearly 23,000 of the City’s 36,000 metered parking spaces had not been raised in decades and were an astonishing low twenty-five cents per hour. When was the last time you parked at a meter in any of the top ten major US metropolitan cities and paid fifty cents for two hours parking?

What everyone is also overlooking is a very important factor called risk. The City divested itself of all risk and cost associated with operating the parking meter system. For example, if gas prices shoot upward of $5, a very likely scenario given the 75 year term of the concession, driving will undoubtedly decrease. What impact will that have on the meter system? What will happen with $10 or $15 a gallon gas prices? Add risk mitigation to the savings in future escalating operating costs for equipment, maintenance, labor agreements, pensions, etc. and the City in my opinion made a very wise trade off.

Let’s assume that the City could have done exactly the same thing as the private operator. They could have netted an additional 600 Million over and above the 1.2 Billion it received up front. Over 75 years that’s a theoretical 8 Million dollars per year that the City “gave up”. How does that stack up when one considers the risk? What is the value placed on betting that there will always be passenger cars in sufficient quantities to generate that kind of return for the next 75 years?

Chicagoans love to moan about corruption, fraud and their crooked elected officials. It’s tradition and if they didn’t it wouldn’t be Chicago. Let’s face it; the local Chicago media bashes Daley at every opportunity. Just look at the last few months of headlines regarding the Olympics, the parking meters, Oprah and even the poor performance of their sports teams. When was the last positive news article about the Daley administration to come out from any of the Chicago media outlets? I’m hard pressed to recall even one.

Let’s not throw out the P3 model with the Chicago bathwater.

1) Raise parking fees to market rate. Fine, but the city could have done it itself.

2) Transfer part of the value of future parking revenues to a Wall Street firm in a secret, no-bid deal. Standard practice.

3) But here is the key. Take future revenues and spend them right now, cashing in an asset created by past generations who built this country up and selling it out from under future generations.

Will the city of Chicago still have to maintain the streets in the future? If so, it will have an ongoing cost but no ongoing revenues — just like the MTA which will have to maintain the transit system (or more likely not) as future revenues go to the past maintenance of the transit system.

The whole purpose of the deal was to allow today’s politicians to cash in the future. The rest is details and misdirection.