City for sale 

The city has put a price tag on everything from parking meters to CTA stops, billboards to city departments. But what's the real cost of plastering our public space with ads?

It would be fair to say that Ed Burke is a fixture in the Chicago City Council, except that he's been there longer than many of the fixtures—43 years, in fact, which makes him the longest-serving alderman in Chicago history. His presence is imperious and haughty—he manages to look down his nose on the meek favor-seekers who approach—and he commands top dollar as a private-sector attorney. Other aldermen frequently seek his advice.

On December 3, though, for the first time in collective memory, Burke admitted on the council floor that he was at a loss.

"I don't understand this," he said.

As he studied the sheet of complicated financial data in front of him, Burke further confessed, "The good Dominican nuns tried to teach me how to add and subtract, but I don't know that we ever got to distribution of revenue-sharing calculation illustrations."

The council dean wasn't alone. His comments came during a committee hearing on Mayor Rahm Emanuel's latest privatization plan, an agreement to rent public space to a private billboard company for a guaranteed $155 million over the next 20 years. City officials argued that the deal would create a desperately needed revenue stream at a time when traditional sources like real estate taxes and federal aid are shrinking.

But the contract was 250 pages of complicated legal and financial language, and many aldermen conceded that they didn't grasp all the terms of the deal. Nor did they have any idea whether the city was getting the best price it could. They also worried about the inconvenient fact that the deal had been brokered behind closed doors, without a structured bidding process.

After five hours of questions and concerns, Burke and his colleagues grew weary and signed off anyway.

What everyone understood, though, was that it won't be the last deal to exchange public space and public rights for private cash. In fact, for the last year the city's goal of pursuing such deals has been written into the municipal code. Mayor Emanuel, even more overtly than Mayor Richard Daley before him, has announced that the city is for sale, and no one seems willing or able to stop him.

Desperate for money, state and local governments around the country have explored all sorts of privatization deals, or public-private partnerships, as advocates prefer to call them. Florida, Arizona, and other states have sent inmates to private prisons. Detroit has considered outsourcing management of its street lighting system. The state of Ohio has launched a program seeking corporate sponsorship of roads, overpasses, and rest stops, prompting headlines like this one in Bloomberg: "Ohio to Monetize Bridges, Toilets with Naming Rights."

Chicago isn't just part of the trend. For more than two decades, it's been one of the privatization leaders.

"You could say they're at the head of the pack," says Leonard Gilroy, director of government reform at the libertarian Reason Foundation. "Chicago is reflective of the outsourcing that's been going on for years."

In his first budget in 1989, Mayor Daley privatized management of a south-side mental health clinic. Next he hired private firms to take over abandoned vehicle towing, parking ticket collections, tree stump removal, parking at O'Hare, and some janitorial services.

While claiming savings for taxpayers, Daley also benefited politically from the highly publicized moves. In the mid-90s the Washington Post and Toronto Globe and Mail wrote glowing stories about how the scion of the nation's biggest patronage operation was so devoted to efficiency that he was privatizing city jobs.

In 1993, a group of investors pitched an idea that wouldn't just save money but generate more of it: Daley could privatize the Skyway. Daley took a pass—for the time.

Twelve years later, though, the economy wasn't so strong. When officials with Goldman Sachs and Macquarie Infrastructure dusted off the Skyway proposal, Daley went for it. The result was a lease deal covering so many years—99—that it amounted to a property sale. Not coincidentally, Goldman Sachs was eventually paid $8.4 million to advise the city on the deal and Macquarie Infrastructure was one of the firms that teamed up to submit the winning bid.

It was the beginning of a wave of asset leases: the downtown parking garages were next, followed by Midway Airport (though the financing later fell through).

And then came the parking meter deal.

The city leased the meters for 75 years in return for a billion-dollar payout, which quickly resulted in a fivefold rate increase in some areas. The deal was quietly put together over the course of a year by a handpicked group of lawyers and investment bankers who were due to make millions of dollars off the transaction. No independent analysis was conducted before the deal was inked, but it's probable the contract was worth three to five times as much.

Daley presented the deal as a windfall for the city. But citizens were outraged, in no small part because they literally had to reach into their pockets for more money every time they parked in a metered space. To them it was just another tax, except that the profits were going to a group of investment bankers and the United Arab Emirates.

The deal attracted a lot of attention, even outside of Chicago. A number of government bodies explored leasing out their parking systems. Among them were Pittsburgh and the New Jersey Transit system, which both hired the Chicago-based investment firm Scott Balice Strategies as an adviser. "You had a couple years of other jurisdictions saying, 'Wow—what did they do?'" says Gilroy.

The New Jersey system is still exploring a deal for its parking facilities, while Pittsburgh officials never went through with one, in part because of concerns raised by Chicago's experience. But other cities did, and they also took note of how things had gone down in Chicago. Officials in Indianapolis, for example, decided they wanted a share of revenues over the 50 years of their agreement as well as the ability to opt out along the way. They also presented the deal for public comment before it was finalized, which reduced the blowback.

Rahm Emanuel was vague on the subject of privatization when he was running for mayor in late 2010 and early 2011. He took a few pot shots at the parking meter deal, saying it "offends" him and promising to pressure Morgan Stanley to renegotiate or even cancel it. Yet he refused to rule out other kinds of privatization agreements.

It wasn't until after he was elected that some of Emanuel's plans became evident. An early message was sent even before he was inaugurated, when he announced the top two members of his financial team. For chief financial officer he tapped Lois Scott, one of the founding partners of Scott Balice Strategies, the firm that had advised Pittsburgh and other governments around the country on privatization deals. And the city's new budget director was Alex Holt, who served as an attorney for the group of investors who won the bid to lease out Midway before their financing fell through.

Over the next few months, the mayor let it be known that he wanted to find new ways of bringing in money, including through "municipal marketing." Though it wasn't evident just what that meant, Emanuel said his goal was to reap at least $25 million a year from it.

click to enlarge PAUL JOHN HIGGINS

In some parts of the country, officials have set up a clear, open process to make sure that their taxpayers aren't getting hosed in privatization deals—and that the politicians won't be blamed in any event.

The state of Virginia, for instance, is establishing a system to sell sponsorships for roads and bridges. The initial step is soliciting competitive bids to find a firm to oversee the effort.

"We first need to figure out how we do it," says Tamara Rollison, a spokeswoman for the Virginia Department of Transportation. "We'll need to set up guidelines because we don't have the expertise."

In Chicago, though, officials have continued the approach they took with the Skyway, parking garages, and meter system: making closed-door deals with the first people who pitch them.

In June 2010, Daley asked the City Council to sign off on a no-bid contract with a suburban marketing firm to solicit advertising for the city's iconic downtown bridges. There was no mystery about where the idea had come from—it was spelled out in the ordinance governing the contract: "Whereas Fresh Picked Media has approached the city of Chicago with a proposal to utilize certain Chicago River Bridge Houses . . ."

The deal entitled the city to 75 percent of the money from bridge ads. The president of Fresh Picked Media predicted it could bring the city $10.5 million a year, and the City Council approved it within a month.

Meanwhile, the CTA was creating its own aggressive plan to turn over public space to sponsors. The transit system has reaped money from ads on buses and trains for years, but it entered new terrain in 2009, when Apple approached with an offer: the company would pay to spruce up the North/Clybourn stop on the Red Line, steps away from its new store. In return, the CTA would let Apple lease the plaza outside the stop at no charge for the next decade. The company would also get first dibs on advertising space inside the station as well as the opportunity to purchase naming rights—raising the distinct possibility that riders would someday pull into the Apple North/Clybourn station.

The CTA, perennially facing the specter of service cuts, jumped at the opportunity. No other companies were asked to make better offers. And no one seemed to question whether the arrangement had implications for fairness and equity in service across the city. Will stations in areas that lack corporate outlets get the same level of investment?

The Apple deal was just a preliminary step to a bigger marketing plan. In late 2010 the CTA announced that it would hire a firm to help it auction off naming rights to train stations. This time the authority put the job up for bid, and in August 2011 it hired IMG, a New York-based branding consultant.

In May of this year IMG invited companies to bid on the CTA's "corporate partnership program" for the Red and Brown lines. Benefits include "Designation of the sponsored station as '[Company's Name]—[Station Name],'" according to the bidding documents. Sponsoring companies would also get the right to use the station for marketing events.

Under the terms of its contract, IMG will get a commission based on what's paid for station naming rights.

By mid-November 2011, something about the Wabash Avenue bridge looked different—something like the cheap vinyl Bank of America ads affixed to the bridge houses.

"As the first products of Mayor Rahm Emanuel's short-sighted plan to raise $25 million by selling ads on all types of city property, they offer a nightmarish hint of what the plan might deliver: the uglification of the City Beautiful," wrote Tribune architecture critic Blair Kamin.

City officials claimed they were just trying the idea out. The ads were up for a month and brought the city $4,500. That would have added up to $54,000 for a full year—quite a few bucks short of the initial projections of the city reaping millions from bridge ads.

It didn't slow the mayor's plans.

Days after the ads went up, the City Council met to consider Emanuel's 2012 budget. There was plenty to spark controversy—a hike in taxes, deep cuts to library staffing, the closure of mental health clinics—but the mayor showed a willingness to compromise, and aldermen approved the budget with a 50-0 vote.

But one significant part of the budget package was largely overlooked: an amendment to the municipal code that expanded the role of the city's chief financial officer. The new law authorized the CFO to determine which city assets might be "desirable to potential commercial partners," and then to broker deals that could leverage the assets for cash.

The law also made it clear that everything of value was on the table. "'Assets' means all assets available to the City," it said, including buildings, vehicles, and "intangible property" such as event sponsorships and logos.

The day after the budget vote, the city issued a solicitation for private partnerships that was extraordinary in its scope. Rather than specifying what the city was looking for, the notice invited firms to come forward with ideas for how they'd like to make money off city properties.

The prospects weren't limited to physical objects or space. "Certain municipal services and programs may be of interest to advertisers and sponsors," the solicitation said. "Opportunities may take the form of advertising on City property, contributing to operating and maintenance costs of the program, preferred product endorsements or other opportunities."

The request concerned the few aldermen who examined it closely. "I think municipal marketing is a good idea, but when you attach a sponsor to a city service or department, it can blur the lines," says Ameya Pawar (47th). "I don't want the Department of Streets and San brought to you by Mr. Clean."

In the first part of 2012, public attention turned to another kind of public-private partnership proposed by Mayor Emanuel. With backing from Bill Clinton, Emanuel announced plans to create an infrastructure trust, a quasi-governmental nonprofit organization that would line up private-sector financing for public works projects. In an era of reduced federal funding and a heavily indebted city government, the trust would "try to create a bridge between where capital exists and where the projects exist," Scott, the CFO, told me.

The bottom line was that the plan would privatize the process of choosing and funding public infrastructure projects.

Though Emanuel and Scott never explained how exactly it would work, why it had to be done through a separate nonprofit entity, or what it would cost taxpayers, the City Council approved the plan in April. Months later, the trust still doesn't have an executive director or staff, but officials revealed over the summer that they've already been shopping around for investors to fund energy efficiency retrofits in city properties, including the water filtration system. One public interest group, Food and Water Watch, has warned that a deal involving the water system could give so much control to investors as to amount to privatizing it.

click to enlarge chicago-privatization-quote2.jpg

Scott dismissed such concerns: "This has nothing to do with public-private partnerships or privatizations per se," she said. "The trust is about finance, and finance only. It's a tool."

In the meantime the municipal marketing plan was speeding along.

Responses to the city's request for pitches were due in December 2011. City officials later said they received thousands of ideas, some more viable than others. Among the most compelling, they said, were five proposals to create a city-owned digital billboard network along expressways.

The city could have set up a bidding process to open competition to other firms, especially since the November solicitation never mentioned billboards. Instead, Scott and other city officials held separate, closed-door conversations with the five entities who'd pitched the idea.

Over the next few weeks, Scott and other city officials evaluated the proposals based on their apparent "value to taxpayers," their ability to preserve "the city's visual integrity," and the experience of the firms. They also received input from an advisory council picked by the mayor and made up of veterans of marketing and architecture, but not finance.

But the city never disclosed how they reviewed the proposals—was there a formal scoring or evaluation system, or simply a series of conversations?

A couple of weeks ago I submitted a FOIA request to the city's finance department, asking for what specific proposals were made, who made them, and what, if any, outside studies were performed to ensure taxpayers are getting their money's worth. The city denied the request, citing a loophole in the state FOIA that lets officials keep contracting records out of the public eye before the deals are finalized. So the public can't see the terms of the deal until after it's in place, by which time it's too late to do anything about it.

Somehow, officials decided by February 2012 that two of the proposals were better than others. Those two firms—Interstate Outdoor Advertising and another company the city hasn't named—then engaged in a seven-month, "intense head-to-head competition," Scott said.

Yet it wasn't as simple as that.

One of the firms initially eliminated from the competition was JCDecaux, an outdoor ad firm that knows its way around City Hall. In 2001 the company cut a 20-year, $308 million deal with former mayor Daley to build and advertise on bus shelters. Among JCDecaux's City Hall lobbyists are Reyes Kurson, a firm led by one of Daley's top political aides, and Greenberg Traurig, which the city has paid at least $1 million in legal work since 2007.

The details are relevant because in August, after JCDecaux's billboard proposal was deemed inadequate, the firm got back into the competition by forming a partnership with Interstate. A month later city officials awarded the billboard contract to the partnership, though the new entity wasn't formalized and registered with the state until November.

The city says nothing was unfair. "The question came up during that process, 'Can we bring in a partner?'" said Steve Holler, the city attorney who did much of the legal work on the deal. Both finalists "were told yes, because we want them to be as strong as possible."

The contract guarantees the city $155 million for the rights to put up 34 billboards along the expressways over the next two decades. At the same time, it includes a complex revenue-sharing structure that it claims could bring the city's total take to $276 million. Interstate and JCDecaux would get even more than that—after expenses.

But there are a lot of buts. For example, the city gets half of all ad revenues for the first $25 million collected in any year, but it only gets 30 percent of anything above $30 million.

Additional millions are at stake in the first few years based on formulas like this:

"The Contractor shall from time to time pay to the City an initial license fee applicable to such site in an amount equal to the product of (A) a fraction, the numerator of which is the Category Coefficient (as defined in Exhibit 2) assigned to the value of the applicable sign face, as set forth on Exhibit IC, and the denominator of which is one hundred eighty two (182), times (B) Twenty-Five Million and No/100 Dollars . . . "

Right.

Mayor Emanuel formally introduced the contract to the City Council on October 31. He dismissed concerns about the closed-door process that produced it, saying he was confident the city was getting a good deal. "I didn't need to go to Harvard Business School to know."

Two weeks later the City Council voted 46-3 to approve Emanuel's 2013 budget, which counts on $15 million in proceeds from the billboard deal. Though most aldermen hadn't even glanced at the billboard contract yet, they had, in essence, already agreed to approve it.

On December 1 the Sun-Times reported that Mayor Emanuel was planning to launch another attempt at privatizing Midway airport before the end of the year. Two days later, the council's budget and zoning committees held a joint meeting to consider the billboard contract. Alderman Burke set the tone early on.

"I have to admit that as I tried to go through these pages of documents over the weekend, I don't have the expertise to really understand them."

A number of his colleagues said they wanted to be sure the city was getting the best deal it could. "Was there any independent financial analysis for this particular proposal?" asked 46th Ward alderman James Cappleman.

"Not directly," said Scott.

Which is to say: no.

Other aldermen wondered if there was an escape clause over the next two decades, in case projections turn out to be way off.

Again: no.

Scott Waguespack (32nd) noted that the city had announced it was hoping to bring in at least $25 million a year, but the guaranteed payouts are far below that—the most per year is $15 million, in 2013.

"We did set the bar pretty low," Waguespack said. "We basically told them what we wanted. It's the opposite of what we should do."

Nevertheless, most aldermen were convinced that it's great news to come upon millions of dollars that the city didn't have before. What could be a better deal than that?

"Can we use this money to hire more police officers?" wondered 11th Ward alderman James Balcer.

Scott was happy to answer. "A hundred percent of what we're getting from municipal marketing is going into the corporate fund to be used for things like keeping our libraries open and meeting the needs of our police and fire departments."

"So this can be used for hiring more police officers, which is what we need," Balcer said. He leaned back with a look of deep satisfaction. "I rest my case."

The contract was approved 20-3, clearing the way for full council approval on December 12. At the same time, the city has reissued its solicitation for more privatization pitches, and Scott says they'll continue to do so.

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