Finally Some Privatization “Good News” in Chicago

Actually, it’s more like “less bad than it could have been.”

You may recall that the city of Chicago leased its lakefront garages to a consortium led by Morgan Stanley. This was a typical Chicago style lease for 99 years with the entire $563 million paid up front.

As I’ve said many times, I don’t hate privatization and wasn’t opposed to the garage lease since garages don’t have urban planning impacts the way meters do. However, apparently I spoke too soon as the city included a clause in that lease that prohibited the approval of any new open to the public parking garages in an exclusion zone as part of a non-compete agreement. This didn’t just affect garages the city might construct. The city promised not to allow even other private investors on their own land to open any garages the public could park in. In effect, by stealth, the city contractually changed its zoning code and stole – and that’s not too harsh a word for it since the city monetarily profited from this – a part of the development rights from every land owner in the district.

Unfortunately, Mayor Daley, after signing this deal, did allow such a garage to open. The vendor promptly filed a $200 million claim for damages.

Well, this week an arbitrator ruled in favor of the vendor, but awarded “only” $57.8 million damages. This is the best privatization news in Chicago in quite some time.

Let me hasten to add that this occurred under Daley and wasn’t Rahm’s fault. He has contested aggressively this and other claims by various vendors. However, Rahm has resolutely refused to challenge or attempt to renegotiate any of these contracts themselves despite massive public policy problems and huge liabilities. (On top of this amount, there are also $50+ million in solid-looking claims from the parking meter lease – and those are recurring claims). I suspect this has to do with the fact that Rahm intends to tap the private capital markets with his Chicago Infrastructure Trust and potential Midway transactions and so doesn’t want to give off vibes that Chicago’s a bad place to invest. Understandable, but there’s a high price to be paid for this.

What’s more, I think there are very good reasons why these transactions could be undone or renegotiated. For example, it’s a basic principle of law that an elected legislative body can’t bind its successors as to policy. But this is an attempt to subvert that by contractually stripping non-contract parties of their rights through contract-based rezoning. I can’t see how this is possibly legal.

Anyhow, this just goes to show how the fallout from these contracts is going to linger for years to come. If I were a property owner in the exclusion zone, I’d immediately propose a garage just so I could sue the city for compensation over my lost development rights as “takings.” Don’t expect these types of claims to end any time soon. As if Rahm didn’t have enough headaches.

It’s a perfect example of why cities should never cede public policy decisions to third parties who don’t have the public’s interest in mind.

A lot of this results from Chicago’s craven city council that, while nominally the constitutionally strongest branch of local governance, is basically a sock puppet of the mayor. Steve Rhodes has a great article in this month’s Chicago Magazine discussing this called “The Yes Men: Why Chicago’s Spineless City Council Just Can’t Say No.” Chicago is a poster child of what you get when you lack effective separation of powers, checks and balances, etc. As with Tocqueville’s description of aristocracy, everything depends on the character and decision making of the aristocrat.

Thanks to Richard Layman for pointing these out, and also for his own interesting discussion of the matter. As he notes, local government are so starved for cash in the here and now that they are cutting simply terrible deals to get it.