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Risks are seen in L.A.'s plan to privatize parking structures

A rushed bidding deadline could lead to undervaluing the leases. Some also caution that depleting the emergency reserve would increase future borrowing costs.

February 08, 2010|By David Zahniser and Phil Willon

Los Angeles Mayor Antonio Villaraigosa's strategy for getting City Hall through two bleak financial years is not just about layoffs.

Though a much-debated plan to eliminate 1,000 jobs would save $65 million next year, city officials are hoping that three times that amount can be generated by leasing 10 city-owned parking structures in Hollywood, Sherman Oaks and elsewhere to private investors.

But that plan, rejected by City Council members before the recession caused a dramatic drop in tax revenue, comes with some risk.

Officials want to close this year's $212-million general fund budget gap almost entirely with money from an emergency reserve, which was designed to help Los Angeles get through earthquakes, floods and other disasters.

Villaraigosa and the council would then replenish that fund with $100 million to $200 million in new parking garage revenue, the details of which would be worked out over the next five months with private bidders.

That scenario means the cash-strapped city would be trying to cut advantageous deals just as it is desperate for money -- not exactly a strong negotiating position for a public agency. The bidding process is also expected to spark an aggressive blitz by the many lobbying firms that are paid to influence Villaraigosa and other elected officials.

"I'm sure there will be a lot of interest in this," said Thomas Lanctot, a principal with William Blair & Co., which advised Chicago on its decision to award a 99-year lease for all of its parking garages in 2006. "There's an enormous amount of private capital out there that is looking for public infrastructure investment."

Chicago completed a parking garage contract within eight months, Lanctot said. Villaraigosa is pushing for an even more aggressive timeline, saying Los Angeles should act so lease money can start coming in by July 1, the start of the new fiscal year -- one in which the city expects a $484-million shortfall.

Such an ambitious deadline could be a tough sell in a bureaucracy known for moving at a glacial pace. For example, the bidding process for a golf cart concession at city-owned courses has taken seven years without anyone ever winning the contract.

Under the garage plan, city officials would request bids for a long-term lease, potentially up to 50 years, allowing all 10 parking garages to be operated and maintained by a private concessionaire that would receive the bulk of parking proceeds. In return, L.A. would receive an immediate lump-sum payment and could retain a small negotiated share of future proceeds.

That concept has "a lot of moving parts to it," said attorney Jerold Neuman, whose firm represents Bainbridge Capital, a potential bidder for the garages. Furthermore, Neuman warned that search processes for complicated city contracts typically take 12 to 24 months.

"At the end of the day, the city's political process lends itself to significant disruption, where challenges occur and different people's agendas are played out," he said. "That all adds up to a lot of time."

Depleting the reserve fund, meanwhile, is fraught with other perils. The lower that account falls, the more nervous rating agencies become, prompting them to raise the interest rate charged on city borrowing. A major drop could also make it more difficult to secure a loan, City Controller Wendy Greuel said.

The reserve is expected to reach $230 million this year and then plummet to $30 million once Villaraigosa and the council balance this year's budget.

City Administrative Officer Miguel Santana, the top budget official, told three investment rating agencies last month that a major drop in the reserve could occur. "That concerned them," he said. "That's why replenishing the reserve is so important."

City Council President Eric Garcetti voiced some doubts about the garage privatization plan, saying it would be a mistake to rely so heavily on a "largely untested and somewhat unpredictable market area" to safeguard the reserve.

"Anybody who puts all their eggs in this basket and expects the reserve fund to be replenished in July, without buttressing it with further actions, might find the reserve fund close to zero . . . and drive us further toward fiscal insolvency," he said.

Villaraigosa's deputy chief of staff, Matt Szabo, dismissed warnings that the parking structure plan is a gamble, saying that the deal can be completed as long as the council moves swiftly to approve it. Investment firms have already expressed interest in bidding on the garages, said Szabo, although he declined to name the companies.

"The risky proposition is doing nothing," he added

The council voted Feb. 1 to ask for the qualifications of potential parking garage bidders. During that debate, Councilman Richard Alarcon complained that parking firms already owe the city $100 million in overdue business taxes and argued that officials should bar contractors with outstanding debts from bidding.

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