Walt Knorr Lease of the Chicago Skyway

Chicago SkywayPublic Policy Issues: A Template for Asset Privatization?: 

Chicago Skyway Public Policy Issues: A Template for Asset Privatization? National Association of State Treasurers September 20, 2005

Origin of The Chicago Skyway: 

Origin of The Chicago Skyway 7.8 mile, six lane toll road and bridge directly connecting I-94 and the Indiana toll road (original southbound entrance off State Street) Planned in the mid 1950’s before the Eisenhower Expressway System Construction financed with $ 101 million of revenue bonds sold in 1955 and 1957 Opened for traffic in 1959 with a passenger car toll of $ .25 Parallel expressway opens in 1962 Defaulted in 1964 on first revenue bond sinking fund payment resulting in technical default Operated in default for 30 years; credit rating a “C” – not investment grade In 1989, City offered to Illinois Toll Highway Authority for $ 1, but rejected because of default status Vulture funds offer cents on the dollar for the Skyway

History of the Chicago Skyway (1960-1988): 

History of the Chicago Skyway (1960-1988) Original traffic projections never materialize as traffic migrates to the parallel freeway After initial default, Skyway becomes delinquent with interest payments City of Chicago provided all maintenance services and public safety for the Skyway $180 million in unreimbursed services for the Skyway incurred by the City between 1963 and 1993 One tollbooth with six manual positions in each direction; limited services and concessions Bondholder lawsuit filed in late 1980’s to require the City of Chicago to back the bonds; tolls regularly reset by Federal judge to $ 2.00 by 1994 No Federal or state money in the Skyway ( $ 20 million of Federal money to “paint” the bridge in the ’90s)

Chicago Skyway Turnaround: 

Chicago Skyway Turnaround By the late 1980’s, the parallel freeway (I-94) underwent significant reconstruction due to heavy usage By 1989, the increase in Skyway traffic became noticeable as a detour route to avoid construction and shorten travel distance Skyway was a commuter route, a route to vacation homes and the quickest route to the Indiana gaming boats Despite completion of construction on freeway, traffic studies in 1994 projected increased Skyway traffic and revenues Engineering studies determined the road and bridge were in fair to good physical condition Skyway replacement value was estimated at $ 800 million Substantial positive cash flow was being generated and dedicated to Skyway capital needs Original $ 101 million of Skyway revenue bonds were refunded in 1994 with investment grade ratings Bondholder lawsuit dismissed with refunding transaction

Decision to Privatize Background(1995 – 2000): 

Decision to Privatize Background (1995 – 2000) Refunded the Skyway’s outstanding 1994 revenue bonds in 1996 with an additional $ 50 million of proceeds for City transportation projects; theoretical partial repayment for unreimbursed services Passenger toll at $ 2.00; commercial toll at $ 1.20 an axle - with traffic increasing annually in excess of 1994 projections Skyway generates positive cash flow of over $ 40 million annually after operating costs and debt service; portions of this cash flow transferred to the City for transportation projects Federal lawsuit filed in late ’90s to prohibit the City from diverting positive cash flow to the City; demanded tolls be reduced and the Skyway operate on a breakeven basis Upgraded the toll booths with automatic lanes; no EZ passes Issued $ 250 million in 2000 and 2001 of Skyway revenue bonds to substantially rebuild the elevated portions of the roadway and bridge decks

Skyway Privatization Public Policy Issues: 

Skyway Privatization Public Policy Issues Where does owning and operating a 45 year old, refurbished toll road and bridge fit into the mission of the City of Chicago? Skyway was not a critical component of the City’s core municipal assets or operations Skyway was not a separate transportation authority or taxing body, but a nonessential City owned enterprise Skyway was not a major employer – only 130 City employees – primarily toll takers that could be assumed by a private operator or back into the City workforce Toll setting and revenue generation was never market driven; City managed and operated the Skyway on a cost recovery basis – cover operating costs and debt service City was aware of the Skyway’s market potential; elasticity in the toll setting, but politically the City not going to increase tolls Opportunity to sell a non critical asset, maintain a reasonable level of governmental oversight, participate in the Skyway’s market potential and use the net proceeds prudently for the City budget

Here’s the Deal: 

Here’s the Deal First broached to RMD in early 2000 Statutory exemption for the Skyway from the State’s leasehold tax was passed by the legislature in the fall of 2000 – revenue neutral to the State First public disclosure of the privatization plan (lease concession for up to 99 years) made in the fall of 2001 Lawsuit over ownership and use of the Skyway’s excess revenues adjudicated in the City’s favor – Skyway was City owned and had discretionary use of excess proceeds Bankers, lawyers, traffic and structural engineers hired in mid 2002 Approval by Federal government because of nexus with Federal expressway system and Federal money in bridge renewal Concession agreement crafted with City policing and oversight provisions, including maintenance inspections and formula limits on toll increases City reserved right to naming rights and advertising and provided no protection against competing facilities Reconstruction of elevated portions of the Skyway completed in the spring of 2004

The Envelope Please: 

The Envelope Please Three bids opened in November of 2004 with a winning bid of $ 1.83 billion Future value of the Skyway’s net revenues with the operator’s assumptions and factoring in the City’s conditions in the pricing? Transaction closed and cash transferred to City in early 2005 City used approximately $ 500 million of the proceeds to pay off the outstanding Skyway revenue bonds, as required Bankers, lawyers and consultants paid $ 1.2 billion plus remaining allocated for current budget purposes and bond defeasance, a mid duration operating reserve and a long term reserve At $ 1.83 billion, the City got $ 234.6 million a mile, $ 13.3 million a yard, $ 4.4 million a foot or $ 367 thousand an inch! Don’t believe these values are a rule of thumb – each asset has its own market driven value