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OSU parking deal requires accurate projections

Ohio State Universitys effort to sell its parking operation to a private vendor is either a savvy plan to unlock the value of a non-core asset or a roundabout way of converting public assets into money that can be invested in the markets, depending on whom you talk to.
The university would experience a windfall of at least $375 million by selling the revenue stream from almost 36,000 parking spaces for up to half a century, but a huge portion of the upfront payment perhaps more than 60 percent could be needed to pay off bonds, run campus buses and pay for other transportation functions.

Selling off non-core operations is good public policy, but getting the details right can be tough, said Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California in Los Angeles.

The OSU trustees approved the plan last month. Now, its up to university President E. Gordon Gee to see if he can get the right price or kill the deal.

How will Gee know the right price?

The simple truth, which sounds kind of flip, is you really dont, Little said. You make assumptions. If you ask five different evaluators to do this, you come up with five different answers.

The public has a poor understanding of the basics of such deals, said Julie Roin, a professor who specializes in state and local finance at the University of Chicago Law School. The deals are debt masquerading as privatization, she said.

This is essentially the same as secured debt, Roin said. They want to take out debt without calling it debt.

What the university is trying to do is get 50 years worth of revenue advanced to year one, similar to homebuyers taking out 30-year mortgages backed by the revenue from their jobs, Roin said.

Why wouldnt the university just issue bonds backed by parking revenue to raise millions to invest in the stock and bond markets?

That would be illegal, said Geoffrey Chatas, Ohio States chief financial officer. Ohio law prohibits such borrowing for anything except new construction, he said.

Ohio States parking operation is designed to be self-sustaining: Money from permits, daily parking and fines pays for building and operating spaces throughout the campus, plus the campus bus system.

By allowing an outside operator to take over, OSU officials say, the university could extract its money from a break-even operation and invest it in the endowment to support teaching and research.

Valuing the parking operation begins with projecting revenue out 50 years, Little said. Then you deduct the costs of maintenance, personnel, new facilities and other expenses. Then you apply an interest rate the profit that the investors demand for their upfront payment. The lower the sale price, the greater their expected rate of return, and vice versa.

After assuming all that, you reverse-engineer that information into todays dollars to come up with a sale price, Little said.

I dont want to belittle what folks do for a living, but its all kind of a guess, based on the assumptions in the analysis, he said. At the end of the day, you come up with a number.

Exactly how Ohio State came up with its number of at least $375 million, its not saying: Officials denied a public-records request for the formula, saying it is a trade secret. Other details also will be held back from all but qualified investors, who have until Nov. 2 to respond to a request for qualification. Only those deemed qualified will be given the complete financial information, and only if they sign a confidentiality provision.

In fiscal 2011, the parking system generated $28 million and had $19 million in earnings before interest, taxes, depreciation and amortization, according to a document being given to potential investors. As a university operation last year, it netted a $3.7 million surplus. That goes toward the bus service.

The transportation department estimates that it would need $8.85 million a year to continue operating the Campus Area Bus Service and carry out other responsibilities, said Sarah Blouch, executive director of transportation and parking.

One estimate by the department shows that if $100million were earmarked in the endowment for those functions, it would be depleted by 2026 if expenses grew by an average of 3 percent a year. The estimate assumes that the endowment earns 8percent annually. If bus service were increased by 50percent, the $100 million would be gone in nine years, according to the estimate.

Chatas said the money earmarked for the bus service might have to be as much as $160 million. And he said the university endowment has averaged a 10 percent annual gain over the past decade and 15 percent over the past three years. By comparison, current 30-year U.S. Treasury bonds pay 3p ercent.

However much is earmarked for the bus service and other needs, it would be expected to grow over time.

Thats been the history of all endowments, Chatas said. You keep up enough to grow.

If the earmark proved insufficient, the university has other reserves it could divert to bus service without raising student and faculty fees, Chatas said.

There are no plans to assess anyone with additional fees to fund these services, said university spokeswoman Shelly Hoffman.
Ohio State University
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