Okay Folks, Let's Think About It

Would you make a public bid on buying a house if you couldn't get the financing? Would you accept a bid on your house and take it off the market by someone who couldn't possibly afford it?

What's up with this failed bid to lease Midway? If they couldn't afford to get the financing to lease, can they take the hit to lose the money?

Something fishy on the fifth floor at city hall.

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The much-anticipated $2.5 billion deal to privatize Midway Airport has become the latest victim of the global crisis choking off the financial markets, Chicago city officials said Monday.

Unable to borrow the mountain of cash needed to finance the deal, a consortium, including a unit of troubled Citigroup Inc., had to scotch its plans to lease and operate the city-owned airport facility.

For now, the city will have to make do without a windfall of $1 billion that Mayor Richard Daley hoped would help fund infrastructure projects, pension obligations and, to a lesser extent, other city spending.

Gene Saffold, the mayor's chief financial officer, said the city will be able to keep $126 million in earnest money put down by the winning bidder to secure the transaction, so "it wasn't a total loss."

But a deal that promised to serve as a model for other cash-strapped states and municipalities seeking to raise money by leasing off big public assets has instead turned into a cautionary tale.

"For other cities trying to cut their budget deficits by selling off assets — and there are many — things just got a lot harder politically," said consultant Steve Steckler, chairman of Maryland-based Infrastructure Management Group Inc.

Though Saffold said there may be an opportunity in the future to resurrect the deal, he conceded any fresh effort would have to wait until the capital markets fully recover.

Meanwhile, the city will set to work formulating a definitive plan to spend the $126 million down payment. Saffold said $40 million would go toward shoring up the budget this year and in 2010, and some will go to unspecified public works projects in the city's neighborhoods.

Daley recently pegged the 2009 budget shortfall at $220 million.

The Midway deal reflects the troubled business environment. In 2005, when times were easier for borrowers and lenders, Chicago was able to reap a one-time $1.83 billion windfall by setting up a long-term lease of the Chicago Skyway toll road. In 2006, Indiana raised $3.8 billion leasing out the Indiana Toll Road.

The mayor's plan to lease Midway for 99 years drew six serious bidders led by a consortium of Vancouver Airport Services Ltd., Citi Infrastructure Investors and Boston's John Hancock Life Insurance Co.

When the City Council voted 49-0 last October to approve the Citigroup's $2.5 billion offer, the idea was to use most of the money to pay off Midway's long-term debt, leaving $1 billion for the city. State law mandated that 90 percent of that had to be used to support infrastructure and pension obligations. But the other 10 percent could be used for general spending.

Steckler said many experts believed the $2.5 billion price tag was high. But once the cost of financing began to soar as the credit markets froze up last fall, it would have become even more difficult to cover future interest expense with airport cash flow, he said.

It doesn't help that due to the recession the volume of both flights and passengers at Midway during January was down 12 percent, year over year, according to the Bureau of Transportation Statistics.

Bob Montgomery, vice president for properties at Southwest Airlines, Midway's biggest tenant, said he would support an effort to cut a new lease deal. But he's "a little bit relieved" this one didn't work because privatization would have been uncharted territory.

"It takes the risk off the table for us," he said.