Leasing Water, Sewer Systems to Shore Up Pensions

What Happened?

To raise money for its growing pension problems, the city of Allentown, Pennsylvania, is considering leasing the city’s water and sewage plants.

So What?

Cities are constantly seeking innovative ways to meet fiscal challenges, and many have considered privatization of water and sewer utilities. Though some criticize these moves as doomed one-shot revenue sources in stark contrast to a balanced financial statement, others see the tactic as preferential to borrowing, as Ft. Lauderdale is considering.

The Challenge

Despite working to boost revenue and cut costs, Allentown’s unfunded pension liability still looms large; the city’s pension costs are expected to be a quarter of the city’s budget by 2015, according to media reports. Allentown Mayor Ed Pawlowski told local media that the decision to lease water and sewer systems “is not an easy option to pursue, but I have absolutely no choice in order to save our city from financial ruin.”

The Deal

The city is not looking to “sell” the water and sewer systems; rather, it is seeking a firm that would be responsible for maintaining and billing for the city’s water and sewer systems. It’s too early to tell what an actual deal would look like, but the city estimates that a 50-year lease would likely generate the revenue that Allentown needs; the city has hired financial advisory firm PFM Group to determine how much a lease could generate, and how to structure a deal. The existing water and sewer workforces—approximately 80 city workers—would be transferred to the entity that leases the systems. The city would use the lease money to fill the widening pension gap.

The Benefits

In a best-case scenario, the lease could fully fund the city’s pensions—or close to it—while simultaneously relieving the city of the capital and operational expenses associated with water and sewers. More than 80 unionized workers would also move off of the city’s payroll.

The Downside

The city would likely leave money on the table; after all, the hired firm would only lease the water and sewer systems if it could make money over the life of the lease. The poster child for this is Chicago, which was widely criticized for selling a 75-year lease on its parking meters for a one-time fee. In addition to this loss of control issue, the city’s water rates would likely increase (just as Chicago’s parking fees and fines increased); one report showed water rates increase by an average of 15 percent one year after privatization. Allentown’s mayor told the local media that rates would be built into the lease, but nothing is finalized yet. Advocacy groups also claim that outsourcing water limits accountability, conflicts with the public interest, yields higher operating costs and rates, worsens service, and more.

Vendors

According to reports, one potential vendor is Aqua America, which provides water and wastewater services for nearly 3 million people in 10 states; it already serves 1.4 million Pennsylvanians in 30 counties. The Lehigh County Authority is also a potential candidate, though Aqua America has been more acquisitive and aggressive in taking on regional clients.

Other Cities

Cities across the country have considered the privatization of water and sewer utilities; according to one privatization report, there have been at least 200 prospective or completed sales since November 2010. Troubled Nassau County, New York, for example, is considering privatizing its sewers to retire 25 percent of its debt and generate revenue. Milwaukee was working on a 99-year lease of its water operations, but the city council abandoned privatization amid strong opposition. Atlanta signed with a 20-year water privatization deal in 1999, but regained public control four years later in response to price increases and service problems. Evansville, Indiana, also ended a 17-year experiment with water privatization. Most recently, as covered by Gov1, Shaker Heights, Ohio, outsourced its sewer maintenance to another community.

Resources

Organizations like Food & Water Watch provide research and data for municipalities, principally aimed at helping them keep control of water and sewer systems. Their “Municipalization Guide” and “Money Down the Drain” reports focus on how private control of water waste money. And their “Trends in Water Privatization” report, though biased against privatization, provides significant detail on recent privatization efforts and the results. A more academic review of water-service privatization was published in 2005.

Gov1 will continue to track this issue for readers; please contact us if you have insight, experience or opinions on water and sewer privatization.