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Allentown Water: The Half-Century Decision

By Randy Kraft, WFMZ.com Reporter, RKraft@wfmz.com
Published On: Oct 28 2012 09:36:14 AM CDT
Updated On: Oct 29 2012 07:36:26 AM CDT
ALLENTOWN, Pa. -

Wednesday, Allentown City Council is expected to vote on whether to support the next step in Mayor Ed Pawlowski's plan to lease the city's water and sewer operations.  WFMZ.com's Randy Kraft takes an in-depth look at the issues and arguments involved with this controversial proposal.

THE PROBLEM

Allentown is running out of money at a time when its multi-million-dollar pension debts are about to dramatically increase.

While the recession, declining revenues and rising health care costs all contributed to Allentown’s looming financial crisis,  Mayor Ed Pawlowski says the biggest problem is “crippling” pension costs because of early retirements by police and firefighters, based on contracts negotiated before he became mayor.

“I lost a third of my police force and I lost almost half the fire department over the last several years,” said the mayor. “We had guys going out at 30, 40, 45 years of age.  I had a guy who was 47 or 48 going out with $90,000 a year for the rest of his life, plus full health care benefits that could be passed onto his surviving spouse.”

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He said some of those retirees walked away with pensions that were 130-140 percent of their base pay.

Pawlowski said “this is what I saddled with” when he took office seven years ago.

He said he was the first and only mayor to sue the police over pensions in Pennsylvania. That suit resulted in a settlement. “We got some retirees to actually give back some of their benefits.”

Pawlowski said some pensions contained provisions that violated state law. But he could not change them until it was time to renegotiate contracts with the police and firefighters unions.

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In 2008, he renegotiated the contract with the police union.

 “We got rid of all these crazy illegal benefits. All the things that inflated the pensions are gone. We stopped that hemorrhaging.”

This year, pension benefits also were changed for firefighters when that contract was renegotiated. “This was the first year I’ve had a chance to restructure it. We got rid of all those illegal pension benefits. They can’t retire early, they can’t inflate their pension with overtime, they have to be 25 years on the force, they have to be 55 or older,” said Pawlowski.

What he can’t do is go back and eliminate or not pay police or firefighter pensions that are contractual obligations under state law. Pension costs keep growing because more people are taking money out of the system “at dramatically increased rates.”

Because of that, said the mayor, unless there is a dramatic increase in revenue, within three years about 25 percent of the city’s budget will go to pay those pension costs. He argues taxes would have to increase up to 40 percent just to pay those costs.

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“Our Minimal Municipal Obligation for our pension fund is going to rise to 25 percent or more of our operating budget in a few short years,” Pawlowski said.  “Unless we ease our pension crisis, our rising MMO will require a massive property tax increase while still not doing anything to bolster our reserves.”

MMO is the minimal amount the city has to pay on its pensions. “It’s like the minimal payment on a credit card,” explained the mayor. “It doesn’t pay off your debt. It does nothing to reduce our unfunded liability.”

The city’s unfunded pension liability now is more than more than $150 million and growing.

This year, he said, the city’s MMO obligation is $15.5 million. Next year, it is $18 million – more than is budgeted for the entire fire department.

By 2015, $23 million -- about 25 percent of the city’s entire general fund budget – will have to be used to pay the MMO.

“We need a dramatic increase in revenue to fill this pension gap,” said the mayor.

 

THE MAYOR'S SOLUTION

Pawlowski is convinced the best way to save the city is by leasing its water and sewer systems for an estimated $200 million.

“We’re trying to address this before it becomes a crisis, but the crisis is on the horizon,” said the mayor. “It is inevitable we will go off the precipice if we don’t do something soon.

“Between the pension costs and the downturn in revenue, we’ve eaten away all our savings. We’re down to $1.9 million.” He said that money will be gone by 2014.

If the controversial lease deal doesn’t happen, the mayor said the city will face massive increases in both water rates and taxes.

He has warned taxes could increase 100 percent if the deal fails.

Allentown already has the highest property tax rate in the entire Lehigh Valley. And Pawlowski knows many people can’t afford to pay more in a city where 25 percent of the residents live at or below the poverty rate and another 20 percent are senior citizens on fixed incomes.

“If the city does not choose this path, our financial situation will worsen deeply,” predicted the mayor. “If we don’t do this, water rates will continue to rise, and so will property taxes, and they will rise dramatically.”

But if the lease is approved, said Pawlowski, revenue from it will eliminate the city’s unfunded pension liability and “dramatically” reduce and stabilize the MMO for the next 30 years. More important for city residents, no increase in city property taxes may be needed for the next six years.

Yet signs declaring “Stop the Corporate Water Grab” are beginning to pop up in yards in the city and one group of residents hopes to stop the lease by having Allentown voters decide the issue in a May referendum. They feel Allentown’s water is much too precious a resource to be controlled by a private company for the next half century.

On Oct. 17, the mayor called a news conference to assure residents and businesses that his lease plan will protect them from skyrocketing water rates for the next 50 years.

He promised water rates will remain unchanged through 2015. From 2016 to 2032, they would rise 2.5 percent plus the Consumer Price Index. Beginning in 2032, they would rise 1.5 percent plus the CPI.

Pawlowski said in the last 20 years water and sewer rates in Allentown increased 196 percent -- an average increase of 5.6 percent a year.

The mayor said even if the annual CPI increases by 2.5 percent, the city’s 33,000 water customers will pay less under the lease than they have been paying in the past.

If Pawlowski hoped that announcement would pull the plug on the controversy surrounding the lease, he was wrong.

By the end of the 50-year deal, the typical household’s annual water and sewer bill will increase by 1,266 percent, claims the Washington, D.C., based Food & Water Watch, which did its own analysis of the proposed lease.

That means a household now paying $457 a year will be paying $6,234 by 2062.

That analysis concluded typical annual household bills will double within the first 10 years and triple by 20th year of the lease. It also warns local businesses will experience even greater increases, which could put a serious financial burden on them.

Mike Moore, Allentown’s communications coordinator, said the increases over the next 50 years will total 579 percent – not 1,266 percent –which is less than the 661 percent in water rate increases city water users have experienced over the last 48 years.

Opponents maintain whatever company the city selects to operate the systems will tack additional fees onto bills, making them much higher than the mayor projected.

The lease allows the system operator to recoup costs for repairs and improvements to the city's water and sewer infrastructure through a capital cost recovery charge.

Opponents say the mayor's projections don't include that charge.

The mayor wasn’t lying about the caps on water rates, said Sam Bernhardt, Pennsylvania organizer for Food & Water Watch. He said there is “not an inch of disparity” between the rates Pawlowski outlined and calculations done by his non-profit consumer organization.

But Bernhardt said the mayor is not factoring in the capital cost recovery charge, which is part of the proposed agreement.

Moore said that's because, “according to the draft agreement, these types of capital expenses will be calculated and billed separately.” He said that Food & Water Watch's estimates are exaggerated by $150 million in potential mandatory improvements.

Moore said improvements will have to be made to the water and sewer systems during the next 50 years whether or not those systems are leased. Without the lease, the city will have to shoulder the cost of those improvements.

The lease agreement also gives city council the power to approve or deny proposed capital improvement projects, according to the mayor.

Pawlowski said 3.8 million of Pennsylvania’s 12.7 million water customers are served by private national or multi-national companies.

According to Food & Water Watch, Pennsylvania residents who have water systems under private control pay 57 percent more each year than those under municipal control – a difference of $121.80.

The average water/sewer bill in Allentown now is $487 a year.

 

WHAT HAPPPENS NEXT

Pawlowski hopes to receive bids before the end of this year and award a lease to the highest bidder by March. Allentown’s City Council must approve that lease contract. The mayor thinks the majority on City Council will do that because “they realize there are no other options.”

Seven potential bidders are interested in operating Allentown’s water and sewer systems. They are Aqua Pennsylvania, American Water, Access Capital, Lehigh County Authority, Macquarie, NDC Housing and United Water.

The next step will be for the city’s administration to gets bids from those water companies, by sending them Requests for Proposal – RFPs.

In a special meeting Wednesday night, City Council will consider whether it wants to support sending those RFPs.

The mayor doesn’t need council’s approval to send RFPs.  But he explained: “If we want to get serious bids, we want the bidders to know council is behind us. We’re trying to show them there is political will to do this. I think we’ll get higher bids as a result of that.”

Instead of getting an annual payment for the lease, the city will get one big upfront payment.

The mayor said the initial estimated value of leasing the city’s water and sewer systems is $130 million to $200 million.

But Pawlowski predicted: “I think we’ll probably get in the $220 million to $230 million range.” If he can get that much, “we’ll be a debt-free city.”

After the RFPs are sent, representatives of the city will meet with prospective bidders, a process that will help determine exactly how much Allentown’s water and sewer systems are worth and if leasing them is the best way to restore the city’s financial health.

Moore said each of those companies will spend $500,000 to $1 million to investigate whether leasing Allentown’s systems is a good idea for them.

The mayor wants “a proven and experienced utility provider” selected through a “highly competitive and professional process.”

“We’re looking at the best qualified operator, the one that the best track record and the one that has financial capacity to pay and gives us the best price,” said Pawlowski. “This is a big system and it’s a well-run system. There are not a lot of capital costs. I think we’re going to get a pretty good price when we put it out for bid.”

City Council has hired the Pennsylvania Economy League to do an independent study of options to solve the coming pension crisis, including but not limited to leasing the water/sewer systems.

Despite council deciding to get that independent review, the mayor said council has been involved in the process “every step of the way.”

The economy league’s findings will be discussed during Wednesday’s City Council meeting, said City Clerk Michael Hanlon. Opponents of the lease have asked council to consider the economy league’s reports before approving RFPs.

Said lease opponent Dan Poresky: “For council to give the mayor the go-ahead prior to reviewing the Economy League report would be showing contempt for the public.”

 

REFERENDUM

In Allentown, an effort is underway to try to stop a lease from being signed by having a public referendum placed on the ballot in the May primary. The proposed question on that referendum is whether or not the city must come to voters before it can sell or lease any property or asset worth at least $10 million.

Those circulating petitions to require that referendum want to get 3,000 signatures -- 1,000 more than they need – by December.

“Before any contract comes to council for a vote, we will have the needed signatures to get our referendum on the ballot,” said Poresky. “When that happens, council will be hard-pressed to justify defying the clear and overwhelming will of the people.”

The petition drive to get a referendum is being done by a five-man committee that includes Poresky, who is former owner of Dan’s Camera City and a member of the city’s Environmental Advisory Council; former City Council member Michael Donovan, who is an associate professor of business and economics at Cedar Crest College; former City Controller William Hoffman, and former Allentown Patriots presidents Glenn Hunsicker and Glenn S. Hunsicker.

Even if the men organizing the petition drive succeed in getting their referendum on the ballot, City Council and the administration could sign a lease long before the May primary.  But they hope just having the required number of signatures to get it on the ballot will be enough public pressure to convince council to delay signing a lease until after the referendum.

Pawlowski’s opinion on that referendum attempt: “This is a representative democracy. They elect us to make the tough choices. This is a very complicated issue. It s going to take a lot of wrapping your head around this to really understand what this is all about.”

 

OPPONENTS AND ALTERNATE SOLUTIONS

The mayor maintains that those who oppose the lease are spreading fear that residents will face exorbitant rate hikes “while not providing any viable alternatives.”

“They’re not going to tell you what the alternative is, because they don’t have one,” he said. “I’ve ask them for an alternative from day one. If they had a viable option, they would have come forward with it. There is no viable option.”

Some opponents maintain they repeatedly asked both council and the administration to meet with them to work together to find the best solution, but their requests have been ignored or rejected.

Pawlowski said opponents often say the best alternative to leasing is a combination of solutions. “What’s the combination?” he asked. “Raising property taxes and earned income taxes? There is no combination. You can’t lease half the plant.”

Some critics of the mayor’s proposal say whenever they suggest an alternative solution to the administration it is rejected as “not recommended.” They also maintain the mayor is proposing a 50-year solution to a 20-year fiscal problem.

Poresky acknowledged there isn’t going to be a simple answer, “where we can say ‘if you just plug in this solution, it’s going to work’. A lot of this has to be worked out and it’s going to have to come from different sources.” He said other solutions can be found “if there is a will to not privatize. Privatization is the most costly, least desirable option.”

“A water company has no allegiance to Allentown,” said Poresky. “It has an allegiance to its stockholders.”

Poresky said opponents don’t want to be heard because they have all the answers, but because they want to work with city council and the administration to help find a better solution.

In September, council rejected a proposal by Donovan to create an independent committee to find the best way to solve the coming fiscal crisis. Opponents also have not yet been able to convince council to allow them more than three to five minutes so they can make a more detailed presentation on the issue.

Pawlowski said he hired “the best people possible” to help the city find the best solution.

“This potentially is a $240 million project, which is twice the amount of our total debt,” said the mayor. “It will eliminate the biggest problem we have and set us on a solid fiscal trajectory. You’re darn right I’m going to get the best professionals in the business to help us navigate through this deal –so we get the best deal possible, the best price and we’ve looked at all the options. I have no problem spending the money to make sure that happens. If we don’t, we’ll be paying a heck of a lot more going forward.”

Some opponents argue that if Allentown succeeded in getting special legislation passed in Harrisburg to create Neighborhood Improvement Zones just to benefit the city, it also should have enough clout to get other changes made by the state to avert the impending financial crisis. One of their suggestions is to get temporary state approval for an exemption to issue a short-term water revenue bond that could be used to help pay off the city’s pension obligation.

Opponents maintain the administration has contributed to the financial crisis by not raising property taxes when it should have. Allentown has not raised taxes since 2006.

One thing both sides agree on: Allentown has a surplus of excellent quality water.

“We have oodles of water to sell,” said the mayor. “We don’t even tap most of our sources.” He expects whatever company leases the water system will go out and get more customers to buy water. He said that benefits the city because the lease includes a revenue sharing component.

Opponents of the lease said Allentown, not a private company, should be making more money by selling more water at higher rates to new wholesale customers outside the city. “This is all revenue we’re giving away,” said Poresky. “The problem is the water department hasn’t been run like a business, to raise as much money as it can.”

In addition to Allentown still owning the water/sewer systems and not leasing its water sources, the proposed lease requires that it set operational standards and retain oversight to ensure water quality. “The lease has fees and penalties,” said Pawlowski. “If they don’t meet the operational standards they can be fined. We also can remove them as an operator and replace them if they are not meeting our standards.”

 

A PRO-LEASE VOICE

Pawlowski has invited Jim Kennedy, former mayor of Rahway, N.J., to share his town’s water leasing experience with City Council Wednesday night.

Thirteen years ago, said Kennedy, Rahway entered into a 20-year lease with United Water, one of the potential bidders to lease Allentown’s sewer and water systems.

“Our deal was very successful,” said Kennedy. ”We have among the lowest rates in New Jersey. They went up marginally, but they remain stable.”

By no longer running its own water system, he said, Rahway originally was projected to save $20 million during the 20-year lease,

But Kennedy said Rahway already has saved more than $20.8 million. He said the city now anticipates saving a total of $30 million over those 20 years. “We did it right and it paid off,” said Kennedy. “It was a very smart thing to do.”

He said leasing Rahway’s water system was one of the reasons he kept getting re-elected to serve a total of five terms as mayor.

Rahway’s 19th-century water system was very old, had been operating in the red for two years and was not meeting New Jersey’s environmental standards – which are more stringent than federal clean water requirements.

Kennedy said the cost to run the water system became impractical for the small city, which has less than 30,000 residents. If Rahway had not leased its water system, he said, its water rates would have tripled.

He said all income from the lease is used to improve Rahway’s water system. “Water quality has been improved because of the investment into the system.”

Kennedy said a very active group of residents opposed the lease, “but they really weren’t looking at it fairly.”

He said one of the criticisms of leasing a public water supply is that private companies do it to make money, “which is accurate, but theoretically so does the municipality. You don’t want to lose money.”

Kennedy said a private water company can do a better job of running a municipal water system than a single municipality can do because of “economies of scale. They have access to large amounts of capital, to soften the impact on the taxpayer.”

Kennedy said Rahway’s City Council still controls water rates.

He said none of the city’s water system employees lost their jobs. A related improvement for water customers was that Rahway added electronic meters so meter readers no longer had to go inside people’s homes to check their water usage.

City Council meets at 6 P.M. Wednesday in City Hall at 435 Hamilton St. A vote is expected on whether council supports the next step in the Mayor's Plan, asking interested private companies their proposals to operate the city's water and sewer systems.