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New terms for water & sewer lease in Allentown

By Randy Kraft, WFMZ.com Reporter, RKraft@wfmz.com
Published On: Feb 28 2013 06:00:00 PM CST
Updated On: Mar 02 2013 11:21:58 AM CST

New terms for water & sewer lease in Allentown

ALLENTOWN, Pa. -

Allentown’s proposed final agreement for the 50-year lease of the city’s water and sewer systems contains “very minor changes...nothing of substance” maintains Mayor Ed Pawlowski.

Opponents do not agree.

Pawlowski is very proud of the 200-page document, which was sent to potential bidders and made public this week.

“This document is skewed in favor of the city of Allentown more so than it is skewed in favor of the concessionaire,” said the mayor. “We did that specifically. My goal is to protect this city –protect the taxpayers, protect the quality of the service we provide and protect the legacy of the city by putting us on a solid fiscal footing for years to come.”

He said the document was six months in the making and stressed: “We hired the best consultants in the business to work with us. We have put the best legal minds in the country to work on this.”

Called the Allentown Water and Sewer Utility System Concession and Lease Agreement, the document was sent to bidders and posted Thursday on the city’s website.

Allentown expects to receive bids from six pre-qualified bidders by March 21. The mayor said the winning bid will be presented to City Council in early April, which will either approve or reject it. In February, City Council’s leaders anticipated voting on the lease before the end of April. But now that timetable seems to be up in the air.

In a Friday afternoon interview with WFMZ, Pawlowski said he hopes the lease immediately will bring the city $150 million to $250 million.

If the deal falls through, warned the mayor, Allentown residents will face property tax increases of 100 to 150 percent “in the very near future” to pay the city’s rising pension costs.

“Many of them cannot handle that type of increase,” he said, adding “it will financially shipwreck the entire city” – including its ability to provide basic services. “It will be a killer economically. It will drive people out of the city. It will create a downward negative economic spiral that the city will never be able to dig itself out of.”

The mayor does not believe a large number of city residents oppose the proposed lease. “There’s a small group of folks who oppose us.” He said 20 people consistently come to meetings to voice their opposition, adding he’s looking out for all 120,000 people who live in the city, not just 20. Even if there are 1,000 opponents, he said, “that’s 1,000 compared to 120,000.”

An opponent’s analysis

An analysis of the final draft document already has been done by Washington, D.C., based Food & Water Watch, a non-profit consumer rights organization that opposes the lease. It maintains rates will be higher than those in an earlier version of the proposed contract.

“Even though rates will be frozen through 2015, household bills will more than double within the first seven years and triple within 13 years,” it claims.  By the end of the 50- year lease, according to Food & Water Watch, “the typical household will be paying more than 15 times what it is paying today for water and sewer service.”

The organization also states: “Over the next five years, the city will have to come up with $40 million to $44 million to replace the revenue and services lost by leasing the water and sewer system. This is partly because, according to the revised contract, the city will receive $2 million to $4 million less each year than required in the earlier draft deal.”

The organization also states the newest version of the proposed agreement contains four new service charges and five additional situations where a concessionaire can increase charges.

The bottom line, of course, will be what’s in the actual bid selected by the administration.

Changes shared by the mayor

 “When we started out, we said this was going to be an evolving document,” said Pawlowski. He insisted it is not true that rates will be out of control or that quality will diminish if the lease goes through.

 While the city’s water rates increased by as much as 20 percent some years and not at all in others, Pawlowski said those rates increased a total of 696 percent over the last 49 years. “If you average that out, it’s a little over 5 percent a year.” He said rate increases for the next 50 years, under the proposed lease, will be less. “The first three years, there is no increase.”

He also pointed out that rates will have to increase even if the city does not lease its water and sewer operations.

He said the lease agreement stabilizes rates and has consistent increases for consumers “so they know exactly what that rate increase is” rather than “a constant roller coaster” of rates.

He even suggested the city on its own might have to raise rates more than the proposed lease’s “2.5 percent, plus the urban consumer price index.” He said that CPI has averaged about 2 percent a year over the last 10 years. Put together, that creates an increase of 4.5 percent. He said that is lower than average ratepayers have been paying for the last 20 years. He predicted they will pay $15 to $20 more a year, “which is a lot less than if I have to raise your property taxes 150 percent.”

The mayor acknowledged one change from the earlier version of the city’s proposed lease is that the rate increase has gone up by .5 percent– from 1.5 to 2 percent – in later years of the contract. He said that’s primarily to build up a capital reserve fund for any necessary improvements as the water and sewer systems age and require improvements. “We want to make sure that if there are capital costs, it doesn’t all come on to ratepayers simultaneously. If that fund is not utilized by the end of the lease period, that money comes back to the city.”

Pawlowski said the city is seeking an annual royalty payment between $500,000 and $2.5 million a year. He acknowledged it initially was looking to get a $4.5 million annual royalty, but “we compromised” when some bidders said they could pay less money up front if they had to pay that much in an annual royalty.

The mayor said the city wants to get as large an upfront payment as it can, to pay off its multi-million-dollar pension debt. He explained the more the winning bidder pays up front, the less it will pay in annual royalties. “Either way, the city will benefit.”

Pawlowski said the only surcharge in the proposed agreement is for capital costs “that go above and beyond the normal cost of doing business,” such as an earthquake or other natural disaster that required repairing a cracked drainage basin. “That would be a cost we would have to pay for anyway, whether or not we lease the system.” He said imposing such a surcharge would have to be approved by the administration and City Council. It would be a separate line item on a bill. “Once that capital improvement is paid for, that line item would come off your bill.”

City Council

Pawlowski said if bids come in within 10 percent of each other on March 21, “they will be pushed out for a best and final offer.” He said bidders will only have a couple of days to do that.

The mayor said the winning bidder immediately will give the city a non-refundable deposit of $6 million. “It means they are really serious,” he said. “We just locked in. If they walk away at that point, we still get that $6 million.”

After his administration selects a bidder, the timetable will be up to City Council, said Pawlowski.

On Friday, Council President Julio Guridy declined to estimate when it will make a decision: “I don’t want to give you any dates because I’m not sure yet.” He stressed council does not want to rush a decision. “I want to wait and see what happens, how things develop.”

Lease opponents have threatened to vote against electing any member of council who votes for the lease. Five of the seven current council members, including Guridy, are up for election in the May 21 primary.

As for the proposed agreement, Guridy said he has not yet read the entire document. “The only comment I want to make is I am looking out for the residents of the city. I’m looking for the best deal we can get for the city. That’s what I was elected for. That does not mean I am against this proposal or that I’m not open to looking at other things. I want to be as transparent as possible throughout this process, for the citizens.”

City Council still plans to hold two special meetings on the issue before it votes, according to Guridy and City Clerk Michael Hanlon, but those meetings have not yet been scheduled.

One will focus on operating standards in the proposed contract, including water quality standards that must be met by the concessionaire. A presentation will be made by Dan Koplish, the city’s former manager of water resources who has been hired by council as a consultant.

The other special meeting will focus on a Pennsylvania Economy League study of alternatives to the lease, including the possibility of creating a public authority.

Jeanette Eichenwald, the only member of City Council who openly opposes the lease, said she has read parts of the proposed final agreement and is having a real hard time understanding why anyone on City Council would vote for it. “This is a far cry from the mayor’s original presentations.”

Eichenwald said the city’s water and sewer systems generate about $10 million in annual income for Allentown and also noted an earlier version of the agreement proposed the city still would get about half that amount in annual royalty payments. But now, she said, that royalty is enormously diminished, possibly to less than $1 million a year.

Eichenwald also maintained rate increases will “skyrocket” after the first few years of the lease.

 Leasing to end pension crisis

The more than $200 million the mayor hopes to get from the lease will be used to reduce a “huge unfunded pension liability that is growing every day.” Pawlowski said that debt payment was $6 million when he came into office. “This year it is $18 million. In 2014, it will be nearly $21 million.”

“We have to lower that payment or our residents are going to be strapped with a massive tax increase – between a 100 and 150 percent in their property taxes.”

In addition to getting the pension debt under control, he said: “We want to stabilize rates, continue to build on the quality of the system that we currently have and continue to pay for capital costs as the system ages. Those are all things we had to do anyway as a municipality.”

To protect the city, Pawlowski said the proposed lease agreement considers every potential scenario that may happen in the future.

He said water quality standards in it are higher than those under which the city currently operates and that it includes fines and fees if standards are not met.

The mayor said the city can change the operator of the leased water and sewer systems. He explained two of the six bidders are non-profit organizations that will do the financing and lease the systems, but hire an operator to actually run them.

Bidders

The six bidders, which have been negotiating terms of the lease with the city for several months, are Aqua Pennsylvania, American Water, Lehigh County Authority, NDC Housing, United Water and Allentown Forward.

Citing confidentiality, Pawlowski would not reveal any basic information about the six bidders. Despite that, he maintained: “This has probably been one of the most open and transparent processes ever in the history of the city.”

He said information will be released about the winning bidder.

Lehigh County Authority soon will be knocked out of the competition if Lehigh County commissioners don’t extend its charter so it remains in existence for the next 50 years. Some county commissioners also want to change LCA’s charter so they can be the ones who make the decision on submitting a bid. Pawlowski declined to comment on that dispute.