Wednesday, March 24, 2010

Williams: Mayor is All Wet on Water Deal

Yeseterday, Democratic mayoral candidate Brian Williams issued a statement regarding the Citizens Gas water deal that is so well-done, I feel compelled to provide it to you in its entirety here. It should be required reading:

Recently, Mayor Greg Ballard and the City of Indianapolis entered into a Memorandum of Understanding (MOU) for the sale of the city’s water and waste water systems to Citizens Gas. Rather than the MOU being the product of a community based decision making process for evaluating water system ownership, management and funding alternatives, the citizens of Indianapolis were presented a transaction that the Mayor intends to pursue, for better or worse.

Strong municipal leadership should have begun a community discussion of how Indianapolis improves the quality of the water it drinks and the water it discharges into our lakes, rivers and streams and how Indianapolis pays for the deferred maintenance of its infrastructure to meet those community standards. In evaluating the transaction the Mayor proposes, its flaws are twofold. The first flaw is what is missing: Assurances that our community continues to receive safe, clean, reliable water. This MOU does not establish any standards or any metrics to measure performance against such standards.

The second flaw is with the content of the MOU. First, the MOU does not provide the city with the option to re-purchase the water and waste water systems in the event Citizen’s Gas decides to sell them in the future. This MOU allows Citizen’s to sell our water company to a for-profit corporation whose interests may not align with those of Indianapolis. Second, the City of Indianapolis and its advisors have failed to protect the city, the taxpayers and the rate payers by allowing Citizen’s Gas to complete the transaction only if it receives "an acceptable indemnification from the City ... related to certain of the City's pre-closing combined sewer overflow liabilities."

This nebulous condition could prove financially ruinous to the city as the City could be responsible for billions of dollars in additional expenses for something it no longer owns – the water and wastewater systems – and for which it no longer receives revenue. A strong leader with experience would define and limit this potential exposure as part of a sale.

Finally, it is unclear that the transaction as presented is a net gain financially to the city for the following reasons:

1. The Mayor has stated that the City will gain $425 million on the sale. Based on the MOU that is not accurate. The MOU clearly states that the City will receive $170.6 million in cash at closing. Another $92 million will be paid on October 1, 2011. Therefore, the net cash proceeds from Citizen’s Gas to the city are actually $262.6 million. However, this amount may be reduced by:

Some unknown amount due to “increased borrowing costs” resulting from a downgrade of a provider of surety bonds backing the Water Company revenue bonds;

The value of the Water Company headquarters if Citizens decides it does not want it; and,“Up to $15 million” based on some vaguely referenced “Cost Sharing Agreement.”

The only way the proceeds from the sale equal $425 million is to assume that the $262.6 million in cash over two years is not reduced by any of these contingencies and that the City of Indianapolis borrows another $163 million.

In the MOU, Citizen’s Gas proposes to make payments in lieu of property taxes in the years 2010 through 2039 totaling over $666 million and that future revenue will be pledged to pay off the principal and interest on a loan of $163 million.

Put simply, the Mayor and his advisors are proposing that we trade over $600 million in future revenues for $163 million today – an amount insufficient to address meaningfully the City’s current infrastructure needs which are estimated to be over $4 billion for the water and waste water systems and $1.5 billion for roads, bridges, sidewalks and parks.

2. As part of the purchase Citizen’s will acquire approximately $127 million in cash that the City currently holds in a construction fund for wastewater system projects. Therefore the maximum net cash proceeds to the city at closing from the sale could be $43 million ($170 million - $127 million). That amount could be further reduced by the contingencies already noted. An astute leader would question whether the risks of losing control over a vital asset and paying the expenses associated with completing a sale of this complexity is worth such a relatively small amount of money.

We do not know how much the city will spend on lawyers, accountants, engineers, environmental experts, brokers and other costs to complete the transaction the Mayor proposes. One study by the non-partisan research organization Public Citizen estimated the costs preparing for privatization at nearly $5 million.

3. Between now and closing the City will continue to pay its obligations, including some debt that Citizens Gas will assume. The City’s payments "will reduce the Assumed Debt Obligations that Citizens will be assuming at closing." In many instances, if the seller pays off debt before closing, then the cash paid to the seller increases at closing. In this case, the maximum amount of cash at closing is $170 million. Under this MOU, if the City pays off $100 million in debt between now and closing, the maximum amount of cash at closing would still be $170 million. In a deal between knowledgeable business people, Citizen’s would pay an additional $100 million to keep the agreed upon value of the assets constant. Here the Mayor and his advisors have not protected the economic well being of the City, the rate payers and the taxpayers.

4. In order to close on the sale, Citizen’s Gas must receive "satisfaction with respect to the balances of the Systems' working capital". In a normal arms length deal, the parties would agree on the amount of working capital. Any shortfall at closing would reduce the purchase price and any excess at closing would be paid to the seller. Here, there is no excess going to the City, but any shortfall could result in no closing, or more likely a further reduction in the amount of cash paid at closing. Again, the Mayor and his advisors failed to protect the City, the rate payers and the taxpayers.

Indianapolis must make significant investments in its infrastructure. Currently, those investments are over $4 billion for water and waste water systems and $1.5 billion for roads, bridges, sidewalks and parks. In addition to those investments, Indianapolis must improve the quality of its water and ensure that it is clean and reliable. The development of solutions to these challenges requires leadership that begins with a dialogue about the problems and the creation of a framework by which community supported solutions can be identified and implemented.

Municipal ownership of water utilities gained prominence in the nineteenth century because of water quality and supply problems and affordability. Those same concerns exist today along with concerns about protecting our water supplies from natural disaster and human threats and about water conservation. Clean water is as important to a community’s well being as public safety and education. Clean water is vital for human health and it is necessary for successful business ventures in agriculture, livestock and manufacturing. In other words, economic development and jobs only come to communities with a reliable source of clean water. For these basic reasons access to plentiful, reliable, clean water is in the community’s short and long term interest. Municipal ownership is the best way to ensure those concerns are met because of accountability at the ballot box, transparency of management and operations and a long term perspective to assess the entire community’s needs.

Unfortunately, the lack of water quality standards as part of this agreement and the relatively insignificant amount of cash at closing present tremendous risks to the city, its citizens and the rate payers – risks that are significant enough that a prudent leader would seriously consider the merits of the Mayor’s proposal. Effective performance of Indianapolis’ water and waste water systems depends upon effective staffing, consistent public support for sufficient funding, better asset management systems, performance measurements and rewards and stakeholder involvement and transparency. True leadership requires that Indianapolis develop sustainable solutions to its infrastructure problems and leadership that develops community support for the performance and standards that must be met.



Had Enough Indy? said...

Thanks for posting this iPOPA. I am late to reading the MOU for myself and this certainly seems thorough.

I asked a few questions in the hallway on Saturday - City folks were at McANA's monthly meeting to present the overview of this deal. One point I inquired about was what happens if Citizens sells the company. I was told they will be banned from selling it. I don't know the specifics, I just it along.

Leslie said...

Kudos to Brian for the thorough analysis, and thanks, Chris for posting. The MOU leaves too many issues unanswered, refers to several outside documents and agreements, and raises a great many concerns.

If there ever was a time for vigilence, I'd say this is it!

Marycatherine Barton said...

Yes, excellent, for Brian.