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untanglingwebs
El Supremo
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May 25, 2014 at 1:00 am
Column: Will suburbs fund Detroit's grand bargain?
Nolan Finley
L. Brooks Patterson wants everyone to know who is really paying for the grand bargain to bail out Detroit. He says it’s the region’s water customers.
The Oakland County executive and his team have been doing a little math, and they say it adds up to a massive transfer of cash from the pockets of regional water ratepayers to the city treasury.
It’s all a bit complicated, but here’s what Patterson says is happening:
The bankruptcy plan of adjustment put together by Emergency Manager Kevyn Orr establishes a Pension Restoration Trust that will erase the shortfall in city pension funds with additional payments over and above the required annual contributions.
Most departments will amortize the debt over 30 years.
But the plan demands the water department substantially fund pensions for its retirees in 10 years. That shortened period means higher annual payments. Water department ratepayers, who are now contributing $15 million to $18 million a year to the pension fund, will be bumped to $65.4 million in the first year, and $45.4 million for the next nine.
That adds up to about $474 million.
The extra revenue, Patterson contends, will cover the city’s entire obligation to the trust for the next decade, so that it can use the payments from other departments to bolster the city’s general fund, if it chooses. Patterson figures they’ll have a $25 million-a-year windfall to work with.
“You think the $195 million from the state is a big deal?” Patterson asked. “What about the $474 million rate payers will fork over?”
Thus far in 2014, fully half of the retail water customers in the city of Detroit aren’t paying their bills, the bulk of the burden will fall on suburban ratepayers.
Oakland and Macomb counties have said from the outset of the proposal to create a regional water authority that there are too many consequences of the plan that haven’t been fully exposed or explored.
The accelerated pension amortization falls into that category. Negotiations on the authority are currently being mediated by the bankruptcy court, and the parties are under a gag order. But since the pension payback was also a subject of the bailout legislation, Patterson feels unleashed.
And you can bet he’ll be talking about the issue long and loud when he heads to Mackinac Island for the Detroit Regional Chamber’s policy conference.
The message he’ll pound home is that water customers, who can already expect to be on the hook for at least $2 billion in infrastructure repairs, will now have to erase a pension shortfall caused in part by city’s failure to make adequate contributions to the funds.
Over the next decade, Patterson says, water customers can expect their rates to double or more. That’s no grand bargain for them.
nfinley@detroitnews.com
From The Detroit News: http://www.detroitnews.com/article/20140525/OPINION01/305250005#ixzz32jMW8oJ0 |
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Sun May 25, 2014 7:44 am |
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untanglingwebs
El Supremo
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Detroit's fast track to private water risks high rates, bad service, experts say
April 6, 2014 |
Switching to a private contractor to manage and operate the Detroit Water and Sewerage Department would bring dramatic changes for the largest water and sewer system in the state, its 1,600 employees and its 4 million customers. / 2006 photo by Eric Seals/Detroit Free Press
By Brent Snavely
Detroit Free Press Business Writer
Related Links
Tom Walsh: How Detroit's crucial bankruptcy might still come unraveled
Editorial: What we'd lose by privatizing Detroit's water system
Oakland County seeks alternatives to 'monopolistic' Detroit water and sewer
American Water; Voorhees, N.J American Water 15.60
Veolia Water North America; Chicago Veolia Environment 14.00
United Water; Harrington Park, N.J. Suez Environment 7.30
CH2M Hill; Englewood, Colo. CH2M Hill 3.50
Severn Trent Services; Ft. Washington, Pa. Severn Trent plc 3.25
Aqua America, Bryn Mawr, Pa. Aqua America 3.10
California Water Service; San Jose, Calif. California Water Service 2.18
Utilities Inc.; Northbrook, Ill. Corix Group 1.60
Southwest Water; Covina, Calif. Southwest Water 1.36
American States Water; San Dimas, Calif. American States Water 1.12
Source: Pinsent Masons Water Yearbook 2012-13; Food and Water Watch; Free Press research
Detroit Water and Sewerage Department facts
■ Employees: 1,600
■ Total 2013-14 budget: $380.6 million
■ Provides water service to Detroit and neighboring southeast Michigan communities throughout Wayne, Oakland, Macomb, St. Clair, Lapeer, Genesee, Washtenaw and Monroe counties.
■ The 1,079-square-mile water service area, which includes Detroit and 127 suburban communities, makes up approximately 40% of the state’s population.
■ Wastewater service is also provided to a 946-square-mile area that encompasses Detroit and 76 neighboring communities.
■ DWSD’s sewer system originated in 1836 and today consists of 10 pump stations and 3,433 miles of sewer lines.
Sources: Detroit Water and Sewerage System, Detroit’s Chapter 9 bankruptcy restructuring plan
Does private management mean higher water and sewer rates?
■ What Detroit says: No: Water and sewer rates would not increase any more under private management than they would under a regional authority or under continued city management. The city is asking bidders to commit to no more than 4% annual rate increases for the first 10 years.
■ What Food and Water Watch says: Yes: “Around the world, multinational corporations are seizing control of public water resources and prioritizing profits for their stockholders and executives over the needs of the communities they serve.”
■ What Veolia Water says: No:Although often misunderstood by critics who confuse regulated utilities with non-regulated utilities, rate-setting authority remains the responsibility of the municipal government.
■ What Pacific Institute says: It depends: “The problem of water rates is perhaps the most controversial issue around privatization efforts. The actual record is mixed — both results have occurred. Significant price increases for some groups of water users may also take place even when overall prices do not rise.”
Detroit risks higher water and sewer rates, poorer service and a mountain of administrative headaches if it insists on an aggressive timetable for choosing a private company to run the city’s sprawling system, experts told the Free Press.
The city, as part of its plan to restructure $18 billion in debt and emerge from bankruptcy, asked private companies in March to provide initial proposals by this week and will ask some from the pool to submit binding bids by June.
The ambitious timetable has stunned analysts and experts throughout the water and sewer industry, raising concerns that rushing things could lead to a hastily cobbled together contract. Experts point to examples of other cities and counties, and their residents, suffering the costs of broken agreements.
Switching to a private contractor to manage and operate the Detroit Water and Sewerage Department also would usher in a period of dramatic change for the largest water and sewer system in the state, its 1,600 employees and its 4 million customers. It could be the nation’s largest water system privatization.
■ Editorial: What we'd lose by privatizing Detroit's water system
“Speed is your enemy here,” said Tom Curtis, deputy executive director of government affairs for the American Water Works Association. “The biggest single caution here would be to take the time to be deliberate and thorough to get it right.”
Time, however, is in short supply for the city. Detroit emergency manager Kevyn Orr decided to seek private bids after 10 months of negotiations broke down with suburban counties to create a regional water authority. The city has submitted a restructuring plan to U.S. Bankruptcy Judge Steven Rhodes and is hoping it will be approved by creditors and that the city is out of bankruptcy by mid-October.
The request for bids could be a bargaining ploy by the city to bring the counties to the table in a more agreeable way. But city sources say Orr and his advisers are serious about privatization. And on the county side, Oakland and Macomb officials said last week they are researching alternatives to buying water from Detroit, with Oakland County preparing to set aside $3 million to look into the possibilities.
■ Related: Oakland County seeks alternatives to 'monopolistic' Detroit water and sewer
The city says its own research shows the bidding timetable is not a problem and that it has received 30 letters of interest as of last week. Orr spokesman Bill Nowling called it “a robust response” and said “all those who are interested believe the proposed schedule and time line is completely workable. This is a process that began back in June of 2013, with the counties and also the city looking at other alternatives.”
But others say it should take a year or more for any serious operator to study all the angles of Detroit’s water and sewerage system. Bids and potential contracts have to be pored over, torn apart and then pored over again to protect ratepayers from unreasonable future increases and workers from layoffs in the name of profit and at the cost of customer service.
Ft. Worth, Texas, for example, spent eight months studying the privatization of its water system before rejecting the idea in November.
“I can’t imagine that it would take anything less than a year” for Detroit to fully vet bids and negotiate a contract, said Mary Grant, a researcher at Food & Water Watch, a watchdog organization that monitors the industry.
Mixed record
Overall, the verdict is mixed for private management of public water systems. They range from disaster in Atlanta, which took back management of its system in 2003, four years after it signed a management contract with United Water. Customer service satisfaction plummeted, and it took longer for water mains to get fixed.
Experts say Atlanta is the poster child for how not to structure a private-public partnership and say the city and the company should share the blame for the outcome.
And there are successes, such as in Wixom and Pontiac, which have contracts with the same United Water, the nation’s third-largest such contractor.
The company has managed billing, meter-reading and a wastewater treatment plant since the mid-1990s, according to Wixom City Manager Tony Nowicki. “They have been highly responsive to our needs. The accuracy of their accounting is unquestionable.”
Nevertheless, Wixom keeps a close eye on the company and has its own staff that is willing to step in if there is a big customer service dispute.
“You need to have a strong management team in the city, as well as a good management working for the contractor,” Nowicki said.
Pontiac hired United Water in 2011to manage billing and two sewage disposal plants.
“It’s like all things that you contract out. You can do it right, or you can do it wrong,” said Louis Schimmel, a former emergency manager for Pontiac. “You can do it right providing that you have good oversight by the municipality. ... We met with United Water on a weekly basis.”
Regional authority idea
Detroit decided to seek private bids after negotiations deadlocked with Oakland, Macomb and Wayne counties. Originally, the city wanted to lease its water and sewer systems to a regional authority jointly managed by the city and the counties in return for a $47-million-per-year minimum lease payment.
The counties have complained that they should not have to bear the cost of paying for Detroit’s past mismanagement and that the city hasn’t shared enough financial information to make an informed decision. Oakland County is moving forward with plans to spend as much as $3 million to study the feasibility of building a new system.
Oakland County Commissioner Shelley Goodman Taub said it could cost billions for the county to build its own system and said the door isn’t completely closed to the formation of a regional authority.
“We wanted a regional authority” as early as 2005, she said.
However, negotiators for Detroit and the counties met Tuesday and made no progress, giving the city all the more reason to find a company willing to buy or operate the water and sewer system.
The rate debate
Detroit’s request for information from private bidders says that companies that respond must make a commitment to limit future rate increases to no more than 4% per year for the first 10 years.
Grant, from Food and Water Watch, said the private management of water and sewer services often leads to higher rates for customers and less responsive service.
But Veolia Water, one of the largest private water companies in the world, calls that a myth. According to Veolia’s website, thousands of North American communities served by public-private partnerships have experienced cost reductions of 10%-30%.
But Grant said that even if the rate for customers remains capped, large sophisticated private water companies often find other ways to recoup costs.
“There could be a provision that allows the company to recover costs for capital improvements,” Grant said. “It’s a sneaky way for them to say they are controlling rates even as the cost to the municipality goes up.”
The city’s request for information and eventual bids spells out plans for capital improvements of $696 million over the next five years for the water system and $695 million for the wastewater system.
The Detroit Water and Sewerage Department is already in the middle of a restructuring plan that calls for at least 600 additional job cuts. The change is part of a plan the department is pursuing to shrink from about 1,600 employees to fewer than 1,000 and to reduce department overhead.
Typically, existing municipal workers are offered jobs when a private contractor takes over. But any deal with a private contractor could mean more job cuts for Detroit employees because of centralized billing and other back-office operations.
“The history has been ... the first thing that happens is cost cutting — often because public agencies are inefficient,” said Peter Gleick, president of the Pacific Institute. “But almost always, the experience has been that the cost cutting has been excessive.”
Detroit's likely bidders
The world of private water management is dominated by a handful of global companies with billions in annual revenue that dwarf Detroit’s annual budget.
The industry also is poised for growth in the U.S. because municipalities are increasingly dealing with strained budgets and are looking for ways to save money.
Across the U.S., about 15% of water systems are investor-owned or are privately operated systems, said Curtis of the American Water Works Association. However, a large number of those privately operated systems are small housing subdivisions or golf courses and few are large metropolitan cities. About 5% of municipal waste water systems are publicly operated.
“If (Detroit’s) process moves past the request for information, it could be the largest such outsourcing deal in the history of the U.S. water sector,” said Global Water Intelligence, a trade publication that writes about the industry.
Some of the companies, including Veolia Water and United Water, are part of publicly traded companies based in France, but they have large U.S. divisions.
Paris-based Veolia Environment has 200,000 employees and more than $30 billion in 2013 revenue.
“We’ve been following the procurement process and plan to respond,” said Matt Demo, spokesman for Veolia Water.
United Water owner Suez Environment reported $20 billion in global sales for 2013 with 36% of its revenue coming from its home country of France.
Other major players in the U.S. include Vorhees, N.J.-based American Water, Harrington Park, N.J.-based United Water, Englewood, Colo.-based CH2M Hill and Ft. Washington, Pa.-based Severn Trent Services.
Maureen Duffy, spokeswoman for American Water, said her company is evaluating the city’s request for offers. Severn Trent Services also is evaluating Detroit’s request, said company spokesman Eric Risch.
Grant said some smaller companies might team up with a private equity firm, especially for a proposal that would include an outright purchase of the water and sewer system.
But both Grant and Gleick say the most likely scenario is that the larger, independent companies will emerge as the lead bidders.
“Detroit is a big place. It’s a big system,” Gleick said. “It can’t be bought by a small private water company. It has to be one of the big players.”
Contact Brent Snavely: 313-222-6512 or bsnavely@freepress.com. Follow him on Twitter @BrentSnavely. Staff writer Kristi Tanner contributed to this report. |
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Sun May 25, 2014 8:11 am |
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tommydean
F L I N T O I D
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Fri Jul 25, 2014 12:03 am |
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