Group outlines water systems’ cash flow

Last week, a consultant hired by City Council to find a long-term lessee for the city’s water and sewer systems estimated a deal could fetch an upfront $180 million to $240 million, which could pay off all city and authority debt, eliminate the 12-mills of property tax dedicated to that debt, fully fund city and authority pension plans and maybe exit the state’s Act 47 distress program – while keeping control of rates and protecting workers.

The upfront payment is a “discounted” reflection of the $12 million to $15 million a year cash flow that the systems generate through rates paid by customers, according to officials of the city’s Act 47 distress program coordinator team who spoke to the Greater Altoona Economic Development Corp. Monday.

That cash flow is the authority’s “EBITDA,” or earnings before interest, taxes, depreciation and amortization – which is tantamount to profitability, according to Susan Friedman of Stevens & Lee of Reading, lead firm of the coordinator team and sister company to Griffin Financial Group. The firm will try to find the most lucrative deal by siphoning maybe 20 invited bidders through several rounds of bidding to create maximum competitive pressure.

Getting all the money upfront requires the lessor – the city – to settle for a big discount, according to Friedman.

Upfront money is generally about a third of the value of the projected annual lease payments, she estimated.

But getting the money upfront allows the lessor to invest the money – or in the city’s case, to pay off debts, thus avoiding interest payments over time, she said.

When GAEDC members expressed concerns that leasing the systems would expose ratepayers to risk, team member Mike Vind of Stevens & Lee sister firm Financial Solutions pointed out that the model deal for Griffin’s analysis – Allentown’s lease of its system – included a three-year cap on rates and then a limit of half a percent above the consumer price index.

Further, if a private firm should lease Altoona’s systems, the Public Utility Commission would need to approve rate hikes, affording “double protection,” he said.

Currently, the five individuals on the authority can raise rates “infinitely,” he said.

And the city’s control over those individuals is tenuous, in the form of whether or not to reappoint them as their staggered terms come up, officials said.

The systems are a “very valuable asset,” and 55 Pennsylvania municipalities have already done what Altoona proposes, team members said.

Those municipalities can’t – at least any more – simply demand the money they need from the authorities that run those assets, officials said.

The city tried that tactic – more or less – in 2004, when it backed off a threat to sell the systems after the authority agreed to increase its annual payments for “services” by more than $2 million a year.

That payment is now $2.9 million a year.

Act 73, passed by the state in 2012 in response to Harrisburg’s extracting money from its authorities, which helped lead to a financial crisis, guarantees that the state would look at Altoona’s deal when it expires in a couple of years, if the city hasn’t leased the systems by then, Councilman Bruce Kelley told GAEDC.

The city would need to “prove” it’s really providing those services, he said.

Leasing the systems is the best hope for the city to get out of Act 47, Kelley said.

County reassessment would help, but that won’t lead to restructuring of millage for several years, and that would simply give council the ability to raise property tax rates, he said.

Others have argued that home rule – which is in process – would give the city tax options that could allow for an Act 47 exit.

One reassuring feature of the current effort is that council can back out at any time before the final commitment, officials said.