Residents skeptical of water systems plan
At its meeting two weeks ago, City Council surprised residents by hiring a consultant to market the city’s water and sewer systems for a big, upfront payment on a long-term lease, to help stabilize city finances and escape Act 47 distress.
At its meeting on Wednesday, several residents responded with skepticism.
Krista Samuel, owner of a small downtown business, dismissed estimates of the system’s potential value by the city’s representatives.
The $12 million to $15 million in “earnings before interest, taxes, depreciation and amortization” – EBITDA – that city representatives have said should attract bidders for the systems is “basically a fairy tale,” said Samuel, citing famed investor Warren Buffett.
EBITDA makes sense “only if you think capital expenditures are funded by the tooth fairy,” according to Buffett, states a Forbes article from 2003.
EBITDA doesn’t take into account capital costs, according to Buffett, as stated in the article.
But because the upfront payment will enable the city to pay off the authority’s debt, the lessee will have a debt-free asset to begin with, said Mike Vind of Act 47 coordinator Stevens & Lee’s sister firm, Financial Solutions – which in turn is a sister firm of lease consultant Griffin Financial Group.
Ultimately, the number will come down to market value – what the bidders on the system are willing to pay, anyway, replied Councilman Dave Butterbaugh.
“That’s what we’re waiting for,” Butterbaugh said.
But how can the city expect anything like the $180 million to $240 million upfront payment estimated by the consultant, if the lease of Allentown’s much bigger water systems, which Altoona cites as the model for its proposal, only generated $211 million, Samuel asked.
The Altoona water system’s excess capacity, replied Councilman Mike Haire.
The 11-reservoir system has a 2.5-year supply of water, he said.
The water allocation permit for the system allows for use of about 14.5 million gallons a day, while the Altoona Water Authority “produces” about nine million gallons.
A lessee could sell the excess water, Haire said.
If it does, then that cushion is lost for the residents, Samuel said.
Jim Hatch, president of the authority’s American Federation of State, County and Municipal Employees workers, told council he knows “what it’s like to have a thankless job.”
“And I understand you’re trying to do what you can to save the city,” Hatch said. “But I don’t agree with the avenues you’re going down.”
One of the urgings of the city’s Act 47 recovery plan is to cooperate with the Water Authority and with groups of employees, he said.
In that spirit, he asked council “to put a hold” on its search for a lessee.
“Work with the Water Authority, so my members can at least move on with their lives,” he said.
The consultant has said the authority can bid to lease the system, and at an authority meeting last week, the authority board authorized its staff to work on a proposal.
“I don’t think we would turn them away,” said Mayor Matt Pacifico Wednesday.
Authority officials and others who have questioned the city’s proposal to lease the system have asked why the authority can’t simply provide the city with the money it needs – to eliminate the necessity of subjecting the water systems to a long-term takeover by an outside organization.
One of the obstacles is a 2012 law that prohibits municipalities from extracting funds from the authorities they create for purposes other than to fund the authorities’ core functions, as Councilman Bruce Kelley pointed out Wednesday.
Municipalities can take over water systems and run those systems themselves, but if they do they would need to go to the Public Utility Commission for approval to raise rates for residents outside the municipality.
The Altoona systems serve residents in many area municipalities.
“Any way you cut it, there’s no other way, other than exploring this option,” Vind said.
City Council on Wednesday agreed not to protest the Water Authority’s awarding of contracts last week for the authority’s Pleasant Valley sewer project, which had apparently violated an order handed down by council at its most recent meeting.
The authority argued that it had no choice but to proceed with the work according to Department of Environmental Protection requirements.