City may search outward for Water Authority aid
In the mid-20th century, state law changed, making it politically impossible for cities like Altoona to annex outlying township areas in exchange for extending water and sewer lines to them.
So those townships became politically stronger, without, as before, becoming part of those cities’ property and earned-income tax bases.
This inability to annex and grow turned out to be among the “systemic” factors that debilitated those cities financially over the years, leading the city to resort to the state’s Act 47 financial distress plan in late 2012.
One can argue, however, that Altoona’s recently revealed plan to accelerate its exit from Act 47 by offering its water and sewer systems to the highest bidder in a long-term lease for a large, upfront payment is a “workaround” way to get an unrestricted, general fund-eligible subsidy from ratepayers in those outlying municipalities, after all these years.
Last week, the Mirror proposed that interpretation to city and non-city officials, asking whether they think it’s valid, and if so, whether they have a philosophical problem with it.
“It’s the truth,” said Joe Whiteford, chairman of the Bellwood Borough Authority, which buys water in bulk from the Altoona Water Authority, which directly or indirectly supplies water to 70,000 people – including about 24,000 non-city residents, according to the authority website.
City Controller A.C. Stickel argued otherwise when he came recently to the Mirror to explain the lease proposal along with Mayor Matt Pacifico and Mike Vind of Financial Solutions – a sister company of both lease consultant Griffin Financial Group and the city’s Act 47 coordinator, Stevens & Lee.
The deal would be nothing more than a transaction involving a city-owned asset, according to Stickel.
The city built the core of the system – which comprises three reservoirs near the Horseshoe Curve, two reservoirs in Mill Run and Homer’s Gap reservoir – between the 1870s and 1950s.
In 1981, the authority bought the Blair Gap system, which included Tipton, Bellwood, Kettle, Blair Gap and Plane 9 reservoirs, built by the Pennsylvania Railroad between 1880 and 1920, to interlock with and extend the city system and inoculate the whole setup against drought – after the municipalities Blair Gap served didn’t “have the wherewithal to buy it,” according to authority solicitor Alan Krier.
Pennsylvania Municipal League Deputy Director Rick Schuettler agrees with Stickel.
“The city owns the asset. Period,” Schuettler said.
The city is merely “trying to be creative” in dealing with a difficult financial problem, he said.
The non-city ratepayers would be subsidizing the city, but that’s only right, according to City Councilman Dave Butterbaugh.
“Everybody outside the city has been more than happy with the city subsidizing [them],” he said.
The city subsidizes the surrounding municipalities because the city is the one that has more than its share of tax-exempt properties, including utility installations and UPMC Altoona, he said.
“The city is the institutional life of the county,” City Councilman Bruce Kelley said recently, referring to tax-exempt properties owned by Penn State Altoona and the Altoona Area School District.
“Any time anybody is injured and needs the trauma unit, they need to travel city roads to get to the hospital,” Butterbaugh said.
The non-city ratepayers are already subsidizing the city general fund with an annual $2.9 million payment for “services,” Logan Township Supervisor Joe Metzgar, Bellwood Borough Authority Brian Kustaborder and Smith observed.
That payment, based on a five-year agreement ending at the end of 2015, helped the city postpone entry into Act 47.
But a payment of that magnitude may end after that because of a 2012 revision in the Municipal Authorities Act that prohibits municipalities from taking money from authorities for anything other than purposes related to the authorities’ missions.
That revision was a reaction to the City of Harrisburg’s raiding its authority for general-purpose funds.
The authority’s payment to the city is suspect, having vastly increased – by $2.1 million – in 2004, in exchange for the city backing off a threat to sell the systems.
Still, the city needs to survive, Metzgar said.
“As a good neighbor,” Metzgar doesn’t have a problem with the current payment setup.
He also doesn’t have a problem with the philosophy behind the lease, although he suggested payments by non-city residents could become optional “checkoffs” on their water bills, like those on tax bills for the Wildlife Conservation Fund.
“We all want the city to become solvent,” said Logan Township Supervisor Ed Frontino.
But the lease is full of unknowns and so long, it might as well be a sale, he said.
“For my generation and part of my kids’, it’s not Altoona’s water [system] anymore,” he said.
“In the spirit of intermunicipal cooperation,” the city should call representatives of all the municipalities with water system customers to discuss the risks and rewards, Frontino said.
“It’s kind of like Obamacare – if you pass it and do it and find out it doesn’t work, then what do you do?” he asked rhetorically.
Antis Township Super-visors’ Chairman Robert Smith isn’t as accepting as Metzgar or Frontino of non-city residents subsidizing the city.
“It’s inappropriate,” he said.
Rural municipalities like his have plenty of trouble taking care of their own needs without subsidizing other municipalities, he said.
A lease would also mean inferior service – the authority has been “exemplary” – or higher costs or both, according to Smith.
“Anyone that thinks a corporation or holding company is going to come in and operate the sewer and water systems and not do it for the sake of generating a profit is [believing] a fairy tale,” Smith said.
There’s also interest on the upfront payment – paid out over the likely 50-year lease period.
But the city is touting its plan for an initial rate cap followed by inflation-based limitations, plus the economies of scale, if a sprawling operation takes over.
It could even be cheaper, according to Schuettler and others.
A private company might be more frugal than the Water Authority has been, Butterbaugh said, referring to the authority’s $6.5 million administration building, which he called a “Taj Mahal.”
To consummate a deal, the city would need to pay off the authority’s approximately $100 million debt and fully fund the authority’s pension plan, using the upfront payment.
The city has talked about using the rest of the upfront money to pay off its own debt and fully fund its own pension plans, which wouldn’t involve its general fund – the chronic source of financial difficulties. Still, that upfront money would be unrestricted, and the city could use it for general purposes if it wants.
The city owns the water systems but by law may not “use the profits,” Butterbaugh said.
It can’t simply take back the systems, then siphon money from non-city ratepayers at will, because the rates charged to those non-city ratepayers would become subject to regulation by the Public Utility Commission.
The commission regulates rates based on “reasonably incurred expenses and a fair return on its investment,” according to a PUC webpage.
The PUC is not involved now because it doesn’t regulate authorities.
The city could take over operations and lease the water and sewer systems back to the authority, as Tyrone Borough does with its own authority, said Tyrone Borough Manager Phyllis Garhart.
But it couldn’t simply get a general-fund subsidy from non-city ratepayers because the city would need to track revenues and expenses to ensure that water and sewer revenues pay only for water and sewer expenses, according to Garhart.
The only way to monetize the systems to take the kind of advantage being contemplated is through the proposed lease arrangement – with competitive bidding to determine true market value, Vind said.
Maybe the outlying municipalities can join with the city to bid, Butterbaugh said.
“Whoever has the shekels is in the race,” he said.
The city has already invited the authority to bid, and the authority – which has the advantage of not having to pay off its own debt – is considering how it may participate.
The potential ratepayer subsidy from non-city residents mirrors the earned income “commuter tax,” that people who work in the city – but live elsewhere – have been paying since the city entered Act 47.
Act 47 lifts the normal prohibition on the commuter tax, which imposes a share of costs for city services like police and fire protection, street repair, street lighting and snow removal for workers whose places of employment depend on those services.
Conveniently, the non-city ratepayer subsidy that would accompany the lease of the water and sewer systems would “replace” the commuter tax, which would disappear, if the lease succeeds in helping eliminate Act 47.
The lease subsidy, however, would apply to people who don’t necessarily work in the city.
The ending of annexation – when a combination of laws in the 1930s and 1940s and a Constitutional amendment in 1968 made it mandatory for both municipalities to approve by referendum – was a “killer of third-class cities” like Altoona, Butterbaugh said.
“Once we had to give away the water, it was pretty much the beginning of the end,” he said. “[Now] it’s the only leverage we have.”
“There’s a certain irony in the way it may be playing out,” said Blair County Chamber of Commerce Executive Director Joe Hurd. “Outlying areas that can’t be annexed now are in a position where they may have to pony up to help the financial future of the city.”
It’s also ironic that the city could help defuse the resentment its enforced subsidy may cause by easing up on its claim to own the water systems that give it the leverage to obtain that subsidy, according to Hurd.
As part of its participation in a statewide effort to help core cities like Altoona, the chamber has been working locally for intermunicipal cooperation, which is one of the major remedies prescribed in the Act 47 recovery plan.
“The prevailing comment by far is ‘we don’t have a problem working with the City of Altoona, except that they absolutely refuse to give us representation on the Water Authority,'” Hurd said.
Asking for that representation isn’t “unreasonable,” he said. Conversely, the city remains “the focal point of the county,” and eminently worthy of rescuing, he said.
“Everybody needs to stop and take a look at the consequences of one part of this area winning at the expense of another part,” he said.
Mirror Staff Writer William Kibler is at 949-7038.