Pittsburgh's water system has so much debt, it's ripe for a takeover
Mayor Bill Peduto's pledge to restructure the Pittsburgh Water and Sewer Authority by joining forces with a deep-pocketed partner reflects a trend toward “creative” collaborations reshaping municipal water systems nationwide, utility experts told the Tribune-Review.
The Peduto administration's goals echo a leaseback deal that pumped $225 million into Allentown four years ago as well as parts of an agreement expected to generate $195 million for Scranton and Dunmore in a transaction finalized last month, said Russell McIntosh, vice president of financial services for the Herbert, Rowland and Grubic Inc. civil engineering firm, a state-sanctioned utility valuation expert.
“These are really unusual times in terms of utility finance, operations, ownership and technologies,” McIntosh said. “In a sector where there used to be zero creativity, we are starting to see there can be a lot of it.”
In the coming months, Peduto intends to negotiate a new model for the debt- and controversy-riddled PWSA by finding one or more private or public entities willing to overhaul the city's water infrastructure without outright owning it. Partners also should have interest in finding ways to grow revenue by expanding PWSA's drinking water delivery to more customers outside city limits.
“We are not seeking a full privatization,” said Peduto's chief of staff, Kevin Acklin, who traveled with aides to Harrisburg this month seeking state support to finance the authority's transition. “What we're looking for is a partner who can share the risk and the rewards of the Pittsburgh Water and Sewer Authority.”
To find those partners, the city has asked teams with financial and legal expertise to devise strategies to improve PWSA's operations, customer service and value. The winning advisory team will guide the process of restructuring the authority and secure bids from potential partners who will invest in repairs and upgrades.
Proposals are due Friday.
In two to three months, the city plans to seek proposals from potential partners. Peduto aims to ink an agreement with a partner by the end of the year.
Critics leery of bringing in outsiders to resolve PWSA's woes — including Pittsburgh Controller Michael Lamb and Allegheny County Controller Chelsa Wagner — question whether Peduto's approach is wise.
“The rates are going to go up and up, and the quality is going to go down,” said Wagner, who suggested the city use Urban Redevelopment Authority funds and discretionary gaming revenues as well as repackage high-risk debt to turn around the authority.
Acklin countered that with 50 cents of every ratepayer's dollar going toward debt, it's “the status quo that will result in skyrocketing water rates and declining water quality.”
Peduto's ideas aren't new to Pittsburgh.
Former Mayor Luke Ravenstahl, a fellow Democrat, joined state Rep. Mike Turzai, a Bradford Woods Republican, in pushing for public-private partnerships or private leases or sales in 2010 and again in 2011.
Between 2012 and 2015, then-private PWSA operator Veolia Inc. created a full-time position tasked with running a marketing campaign aimed at attracting more drinking water customers and finding ways to collaborate with other Western Pennsylvania water systems.
PWSA has several wholesale customers, including Fox Chapel, Reserve, Aspinwall, Hampton-Shaler and West View. Combined, they accounted for $2.1 million in revenue in 2016, according to PWSA spokesman Will Pickering. The authority has a roughly $130 million annual operating budget, Pickering said.
Skeptics have questioned why attempts by Peduto would be more successful — and whether enough viable partners will materialize to achieve his goal. The mayor seeks partners with enough cash or borrowing power to not only pay down the authority's ballooning debt — now topping $750 million — but also to replace some private homeowners' lead service lines.
The utility market, however, appears ripe for Pittsburgh to strike a deal, McIntosh said.
“Whoever comes in will likely make some level of immediate payment to the (city), but the physical assets remain the property of the current owner,” McIntosh said. “Everybody would have interest. The problem is one of financing.”
John Brosious, deputy director of the Pennsylvania Municipal Authorities Association, said he has observed a trend of “all sizes of (water) systems being looked at by the privates (companies) for takeovers” and mergers.
“While they can come in and do all this investment, rates are going to increase because private companies are investor-owned,” Brosious said.
In Allentown, the Lehigh County Authority — an independent, public authority established in 1966 — outbid private companies with a proposal to lease Allentown's drinking water and sewer systems for 50 years. It did so by borrowing $308 million at “attractive bond rates” available to tax-exempt entities, Lehigh County Authority CEO Liesel Gross said.
The deal not only paid off about $30 million in debt related to water systems but also took care of Allentown's broader $160 million unfunded pension liability, Gross said.
“Included in the leaseback agreement were controls on what could happen with rates, so you could only leverage the future revenues to a certain degree,” Gross said. The arrangement enabled the Lehigh County Authority to more than double its customer base, to 55,000 and grow from 39 employees in 2012 to 160 in 2016.
Also built into the contract were commitments to invest in infrastructure and make a $500,000 annual payment to the city, Allentown Controller Jeff Glazier said.
Glazier said the arrangement seems to be working well in its first few years. City officials regularly get reports and convened a sewer and water advisory council to hold Lehigh County Authority accountable.
“We're in this relationship with the city,” Gross said. “They still own the system and have a long-term interest in having it be well-maintained.”
In Scranton, public officials sold their sewer system outright to Pennsylvania American Water Co. for $195 million, with the proceeds to be split between the city of Scranton and the borough of Dunmore. Scranton maintained control and residual revenue from stormwater operations.
Penn American has no pending partnership offers before Pittsburgh officials — but the private company that already serves 26,000 customers in southern Pittsburgh is open to discussing solutions to Pittsburgh's problems, spokesman Gary Lobaugh told the Trib.
“We are members of this community and understand how critical ongoing infrastructure upgrades and high-quality water and service at a reasonable rate are to Pittsburgh retaining its ongoing mantle as one of the country's most livable cities,” Lobaugh said.
PWSA's challenges go beyond finances.
The city controller joined state Auditor General Eugene DePasquale last week in announcing an audit had found problems “everywhere we turned at PWSA,” citing leadership turnover and a lack of long-term improvement plans as major challenges.
PWSA interim Executive Director Bernard. L. Lindstrom, who took the helm in September, has described the authority as being at an “all-time low” in terms of not only staff and customer morale but also capabilities.
In the past year, PWSA has grappled with multiple public relations crises, from overbilling customers to chlorine treatment deficiencies that spurred a flush and boil order affecting one-third of the city last month.
Pittsburgh's situation should not be compared to that in Flint, Mich., where many residents still hesitate to drink or bathe using tap water, said Marc Edwards, the Virginia Tech research scientist who helped to expose Flint's lead-water crisis.
“Pittsburgh isn't there yet, but Pittsburgh is near a crisis situation,” Edwards said. “It's refreshing to see that this problem is being taken seriously.”