Updated 2008 water deal piece – the arguments remain the same

Right now the big news in Trenton is that the Trenton Water Works deal that sells miles of pipelines, other infrastructure and a majority of the Trenton water utility’s captive consumers to New Jersey American Water Co. for $80 million could end up in the hands of the voters.

Some city officials compare selling water infrastructure outside the City of Trenton in Ewing, Hamilton, Hopewell, and Lawrence while continuing to sell water to customers there as a relationship akin to selling an old, maintenance-costly delivery truck, while continuing to hold a lucrative contract with outlying customers.  If one listened to what Mayor Douglas H. Palmer and his administration officials have been saying about the deal, perhaps this is the impression of the whole deal that develops.

But, as usual, City of Trenton officials are engaging in a bit of truth-bending. In reality the deal is one that further compromises Trenton’s future revenue-generating capability and fiscal stability.

First of all, the outlying infrastructure currently up for sale is anything but old, especially in Hopewell.

In Hopewell, most was constructed after 1987, and nearly 90 percent of it was constructed by developers and handed over to the City of Trenton like some sort of birthday present, according to regulatory testimony available on the Hopewell Web site.  There is some aging infrastructure in some township areas, but on the whole, that outlying system is in much better shape than what lies beneath the ground in Trenton.

The townships, having developed at a later time, tend to have newer, more modern infrastructure that is much less costly to maintain, according to utility employees.

“What we’re selling isn’t aging,” said a high-ranking utility employee during some fact-checking performed last year. “I have only done 10 repairs in Hopewell in 10 years.”

In fact, estimates considered by the Board of Public Utilities say that with all the developer-supplied infrastructure taken out, it appears that the real Trenton-bought and constructed infrastructure amounts to less than half the value of the deal – somewhere below $50 million. Even worse, testimony given to the BPU says that type of infrastructure actually belongs to the ratepayers, and is not even really Trenton’s to be selling.

The real aging and decaying infrastructure in Trenton will become the sole responsibility of ratepayers from the city in terms of maintenance and capital improvements, instead of the current situation, as a result of this deal.

Also at the core of the issue is the arrangement that calls for Trenton to sell water to New Jersey American’s newly acquired township customers for a period of 20 years, with a proposed charge of around $10 million a year, among other perks coming to the city.

That all sounds nice, but when one considers that a majority of the utility’s ratepayers live outside of Trenton, it becomes clear that the $10 million represents a significant downgrade as far as the water utility’s attractiveness as a revenue-generating asset is concerned.

The water utility has been making roughly $30 million a year as recently as 2008, and a majority of that – upwards of $16 to $18 million – is coming from the water rates paid by township customers making up more than 60 percent of the utility’s total customers. Take out that revenue and substitute the wholesale water deal and you get a utility that will have to cut roughly $6 to $8 million worth of costs simply to maintain CURRENT revenues.

Again, not good.

What the deal leaves the city with – Trenton’s ratepayer base – is also misleading.

The ranks of Trenton-dwelling ratepayers are filled with thousands of delinquent or non-existent accounts existing in a municipality experiencing all the effects of a shrinking population and urban decay. That ratepayer base was always augmented with the 45,000 or so more reliable township ratepayers, yet that will all end with a successful deal.

Utility employees say it remains to be seen whether Trenton will see anymore budget dollars coming from the outlying townships once the 20-year deal with New Jersey American Water is completed, considering the city’s partner is a company that already has connections with the township water infrastructure that would allow it to quickly pump water in from non-Trenton sources.

Arguments for the sale fail to take into account the fact that private developments generally have to perform their own water repairs, and the city only repairs piping or infrastructure between the main line and the curb. That fact means that much of the infrastructure in built-out portions of the townships costs the city nothing to maintain.

Also, merely controlling that infrastructure means that city receives several revenue streams that will disappear with the American Water deal. For instance, the city gets to charge all townships for the construction and maintenance of hydrants, and receives money from so-called ready-to-serve charges for each new customer.

Both the hydrant and ready-to-serve dollars will dry up with the proposed sale, and any future development in many of these thriving suburbs will also fall into the hands of New Jersey American Water, and not the City of Trenton.

All of this adds up to a deal that will simultaneously damage Trenton’s finances and further destroy the city’s relationship with bordering towns, all for a quick infusion of budget dollars that could very well disappear in the course of a year or two, when Mayor Palmer’s currently threatened tax increases will take on even larger proportions.

Hopefully someone puts a stop to it, for the sake of Trenton residents and our neighbors in Mercer County.

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2 Comments

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2 responses to “Updated 2008 water deal piece – the arguments remain the same

  1. Clark Blade

    The following is based upon approximations based upon news accounts of the water rate increases in 2006 and 2008.
    For FY2009
    Total revenue $42,000,000
    Township revenue about 60% of total or $25,200,000
    City revenue about 40% of total or $16,800,000
    Operating budget $38,000,000 (Mr. Gonzalez, could be more)
    After sale of assets revenue:
    City revenue $16,800,000
    Sale of water to NJAWC revenue $9,600,000
    Total revenue $26,400,000
    Shortfall or deficit $11,600,000
    How will this be reconciled?
    Reduction in operating costs?
    According to Mr. Gonzalez, there will be $4,500,000 in savings. He did not provide how that number will be achieved. Will they layoff 50 to 60 water utility employees? They have already reduced staffing levels to where high paid staff must work overtime to fill in for non-existent lower paid staff. Elsewhere, maintenance has also been drastically reduced so that needed maintenance is not being performed. It doesn’t seem as though those cost savings will or could be realized by reduction in staff. Even if those cost savings were realized by some other means, there would still be a $7,100,000 deficit. How will that be offset? Does that mean that higher water rates are coming to City residents? That would require a 42% rate increase. If the alleged cost savings don’t materialize, then the increase would be greater. Water rates are not the lowest in the area. Any rates that are about equal to the rates of NJAWC are not low rates. NJAWC has had and will continue to have one of the highest rates in New Jersey. In three years it will cost City residents $21,000,000, which is more than the first of two years revenue that is proposed to be used to help balance the City’s budget. This will continue indefinitely. It may not, if the City stops using the water utility as a means to tax City residents through their excessively high water bills. Not all of the water utility budget is for water utility purposes.

    If the actual numbers are different than these, then the City should publicly present them to show that the deal makes sense for City customers.

  2. Clark Blade

    A revision to the foregoing analysis is necessary because someone just provided additional information about the Administration plan. It intends to realize some operating budget savings by retiring $40 million dollars of water utility debt with half of the proceeds from the sale of the assets.

    If the debt carries an interest rate of 5% (it could be less), then that would reduce the utility debt service by $3.17 million. That would still leave a deficit of about $4 million. That’s better but it doesn’t take into account the looming additional debt that the utility will be taking on for some of the projects previously identified and used to justify the last rate increase of 40%. Those were reported to be a pumping station project that will cost about $10 million, a reservoir project that will cost about $25 million dollars and pipe projects that will cost at least $5 million. That additional debt will almost negate the benefit of retiring the $40 million.

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