Alternative Financing for Water and Sewer Upgrades

In my last post I addressed ways to reduce existing costs within the labor side of the water and wastewater Departments to “free up” monies to pay the interest and principal on bonds. Even adopting a moderate mix of the reforms suggested should be able to cover up to $500 million in bonds this way.

Still not enough? That’s where the next set of reforms come into play. We have to raise the funds for infrastructure investments using alternative financing vehicles.

One popular vehicle that has been used nation-wide to pour billions into municipal infrastructure is the public-private partnership model. Other cities have faced even more daunting infrastructure financing requirements and have turned to creative public-private partnerships to raise funds for the investments.

For example, in 1997, the City of Buffalo contracted with the American Water Services, Inc. to upgrade, operate, and maintain its water system. The city required that performance standards be implemented with benchmarking to measure and enhance water quality. The service American Water provides to Buffalo includes repair and maintenance of the distribution system, water treatment and pump station operation, residuals management, customer service, billing and collections, and water meter repair and installation. Moreover, the cost of for capital planning and implementation of capital programs is shared between the city and American Water.

And what happened to the rates in Buffalo? An initial water rate reduction of 8 percent has held for five years. Milwaukee outsourced its operations and maintenance, resulting in a reduction in rates from $85 to $72 – a sixteen percent decrease. Rates are frozen until 2007.

Tampa Bay Florida, recently announced a $600 million infrastructure investment plan, and tapped private investment for website. In fact, the Reason Foundation finds that more than 40 percent of drinking water systems nationwide are now private, regulated utility systems.

Even the federal government is encouraging the use of public-private partnerships to address water and sewer infrastructure financing. The U.S. Environmental Protection Agency (the same federal agency forcing the city of San Diego to invest in its water and sewer system) endorsed public-private partnerships as a means by which local governments can meet environmental standards. Indeed the environmental financing unit at EPA wrote in a report in 1998, “[National case studies] provide concrete examples to local officials of how successful partnerships and other models can be used by communities to provide needed environmental services more efficiently. They also show how public-private partnerships can be used as a way to provide substantial benefits to both the public and private sectors, creating the classic win-win situation.”

In fact, a 1999 study of public-private partnerships in water and wastewater utilities by the Hudson Institute examined 30 partnerships and found that prior to the partnerships, 41 percent of the facilities surveyed were not in full compliance with the Federal Safe Drinking Water Act. One year after entering into a public-private partnership, all were in compliance with federal water standards.

There are good ways for San Diego to craft the right partnerships that will raise the needed revenues for infrastructure investment while providing safeguards for water quality and resident service. In fact, they even have “cookbooks” on how to structure deals properly. Read this one: Establishing Public-Private Partnerships for Water and Wastewater Systems: A Blueprint for Success

Another idea is to take a hard and close look at existing assets “owned” by the water and wastewater departments to see if we can lease or sell them to “convert” resources into truly useful water and sewer infrastructure assets. The water and sewer departments own millions of dollars in assets that could be leveraged to provide funding for useful infrastructure.

Unfortunately, monies that should have been going for water and sewer infrastructure projects all along have been diverted to buy properties not needed by the water and wastewater departments. A recent “watchdog report” by the Union-Tribune detailed instances where the city “sold” various land and assets to the water and wastewater Departments to raise cash to finance the General Fund Deficit.

Nobody can say how many land-for-cash swaps have occurred because they don’t create a ready paper trail. The San Diego Union-Tribune requested records of internal property transfers, but a spokesman for the mayor said they’d have to cull through thousands of real estate files to get them.

We need to find every dollar to pay for water and sewer infrastructure. Before you raise rates on San Diegans, we should probably go look through those real estate files to devise a comprehensive list of water and sewer properties and assets that could be “converted” to free up resources for system upgrades.

I am not suggesting that all of the financing needed for the infrastructure upgrades should or could come from partnerships or asset conversions. However, a significant portion of the funds could come from these innovative financing models.

$75 million here, $150 million there…soon we’re talking real money. Why don’t we see this thinking in the city’s rate hike proposal? They must think it is easier to just raise rates on residents.

– CARL DeMAIO