Struggling Erie, Pa., Considers Selling its Water System

The city government is seeking an appraisal for the system in response to an offer from Erie Water Works, which currently leases the system and runs it to serve nearly 60,000 customers.
by Kevin Flowers, Erie Times-News | October 9, 2019 AT 3:01 AM

(TNS) — The city of Erie's water system serves more than 60,000 customers and has undergone badly needed multimillion-dollar upgrades since the early 1990s.

But what is the system worth?

Mayor Joe Schember intends to answer that question soon to implement a key recommendation of the Philadelphia-based consulting firm that is helping the city to develop a long-range financial stability plan.

In an interview, Schember said his administration hopes to hire a firm within the next three months to do a comprehensive appraisal of Erie's water system, which is operated and maintained by the Erie Water Works via an extended lease agreement that pays the city millions of dollars each year.

The valuation would examine the system's facilities and other assets; operating costs and revenues; long-term debt, and other factors.

City government's lease with Erie Water Works, which took over the city's water system in 1992, is scheduled to expire in 2050. The utility is interested in purchasing the system from the city, said the Water Works' CEO, Paul Vojtek, and has offered to make an upfront payment of at least $75 million to take control of it.

"Owning the system would certainly be our preference, and it would keep the water system in the public domain," Vojtek said in an interview.

Erie Water Works has about 63,000 direct residential, commercial, industrial and institutional customers in Erie, Lawrence Park Township, Wesleyville and Millcreek Township, as well as parts of Harborcreek, McKean, Greene and Summit townships. Vojtek has said the utility has spent more than $260 million improving the water system's underground water pipes and other infrastructure, some of which dates back to the 1860s.

"We've talked to the city about basically buying out of our lease, and we want to be a partner in anything that benefits the city or helps the city out financially," Vojtek said. "We want to be part of the solution."

'Due Diligence'

However, representatives of Public Financial Management Inc. — the city's state-required financial consultant for the Early Intervention Program for financially-struggling municipalities — suggest the city should do something else first.

PFM's consultants, in a report presented to Schember and members of Erie City Council in late September, urged the city to begin an "asset monetization process" regarding the water system, in large part because the proceeds from a multimillion-dollar new lease or sales agreement could help the city alleviate a structural budget deficit.

That shortfall, according to PFM, includes as much as $2.5 million for 2020 alone and could grow to as much as $16 million by 2024 without major changes in the city's fiscal practices. The consulting firm is helping the city to craft a five-year plan to stabilize Erie's finances over the long term.

Gordon Mann, PFM's director, said in a recent interview with the Erie Times-News that an accurate, up-to-date water-system appraisal could be used to explore a new financial arrangement with Erie Water Works or a sale/lease with another operator. The city could then use those profits to pay down millions of dollars in city debt.

Mann said the city should do its due diligence, starting with the valuation. Then the city can either directly negotiate a new deal with Erie Water Works, seek other proposals for buying/operating the water system, or a combination of the two.

The entire process, including valuation, could take up to a year, according to PFM.

"There are benefits to the city's current arrangement with the Water Works," Mann said. "They handle the sewer and garbage and water billing, for example, along with running the (water) system.

"But you don't sell a car and let the seller determine what the car is worth," Mann continued. "The city needs to know what the true value of the water system is. Then it can make the best decision."

Erie Water Works' annual lease payment to the city for 2020 is $3.8 million; it was $3.6 million in 2019. The yearly payments grow incrementally over time, increasing to $4.8 million by 2046 and staying at that number through 2050, according to PFM's research.

Schember cautioned that the process will take time and that nothing is immediately changing regarding the water system, including customers' rates. He said Kathy Wyrosdick, the city's planning director, is researching the city's appraisal options.

The city could have an updated water system valuation as soon as early January, Schember said. Then, the city can better explore its long-term options.

"We're open to anything at this point," Schember said, adding that he eventually wants to see a deal in place that provides the city with enough up-front money to fix structural budget problems.

"Whatever we do, we have to make enough to make up for not only the $4 million they pay us each year, but enough to make up for the liabilities on our balance sheet," Schember said. "Two options are contributing more money to our pension funds and paying down our debt. What gives us the most in terms of reducing our costs? That's what we have to be concerned with."

Financial Concerns

PFM's report to Erie officials identifies pension-related costs as "the most pressing problem" the city faces in terms of finances. The report states that, according to actuarial projections, the city's state-required contributions to employee pension plans will increase from $16.3 million in 2019 to $18.8 million in 2020.

Further, the city has more than $127 million in long-term debt, according to city financial figures. While recent restructuring of that debt has helped the city reduce its yearly debt payments — the city will pay $2.5 million on debt in 2020, for example — those annual payments will rise to $9.3 million by 2027, according to PFM.

The firm's report recommends that the city stop restructuring its debt, via taxable and tax-exempt bonds, every few years because that creates new debt and offers minimal long-term benefit. The firm instead recommends that the city restructure debt over a longer period of time to permanently reduce its yearly debt payments and avoid the cycle of paying the fees and other costs associated with refinancing every few years.

City Council President Jim Winarski supports the appraisal, but added, "At the end of the day, we're not going to jump into anything in terms of selling the system." He said he's concerned that a sale could mean higher water rates for city customers.

"If we sell we would lose a major asset, and selling it off, we don't know what would happen to the water rates," Winarski said. "But we should find out the value."

Mann, PFM's director, has told city officials that flat revenues combined with growing expenditures and pension obligations will deplete the city's fund balance by 2022 and lead to sizeable deficits if nothing changes. Nearly 90 percent of the city's costs are employee-related, such as salaries, benefits and pensions.

According to city financial figures examined by PFM, city revenues such as real estate and income taxes, fees and grants are expected to grow, on average, 1.7 percent each year between 2019 and 2024, from $77 million in 2019 to $83 million by 2024. However, those same figures show that city expenses will increase by an average of nearly 6 percent annually over the same time period, from $78 million in 2019 to nearly $103 million by 2024.

The Pennsylvania Department of Community and Economic Development oversees the Early Intervention Program. PFM will present a final report on city finances by the end of the year.

©2019 the Erie Times-News (Erie, Pa.). Distributed by Tribune Content Agency, LLC.