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The Suitcase Full Of Money Offer

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What happens when a Big Water company knocks on the door and offers to buy your local municipal water or sewer system?  Or, your local officials might independently “explore” a sale of the system.  Either way, one of the early pitches will likely be the municipality getting a proverbial suitcase full of “Free” Money”.  Like a “Candy Jar” in front of a child, it appears as one “sweet” irresistible temptation. 

 

Both Buyer And Seller Want Top Price

This is a situation where both the seller and buyer want the price as high as possible.  The reason is obvious for the selling municipality – more money for the government.  But, why would the buyer want to pay more?  That would be like a person shopping for a new car.  For a car with a $25,000 sticker on it, The shopper asks the dealer if he would take $45,000 for it.  Would you do that?  It is different for Big Water. Within some limits, the more Big Water pays for a system, the greater its profits – and Big Water’s reports to investors makes it clear that growing profits is a major objective.  This is a highly unusual situation where both buyer and seller want the price as high as possible.

$$$   The Municipality Sees "Free Money"   $$$

 

Big Water will tell you about the big fat check that you can spend however you want.  It is “Free” Money”.  No strings attached.  There will be no need for a tax increase – a hot button for any politician.  There will be emphasis on how this “Free” Money” can be spent on all kinds of projects for good causes.  Your voters will love you. 

From the perspective of the local official this can be an amazing opportunity.  The amount of money being offered is usually a “once in a lifetime” event.  It is somewhat like winning the lottery.  Municipalities are hounded to fund all kinds of causes.  Big Water’s promise of “Free” Money” without a tax increase is highly seductive.  Some elected politicians are likely to see it as being in their best interest for career advancement.  Often they are quick to grab the money. 

NO - It Is NOT "Free Money"

Indeed, the local government gets a big check.  However, the reality is that the customer is on the hook for the entire sale price.  Ultimately, rates will increase - probably dramatically.  The regulatory process may delay these increases for a while, but they are inevitable.  The following table shows rate increases for recent sewer acquisitions made in Pennsylvania.  They are based on using 4,000 gallons/month, rates before the acquisition and rates after the first general rate increase:

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It must be made clear that these increases only cover investment made by Big Water to purchase the municipal system. Any improvements needed will be paid for by future rate increases.

A Less Costly Alternative To That "Free Money"

Sadly, selling a water or sewer system is usually the most expensive way to raise that “Free Money”.  What local officials may not understand or choose to ignore is that there can be cheaper ways to fund those public good projects.  Without a full analysis of the alternatives, they are not serving the best interests of their constituents.  In all cases, it is the ratepayer who is left to pay the bill.  In most cases, selling will be a negative to the public good. 

 

It should be the responsibility of your local officials to do a thorough economic analysis before selling their utility.  A basic element of that analysis is:  What are the other alternatives?  That answer will almost always be that it is cheaper for their ratepayers if they issued a bond for the same amount as the sales price.  Here is a detailed illustration of that analysis: (Future LINK) The debt service on that bond will most likely be cheaper than the utility rate increases needed to feed Big Water’s profits and costs. 

 

The problem with issuing a bond is that your local officials would have to find a way to pay for it.  Usually that means increasing taxes – not a popular alternative.  If their taxpayers were given the choice between the supposed benefits and increased taxes, the most likely answer would be NO WAY!

Selling Is A Backdoor Tax Increase

So, to realize the supposed "candy jar" of benefits, the local officials choice is to sell a tax increase to residents or sell the utility.  Since selling a utility can be packaged as a “Sweet Deal”, that becomes the easy path to follow.  However, the future rate increases will effectively be a backdoor tax increase.  When those rate increases actually happen, they usually blame Big Water or the state regulator.  In reality, if they had fulfilled their responsibility, they should have no excuse for not knowing what was to come. 

 

Selling a utility system is seldom in the best interests of the system’s customers.  Why should the system’s customers be saddled with large rate increases when lower cost options are available?  Especially if those lower cost options would be rejected by taxpayers because the cost out weighs the benefit? 

Who Pays Versus Who Benefits

 

There can also be an element of “beggar thy neighbor” in a utility sale (LINK).  New Garden Township is an example.  The whole township is benefiting from the sale proceeds.  However, only about half of the municipality use the sewer system.  That half is paying the full cost of the sale.  They are being “beggared” by those with septic tanks.  Another good example is the situation with Chester Water Authority, which is covered here:  Link

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