I got a letter from Illinois American Water today (as I’m sure many of you did, too). I thought it was going to be a report on water quality, but to my surprise, it’s the first volley in the quinquennial fight over the City’s attempt to take over the water company! The pertinent portion of the letter reads (underlining in original):
One other matter I would like to inform you of is that the Peoria City Council is expected this month to consider whether to pursue a buyout of Illinois American Water’s Peoria District water system. An 1889 franchise agreement gives the City the right every five years to pursue a buyout of the water system. As you may recall, in 2005 residents of Peoria voted against a buyout by a margin of 82-18. At that time, an independent panel determined the purchase price would be $220 million in addition to new capital investments made by the company.
If the City Council decides to again pursue the takeover of the water system, the study alone may cost taxpayers $1 million or more. In addition, the company has made significant capital improvements since 2005, which have increased the value of the water system. Some buyout proponents suggest that the takeover of Illinois American Water’s business in Peoria will provide new revenue for City projects not related to the water system. That would be a mistake. Revenue from water bills should be used to operate and invest in the water system, as we do, rather than to fund other City projects. We have encouraged members of Council not to pursue a buyout because there is no reason to do so. A buyout process will be very long, costly and divisive while distracting the City and the company from more important priorities.
I could be wrong, but if I were a betting man, I’d bet that this time we’re going to hear the biggest push ever to buy the water company. Why? Three letters: CSO. The city really, really wants to find a way to pay for the Combined Sewer Overflow project without raising taxes. Being able to take water company revenues and put them toward that effort may prove too hard for the council to resist.
I’ve always been against the water buyout in the past, chiefly because I fear the city will use water rates to raise revenue for other things — essentially a hidden tax that could be used for questionable things like Gateway Buildings and subsidized parking decks. And that’s the argument the water company is making as well in this letter.
But on the other hand, it’s not like Illinois American Water is a non-profit cooperative, putting all their revenue back into the company. They make over $6 million a year in profit for their shareholders. Why shouldn’t the City make that profit and be able to use it toward, say, the CSO project? Or to get rid of the so-called garbage fee?
I’m starting to change my mind. It’s not that I don’t still have the same concerns about a potential water company buyout. It’s just that desperate times call for desperate measures. Buying the water company might be a way for the City to mitigate potential tax increases and still have the money to take care of the CSO project and other basic services.
Very good post. I am very glad I had the wisdom to favor the buyout the last time it came up (unlike others I can name). By the way, every single person who voted against the buyout last time knew the CSO bill was coming due. Problem was, re-election was coming FIRST.
Billy — They didn’t know what the CSO bill would be, although in fairness, they knew it would be large. But the last time the buyout option came up, people were still wary of the old council and their penchant to spend money on non-essentials first. Although the new council had been seated, they didn’t have much of a track record yet. I think the new council has shown quite a bit of constraint comparatively, and residents may be more trusting of a water company buyout now, especially if it’s sold to the public as a way to help pay for the CSO project while mitigating tax and fee hikes. If the money is going to basic infrastructure like sewers, I think the public is going to be much more favorable to the idea.
forgive me for being so niave but where is the city going to come up with the money to pay for IAW if the $6 mil in profits goes towards the CSO?
I think that they seriously need to consider this purchase. It is not only a revenue source but a matter of control. I agree with Councilman Sandberg that water provision is one of the basic services that should be provided by the local government.
I think part of the problem last time was that goofy arrangement with the private investors that put up the initial funding for the study. There was a lot of concern that they were going to profit off the city’s purchase of the system. If the City decides to pursue, they need to fund the study and be clear and direct up front how they will finance the purchase and where the revenues will be spent.
As you note, it may be one of the only realistic ways to address the CSO issue – assuming revenues from Water can legally be spent for that purpose.
I think the government should be in charge of water and power, but… not because it is a source of revenue or profit. In fact, it should NOT be a source of revenue or profit. Government should not be in the profit business.
Illinois American generates $6 million in profit for investors and what portion of that is specifically from the Peoria section of their holdings?
The current council may be showing more constraint in some areas yet annexation, enlarging the EZ or Enterprise zones in the areas recently passed is detrimental to our older neighborhoods, and not sticking to the new code when a development comes along is also detrimental to older neighborhoods. I am not convinced that the council members will stay the course and not be tempted to spend elsewhere. Even if the council were to adopt a provision that profits could only be used in an ‘abc’ manner who is to say that the next council would or would not change that provision? I would think and perhaps inaccurately that at least a portion of the profit should be set aside for ‘rainy day’ expenses.
And yes, how will we pay for it as septboy asked? It will be the price tag plus the millions in interest tacked on.
Peoria is the 4th city in Ilinois I have lived in and I think it is ridiculous that the city does not provide water, sewer and ambulance service.
IAM is a for profit company. The city could provide the same service without worrying about making a profit for the shareholders.
kcdad- the way I see it the govt would need to make a profit or rev on the water co. definitely not to the extent IAW does but some so they can pay for upgrades, expansions major repairs w/o putting a (larger) tax burden on the residents.
What aspects insure that this business acquisition by Peoria city government will be accretive any time soon? None. What gives anyone faith that this enterprise can be operated/managed by this city efficiently and competently? None. It’s all supposition and theory. This would be a speculative purchase, hoping with fingers crossed, that it will pay off to the taxpayers benefit. This business is a low margin, high maintenance, high expense business. Throw in a bit of bureaucracy and politics (not to mention the EPA) and it gets worse easily. If it does get worse, then you have added costs to the taxpayer above the costs of the CSO project. As a corporation IAW can absorb unexpected costs more easily since it operates and pulls in revenues from other areas. The city though doesn’t have that avenue. Its only “area” will be Peoria.
If the city could turn an effective income where the taxpayer can actually benefit by getting something like a CSO project paid off, then the city would really be like walking on the water. But, getting to effective income presupposes an absence of bureaucracy and politics (council interference) and politics being what it is, there is no way and the city drowns in ankle deep water.
There is no walking on the water and the city can’t run a business. The city had difficulty getting streets cleared after that December ’06 snow storm. Give the city a couple of years with a water company in their pocket and we’ll be lucky if we can run sprinklers on our gardens and yards in July.
Well said, Samuel.
Karrie, where did you find the $6 million in profit figure? When I look at American Water, ticker symbol AWK, its income statements indicate a net loss for the last two fiscal years.
Why would anyone accept the premise that the City could operate this utility with anything remotely resembling the efficiency of an experienced, publicly traded company? Besides the limited financial analysis that was conducted, was a pro forma operating plan developed, or was it just accepted that “we’ll do it like they do?”
Let’s focus on issues that we must such as the CSO. I fear the water company buyout would rapidly become a be-careful-what-you-wish-for money pit that should be left to the professionals. I don’t like writing my check every month any more than the next guy, but I do know that Peoria tap water is pretty darn good and I have a high confidence level in the quality.
I wish IAW was in the contract snow removal business so we could consider this in the reverse.
The possible buy out of IL American water is a scary thought, if that happens and the City of Peoria uses it as a “cash cow” and funds the CSO and other projects what becomes of the water system? Neglect like the CSO problem, it has been known about for years and left to fester until it has grown into a huge problem.
The purchase of IAW is no simple thing they supply water to more than just the City of Peoria. They provide water to Hanna City, Bartonville, West Peoria, Timber-Logan Water District and others. Currently if a main needs replaced in lets say West Peoria IAW does it and all customers pay, what happens when the COP owns it? Will they say “West Peoria you are not part of Peoria and we won’t fund your project? Or force annexation to the COP?
Consider the recent spike of water man breaks, the water system is old and will need MAJOR repairs and upgrades. Soon water companies will be required to replace all public lead service lines (not customer’s private lines); this will be a huge expense in the “older neighborhoods” of Peoria.
If the COP wants to purchase IAW the only solution I see as to jurisdiction is forming a Public Water District and each community or bulk purchaser would be on the district board. “Profit” after needed improvements to the system would be distributed back to each entity based on the number of customers.
One closing thought, the last group “Peoria Area Advancement Group” (PAAG) suing the City? What is that $$$$$
nontimendum:
In Cj’s original post — he wrote …. ” They make over $6 million a year in profit for their shareholders.”
That number seemed high to me and I was asking what portion of that profit was specifically generated by the Peoria section.
Right in front of me, no wonder I couldn’t find it. C.J., what is the source of that figure?
Zoom Info
And you’re right — that’s for all of ILAWC, not just the Peoria District. My mistake.
The $6.3 million reported on ZoomInfo is revenues (total gross sales), not profits. That figure seems too low.
I asked the question only because the current level of profitability (or lack thereof) could make me rethink this. It is possible that the Illinois susidiary is profitable while the parent corporation isn’t.
unless i missed out on a city wide replacement of century old water lines (how maney breaks do you rember seeing last year); buying back the water system will soon require a massive fix as the sewer overflow project will be. Bite the bullet and pay for our city’s mistake’s and don’t make any new ones.
The purchase would be funded by municipal bonds. Water, everyone needs it, and they use it at generally a pretty predictable rate. Thus revenue receipts from the predictable returns go to pay off the bonds and you’ve then essentially bought a major public asset for no tax increase. Its one of the safest investments out there. After the utility is paid off water fees flat line or the city reinvests in some other capacity… either way the funds don’t go to line the pockets of the private sector.
Just ask yourself this question, why is IL American likely to fight this so hard?
Chief:
Just ask yourself this question, what are the qualifications of the City of Peoria to run or even hire a private company to efficiently and effectively run the water company?
Please remember to list previous city success stories.
Would any rational person hire the clowns that run the City to provide them with water? I didn’t think so.
Oh, they are going to hire a contractor to do it? And the contractor is going to do it for free? Get real people, if you use water, this is a bad deal for you.
Mouse & Karrie: The city will be using the same local people to run the water company as they do now. Don’t be in such a hurry to bad mouth city officials and employees, if you can do better, quit whining and run for the office or apply for a job there.
So add the interest expense of the bonds to what already appears to be an iffy proposition. I can’t wait to see the pro forma plan wherein the City holds itself out as a more efficient water works operator than the professional water works operator.
Karrie, The services would be contracted for.
But why would you assume our local government has any less of a capacity to manage such an enterprise than THOUSANDS of similar jurisdictions across the county? Your rationale obviously isn’t based on staff or even political capability (because it is no doubt there), but its seems grounded in a simple distrust of government, which would apply to any new enterprising function, utility or not…. which is too bad.
Not related to water, but below is an article on electric utilities in Utah. (41 public, 1 private)… it speaks directly to this issue. http://findarticles.com/p/articles/mi_qa5279/is_/ai_n21266061
I would argue that the economic benifit, while appealing, is not the most important consideration here. The City’s ability to influence growth and development and guide it in a meaningful way is even more critical. Control of the water utility provides substaintial influence over issues like municipal annexation, curbing spawl, and urban reinvestment and densification.
Do you think Illinois Amercian would look for opportunities to leverage a water main replacement as an opportunity to install a new bike path or a storm water BMP? The answer is no… only through city owenship and there be real efficiencies and leveraging these existing investments in a way that achieves mutual, multiple benifits.
wacko and chief — thank you for the dialogue. Not sure that our paths have crossed in person. I am not whining / complaining about city staff — I persistently take my complaints to city staff and they are helpful in resolving the issues at hand.
wacko — what is your definition of bad mouthing? and city officials — would that be department heads or elected officials? If elected officials — imo — badmouthing is not reporting factual news which also happens to be negative. I asked for specific successful financial city examples to be provided. Please, tell me one project which has lived up to its economic projections? I cannot think of one. No one has provided any examples of financial leadership (to-date) which would instill confidence to get my support for the city to purchase the water company.
chief — your analysis of my rationale is incorrect. Show the figures, the actual figures and then we’ll talk. I have seen too many rose colored glasses proformas — ie: projections never matched with reality. Perhaps you have not had that personal experience with Peoria’s projects to date.
and as far as using the water company for the city to have the ability to influence growth and development and guide it in a meaningful way — I do not get your point. Please help me to understand.
Currently and for the past decade, probably decades our elected officials have participated in unwise decisions to sprawl Peoria to the north to the detriment of older neighborhoods. What would make you think that controlling the water company would improve their thought process about a positive influence to growth and development?
Each time our elected officials annex another land parcel, extend the enterprise and EZ zones, the older neighborhoods take another hit. These decisions are not sustainable and we continue to swirl down the sewer.
There is rarely a project or development our elected officials do not like as they can use the charge card aka municipal bonding authority to purchase another trinket which does not provide the pro forma results which is sometimes referred to as ‘juicing the numbers’.
Think Riverfront Village, parking decks, ball stadium, civic center, Riverplex, zoo … These are not all city of Peoria projects yet on the whole — how long is such a balance sheet sustainable without raising taxes? Now add the library expansion, the CSO project and the Bellwood Nursing Home rebuild along with $80 million in new school funding.
We have Duany’s plan, a new code and then no backbone to get the change done. I am not against change — change for change sake is meaningless and often detrimental. We supposedly have a plan and then there is no funding for the Heart of Peoria Commission — let’s talk about the lack of commitment of elected officials to get the job done? It is absent.
It would be challenging enough if we were paying the asking / purchase price upfront — we are not — we are double the cost of each project when the interest is added.
Now, we are in the throws of an economic downturn, health costs rising for city employees and so on. Anyone else concerned?
Have you added up the cost of all of these ‘needed’ projects?
What do you think the bottom line number on your property tax bill will be next year? lower? No. It will probably be significantly higher.
So let’s keep talking because I feel you are making inaccurate assumptions about what you think I think.
Karrie-
We’ll said, and I don’t disagree that there have been missteps along the municipal way and that retrospectively there may have been better options available than those ultimatly selected. But I still fundamentally believe our representatives (staff and elected) have Peoria’s best interest at heart, and I would hope we wouldn’ t use past mistakes as a rationale for missing future opportunities.
When I talk about the impacts of growth and development, I don’t intend to convey that this is a golden ticket. It is potentially one significant carrot that the City can use to help guide and determine areas suitable for growth and densification (based on where they are willing to extend and provide). And in addition, the city would also have the ability to leverage other facets of development & annexation agreements (street construction costs, trail development, etc) that could lead to more expansive private sector investment. A.K.A. they could come closer to capturing a share the real costs associated with respective developments. As I.A. is only in the buisness of selling water, they have no interest in anything other than expanded service territory and increased sales.
Lastly regarding specific numbers. Its easy to demand those knowing full well I don’t have them and they simply aren’t yet at that point in the process or conversation. The point I’m making, which I’d like to hear your response two is twofold, 1) what rationale do you have for assuming this wouldn’t be economically benificial when this frakely is the model most comonly utilized across the county? and 2) Yes, inflation and interest, and maintainence, and management costs all need to be reflected in a true financial anaylsis as they have been included in the past. I’d predict the investment still projects to be profitable (assuming a reasonable purchase price), but the bottom line I’m making is it makes sense strongly consider based on a full anaylsis, and in addition there are other non-financial considerations that should also inform the ultimate decision. I’d predict that water service ownership will be in the best interest of the citizen’s economically, environmentally, and socially for decades to come.