Allentown, Pa., and the Lehigh County Authority on Wednesday closed the public works agency’s $211 million takeover of the city’s water and sewer system.
Under the deal, which drew widespread attention from the capital markets, the city will cover its pension liability with the upfront payment. Allentown, the 119,000-population seat of Lehigh County, will also receive a $500,000 annual royalty under the 50-year agreement.
A Lehigh official said Allentown will receive $9 million less than what the authority bid earlier this year because a contract provision allows an adjustment to the initial payment either way, to reflect market condition changes. Bond interest rates have risen in the last month, thus lowering the amount Allentown will receive.
According to PFM Group Inc. of Philadelphia, the city’s financial advisor on the deal, this is the first concession lease of public assets in the United States to have been offered to both corporate and governmental bidding teams and to have then secured competitive final bids from both.
“Our analysis confirmed market appetite for leasing these assets, the feasibility of a competitive procurement of the concession lease, and a threshold value for these assets that – if realized – would enable the city to dramatically reduce its large unfunded liability for the city’s fire and police pension plans,” said Scott Shearer, the Harrisburg-based managing director who coordinated PFM’s effort and has served as a long-time financial advisor to the city.
The quasi-public LCA, which will take over the system on Thursday, submitted the winning bid in April, besting several private firms. On May 2, one week after the City Council approved the proposal just before midnight at a raucous public meeting, the parties signed the contract.
Mayor Ed Pawlowski said that without the move, pension liability could have consumed up to one-third of Allentown’s general fund budget by 2015. That total is now about 20%. Without the water lease, “we’ll be just another Pennsylvania city making ugly headlines,” he told the council in April.
Goldman, Sachs & Co. last week priced $308 million of bonds that the authority sold to transfer the upfront payment to the city. The bonds yielded 5.13% with a 5% coupon in 2038, 5.23% with a 5% coupon in 2043, and 5.40% with a 5.125% coupon in 2047. The bonds are callable at par in 2023.
Additional bond proceeds will prefund capital improvements and provide the authority an additional operating cushion for the early years of the lease contract.
According to Shearer, PFM built in several additional features to offset most community concerns that often impede P3 transactions of this type. The agreement allows the city to set operational standards and retain oversight. No city-owned assets are being sold and at the end of the lease, the city will take back the utilities.
Dilworth Paxson LLP and Katten Muchin Rosenman LLP were the city’s legal advisors. McNees Wallace & Nurick LLC was bond counsel and authority transaction counsel.
Standard & Poor’s assigned an A rating to the bonds. Moody’s Investors Service in May called the deal a credit positive for the city. According to Moody’s, had Allentown not approved the lease, it would have had to issue pension obligation bonds or raise property taxes by up to 75%.
Moody’s rates Allentown’s general obligation bonds A3 with a negative outlook. S&P assigns a BBB-plus and stable. Neither Fitch Ratings nor Kroll Bond Rating Agency rate Allentown.
Since signing the contract, the authority has spent about $2 million in personnel time and professional services to complete the transition. The LCA also said that 84 city workers have accepted comparable positions with the authority and that it has offered positions to 20 new employees.
