ALLENTOWN, Pa. – Mayor Ed Pawlowski told the Allentown, Pa., City Council that without a 50-year, $220 million agreement to lease its water and sewer system to the Lehigh County Authority, “we’ll be just another Pennsylvania city making ugly headlines.”
“We should not allow our city to become another Harrisburg or Scranton or worse, even Stockton, California,” Pawlowski said at a council meeting Wednesday night that lasted five and-a-half hours.
The council will continue its hearing Monday night and vote on the proposal next Thursday.
Harrisburg, the state’s capital, is under receivership and Scranton for two weeks last summer paid its employees the federal minimum wage, unable at the time to obtain cash-flow funding.
Stockton filed for bankruptcy last June.
Pawlowski seeks council approval for the concession, the structure of which has generated a buzz in the capital markets.
“We flipped the thing on its head. We wrote the agreement first,” Pawlowski said in an interview before the meeting. “This may very well be one of the few times any city has drafted a lease before a bid is awarded.”
The city intends to apply upfront money from the deal to eliminate its unfunded pension liability, which stood at roughly $158 million in 2012. That amount, though, is based on an 8% return assumption; if actual returns fall short, there would be an increase in unfunded liability.
“Even the return assumption should be reconsidered,” said Scott Shearer, a Harrisburg-based managing director at PFM Group Inc., Allentown’s financial consultant. Shearer and managing director Tim Carden are working for PFM on the Allentown deal. Dilworth Paxson LLP and Katten Muchin Rosenman LLP are the city’s legal advisors.
Lehigh County Authority, a quasi-public regional agency in county seat Allentown, emerged two weeks ago as the high bidder after making a “best and final offer” that topped American Water Works Co. of Vorhees, N.J. and United Water of Harrington Park, N.J.
Allentown expected $150 million to $200 million from the RFP process. The extra round bumped the price up from $205 million.
The city has already received a $10 million letter of credit from the authority.
Wednesday’s council meeting – a two-part work session sandwiched around a regular meeting – drew a standing-room-only crowd of nearly 170 and lasted until about 11 p.m. It included three police officers and a fire marshal, but remained orderly.
According to Pawlowski, his city has nearly depleted all its available fund balance in recent years while also making substantial expenditure and revenue adjustments.
“We’ve implemented new taxes, restructured fire and police contracts, restructured debt, undertaken various revenue-sharing agreements and cut other major expenditures,” he said.
Moody’s Investors Service rates Allentown’s general obligation bonds A3, with a negative outlook. Moody’s downgraded Allentown from A2 last October. Standard & Poor’s assigns a BBB-plus rating and stable outlook.
Allentown, said the mayor, projects its minimum municipal obligation to increase by $13.3 million to $18 million short-term. “And even that’s like paying the minimum on a very large credit-card balance,” he said in the interview. In 2006, pension costs were $7 million, or 9.7% of the budget. Without action, Pawlowski projects the pension cost to total as much as 33% of the budget by 2015.
Selling the water system, said Pawlowski, was viable because its combined debt is only $30 million and there is no deferred maintenance.
The authority, should the council approve the contract, will pay Allentown $220 million up front. The city would also receive annually, beginning in 2016, a payment of $500,000 in equal amounts in April and October, increased by an inflation factor. City officials expect $33 million left over after paying off the pension debt.
Some speakers Wednesday questioned how the Lehigh County Authority would finance the acquisition. Authority officials have cited confidentiality agreements with the city. Authority officials are expected to speak on Monday.
Labor leaders spoke favorably because the transaction includes built-in protections. The authority must recognize the Service Employees International Union as the exclusive bargaining representative and adopt the bargaining agreement for those union employees.