The quasi-public Lehigh County Authority emerged as the winning bidder of a 50-year lease of the sewer and water system in Allentown, Pa., beating out several private firms including two in the final round.

According to Mayor Ed Pawlowski, Lehigh’s last-round “best and final offer” of $220 million exceeded expectations. The city intends to apply the funds to offset its pension liability, which Pawlowski said could consume more than 30% of Allentown’s general fund by 2015.

“There have been many who doubted that a bid number of $150 million to $200 million could be obtained. I’m here to tell you that we have not only met but exceeded our expectations,” said Pawlowski, who has called unfunded pension liability “a 500-pound gorilla.”

Pawlowski said the final round added $15 million to the bid.

American Water and United Water were the losing bidders. Bids were opened Friday in the Harrisburg, Pa., office of PFM Group Inc., one of the city’s consultants. One bid was within 10% of the best offer, triggering the best-and-final round.

The City Council must approve the deal. The council is expected to introduce it Wednesday night and hold a hearing for later this month.

Moody’s Investors Service in October lowered Allentown’s general obligation bond rating to A3 from A2 while maintaining a negative rating. Moody’s cited four straight years of operating deficits. Standard & Poor’s rates the bonds AA-minus and stable.

The authority, a regional nonprofit water service, has more than 20,000 customers in the region. It almost missed out on the bidding when Lehigh County’s board of commissioners last month voted not to extend its charter to accommodate a 50-year lease, but the commissioners approved the bid later in March when Allentown clarified the bid language to their liking.

LCA late last year completed an interconnection with Allentown’s system. Allentown, with a 119,000 population, is the seat of Lehigh County.

“We’re neighboring systems and essentially protect the same water resources,” Aurel Arndt, the authority’s general manager, said in an interview. “Beyond that, we also believe we can create synergies and economies of scale.”

Arndt expects the authority will finance the project mostly through the sale of tax-exempt bonds. It generally finances its capital needs through the tax-exempt market, and to a lesser extent direct borrowing from banks.

He also said LCA’s nonprofit model offers the best form of financing available. And, Arndt said its local emphasis could offset concerns by some citizens who oppose the project, fearing it will lead to higher rates.

“Several citizens in the community concerned about this approach have also said that if it is to happen, let it be the Lehigh County Authority,” he said. “We think it’s more favorable than having someone come in from outside.”

Public-private partnerships have become a political hot-button in Pennsylvania, where Gov. Tom Corbett is looking to privatize the state lottery and liquor-store system.

Allentown issued a request for qualifications in July for the concession lease and drafted an agreement in October that brought potential bidders to the table. The council that month authorized Pawlowski to proceed with the deal. “We rejected many requested provisions that would have put the city at an unacceptable risk,” said Pawlowski.

“This is a unique venture in terms of its magnitude and complexity,” Arndt added. “We’ve been examining all the intricacies. I’m not saying it won’t be a challenge, but we’re very pleased to be the successful bidder.”

Aqua Pennsylvania, American Water, NDC Housing and Economic Development Corp., Access Capital, Corix, Allentown Forward and Macquarie also responded formally to the RFQ.

In January, the council rejected a proposal to establish a binding May referendum for the lease.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.