Louisiana officials have accused Sustainability Partners, a national operator promising "infrastructure as a service," of evading required Louisiana Bond Commission review, overcharging governments and burdening them with hard-to-understand contracts.
"It causes great concern that [Louisiana municipalities and political subdivisions] are entering into long-term debt and they don't even know what the debt is that they have committed these towns and taxpayers to paying," said Louisiana Attorney General Liz Murrill.
Arizona-based Sustainability Partners promises to help local governments build infrastructure with a "usage-based model" requiring zero upfront capital.
Murrill,
Some said Sustainability Partners' contracts were void and should be canceled. The commission voted to hold a special session in June to discuss Sustainability Partners' work with company officials and the municipalities that have entered contracts with it.
"New approaches often encounter instinctive skepticism, even when grounded in proven foundations," Sustainability Partners CEO John Veech said in a statement provided to The Bond Buyer. "Sustainability Partners is simply extending the trusted service model used for essential utilities to the world of essential infrastructure."
Sustainability Partners presents its services as a concession to municipal governments, Murrill said at the meeting. It pays governments a fee up front, installs or builds equipment or other facilities and then charges fees to users over multiple years. Most of the company's Louisiana deals are to install water meters but has also built wastewater treatment plants and installed turf and lights on recreation fields and wi-fi infrastructure in dormitories,
The officials at last week's meeting said the contracts go beyond a concession arrangement. Municipalities are required to pay fees to escape deals.
The company's contracts are very difficult to understand, Waguespack said. When Murrill and others in her office looked at them, they had a hard time understanding the actual rate structure.
"All we can tell mostly is that it goes up," Murrill said.
Fleming said he looked at one of the documents between the municipalities and Sustainability Partners and it was "unreadable. It looked like it was designed so that you could not understand it. The lawyers said they couldn't read it either."
"Our service agreement is intentionally concise: just 10 pages, formatted in a clear outline to be accessible to school boards, city councils and commissions," a Sustainability Partners spokesperson, who refused to be identified by name, said in a statement to The Bond Buyer. "Using this standard service agreement, we have successfully delivered hundreds of millions of dollars in infrastructure projects across the country."
Justin Lester, Louisiana assistant attorney general for the public finance sector, said the biggest concern in looking at the contracts is that one can't tell what municipalities are obligating themselves for other than that they are obligating themselves for debt.
Local debt issuance must be approved by the Louisiana Bond Commission, which vets applications to confirm if they meet constitutional and legal requirements and if the borrower has the ability to repay any indebtedness incurred.
None of the executed Sustainability Partners contracts had been brought before the bond commission for review.
"It certainly is debt," Fleming said. "However, the words debt may not show up on contracts. It's intended to look a different way."
Whether it is "debt" in a strict sense is irrelevant, Fleming said. Rather than using the word "debt" to denote what municipalities must turn to the commission for approval, Fleming said the word in the state constitution is "obligations."
"This is truly a financial obligation," he said.
Murrill said that all 20 contracts in Louisiana with Sustainability Partners were for long-term debt that the bond commission should have reviewed.
"Whether our infrastructure as a service model constitutes debt is determined by applying GASB 60, 87, 88, and 89," the Sustainability Partners spokesperson said.
"Louisiana law and previous attorney generals have consistently recognized service contracts — similar to your utility bill — as exempt from the requirement to seek bond commission approval," the spokesperson said, adding it is up to the municipalities whether to bring it to the commission. The agreements require municipalities to get necessary approvals and if they fail to do so, any resulting issues are their "responsibility," the firm said.
Sustainability Partners has told municipalities they don't need to seek public bids as part of the process of signing contracts with the firm, Murrill said. But public bid laws should cover its provision of equipment, she said.
Sometimes municipalities have used bid request language written so that only Sustainability Partners could respond to the bids, Murrill said. The company may have contributed to wording of the bid request, she said. Using language that restricts the bidders to just one is not a true bidding process, she said.
"To assist municipalities, we provide a free, publicly available resource on our website that outlines an approach for drafting such requests for proposals," the company said.
Sustainability Partners' deals with municipalities have sometimes allowed it to avoid paying sales tax for things the company has bought for the projects, Murrill said. Since the company continues to own the infrastructure it installs, it should pay the sales tax, she said.
"Local taxing authorities determined the items qualified to be sales tax exempt," the company said in a statement. "SP had nothing to do with the application for and issuance of the sales tax exemption certification."
Beyond the procedural legal problems, the deals seem to harm municipalities that enter them, officials said.
Murrill said one deal she looked at yielded an effective interest rate of 11.75%.
"In every case, the cost of the infrastructure is much more costly to the taxpayers and the political subdivision cannot explain the rate/payment structure," Murrill said in the memo.
"It has been our observation that it seems that the political subdivisions that are in the worst position have been the ones preyed upon here," Fleming said.
Of the 20 municipalities and political subdivisions that have contracts with Sustainability Partners, three have gone into financial administration, a process in which the state government appoints an outsider to run municipal finances. "They cannot pay these bills," Murrill said.
"If they're signing up for a 12% financing agreement when they can get bonds that are 6%, then that begs the question why they are entering into that agreement," Murrill said.
"If something doesn't work, the customer doesn't pay until SP has repaired or replaced it," the company spokesperson said. "When considering the full lifecycle costs of infrastructure, including upfront capital, ongoing maintenance and renewals, SP's service proves so compelling that the vast majority of our customers are investment-grade public entities."
Murrill, in her memo, said a legal case on a deal between Sustainability Partners and the Capital Area Groundwater Conservation District, a tax judge ruled the arrangement creates a tax.
Brett Furr, a board member of the Baton Rouge Water Company, which is regulated by the conservation district, said the district tripled its tax to fund the Sustainability Partners contract. The judge said the fees were OK but the tax increase was unconstitutional because the district had not gone through any of the approvals needed to pass the tax. The district is in discussions with Sustainability Partners to reach a settlement, Furr said.
Murrill said the company should add an appropriations clause to the contracts. If Sustainability Partners has "a true appropriations clause, it allows the termination of the agreement without these long-term consequences." However, if that were in the contracts, it would "undermine their entire business model."
"We have non-appropriation language from the state's model service contract," the Sustainability Partners spokesperson said.
Waguespack said the municipalities' contracts with Sustainability Partners sometimes appear in audits and sometimes don't.
Angelique Freel, executive counsel in the governor's office, said if the commission's OK was legally required and not gained than the contracts would usually be null and void.
Murrill said the contracts should be examined to see if they need to be canceled.
Fleming said in personal meetings with Sustainability Partners professionals and in hearings in the Louisiana House and Senate, company officials made clear they don't want to go through the bond commission and believed they don't have to go through the commission.
"They have been very resistant to coming to the bond commission, which by itself is a red flag to me," Fleming said.
"We do not fall under the bond commission's regulatory authority," the company spokesperson said. "There is no basis in law to require our attendance but once we have been formally invited, we will consider attending."
Sustainability Partners has offices in 23 states and operates in all 50 states.
