Milwaukee Comptroller Seeks Proposals to Privatize Water Utility

CHICAGO - With an eye on establishing a long-term revenue stream to subsidize operations, the Milwaukee comptroller's office will accept until April 9 proposals from firms interested in working on a buy-side advisory team for the possible privatization of the city's water utility.

Longtime Milwaukee Comptroller W. Martin "Wally" Morics floated the idea to city officials last year of leasing the system as a possible means to generate an ongoing revenue source. The city faces a near-term budget crunch and the long-term strains of growing costs, shrinking state aid, and limited tax-raising abilities due to state caps.

The city would place the proceeds of any transaction into a special endowment with earnings flowing into city coffers. While the Common Council's approval would be needed for any transaction, Morics said he would not support any move to use a deal's proceeds as a one-time infusion.

"It's a self-sufficient enterprise system that provides no revenue for the city while the city is the sole shareholder," Morics said yesterday. "And it's come to a juncture in the city's history where selling off an asset like this to capture its value makes sense if you can generate a long-term revenue source."

The utility is also a good candidate because its physical plant is in good condition. Milwaukee received $7.5 million in 2006 from the utility as payments in lieu of taxes, but otherwise does not rely on any system revenues.

While a formal valuation of the utility has not yet been completed, the minimum goal is to establish an endowment of at least a half billion dollars that could generate at least $20 million to $30 million in annual revenue. The city would consider a lease of between 50 year and 99 years.

The Milwaukee Water Works system has spent more than $210 million on upgrades to its treatment and distribution systems. The system treats Lake Michigan water and distributes it to city residents and 15 surrounding communities.

If privatized, rates likely will rise, but any future hikes would still be subject to consideration by the Wisconsin Public Service Commission. The utility won a rate increase of 6% effective in 2007. The system generated revenues of $73.1 million in 2006 with expenses of $58.1 million.

The system has about $36 million of debt of which about half sold through the state revolving fund would have to be retired if a deal comes to fruition, while city general obligation debt could be rolled into Milwaukee's capital fund.

If the deal happens it would mark the first such lease of a water utility run by a major city. Akron last year floated a lease of its sewer system and others have handed over operations to the private sector. None have entered into a long-term contract with an up-front payment mirroring the deals Chicago has struck in recent years involving a toll bridge, parking garages and parking meter system.

Milwaukee last week closed a search for a financial adviser to help in the selection of the buy-side advisory team, receiving two proposals. The buy-side team, once selected, would be charged with coming up with a preliminary valuation and offering financial and technical and policy advice and tentative lease terms.

In an example of the city's stressed balance sheet, the city will enter the market today with the competitive sale of $116 million of GO cash-flow notes, up from $90 million last year. All three rating agencies affirmed the city's long-term credit.

Moody's Investors Service assigns a negative outlook to the Aa2 credit on $780 million of debt because of budgetary strains that have led to draws on the city's general fund balance.

"Financial flexibility will continue to pose a challenge for city management as revenue raising opportunities are limited," Moody's analysts wrote.

Standard & Poor's rates the city AA, while Fitch Ratings assigns a AA-plus.

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