Case Studies in Water Projects: Rialto & Allentown

Report
A Tale of Two Cities:
The Rialto and Allentown Water / Wastewater
System Transactions
National Conference for Public-Private Partnerships
P3 CONNECT
Denver, Colorado
July 29, 2014
1
Tale of Two Cities Panel
R. Timothy Weston – Moderator
Partner, K&L Gates LLP
Hon. Deborah Robertson
Mayor – City of Rialto, California
Neil V. Callahan
Vice President – Leidos Engineering, LLC
Scott E. Shearer
Managing Director - PFM Group
Andrew Swope
Partner, K&L Gates LLP
2
Two community perspectives
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Perspectives – Rialto, CA and Rialto Utility Authority
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City of Rialto
 Population: 100,000
 Median household income:
$51,499 in 2010
 Budgeted General Fund revenue:
$58.6M in FY14
 Major employers: school district,
distribution centers, manufacturing, services
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Rialto Utility Authority (RUA)
 Water service to 50,000 City residents
 Wastewater service to entire City plus outside customers
 Budgeted revenue of approximately $37 MM in FY14
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Perspectives – City of Allentown, PA
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Population: 118,032 (2010 Census)
City General Fund Budget
 2014 Proposed Budget:
~ $90 MM
Water System
 ~ 53 employees
 2013 Budget: $16.0 MM
 Gallons Produced: 15.86 MGD
(Capacity of 30MGD)
Sewer System
 ~ 79 employees
 2013 Budget: $16.9mm
 Gallons Treated: 30.91 MGD (Capacity of 40MGD)
 EPA Administrative Order to eliminate sanitary sewer overflows
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5
Side-by-side system comparison
Rialto
• Water: 12,000 connections;
48,000 customers
• Sewer: 20,400 connections;
100,000 customers
• Owned by the City, leased to RUA
• RUA obligated to make lease
payments based on system fair
market value
• Moderately integrated with
surrounding systems
• Significant deferred maintenance
& capital improvement needs
• Sources impacted by perchlorate,
requiring water purchase from
other systems
Allentown
• Water: 34,000 connections,
180,000 customers
• Sewer: over 195,000 customers
• Owned by city
• Part of a regional water &
wastewater system with many
interconnections & intermunicipal
agreements
• Some deferred maintenance and
needed capital improvements
• Subject to an EPA administrative
order for issues with the
wastewater system
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What were the drivers for a
PPP transaction?
klgates.com
7
PPP Transaction Drivers - Rialto
• Unfunded Projects and Unfunded Liabilities
 Unfunded projects to accommodate growth
 Unfunded pension liabilities and other long-term costs
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Tight Budgets
 Retirement pension cost strained the budget and posed long term
negative rate impacts
•
Project Delivery
 Critical projects had historically been deferred due to lack of
funding
 Delays put the City at risk of higher construction cost over time
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Aging Infrastructure
 Water and wastewater infrastructure challenges
 Delays in replacements increased maintenance costs
.
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PPP Transaction Objectives - Rialto
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Desire to retain ownership
 No sale of the utility assets
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Public Private Partnerships alternative considered
 Concession Agreement
 Qualified Management Contract
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Traditional Municipal vs. Private Financing
Extensive community outreach was a priority
After thorough evaluation, community outreach and labor
negotiations, the City elected to move forward with a
Concession Agreement
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PPP Transaction Drivers - Allentown
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Significant ongoing fiscal imbalance / need to find a long-term solution
– fund balance nearly depleted even after:
 Implemented new taxes
 Restructured Fire and Police contracts
 Debt restructurings
 Various revenue sharing agreements
 Cut other major expenditures
Pension shortfall
 After contract restructuring, 2012 estimate of unfunded liability
was $158 mm (based on an 8% return assumption)
 Minimum Municipal Obligation (“MMO”) projected to increase by
approximately $13.3mm -$18mm in the near term
 In 2006, pension costs were 9.70% of budget. In 2015, pension cost
projected to become 30%-33% of budget.
.
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Allentown’s challenge - impact of minimum
municipal obligation
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Options explored by Allentown
Revenue Enhancement Options to pay the MMO
• Option 1 – Increase the millage rate, but Allentown has the highest
millage rate in the area
• Option 2 – Increase the earned income tax
Options to Reduce Unfunded Liability (i.e decrease MMO expense)
• Option 3 – Issue a second Pension Obligation Bond
 City would issue Taxable debt secured by its tax pledge
• Option 4 – Sell the Water and Sewer systems to a new Allentown
Authority
 New Authority would issue Taxable debt secured by water and sewer
revenues
 May require a City guarantee
• Option 5 – Enter into a concession/lease agreement (Public - Public
Partnership or Public Private Partnership) of the Water and Sewer systems
with LCA
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What procurement process
was followed?
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What procurement law / process followed?
Rialto
Allentown
• Concession & lease arrangement
• California P3 Statute
• RFQ – requesting qualifications
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and suggestions as to structure
RFP with extensive price
information, indicative form of
concession agreement and
qualified management agreement
Interviews of proposers
Extensive weighted selection
criteria
Preferred proposer negotiations
Extensive negotiations
Contract execution
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under enabling legislation applicable
to municipalities and Allentown
Home Rule Charter
RFQ to invited proposers
Evaluation focused O&M expertise,
customer service, safety & security,
capital improvements, financial
capacity
Six teams qualified to participate (5
private and 1 public)
Common agreement form
Bid for the right to lease the system
and receive the rates
Highest bidder wins
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Procurement - Rialto
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California Government Code § 5956 et seq., Infrastructure
Financing; provides for utilizing private investment capital to design,
construct, develop, finance, maintain, rebuild, improve, repair or
operate, fee-producing infrastructure facilities.
A governmental agency may solicit proposals and enter into
agreements using a competitive negotiation process
The competitive negotiation process does not require competitive
bidding
The procurement process required proposals for both Concession
Agreement approach and Qualified Management Agreement
approach structures
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Procurement – Rialto (con’t)
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Request for Qualifications
 Narrowed field to qualified vendors
 Qualifications only; no price, few project details
 Results in “shortlisted” vendors
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Request for Proposals
 Only shortlisted vendors could submit
 Three vendors were shortlisted
• Submittal based on City’s Conceptual CIP
• Proposal included Pricing, Financing Plan, Technical Proposal
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Preparation and Procurement - Allentown
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System evaluation
 AUS Consultants valued the Water and Sewer systems using
weighted approach, including the cost, income, & market
comparables.
 Preliminary combined values range from $135mm - $164mm
after repayment of outstanding system debt.
 PFM independently created a Discounted Cash Flow model to
value systems.
RFQ to determine operational and financial ability => selection of
pre-qualified bidders
City drafted Operating Standards overseen by Council rep
City drafted Concession and Lease Agreement
City Council authorization to move forward with process
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Procurement – Allentown (con’t)
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One-on-one meetings with pre-qualified bidders to review
concession agreement terms and operating standards, combined
with tour of and ongoing access to City water and sewer system
assets
Negotiated terms of final Concession and Lease Agreements with
pre-qualified bidding teams
Released Request for Bids (“RFB”) with final terms and conditions
BAFO, Best and Final Offer process due to second highest bid within
10% of highest
Selection of winning bidder based on highest present value bid
Up to 90 days to close
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Allentown Pre-Qualified Bidding Teams
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How was the transaction
structured?
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Rialto transaction structure
Concessionaire
City
City of Rialto
Customers
Lease
Rialto Utility Authority (RUA)
Concession Agmt
Rialto Water Services, LP
Table Rock Capital (TRC)
+
Veolia Water
Lock Box
Equity
Investors
Lenders
O&M Contractor
Veolia Water
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Rialto key elements of deal
• 30 year concession agreement to operate and maintain systems
• $42 million capital improvement program
• $30 million up front concession payment
• $2 million per year contingent concession payment
• Financing provided by private bonds issued by Concessionaire
• Repayment of bonds are a fixed component of the service charge
• City pays concessionaire service charges based on amounts and
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formulas
Service charges set with some automatic adjustments for inflation and
periodic re-setting of certain components
City council sets the rates for customers, subject to a rate covenant
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Rialto Concession Arrangement structure
Rialto Utility Authority
Sets water/sewer rates in
amounts sufficient to pay the
Concessionaire Fee
Defines and prioritizes capital
improvements
Rialto Water Services,
L.P. (RWS)
Contract between RWS
and Veolia
30-year Concessionaire:
30 year contract:
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
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Provides financing that
conforms to a market
standard financial
security package
Absorbs contracting and
completion risk for the
CIP
Assumes long term
operations and
maintenance
responsibility
 Day-to-day operations and
maintenance of facilities
 Billing and customer service
 Management of capital
improvement projects
 Equipment repair and
replacement
Structure delivers enhanced O&M and CIP management with an
up-front payment, debt defeasance and capital improvement financing
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Rialto concession arrangement considerations
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Stakeholder communications
Rate increase - cumulative 115% rate increase over 5 years
No lease interest in any real property
 Transaction structured as a Service Contract with access
easements and licenses
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As-Is Risk – management & transfer
 Maintenance vs. Repair, Replacement & Capital Project
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CIP definition & implementation risk transfer
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Rialto concession risk transfer over time
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Rialto concession O&M cost risk sharing
CITY
RWS
Maintenance
Consumable Costs >
$250
Fixed Fee
Maintenance
Maintenance
Consumable
Costs < $250
Underground Asset
Routine Repair
& Replacement
Routine R&R up to
Labor Cost Escalation
Labor
Labor Costs for Scope
Commodity Price
Chemicals
R&R
Adjustments
Operating R&R over
$250,000/yr
Operating
Repair &
Replacement
$191,000/yr
Commodity Usage
Guarantee
Operating R&R up to
$250,000/yr
Allentown concession structure
City of Allentown
50 year lease /concession
$212 MM upfront payment
$500,000 annual payment
Lenders
Lehigh County Authority
(Concessionaire / Operator)
Customers
Contractors
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Allentown key deal elements
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50 year lease concession rights to operate & maintain system
 $212 million up front concession payment
 $500,000 annual royalty payment
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Concessionaire responsible for capital improvements during the term
Certain capital improvements can be funded with rate increases
subject to city council approval, while others are concessionaire’s
responsibility.
Rates charges set initially and adjusted pursuant to a formula inflation, plus a percentage (2.5% first 20 years, 2.0% next 30 years)
Concessionaire sets the rates in accordance with the agreement. No
true rate covenant.
Concessionaire takes the risk that the rates are sufficient.
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What benefits did the
community accrue in the PPP
transaction?
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Rialto key benefits of transaction
• Implementation of a much needed Capital Improvement Program (CIP)
• Contracting with a full service (O&M + CIP) vendor => more efficient
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method of operating, maintaining and upgrading facilities.
CIP by a highly experienced team providing predictable costs and budgeting.
Provides financial savings from reduced time and duplication in
construction process.
Savings associated with national purchasing power, economies of scale and
increased operating efficiencies => passed along to the RUA through service
fee calculations.
Implementation of an industry leading asset management and preventive
and predictive maintenance program.
30-year lease establishes long-term stability in rates.
Vendor is responsible for paying performance damages if they fail to
operate in accordance with applicable law.
RUA benefits from energy savings related to power usage efficiencies.
Performance risk transfer over time..
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Allentown key benefits of transaction
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Protects system users with various rate protection factors
Protects the integrity of the assets with strong operating
standards and required capital
Allentown workforce treated very fairly
City received substantive upfront payment to stabilize pension
fund (City could never have afforded future MMO payment)
Ongoing payments received by City is a predictable revenue
source
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Some significant / potential issues
Rialto
• Ability to raise rates in the future
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Allentown
• Potential PUC involvement
• Repayment for late term capital
to support contract charges
Calif. Proposition 13
Ability to fund future capital
improvements
Sharing of cost savings and
guaranteed maximum
consumption for electricity and
chemicals
Periodic re-setting of certain
costs, e.g., labor and routine
repair and replacement costs
Incentives to maintain the
condition of the system
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improvements
Cumulative impact of rate
increases
Impact of long-term
intermunicipal agreements
Successful bidder, LCA was a
public entity who could raise taxexempt financing / form of
agreement was different from the
other bidders.
Very long deal term, with
potential changes of
circumstances in future.
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What lessons were learned?
klgates.com
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Lessons learned
Rialto
• City staff should be the external
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public face of the project
Anticipating replacement of the
operator prior to financial close
Contract assurances to avoid CIP
schedule delays
Public vs. Private mentality –
public service vs. profit
Proprietary Information vs. public
transparency – nature of two
separate industries
Attorney costs
Successful PPP support is highly
dependent on public
communication effort
Allentown
• Stakeholder outreach and citizen
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education is crucial
Requires a strong municipal leader
to carry the message
Would not have been nearly as
impactful to the City if the systems
were already highly leveraged
Concession lease much more
palatable than a sale
Protecting the work force is curcial
A highly competitive process can be
very valuable if conducted correctly
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Contact information
Hon. Deborah Robertson, Mayor – City of Rialto
Tel: (909) 820-2525 | Email: [email protected]
Neil V. Callahan, VP – Leidos Engineering, LLC
Tel: (949) 596-8981 | Email: [email protected]
Scott E. Shearer – Managing Director, PFM Group
Tel: (717) 232-2723 | Email: [email protected]
Andrew L. Swope – Partner, K&L Gates LLP
Tel: (717) 231-4512 | Email: [email protected]
R. Timothy Weston – Partner, K&L Gates LLP
Tel: (717) 231-4504 | Email: [email protected]
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