17736_Authority_August

municipalauthorities.org | 55 older, more developed parts of the Commonwealth, IOU’s predominantly grow their business through acquisitions (of both private and public systems) rather than through organic customer growth through developments within their service area. IOUs expend significant capital in acquiring, upgrading (to a state of relatively good repair), operating and maintaining their water and wastewater systems and are entitled to recover those costs, together with a reasonable rate of return on such costs, through their rates, fees and charges. The IOU’s will pay their shareholders a portion of their net revenue through dividends. The added return to shareholders is a cost not borne by municipalities and their authorities because they have no shareholders. IOUs also can access additional capital by issuing stock and incurring debt. Q Why is the one-time cash deal not a panacea to a municipality’s financial problems? A First, never forget one basic economic theory: There is no such thing as “free money!” A municipality facing financial headwinds may believe that a large infusion of cash is just what they need to address their budget deficits or other fiscal distress. Local elected officials are accustomed to competitive procurement and may be incentivized to seek the highest price for their municipal assets. There is a direct correlation, however, between higher sale prices and higher rates borne by the IOU’s customers because any buyer will seek to recover its acquisition costs through future rates, fees and charges. F urther, what the selling municipality chooses to do with the sale or lease proceeds will be a critical consideration – with potential political, economic and societal consequences. Some selling municipalities have chosen to set aside a significant portion of the proceeds to mitigate future rate increases, but that may not be politically palatable when the selling municipality has more pressing financial needs. As this is a one-time windfall in money, elected officials must consider how to put the proceeds to the greatest community use by, among other options, (i) reducing other liabilities (including debt repayment, pension liability funding, etc.), (ii) addressing deferred maintenance and/or making prudent investments in the community to catalyze redevelopment efforts, and (iii) providing local funds to match Commonwealth, federal and private investment in their communities. Those purposes tend to assist a municipality in achieving a structurally balanced operating budget by reducing liabilities and expanding its tax base. As sale proceeds are not a recurring revenue, local officials should be wary of using proceeds to pay recurring operating expenses. Whatever their ultimate use may be, the proceeds received by the selling municipality eventually will have to be repaid (with a nice dividend for an IOU’s shareholders) by the system customers through higher rates, fees and charges. Municipal officials should consult with a financial advisor (ideally offering a combination of engineering, rate sensitivity, strategic planning and financial expertise) to advise the municipality on how it may want to use its sale proceeds for the maximum benefit of the community. Q What are the typical challenges in structuring these transactions? A Each of these deals, whether with an IOU or a public authority as buyer, present some material structuring issues that need to be addressed by both buyer and seller. Those issues include (i) distinguishing between assets to be acquired and assets to be retained (if any), (ii) identifying all real property interests to be conveyed (many of which are underground and not easily ascertainable and some interests (e.g., easements) may never have been recorded) and then properly conveying them, (iii) integration of any unionized employees that intend to move over to the buyer, and (iv) the assumption, defeasance and/or refunding of existing indebtedness. Those issues can absorb a significant amount of administrative and legal time and expense and probably warrant the engagement of experienced public sector labor counsel, real estate counsel and bond counsel to the seller’s team.

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