By John J. Metro
With water costs up nearly 50 percent since 2012 in Bayonne, both residents and elected officials are looking into options surrounding the current 40-year water deal. While a legal review is warranted, those with an understanding of the agreement know that there are limited possibilities of change. Residents’ expectations of favorable renegotiations should not be overly optimistic.
In 2012, Bayonne was in a severe fiscal bind. The city needed $100 million for upcoming debt payments. Additionally, the aging water and sewer infrastructure was on the verge of collapse.
For decades, political mismanagement led to low tax rates for residents and deferred infrastructure maintenance. In addition, the city had a distressed credit rating and could not issue the amount of debt needed, even at higher interest rates.
Given this, Bayonne turned to a private-public partnership to tackle both the upcoming debt payments in addition to its aging infrastructure together. The agency formed a 40-year joint venture with Kohlberg Kravis Roberts. The structured options included selling the city’s entire water utilities unconditionally to the private entity or entering into either an operation-and-maintenance contract or a longer-term concession agreement.
The city chose the latter and received a $150 million cash inflow upfront, which solved budget woes and brought in SUEZ Water to maintain and upgrade the drinking and wastewater management. Additionally, as part of the agreement, the joint venture will funnel another $157 million into the water systems over the contract’s life, with about $2.5 million a year designated for maintenance and upgrades. They also installed sophisticated water meters to detect leaks in homes and sent nearly 2,000 letters to customers warning when such leaks occurred.
Many argue that the terms of a private partnership like this one benefit residents long-term.
While political will landed the city in its predicament, these upgrades and capital investments are contractually required and take political will out of the equation. According to federal estimates, this is something cities and states are struggling with as nearly $700 billion in water infrastructure upgrades are considered necessary, according to national estimates, due to chronic underinvestment and political strategies that kick the can down the road.
In return, the contract guarantees KKR revenue to the tune of more than half a billion dollars over the 40-year term. This amounts to a guaranteed rate of return of 11 percent annually.
Unfortunately, while this profit rate is in line with other private partnership terms, the formula to arrive at the returns is radically flawed. To achieve this pace of return on investment, the residents of Bayonne had to purchase a continuous increase in the volume of water year-over-year and digest an approximately 4% rate increase annually.
This growth sounds bearable, as data show an average of a 5% annual rate increase for New Jersey’s regulated water utilities since the 1970s. However, the merit of the equation is highly debatable.
To achieve consumption rates that create steady rate increases, many speculated items such as population expansion, increased usage by more significant cruise ship vessels, and individual use growth increases were included in the formula. However, the reality is that the housing stock grew more slowly due to the financial structuring of development opportunities; cruise line expansion was limited, then disappeared during the pandemic; and resident consumption decreased due to the meter investments identifying leaks and explosive rate increases, leading to more frugal decisions.
What most residents don’t realize is that the less water they consume, the more expensive it becomes.
These drivers, paired with over $17 million in emergency repairs to the aging system, have forced drastic rates, infuriating residents.
There is no question that Bayonne taxpayers are going to continue to face increasing rate adjustments. The operators are going to collect on their interests, and the capital investments will be costly.
But there is also no debate that both the cash payments and investments were desperately needed and long deferred. The city can open up the contract, but options are very restricted. The private partners will require upfront payment of their investments and expected returns. This would cost hundreds of millions of dollars that the city does not have and would translate into a tax increase anyway.
The administration can also look into creative ways to alleviate the rate increases by subsidizing increases with dedicated funds, such as payment in lieu of tax revenue, but this again creates political will.
John J. Metro was the former chairman of the Bayonne Municipal Utilities Authority and oversaw its dissolution.
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