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A Tale of Two Cities: The Rialto and Allentown Water / Wastewater System Transactions National Conference for Public-Private Partnerships P3 CONNECT Denver,

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Presentation on theme: "A Tale of Two Cities: The Rialto and Allentown Water / Wastewater System Transactions National Conference for Public-Private Partnerships P3 CONNECT Denver,"— Presentation transcript:

1 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

2 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

3 Two community perspectives.3

4 Perspectives – Rialto, CA and Rialto Utility Authority 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 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 FY14.4

5 Perspectives – City of Allentown, PA.5 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

6 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.6

7 What were the drivers for a PPP transaction? klgates.com7

8 PPP Transaction Drivers - Rialto Unfunded Projects and Unfunded Liabilities  Unfunded projects to accommodate growth  Unfunded pension liabilities and other long-term costs 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 Aging Infrastructure  Water and wastewater infrastructure challenges  Delays in replacements increased maintenance costs.8

9 PPP Transaction Objectives - Rialto Desire to retain ownership  No sale of the utility assets Public Private Partnerships alternative considered  Concession Agreement  Qualified Management Contract 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.9

10 PPP Transaction Drivers - Allentown 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..10

11 Allentown’s challenge - impact of minimum municipal obligation.11

12 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.12

13 What procurement process was followed?.13

14 What procurement law / process followed? Rialto California P3 Statute RFQ – requesting qualifications 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 Allentown Concession & lease arrangement 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.14

15 Procurement - Rialto 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.15

16 Procurement – Rialto (con’t) Request for Qualifications  Narrowed field to qualified vendors  Qualifications only; no price, few project details  Results in “shortlisted” vendors 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.16

17 Preparation and Procurement - Allentown 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.17

18 Procurement – Allentown (con’t) 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.18

19 Allentown Pre-Qualified Bidding Teams 19

20 How was the transaction structured?.20

21 Rialto transaction structure 21 City of Rialto Rialto Water Services, LP Table Rock Capital (TRC) + Veolia Water Rialto Utility Authority (RUA) City Concessionaire Lease Concession Agmt O&M Contractor Veolia Water Equity Investors Lenders Customers Lock Box

22 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 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.22

23 30-year Concessionaire:  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 Sets water/sewer rates in amounts sufficient to pay the Concessionaire Fee Defines and prioritizes capital improvements Structure delivers enhanced O&M and CIP management with an up-front payment, debt defeasance and capital improvement financing Rialto Water Services, L.P. (RWS) 30 year contract:  Day-to-day operations and maintenance of facilities  Billing and customer service  Management of capital improvement projects  Equipment repair and replacement Contract between RWS and Veolia Rialto Utility Authority Rialto Concession Arrangement structure 23

24 Rialto concession arrangement considerations 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 As-Is Risk – management & transfer  Maintenance vs. Repair, Replacement & Capital Project CIP definition & implementation risk transfer.24

25 Rialto concession risk transfer over time 25

26 Rialto concession O&M cost risk sharing Maintenance Consumable Costs > $250 Maintenance Consumable Costs < $250 Underground Asset R&R Chemicals Routine R&R up to $191,000/yr Fixed Fee Maintenance Routine Repair & Replacement Labor Operating Repair & Replacement Operating R&R up to $250,000/yr Commodity Price Adjustments Commodity Usage Guarantee Operating R&R over $250,000/yr Labor Cost Escalation Labor Costs for Scope CITY RWS

27 Allentown concession structure.27 City of Allentown Lehigh County Authority (Concessionaire / Operator) Lenders Contractors 50 year lease /concession $212 MM upfront payment $500,000 annual payment Customers

28 Allentown key deal elements 50 year lease concession rights to operate & maintain system  $212 million up front concession payment  $500,000 annual royalty payment 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..28

29 What benefits did the community accrue in the PPP transaction?.29

30 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 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..30

31 Allentown key benefits of transaction 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.31

32 Some significant / potential issues Rialto Ability to raise rates in the future 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 Allentown Potential PUC involvement Repayment for late term capital improvements Cumulative impact of rate increases Impact of long-term intermunicipal agreements Successful bidder, LCA was a public entity who could raise tax- exempt financing / form of agreement was different from the other bidders. Very long deal term, with potential changes of circumstances in future..32

33 What lessons were learned? klgates.com33

34 Lessons learned Rialto City staff should be the external 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 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.34

35 Contact information Hon. Deborah Robertson, Mayor – City of Rialto Tel: (909) 820-2525 | Email: Neil V. Callahan, VP – Leidos Engineering, LLC Tel: (949) 596-8981 | Email: Scott E. Shearer – Managing Director, PFM Group Tel: (717) 232-2723 | Email: Andrew L. Swope – Partner, K&L Gates LLP Tel: (717) 231-4512 | Email: R. Timothy Weston – Partner, K&L Gates LLP Tel: (717) 231-4504 | Email:

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