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City of Allentown Summary of the Concession and Lease Agreement As of April 17, 2013 Please Note: This summary is intended to provide a general overview.

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Presentation on theme: "City of Allentown Summary of the Concession and Lease Agreement As of April 17, 2013 Please Note: This summary is intended to provide a general overview."— Presentation transcript:

1 City of Allentown Summary of the Concession and Lease Agreement As of April 17, 2013 Please Note: This summary is intended to provide a general overview of the Agreement – Please refer to the Agreement for complete details

2 2 Executive Summary 1.A significant ongoing fiscal imbalance has resulted in the need to find a long-term solution to the City’s fiscal challenges 2.To close the fiscal gap in recent years, the City has nearly depleted all available Fund Balance while also making substantial expenditure and revenue adjustments including: A.Implemented new taxes B.Restructured Fire and Police contracts C.Debt Restructurings D.Various revenue sharing agreements E.Cut other major expenditures 3.Even after significant restructurings of the police and fire contracts, projected pension costs (because of the legacy costs) are anticipated to result in significantly greater fiscal pressures on the City’s General Fund (2012 current estimate of unfunded liability is $158 million (based on an 8% return assumption)) A.Return assumptions are being reconsidered and are likely to drop which will increase unfunded liability B.The Minimum Municipal Obligation (“MMO”) is projected to increase by approximately $13.3mm -$18mm in the near term C.In 2006, the pension costs were $7mm (9.70% of Budget). In 2015, the pension cost is projected to be approx. 30%-33% of Budget.

3 3 Executive Summary (continued) 1.Illustration of projected MMO budget impact…requiring significant ongoing new revenue source and/or a significant ongoing expenditure reduction.

4 4 Overview of Concession/Lease Process To ensure the City followed a process of high integrity, transparency and thoughtfulness, the following process was utilized over the last year to year and a half: A.Perform due diligence and financial studies on the assets while analyzing other alternatives B.Initial Request for Qualifications to determine operational and financial ability C.Various public meetings conducted around the City with substantial public input D.Selection of Pre-qualified bidders E.Allentown Team drafted Operating Standards requirements overseen by Council representative F.Allentown Team drafted Concession and Lease Agreement with requirements for highest conforming bidder G.City Council authorization to move forward with the Concession/Lease process H.Allentown Team conducted 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 I.Allentown Team negotiated terms of final Concession and Lease Agreements with pre-qualified bidding teams J.Released Request for Bids (“RFB”) with final terms and conditions K.BAFO, Best and Final Offer process due to second highest bid within 10% of highest L.Selection of winning bidder based on highest present value bid M.Up to 90 days to close

5 5 Critical Focal Points During the Process While drafting the Concession Agreement and Operating Standards and ensuring a long term partnership with a qualified operator, below are a few of the key points that the entire project team focused on: A.Fair treatment of sewer and water employees B.Protecting the sewer and water rate payers C.Protecting the City’s General Fund D.Maintaining City ownership of the valuable asset E.Setting high operating standards to ensure high quality performance F.Controlling and protecting the quality of the water supply G.Ensuring the system is well maintained so the City receives it back in good condition H.City has control and approval rights over such things as a new operator and capital projects I.City has control and receives revenues from sale of surplus water J.Future rates are comparable to the historical increases K.City receives numerous financial/operating reports on an ongoing basis

6 6 Introduction of the Agreement 1.The City currently owns and operates the Allentown Sewer Utility System. 2.The City also currently owns and operates the Allentown Water Utility System (constituting the Water Plant and Distribution System and the Retained Water Supply System). 3.The City desires to lease the Sewer Utility System and the Water Plant and Distribution System (the “System”). 4.The City will retain and continue to own, maintain and operate the Retained Water Supply System (water reservoirs, wells, pumping and transmission facilities) a)The City has agreed to provide Raw Water to the Concessionaire. 5.The City has determined that the terms and conditions of this Agreement assure: a)That the System will continue to be operated and the Utility Services will be provided in a manner that benefits the public and fulfills the public purposes of the System, and b)That such public benefits and public purposes will be preserved by requirements that the System be maintained, & the Utility Services be performed, in accordance with Operating Standards.

7 7 Funding 1.The Concessionaire shall pay the City at Closing $220,000,000 (the “Consideration”) and the City shall lease the System to the Concessionaire for 50 years. In addition, the City will also receive annually, starting in 2016 a city payment of $500,000 increased by an inflation factor a)The City will use the upfront funds to significantly reduce the MMO, thereby creating fiscal stability moving forward. The City will receive sufficient funds to eliminate the unfunded pension liability of $158 million, pay off existing water and sewer debt, and have additional proceeds of approximately $33 million 2.Closing will occur 90 days after date of this Agreement (or such other agreed upon date). 3.On the date prior to the bid, the City received from the Concessionaire a Letter of Credit in the amount of $10 million to be held by the Escrow Agent.

8 8 Annual City Payment 1.In addition to the Consideration, the City will also receive from the Concessionaire an Annual City Payment of $500,000. Year commencing 1/1/2016 =$500,000 Each year thereafter = $500,000 Adjusted for Inflation (CPI Index) (Example: In 30 th year, estimated Annual City Payment = approx. $950,000) 2. Annual City Payment will be paid in two equal semi-annual payments (April and October). 3.City Payment Reserve Fund – established and maintained by the Concessionaire and held in trust at a bank for the benefit of the City. 4.City Payment Reserve Requirement : Prior to 10/1/2015=$ 0 During period 10/1/15-12/31/15 =$250,000 Year commencing 1/1/2016 =$500,000 Each year thereafter = $500,000 Adjusted for Inflation (CPI Index)

9 9 Union Employees 1.As a condition, the Concessionaire shall: a)Recognize the SEIU as the exclusive bargaining representative for all Union Employees b)Adopt the Collective Bargaining Agreement (“CBA”) for those Union Employees c)Make offers of employment to each Union Employee in good standing at the time of Closing 2.Such offers of employment shall contain the same wages, paid leave time and benefits, or the equivalent of such benefits, as set forth in the CBA with the exception of retirement benefits. 3.Health and Welfare Benefits for Union Employees: a)Concessionaire shall provide the active and post-retirement health and welfare benefits that have been negotiated as part of the CBA in effect prior to Closing for the remaining period of such CBA.

10 10 Other Employees 1.The Concessionaire shall either offer employment or interviews to non-union employees. a)For those offered immediate employment, such offers shall contain the same salary and other terms of employment, including health and welfare benefits, adjusted for an annual salary increase granted after the Bid Date, but not including any special bonus payments or increase in employment benefits. b)For those offered interviews and ultimately employed, such offer shall contain only the terms and conditions of employment that the Concessionaire deems to be appropriate in its discretion, except for Retirement Benefits (next page). 2.Health and Welfare Benefits for Non-Union Employees: a)Concessionaire shall provide post-retirement health and welfare benefits that are substantially identical to the benefits such individual was entitled to receive as an employee of the City prior to Closing. This obligation shall terminate at the expiration of the CBA in effect at Closing for the Union Employees.

11 11 Retirement Benefits 1.The Concessionaire, or the Operator on behalf of the Concessionaire, shall establish and maintain for any former System Employee who is hired by the Concessionaire a retirement plan. a)This retirement plan may be any existing pension plan of the Concessionaire or Operator that provides retirement benefits that are substantially equivalent to the retirement benefits provided to other employees of the Concessionaire or Operator. 2.The Concessionaire shall recognize all service recognized under PMRS (PA Municipal Retirement System) as of Closing, including service for purposes of eligibility, vesting, retirement, and benefit accrual. 3.LCA is in the PMRS Plan and is offering a Defined Benefit Plan with many similarities to the Allentown Plan.

12 12 System Operations 1.The Concessionaire shall a)Be responsible for all aspects of the System Operations b)Maintain and operate the System and cause the System Operations to be performed in accordance with the Agreement, applicable Law and Prudent Industry Practices 2.Costs and Expenses – The Concessionaire shall pay or cause to be paid all costs and expenses relating to the System Operations as and when they are due and payable. 3.The Concessionaire shall not engage or appoint a replacement Operator unless the City has Approved such Operator. a)The Approval of a replacement Operator may be withheld if the City reasonably determines that such Operator is not capable of performing the System Operations in accordance with the Agreement.

13 13 System Operations…continued 1.Removal of the Operator a)If the Operator fails to operate the System in compliance with the Operating Standards, and after 30 days written notice, fails to correct all deficiencies, then the City may direct that the Concessionaire replace the Operator pursuant to a resolution adopted by the City Council. 2.The City has the right to enter and inspect the System and to take certain actions including to deal with an emergency. 3.Naming Rights a)The City grants the Concessionaire a non-transferable royalty-free license to use the name “Allentown Water and Sewer System”. b)The City shall retain the right to solicit for advertisements at the System properties and retain any moneys derived from the sale of advertisements.

14 14 System Operations – Water Supply and Quality 1.The City shall supply the Concessionaire, at no cost, all the Raw Water in the quantity and rate as necessary : a)To the City and its residents, the commercial and industrial users and all other users in the City, b)To each Municipal Customer under a MSA, c)In accordance with any agreement for the bulk sale of Surplus Water. 2.Mitigation – If the Raw Water does not meet the Raw Water Specifications, the Concessionaire shall: a)Take all appropriate mitigation and treatment actions previously utilized by the City in similar situations & advise the City of the situation and the Concessionaire’s planned course of action b)Use reasonable efforts consistent with Prudent Industry Practices to comply with the Operating Standards. 3.Surplus Water – The City retains all of the water rights with respect to Surplus Water. The Concessionaire shall not be entitled to enter into any agreement for the sale of surplus water unless approved the City. 4.Reimbursement – If the Concessionaire is required to secure a replacement source of water as a result of a Water Shortage or other events, the Concessionaire is entitled to recovery of its costs.

15 15 System Operations – Service to City and City Users 1.Free Service – No Service Charges shall be imposed on the City a)Water shall be provided free of charge for: Suppression of fires Street cleaning City Hall and other public use buildings City Swimming Pools Comfort stations in City parks Municipal Golf Course b)Sewer services shall be provided free of charge for City Hall and other public use buildings 2.Office in the City – Both the Concessionaire and any Operator shall maintain an office in the City for the management and operation of the System and providing customer service.

16 16 Capital Improvements 1.The Concessionaire shall be responsible for all capital improvements with respect to the System required to be completed in accordance with the Agreement. Major Capital Improvements have a cost of at least $1 million and improvements may be aggregated when such improvements are to replace water mains or sewer lines and have construction commencing in the same calendar year. 2.Capex Plan a)At Closing, the Concessionaire shall deliver to the City a preliminary asset management plan for the System for the 1 st year. b)After Closing, the Concessionaire shall develop, in consultation with the City, an initial 5-year asset management plan for the System. c)The 5-year Capex Plan shall be delivered to the City no later than 60 days after the 1 st anniversary of Closing. d)The Concessionaire shall update the 5-year Capex Plan annually. e)Each Capex Plan shall be subject to City Approval. 3.Design and Performance Standards – The Major Capital Improvements shall be designed to comply with various design and performance standards. 4.City Review of Design – The Concessionaire shall submit to the City for review and approval the plans and specifications for the Major Capital Improvements.

17 17 Capital Improvements…continued 1.Construction schedule - Within 30 days after the approval of the Capital Cost Recovery Charge, the Concessionaire shall submit to the City a progress schedule covering all work to be performed with respect to the construction. 2.Monthly reports - The Concessionaire shall prepare monthly reports describing the progress with respect to the design and construction of each Major Capital Improvement. 3.Capital Cost Recovery Charge – The Parties shall proceed in good faith to negotiate and complete the requirements for the imposition of a Capital Cost Recovery Charge that is mutually acceptable to the City and the Concessionaire. Once agreed upon amortization periods ends for that project….the Charge will be eliminated 4.Following completion of the Major Capital Improvement, the Concessionaire and City shall confer regarding any adjustments to the Capital Cost Recovery Charge that may be necessary. 5.For Major Capital Improvements, the Concessionaire will take all steps necessary to enter into a Project Labor Stabilization Agreement

18 18 Capital Improvements - Capex Fund & Letters of Credit 1.No later than 1/1/2033, the Concessionaire shall establish the Capex Fund – established and maintained by the Concessionaire and held in trust at a bank for the benefit of the City and Concessionaire. This is funded through a portion of the 2.00% Margin starting in 2033. 2.Capex Fund Deposit Requirement: 2033 - 2042 =$1,000,000 Adjusted for Inflation (CPI Index) 2043 - 2052 =$2,000,000 Adjusted for Inflation (CPI Index) 2053 - 2062 =$3,000,000 Adjusted for Inflation (CPI Index) 3.The moneys in the Capex Fund shall be used to pay that portion of the cost of Major Capital Improvements that cannot be recovered during the Term as a Capital Cost Recovery Charge because the last day of the Cost Recovery Period of the Major Capital Improvement to be funded is later than the End Date of the Agreement. a)Surplus funds at end of Agreement revert to the City 4.Letters of Credit – the Concessionaire shall deliver to the City no later than 5 years prior to the final year of the Lease, a Letter of Credit (not to exceed $25 Million, adjusted for inflation) in the amount equal to the costs of capital improvements for the remainder of the Term as set forth in the then current Capex Plan.

19 19 Administrative Order (“AO”) Projects 1.All Project Costs related to the remediation of violations set forth in the EPA Administrative Orders are to be undertaken by the Concessionaire at the sole costs and expense of the City. a)The Project Costs are to be funded from the proceeds of sale of the AO Bonds and other City funds to be deposited into the AO Fund. 2.Administrative Order Fund – a)The City shall deposit from time to time money as needed for the punctual payment of Project Costs for AO Projects. b)The moneys shall be used to pay Project Costs that are undertaken by the Concessionaire to remediate the violations cited in the EPA Administrative Orders. c)From time to time, the Concessionaire may requisition moneys to reimburse the Concessionaire for Project Costs incurred. d)After payment for all Project Costs, any moneys remaining shall be paid to the City. 3.Management – The planning, design and construction of the AO Projects shall be undertaken in the same manner as Major Capital Improvements except that no Capital Cost Recovery Charge may be imposed for an AO Project.

20 20 Administrative Order (“AO”) Projects…continued 1.Financing – The City will be responsible for the funding of Project Costs and anticipates that AO Bonds will be issued from time to time to finance Project Costs. a)The Annual Debt Service for the AO Bonds will be allocated to sewer customers. b)The AO Bonds may not be secured by a pledge of or lien on Revenues. 2.Application of Service Charge Collection – Any moneys collected by the Concessionaire by virtue of the imposition of Service Charges to fund Net Debt Service Payments for AO Bonds are the property of the City and the Concessionaire shall promptly pay such moneys to the City.

21 21 Operating Standards 1.The Concessionaire shall cause the System Operations to comply with and implement the Operating Standards in all material aspects at its sole cost and expense. 2.If the Concessionaire, at its expense, wishes to implement operating standards other than the Operating Standards, the Concessionaire must provide such proposed operating standards to the City for Approval. 3.If the City modifies the operating standards for a Change of Law or to conform to standards of practices generally adopted, the Concessionaire must implement at its expense. a)If the City modifies for other reasons, the City must pay the Concession Compensation to the Concessionaire.

22 22 Service Charges/Rates 1.The Initial Schedule of Rates shall be in effect on the Closing Date. 2.Prior to 2016, the Concessionaire shall not revise the Schedule of Service Charges from the Initial Schedule of Rates without the prior approval by the City. 3.Annual Rate Adjustment – For 2016 and each year thereafter, the Concessionaire shall establish the Schedule of Service Charges for each class or type of Utility Service. a)The Annual Rate Adjustment for each such year may not result in an increase in Service Charges in excess of the Permitted Annual Rate Adjustment for that year. b)Schedule of Permitted Annual Rate Adjustment: 2016 – 2032 = up to Index + 2.50% 2033 and each year thereafter =up to Index + 2.00% Index = Consumer Price Index for all Urban Consumers-Northeast

23 23 Concession Rate Regime Assumptions 1.25-year historical average of Allentown Utility rates= approx. 5.50% 2.2.00% is the Federal Reserve’s target inflation rate 3.20-year historical CPI = approx. 2.50% 4.Assuming the Fed’s target inflation assumption, the new rate regime would be: Years 1-3 = 0% Years 4-20 =4.50%(CPI +2.50%) Years 21-50 =4.00%* (CPI +2.00%) Approx. Average =3.93% 5.City’s historical rate increases = 5.50% 6.Concession Agreement average = (3.93%) 7.Difference = 1.57% *Includes required deposits to the Capex Fund starting in 2033. That is the approx. PV equivalent of $375 million of available money for capital improvements, changed law, demand shortfall recoveries, etc.

24 24 Service Charges…continued 1.Major Capital Improvements - In addition to the Service Charges, the Concessionaire may also impose a Capital Cost Recovery Charge (“CCR Charge”) to recover the capital costs of Major Capital Improvements. a)If the Concessionaire seeks to impose a CCR Charge, it shall submit a report to the City for its review and Approval. 2.Demand Shortfall Recovery – The Concessionaire may also impose upon all Retail Water Customers a Service Charge in any Demand Shortfall Recovery Year to recover the Annual Shortfall Recovery Amount. 3.Net Debt Service Payment (for debt on City’s AO Bonds)– A Service Charge, for the benefit of the City, shall be imposed in any year to fund the Net Debt Service Payment for that year. 4.Major Force Majeure Event – The Concessionaire may impose a Service Charge to fund the Major Force Majeure Unfunded Loss (Force Majeure Event that causes a net Loss to the Concessionaire, after taking into account insurance proceeds, of not less than $500,000).

25 25 Service Charges…continued 1.DRBC Charge- The Concessionaire may impose a Service Charge to pay for any fees imposed on them by the Delaware River Basin Commission. 2.Change of Law – The Schedule of Service Charges shall be subject to prospective annual adjustment, upward or downward, on account of any Change of Law in order to reflect any changed cost related to the System and incurred by the Concessionaire, as may be reasonably agreed to by the City and the Concessionaire. 3.Leasehold Tax Adjustment – In addition to the Service Charges, if a Leasehold Tax is to be paid by the Concessionaire, the Concessionaire may also impose a Service Charge to pay the Leasehold Tax. 4.City Approval – In addition to the Service Charges otherwise imposed, the City may approve an increase in Service Charges to fund amounts due the Concessionaire pursuant to the Agreement. 5.Rebate of Service Charges - As of the Bid Date, the City has established a program of Service Charge rebates for all bona fide residents of the City who are 65 years of age or older or who are permanently disabled individuals. The Concessionaire shall continue this program during the Term of the Agreement.

26 26 Service Charges…continued 1.Collection and Enforcement of Service Charges- The City agrees to assist and cooperate with the Concessionaire in the collection and enforcement of Service Charges. Any costs incurred by the City shall be at the sole cost and expense of the Concessionaire. 2.PUC Regulation a)In the event that the Service Charges become subject to PUC jurisdiction and cause a reduction in the Revenues, the Concessionaire shall file a report detailing the reduction in Revenues and the City shall pay to the Concessionaire that amount. b)The Concessionaire and the City agree to cooperate in any rate hearing before the PUC in order to defend the Schedule of Service Charges imposed pursuant to the Agreement. c)In no event may the Concessionaire or the Operator petition for or otherwise seek PUC approval of any schedule of rates and charges other than the Schedule of Service Charges imposed pursuant to this Agreement.

27 27 Reporting 1.The Concessionaire shall provide notice to the City within 24 hours of all emergencies. 2.The Concessionaire shall immediately notify the City of any violation of Environmental Law, malfunction of the System or failure to operate the System which has the potential to present a danger to public health and safety. 3.The Concessionaire and the Operator shall deliver to the City within 45 days after the end of each year a certification that the System is and had operated for the year in compliance with Environmental Laws. 4.The Concessionaire shall provide its audited financial statements to the City each year. 5.To monitor reporting and other functions, the City will set up the Office of Ombudsman

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