Friday, April 10, 2009

CIB Woes Pale In Comparison To Looming Gusher At The Water Company

While all of the focus right now is on the CIB's $48 million annual deficit, there is a much larger financial problem looming for the City of Indianapolis at the Indianapolis Water Company ("IWC"), the white elephant Bart Peterson and Beurt SerVaas snookered the Indianapolis City-County Council into buying for at least double what it was worth. The water company is now drowning in more than $800 million in debt, more than $300 million above the company's original purchase price, and that figure is only expected to grow in coming years. IWC is currently seeking an emergency rate increase that will up water bills in Indianapolis by close to 20%, in addition to a general rate increase already scheduled to take effect. Interest costs on the water company's debt has skyrocketed over the past year because city financial gurus foolishly issued variable rate bonds instead of long-term fixed rate bonds. Even with the huge rate increases, city officials are now conceding that the water company will be more than $10 million short in operating funds. Ed Feigenbaum of the Indiana Legislative Insight writes about something most of the local news media ignored this past week:

City officials warn, "The situation is such that even with the requested emergency relief, the Department anticipates that by July 2009, it will experience a shortfall in its operating cash of approximately $10.6 Million, which does not factor in the potential $14.2 Million payment to [the Department's standby bond purchaser] DEPFA" Bank. All of this could lead to a further rating downgrades. "A ratings downgrade will result in higher interest rates on the Department's financings and more debt service expense ... which will cause upward pressure on the Department's water rates. The inability of the Department to meet its daily expenses, the curtailment of service, the potential reduction in essential revenue-funded capital projects, and the potential ratings downgrade demonstrate that the Department will experience serious financial deterioration without emergency rate relief." The rate request also includes 'just $12.3 Million for only those revenue-funded capital projects most needed to prevent the Department's service from deteriorating. This is a $22.2 Million reduction from the 2009 revenue-funded capital project figure approved [by the IURC]."

As has become quite obvious, NiSource plundered the water company's assets before selling the utility to the City of Indianapolis for more than $500 million. Some of its better assets, such as SM&P and Miller Pipeline, were sold off after the company purchased the water company in the last 1990s. A few years later, NiSource's acquisition of Columbia compelled regulators to order it to sell the Indianapolis Water Company. SerVaas and Peterson urged the purchase of the water company to prevent it from falling into foreign ownership and the attending large water rate increases the two projected if that occurred. The City purchased the water company for more than $200 million more than NiSource paid for it just a few years earlier before it shed some of its better assets. The City acquired a data processing company as part of the deal which handled billing for the IWC and a few other utilities. The software used by the company proved defective and the City later sued NiSource, alleging fraud and demanding payment of $2 million from NiSource. Based on the hundreds of millions in additional debt the water company has incurred post purchase for capital improvements, it appears that NiSource saddled the City of Indianapolis with huge costs which the City should have anticipated but didn't disclose to City-County Councilors at the time of the purchase.

Peterson's and SerVaas' decision to push the imprudent purchase of the water company on NiSource's terms has been perplexing to observers. The City, under state law, had the right of first refusal to acquire the company and had already initiated an eminent domain action to acquire the water company. Most experts would agree that the value of the water company established in a eminent domain action would have been considerably less than the more than a half billion dollars paid by the City under the deal SerVaas and Peterson negotiated with NiSource. After the two struck the deal, information came to light suggesting the two had conflicts of interest. A company owned by Peterson's family, which he ran before becoming Indianapolis mayor, owned a water utility in Hancock County where it was developing property. The water company had taken an ownership interest in the Peterson-owned water utility in consideration for IWC spending millions running water lines to the property. The former CCC President SerVaas founded a water pipeline company that held an exclusive right to build a pipeline from Lake Monroe to Indianapolis to help IWC meet its future water needs. SerVaas insisted he would not personally profit from the deal as his pipeline company would operate as a nonprofit.

After the City-County Council approved the purchase, an employee of SerVaas' and a former City-County Councilor, Carlton Curry, received a six-figure consulting agreement with the water company. Notwithstanding concerns stated before the purchase that the deal was needed to prevent the water utility from falling into the ownership of a foreign company, the Peterson administration awarded a huge multi-million dollar management contract to a French-owned company, Veolia, which was represented by powerful Democratic lobbyists close to Peterson. The privatization deal ensured management payments to Veolia of approximately $40 million a year. Although part of Curry's job was to hold down additional incentive payments to Veolia that weren't warranted, his efforts were thwarted at every turn by the Peterson administration according to a source. The source says Curry would deny an incentive payment, Veolia would run to the Peterson administration and it would overrule Curry, effectively removing any benefit in paying him a consulting fee to look out for the City's interests. Former City Controller James Steele currently performs essentially the same role Curry performed.

According to a financial report prepared on April 16, 2002 by Umbaugh & Associates, the City anticipated financing $580 million in bonds to cover the purchase of the assets, the assumption of $40 million in tax-exempt bonds issued by IWC and funds needed to capitalize its initial operation. An amortization schedule for the bond debt indicated that long-term, fixed rate bonds of approximately 5% would be issued. Annual debt service on the bonds would cost approximately $20 million during the first year, growing to more than $40 million over a 20-year period. The analysis indicated that the debt would not be paid off until 2035, costing taxpayers $1.3 billion when interest is included. Umbaugh's report projected the water company would have approximately $110 million in annual revenues, leaving IWC with a profit ranging from $10-$15 million annually after paying debt service, providing estimated debt service coverage of 130%-150%. A provision of the original purchase agreement which Peterson hailed barred IWC from seeking a rate increase for 5 years, deferring rate increases until after his 2007 re-election race. The inability of the IWC to incrementally increase rates during that period proved disastrous. According to Steele's testimony before the IURC, IWC paid $57.2 million in interest debt alone last year.

At the time of the transaction, close to $15 million got paid out in consulting fees by taxpayers. All of the usual suspects (big law firms which contributed big to Peterson) were at the table participating in the transaction. The Peterson administration defended the costs as relatively small given the size of the transaction. Peterson's point man on the deal, former City Controller Bob Clifford, now works for Umbaugh, one of the consultants who helped with the deal. The bond consultants upon whom the City relied no doubt urged it to issue variable rate bonds as a way of earning more fees, while touting initially lower interest rates. With the meltdown in the financial market, annual interest rate costs soared more than $20 million a year, wiping out any projected earnings for the IWC. The taxpayers should never forget what SerVaas, Peterson and his administration did to your city with this colossal ripoff of unrivaled proportions. You will pay dearly in the coming years in higher water rates because they chose to put their own interests ahead of your's. The CIB mess is nothing when compared to the gusher coming from the IWC. And by the way, if the Ballard administration does its job it will terminate Veolia's contract and stop foolishly paying the company its exhorbitant management fee. Until it ends this payoff to Bart's cronies, it will never resolve its escalating financial problems short of breaking the backs of Indianapolis ratepayers.


Paul K. Ogden said...

Veolia is also a client of Barnes & Thornburg which runs city government. I'm pretty sure they aren't going to let Ballard cancel Veolia's contract.

I'm very thankful I'm on a well.

Gary R. Welsh said...

Paul, it was my understanding that B&T represented United Water, which has the contract to manage the wastewater system. United Water competed against Veolia to win the management contract for the water company, but Peterson didn't want United Water because of its ties to the Goldsmith administration. I know that Karen Horseman, who formerly worked for B&T at the time of the IWC purchase, had to abstain from voting on it as a city council member because B&T represented United Water.

Unigov said...

Advance - brilliant work.

Craigslist has taken over the Star's classified ad business. You're eating into their news business !

jabberdoodle said...

Wow - that's a vast conspiracy.

The current issue revolves around the water company's variable rate bonds not being refinanced. The City tried last year, but could not get it done in that economy.

Yes, the City had a bunch of variable rate bonds for all sorts of things - much like other governmental units throughout the Country. In hindsight it wasn't conservative enough to weather the economic changes that evolved from the energy cost increases of a couple of years ago and then the collapse of the credit markets just this past year.

The City began converting out of all the variable rate bonds a couple of years ago, in response to the changed market and increased volatility of those bonds. The water company, to my understanding, was the last of those. The timing was such that the credit market was tightening up and the feat could not be accomplished then (last year). I am not sure if they have managed to get the deal done in the last month or not.

We also recently saw that both the Circle Center folks and the CIB had/have to stash away some hard cash (around $25 million each) as a sort of collateral for future bond payments, due to the downgraded rating of their bond insurance company. (that's my way of understanding the issue. Someone technically adept in the field would likely use different jargon than 'collateral')

It is worth examining the root causes of calamities so that they are not repeated in the future. But, come on. This one hinges on bad bond investments, not all the 'evils' of the Peterson administration at once.

Gary R. Welsh said...

As near as I can tell, variable rate bonds are the equivalent of what adjustable rate mortgages are to the mortgage industry. When the first stories were written locally, a former bond advisor to the state told the IBJ that she would never recommended their use because of the risk potential associated with their use. It is a fact that they were being pushed because they could offer the borrowers lower initial interest rates and at the same time earn higher fees than with typical long-term bonds. When the water company purchase was being sold to the council, the documents they were shown indicated the bonds would be financed by long-term fixed rate bonds. This clearly didn't happen. Why?

jabberdoodle said...

That is a good question that deserves an answer.

It would be a good thing if there was some committee of financial experts set up to review all of our past and present investment strategies. The purpose would be to come up with new rules to keep our finances from consuming our budgets - either through too much bonding or too risky bonding.

I'm not sure there is the political will to do so, though. One thing Democrats and Republicans in office can often agree on is - you don't look too closely at my shortcomings and I won't look too closely at yours when I get the chance.

Gary R. Welsh said...

Those of us who supported Ballard's election thought that is exactly what he planned to do. That was before we learned that Bob Grand had really become mayor and Ballard became just a puppet whose strings were being pulled by Grand.

Citizen Kane said...

Jabberdoddle, please don't try to marginalize information contained in this blog by throwing around the word "conspiracy." The facts are that government is full of self-dealing profiteers who look out for themselves and their friends under the guise of civic service. When you want to know why events occurred as they did, the old adage of "follow the money" answers all of the questions all of the time.

Anyone with any sense knows that you don't put more than half of your debt in variable rate bonds. Even during the last Board of Waterworks meeting on March 19, 2009, Jim Steele admitted (maybe that is why he did not get hired as the director) that it was not sound practice to have 60% of their debt in variable rate bonds. But, of course, the too-smart-by-half crowd had convinced the previous board that it was sound to follow that path. And Advance Indiana is correct. it is just like adjustable rate mortgages in the sense that it permits people and organizations to make unsound decisions that are later regretted. Yet no one who made those decisions or gave that advice is being called to the carpet.
Some credit has to be given to Benjamin Hunter for at least making the water company appear before the Board of Public Works on April 2, 2009 and Janice McHenry for asking a couple of cogent questions. But those responsible for this mess have not been exposed.

Jabberdoddle, you should be giving kudos for Advance Indiana for at least trying to shed some light on this issue and exposing those responsible for this rape of water company ratepayers.

guy77money said...

Beurt SerVaas had other plans for the land that the Water Company's main offices sit on. He wanted to move the main office to another location and have the city donate the land to IUPUI. Then he would have donated his land that sits right next door to the water company. There were actual blue prints showing the new building that would have had his name attached to it that would have been built on the site. Not to mention he would have received a very nice tax right off on the buildings and the land he owned. He truly didn't give a rats ass about the taxpayers of Indianapolis, all he truly cared about was his legacy (they named the main council chamber after him) and his pocket book. Luckily the cost of relocating the main office was too prohibitive.

Paul K. Ogden said...


Veolia is one of the companies that received a diversity award from the Mayor. I remember looking into it at the time and finding out that Veolia was a client of B&T. I can't remember where I got the info from however.

Gary R. Welsh said...

Krieg DeVault is registered to lobby for Veolia, Paul.

I know said...

The price to flush goes up. The price of food goes up. The price of drinking water goes up. The price of alcohol goes up.

No property tax caps and the price of tickets to a valued ball game go up.

When does everyone get tired of BIG BROTHER choking you to death?

You have just been taxed out of the needs in life!

The evidence is out there to unravel the deceit and corruption and the few that try get destroyed. Maybe you might listen to those that know.