Public-Private Partnership (P3) Case Studies is an ongoing series featuring noteworthy P3 delivery of infrastructure projects. These case studies will focus on how P3 projects are structured, procured, and implemented. By discussing the challenges and successes of each project, this series will build a foundation of considerations for future infrastructure projects.
Allentown, Pa. faced a rising unfunded pension liability and a reluctance to levy tax rates after serial budget cuts and wage freezes. By 2015, pensions costs were projected to capture about one third of the total budget. The city faced potential bankruptcy.
The City turned to innovative financing in order to address the expected budget shortfall. After spending months addressing the legal hurdle of tapping utility revenue for pension use, Allentown went to market to lease its water and sewer assets in mid-2012. Allentown pursued a transparent and competitive procurement process; investor communications and key documents were shared with the public through townhall meetings and website access. A professional PR firm was also engaged.
The initial seven bidders were whittled down to the three most qualified, then eventually the two best and final offers. Lehigh County Authority, an independent public agency, won the bid with a concession to provide a $220M upfront payment and an annual payment of $500,000 indexed to inflation. Lehigh County Authority's final winning bid was 7 percent higher than its previous offer.
The City will use upfront funds to eliminate the entire unfunded pension liability and existing water and sewer debt. The City will also deploy approximately $30m of the proceeds for other city services.
Below is a snapshot of the process:
50-year asset lease
- American Water—$192.5m upfront and $750,000 annual payment to city
- Lehigh County Authority (LCA)—$205m upfront and $500,000 annual payment to city
- United Water—$150m upfront and $500,000 annual payment to city
LCA increased final offer by 7 percent to $220m upfront and $500,000 annual payment
- 50-year agreement
- City keeps ownership and oversight of system
- Performance standards
- LCA, customers, and City will share capital costs
- LCA adopts union contracts
- City reduces debt and pension without levy
- City’s annual net utility revenue declines from $10M to $0.5M
- City shifts risk and costs to private party
- Consumer rate increases: Consumer Price Index + 2-2.5%
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