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.