Invest the Trenton Water Works proceeds in the future not the past

That the suburban portion of the Trenton Water Works will be sold seems to be a foregone conclusion. This is a good thing.

Running a water company for Ewing, Hopewell and other towns isn’t core to the business of running Trenton. It’s safe to say that we have more pressing concerns than whether or not our neighbors to the north have good water pressure. Continuing to run TWW would stretch our already thin and getting thinner, management resources.

Those that argue against the sale need to consider the big picture.

After all, it’s not as if owning the water works is somehow a birthright to all Trentonians. In peril of not having studied the history of TWW, I’ll guess that sometime long ago, Trenton was the stable big brother to Ewing, Lawrence and the others. With an attitude of taking care of our young neighbors and empire building, it probably seemed a good idea to run their water systems.

However, running Ewing’s water system isn’t core to Trenton’s management and never was.

Some opponents have complained that by selling TWW, Trenton will miss out on a revenue stream that it needs. While we will forego a portion of the revenue (we maintain a wholesale capability) we also forego future expenses and capital improvement costs.

Hopefully the administration or its professional advisors have done an analysis that compared the NPV (Net Present Value) of selling TWW vs. keeping it.  The NPV of selling it is $80M (i.e. the sales price)

The NPV for keeping it includes an analysis of future cash flows as follows:

  • Revenues for the suburban water, expenses associated with the revenue and estimated capital upgrades and repair costs.
  • All of these would be added together over time and discounted to present value.
  • That present value is hopefully less than $80M.
  • Extra credit if the admin did some scenario analysis (particularly a Monte Carlo analysis) to test an expected value for the NPV given a variety of scenarios (i.e. what if a major repair is needed).

My hope is that Council was briefed by the professional help on this analysis and all seven were comfortable with it.

Did we get a good deal?  We got as good a deal as those in power could negotiate.   It was in their interest to maximize the sales price. The $80M sales price factors in future revenue and costs. By selling the asset we’re getting the financial benefit up front so we can re-invest it in a way more closely aligned with the city’s strategic objectives (like lowering our debt burden).

At a broad brush, the city of Trenton should not be in the water business outside its borders. We’re stretched thin at managing things in general and there is a real risk that things could go wrong (pipe breaks, contamination, corruption). Reasonable people support the sale, including me.

My concern is over what we do with the funds.

We have a few options of what to do with the $80M in sales proceeds from TWW.

  • We could pay down $35.7M of water utility debt and spend the rest plugging budget gaps for the next two years. This is the administration’s current proposal.
  • We could use all $80M to pay down debt principal.
  • We could pay down $60M in debt principal and use $20M to plug the hole in the 2009 budget.

In principal, we should use the proceeds of the sale to pay down long term debt. The value in TWW has been built up over many years by many Trentonians. We should want their efforts to be repaid to generations to come, not to just those of us living in Trenton today.

Furthermore, reducing the city’s overall debt level increases our flexibility to fund future capital projects.

The argument against using the proceeds to fill budget gaps is similar in logic to how businesses and homes manage their budgets. We don’t sell our car or home to pay for groceries. Rather, we invest the proceeds in other long term assets (new home, college education). By paying down an additional $44M in principal we reduce debt expenses in future budgets by $2M – $3M per year.

By using the proceeds to plug holes in the 2009 and 2010 budgets, we are using a precious long term asset to cover up our spending problems for just two years. The 2011 budget and beyond will have even bigger shortfalls ranging up to $30M.

To avoid any perceived impropriety, the Palmer administration should not use the TWW sale to fix current budget issues at the expense of future budgets and future administrations.

Instead the administration should propose the following:

  • Pay down $60M in long term debt
  • Use $20M to plug the 2009 problems (its too late to fix this year any other way)
  • Get busy fixing our structural issues in advance of 2010

The long term fixes to our budget’s structural problems will come in six areas

  • Reduction of long term debt ($60M from TWW sale)
  • Non-resident wage tax
  • Property re-assessment & rate increase
  • Implementation of a land tax (or fines on vacant property)
  • Accelerated sale of city owned property (at nominal prices)
  • Realignment of the budget towards revitalization

Fixing our structural budget issues is hard work. Using proceeds from the TWW sale to fix the budget is an easy shortcut. The question is whether the Palmer administration, along with city council, will undertake the hard job of restructuring our budget or simply leave it to the next mayor.

Mayor Palmer will leave a positive legacy in Trenton if he can work through these thorny issues by the time he leaves office. I, for one, am ready to help.

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2 Responses to “Invest the Trenton Water Works proceeds in the future not the past”

  • Like you, I am concerned about the amount of money the city needs just to service the debt. I have, however, lost faith in the administration. We shall see.

  • [...] times were less turbid, I made one central argument for selling the suburban water works. (see Invest the Trenton Water Works proceeds in the future not the past ,   Valuation tips for voters on the Water Works deal  and  Hope for Trenton – Compromise on [...]

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