My thesis was that the suburban pipes were not strategic for the operation of Trenton as a city and that it would, instead, divert management attention from out critical issues.

Sure enough!

I didn’t debate my friends in the “No” camp that the price wasn’t high enough.  I had no idea what the right price should be.  In the end, there was evidence that the $80M price was too low by virtue of the expensive marketing campaign,  American Water waged to win the deal.   I voted “No” but think $100M would have moved me into the ‘Yes” column.

Nor did I debate my “Yes” friends who wanted to patch the 2010 budget with the proceeds.  By the time the vote happened, the Governor had pulled the plug on Trenton’s budget and it should have been clear to everybody that the TWW patch was like putting a finger in the dam of financial destruction.

Both sides were wrong and neither considered the central question:  “Is it strategic for a city to operate water works for its suburban neighbors.” 

I can’t see how it is.

Now with a Mayor beset by personal financial issues, dramatic municipal financial issues, a looming crime wave, low worker morale and an “almost” flood; here he is, having to take flack from the mayor of Hamilton.  That call to Hamilton warning about unsafe water is one more thing on Tony Mack’s “to do” list that he shouldn’t have had to do and certainly didn’t want to do.  It was a distraction and so much so, he did it poorly, causing himself and the city even more embarrassment.

In tough times it’s important to simplify your operation and focus on the core. Trenton needs to shed every single operation that doesn’t directly lead to its own revitalization.  There is no way running pipes in Hamilton will ever revitalize Trenton. 

Even the most ardent “No” supporters will have to agree that there IS a price at which we can profitably sell the water works.   There are professionals in the business of properly valuing assets like TWW’s suburban pipes and we should hire one.  Given risk and the time value of money, there simply has to be a price at which our future revenues are worth the same as a current price.  Perhaps $80M was too low, but there is a price.

The suburban Water Works is only the most glaring example of a non-strategic distraction for our very scarce management resources.  Other operations that should be up for discussion are our Health and Human services department, the libraries and our schools. 

The question is what parts of our city budget give us strategic advantage in attracting new residents with disposable income.  Pipes in Hamilton most certainly do not.

And before people try to correct me by pointing out that we would have still supplied the water to Hamilton this week, I know that.  However it would have been a very different customer dynamic with American Water serving as a buffer between Trenton and its irate neighbors.  Perhaps the water company would have been a bit quicker to turn on the reserve taps.

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.