Valuation tips for voters on the Water Works deal
April 6th, 2010 | 
Author: Now that the Petitioners have won their court case, the voters may need to decide on whether to do the Water Deal. This is a complicated decision and presumably will be on the ballot this December. In the meantime, the city will have to pass along at least an $.80 / $100 tax hike. That’s assuming there’s not another tax hike on top of that to make up for money the State is taking away.
With the tax hike as currently proposed our tax rate will go from $4.69 / $100 with an effective rate of $2.784 / $100 to a rate of $5.49 / $100 and an effective rate of $3.26 / $100. On a $100,000 home tax would go from $2784 to $3260 or up $476.
We will move into 4th place in NJ for highest taxes and 1st place for towns over 25k residents.
That’s all very nice, but we as citizens still have some high finance to sort through.
1) First, a new administration could decide to abandon the sale all together. We may not have
2) If the issue does go to a referendum (and I think it should despite the new administration)
- The ONLY question you should have as Trentonians is: is it a fair price?
- Despite all the risks and loss of future revenue, there is a price at which we should sell.
- The question is, “Is $80M that price?”
- Astute financial analysts should presumably be deployed on both sides of the debate to convince the public as to the correct valuation
- Since the general public, doesn’t typically understand what a valuation is, both sides will resort to non-financial arguments, that will no doubt distort the issue (as they already have)
3) In reality, you would be voting one way or another because you either trust the people who negotiated the deal to have negotiated in good faith, or you don’t trust them
In the long history of this debate, I’ve not found a single person who would turn down the deal if it were priced at $1B. OK. What about $500M? $100M?
See how it’s really about valuation.
There are plenty of risks:
- Will the company actually buy water from us in 20 years?
- Will our neighbors be mad at us?
- Might our neighbors agree to pay us more money for water in the future, and we would have lost out on our opportunity to squeeze them?
- All future cash flows carry some risk and therefore need to be discounted and turned into a present value
All of these risks can be factored in to a proper valuation and hopefully they were. An intelligent question for the administration would have been, and may still be, could you show us your math for valuing these risks.
As for whether this is a stop-gap or not, that’s a different issue.
The current plan was to use 80% of the proceeds to pay down long term debt. When selling off a long term asset, it’s generally wise to pay off corresponding long term debt. We could argue about whether 80% or 100% should be applied to debt, but the effect will generally be to reduce Trenton’s future interest expense. This should offset the loss of net income from the water wholesale business.
I understand how this issue got to be emotional, but really it should have just been a business deal. That said, it’s a BIG business deal and the owners should have had a vote.
Posted in 
Tags:
Prior to sorting out the relative pros and cons on the water issue the upcoming May election is now the most pressing issue. A responsible new administration may abandon the idea of selling the infrastructure altogether. At the very least they should have multiple public forums at various locations throughout the city to discuss the realities of the cities budget problems and to seek input from the residents who will be most affected. Therefore the 1st order of business should be a call for all candidates that supported the Mayor in this fiasco to withdrawal from the race. The essence of representative government is for elected office holders to be responsive and accountable to their constituents. Any sitting councilperson (Mr. Segura, Mr. Pintella, Ms. Lartique), seeking election and Mr. Jackson, Mayor Palmer’s hand picked director who openly supported the Mayor’s position calling for the Water Works sale without permitting the voters to express their will, should step aside now. If a candidate is opposed to letting a democracy work for the benefit of the people whom they wish to serve, then they are unqualified to represent those same people. This would at least narrow the field for the remaining candidates to debate the issues and for the people to hear them. The city needs to clear the decks and elect a new leader with bold innovative ideas. We need a leader that respects the city residents, one that will be responsive to them and partner with them to lead us into a brighter future.
Its not complicated at all. Selling the network will cost Trenton residents $8-9 million every year FOREVER. In return we would receive the $7 million last year, $8.9 million this year, and very likely nothing more since the state will soak up any remaining proceeds starting next year before any state aid. Even the “debt payments” that you talk about would leave the city along with the system being sold. We would never really touch that money. Trenton’s debt will stay soley on the backs of Trenton’s residents.
This isn’t a business deal. A real business deal would have some real value to it.
I’m surprised that there has been no reply. I actually started work the very next morning detailing how the “$80 million” deal was really a “$37 million” deal that turns out to less than a “$30 million” deal when payments for water employees (we have to pay 4 engineers every year for 20 years) and separation costs (we are responsible for everything on our side) are included. This wouldn’t include risks, enormous debt, etc. Overall, I estimate the true value of the deal to be about $20 million, IFF we don’t lose any state aid from having a large pile of cash around. Balance $20 mil against $8-$9 mil+ every year FOREVER, and you get a deal that no-one would ever make.
The deal is a bad deal from every perspective. Yet the lack of guarantee that we could use any of the proceeds for surplus instead of getting locked up with our state aid makes the deal and absolute looser. Case closed. A two year old can decide that one. A one year old may give up his blankie for a bag of candy, but somewhere after their second birthday they may very well insist on having that bag of candy in hand first. Smart, no?
Now I suspect that our mayor is right now selling his soul to the governor’s office to try to drag some deadbeat out who will claim to guarantee that Trenton’s selling of a major asset will have no bearing on state aid. Mind you that nothing short of a legal contract (state law?) would guarantee anything, and even then it is an incredibly bad deal.
So let’s debate the deal on its imaginary merits. At $20 (or even $30 mil, whatever you prefer) million, knowing that the deal will cost us $8-9 mil+ per year… do you make the deal? The answer is NO.
Mike, you are absolutlely correct. There are many issues that the administration, Council and their professionals fail to speak about. My reading of the contract suggests that the entire deal for the payment of water consumption beyond the first 36 months is tenuos at best. It seems to change the language as to how TWW would be compensated and permits the proposed buyer to terminate any usage payments if they chose to supply its outlining areas through Elizabethtown Water (which it also owns). If that was to happen Trenton would get no future revenue beyond that point. I cannot understand the urgeny the Palmer administration and Council place on this sale and the referendum. Something stinks. That is why I support Keith Hamilton for Mayor. I feel confident that there will be no such sale if Keith is elected. We must keep up the good fight at least until July 1. Congratulations to you, Algeron and all the others that have led this battle for the rest of Trenton.
[...] 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 the Water Works [...]