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Wednesday, May 27, 2009

Is the Milwaukee Water Works a Cash Cow?

Questions arise over privatization discussions

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City Comptroller Wally Morics, with the support of the Milwaukee Common Council, is considering whether a long-term lease of the Milwaukee Water Works is one of the answers to the city’s budget nightmare.

Morics has argued that the money raised by a long-term lease, if invested in an endowment fund, would generate an estimated $30 million annually, which could be used to partially close a looming $90-$100 million yearly budget shortfall caused in large part by a cut in state shared revenues.

Morics is currently sifting through 16 bids from consultants to become the city’s “sell side adviser team,” which would investigate the value of the municipally owned water utility and research the legal and political implications of extending a 75-year or 99-year lease to a huge water corporation.

Morics and his staff will interview a few finalists, then present their recommendations to the Milwaukee Common Council, which will weigh in on Morics’ choice.

If the council approves a team, it would then begin moving ahead on researching a sale and developing a lease with a private company, which could bring in as much as $500 million. The process could take up to 18 months of study and discussion.

The city’s budget is in bad shape. Milwaukee’s state aid once covered about 55% of its expenses; that has declined to about 40%. The city relies on the property tax and assorted fees to raise revenues. Leasing the Water Works would be one more revenue stream for the city.

“We’ve got to find four or five tools like this because the state is not going to bail us out,” said Michael Daun, the city’s deputy comptroller.

Is Privatization the Only Answer?

But is privatizing the Water Works the best answer for the city’s budget woes? Have other options been considered? “Given the fact that we have these budget issues, it concerns me that the city would pay out money to hire an adviser to grease the wheels for privatization without having any public input,” said Cheryl Nenn, Milwaukee riverkeeper at Friends of Milwaukee’s Rivers.

Conventional wisdom is that state law requires the utility to retain its revenues for the maintenance of the Water Works, and not flow them into Milwaukee’s general funds to pay for pothole repair and public safety.

This perception is wrong. State law does allow a utility to take “excess funds” from the utility and place them into the general fund “to be used for general city purposes or in a special fund to be used for special municipal purposes.”

Yet the Public Service Commission frowns on this practice and it regulates the water rates.

In an e-mail, PSC spokeswoman Teresa Weidemann-Smith wrote: “While this is allowed by statute, Public Service Commission staff does not consider this to be a sound practice. Transfers to the municipality would be charged against the utility’s retained earnings as appropriations to municipal funds. While even a single transfer could diminish a previously favorable utility capital structure, such an ongoing practice would quite likely have the effect of increasing the overall cost of capital. This would increase the revenue requirement and result in higher rates for the utility customers.”

In plain English, it means that the PSC doesn’t want to let a municipality use its surplus from the Water Works to subsidize other city functions.

Yet Milwaukee hasn’t raised its water rates to the maximum allowed by the PSC. The PSC had granted the utility the right to raise its rates by 15%, but the Common Council chose to raise the rate by 6% instead in 2007.

Daun said that Common Council members, who must sign off on any rate increase, were reluctant to raise the rate to the limit. “The aldermen are very cautious about doing that,” Daun said. “They know they can declare a dividend, but there is political pressure not to raise rates.”

If the Water Works is privatized, it’s likely that rates will increase dramatically, subject to approval by the state Public Service Commission. The Common Council would likely not have to sign off on the increase unless that provision was built into the lease agreement.

Jack Norman of the Institute for Wisconsin’s Future cautioned that a private company may not raise rates on all water users in the city and the 15 communities that purchase water from Milwaukee. The corporation could decide to raise rates for residential customers, but not businesses, as a way to attract more high-volume users to the area. “Whose rates will go up?” Norman asked rhetorically.

Details Still Up in the Air

Daun, deputy comptroller for the city, said that the decision to privatize the water utility isn’t a done deal. Daun said that the council or the mayor would be able to pull the plug on the plan, and the public would be fully informed of the progress of the deal and be able to ask questions and voice their concerns.

Daun said that authority over decisions concerning water quality, rates, employee contracts and authority over water sales to non-Great Lakes Basin communities would likely be part of the final deal.

He said that there are a “spectrum of choices” to be made about the control the city would still have over these matters. The more limits the city places on what the corporation could do, the less valuable the Water Works is to the corporation. “It’s a balancing act,” Daun said.

Comment on this article at ExpressMilwaukee.com.

To view this week’s column by Joe Conason, visit Expressmilwaukee.com.

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