Towns, Private Profits From Public Works
N.J. — Nicole Adamczyk’s drinking water used to
slosh through a snarl of pipes dating from the Coolidge administration
— a rusty, rickety symbol of the nation’s failing infrastructure.
So, in 2012, this blue-collar
port city cut a deal with a Wall Street investment firm to manage its
Four years later, many of
those crusty brown pipes have been replaced by shiny cobalt-blue ones,
reflecting a broader infrastructure overhaul in Bayonne. But Ms.
Adamczyk’s water and sewer bill has jumped so much that she is
thinking about moving out of town.
“My reaction was, ‘Oh, so
I guess I’m screwed now?’” said Ms. Adamczyk, an accountant and
mother of two who received a quarterly bill for almost $500 this year.
She’s not alone: Another resident’s bill jumped 5 percent, despite
the household’s having used 11 percent less water.
Even as Wall Street deals like
the one with Bayonne help financially desperate municipalities to make
much-needed repairs, they can come with a hefty price tag — not just
to pay for new pipes, but also to help the investors earn a nice return,
a New York Times analysis has found. Often, these contracts guarantee a
specific amount of revenue, The Times found, which can send water bills
Water rates in Bayonne have
risen nearly 28 percent since Kohlberg Kravis Roberts — one of Wall
Street’s most storied private equity firms
— teamed up with another company to manage the city’s water system,
the Times analysis shows. City officials also promised residents a
four-year rate freeze that never materialized.
In one measure of residents’
distress, people are falling so far behind on their bills that the city
is placing more liens against their homes, which can eventually lead to foreclosures.
In the typical private equity
water deal, higher rates help the firms earn returns of anywhere from 8
to 18 percent, more than what a regular for-profit water company may
expect. And to accelerate their returns, two of the firms have applied a
common strategy from the private equity playbook: quickly flipping their
investment to another firm. This includes K.K.R., which is said to be
shopping its 90 percent stake in the Bayonne venture, a partnership with
the water company Suez.
Rich Henning, a Suez
spokesman, said that “Bayonne had chronically underinvested in their
water and sewer infrastructure, which has certainly contributed to rate
increases during the past few years.” He added, “We understand that
these increases create stresses for ratepayers.”
President-elect Donald J.
Trump has made the privatization of public works a centerpiece of his
strategy to rebuild America’s airports, bridges, tunnels and roads.
Members of his inner circle have sketched out a vision, including
billions of dollars of tax credits for private investors willing to
tackle big infrastructure projects. And Mr. Trump himself promised in
his victory speech “to rebuild our infrastructure, which will become,
by the way, second to none.”
Private equity firms like
K.K.R. have already presented themselves as a willing partner, and
Bayonne provides an important case study. Its arrangement is one of a
handful of deals across the country in the last few years in which
private equity firms have managed public water systems. While these
deals are a small corner of private equity’s sprawling interests, they
represent the leading edge of the industry’s profound expansion into
For residents, the financial
trade-offs from these water deals can be painful.
The Times analyzed three deals
in which private equity firms have recently run a community’s water or
sewer services through a long-term contract. In all three places —
Bayonne, and two cities in California, Rialto and Santa Paula — rates
rose more quickly than in comparable towns, which included both publicly
and privately run water systems. In Santa Paula, where Alinda Capital
Partners controlled the sewer plant, the city more than doubled the
rates. A fourth municipality, Middletown, Pa., raised its rates before
striking a deal.
Now, some of these cities are
trying to take back their water. Missoula, Mont., wrested away its water
system, which had been owned by the Carlyle Group.
Apple Valley, Calif., whose waterworks were also owned by Carlyle, has
filed a similar lawsuit. Santa Paula bought its sewer plant from Alinda
Of course, there’s a reason
many communities look for private partners to begin with: Their water
systems are in poor shape. Budget shortfalls and political mismanagement
can represent a real threat to both infrastructure and citizens. For
evidence, look no further than the crisis in Flint, Mich., where the
drinking water became tainted with lead.
“Keeping rates down may
sound like the ultimate righteous good for ratepayers, but the truth is,
not if you’re failing to provide basic care and maintenance,” said
Megan Matson, a partner at Table Rock Capital, the boutique private
equity firm that invested in Rialto’s water and sewer system. She
added that it helps for deals to “provide more obvious public
benefits,” noting that her firm partnered with Ullico, the nation’s
only labor-owned insurance and investment company.
Proponents of the
public-private partnerships, citing recent studies in Canada and Europe,
argue that private businesses operate more efficiently than governments
do and that this translates into cost savings for citizens. And private
equity firms, lacking technical expertise in how to manage
infrastructure, often team up with private water companies.
Supporters also say that the
deals require private equity to spend millions of dollars a year to fix
things (money that towns may not spend on their own), and that the firms
sometimes pay towns millions more up front. Bayonne, for instance, got
$150 million up front from K.K.R.’s team, which the city used to pay
off a pile of debt.
In a statement, a K.K.R.
spokeswoman said, “Our partnership has provided Bayonne residents with
better service, modernized technology to detect leaks and conserve
water, improved infrastructure and safer conditions for workers — all
without a tax increase or public expenditure.”
In Bayonne, a city of about
65,000 on a peninsula in the shadow of the fallen twin towers, a crucial
test for its private equity deal came in July 2012. By then, Bayonne had
already spent nearly a year haggling with some of K.K.R.’s top
Next, city officials presented
the deal to a more skeptical crowd: their own residents.
Bayonne’s sales pitch to its
citizens illustrates the bold steps town officials can take —
including making promises that are at odds with the actual terms of the
deal — to attract private equity money. Private equity, in turn, can
earn significant returns.
At a public meeting in city
hall, a lawyer for the city promised that, after an initial rate bump,
there would be “a rate freeze for four years,” according to a
meeting transcript. Bayonne’s mayor, Mark Smith, later reiterated the
four-year freeze in a magazine article.
That promise turned out to be
The contract allowed
additional rate increases after only two years. There was no four-year
In fact, rates rose even more
than the Bayonne contract predicted — in part because K.K.R’s team
had to make unexpected infrastructure upgrades, but also because
residents were using less water than expected. The contract guarantees
revenue to the team — more than half a billion dollars over 40 years
— so water rates have jumped, in part, to make up the difference.
The city said it saw the
revenue requirement as a way for K.K.R.’s team to earn steady returns,
but not a windfall.
But the Times analysis showed
that Bayonne’s water rates grew almost 28 percent under the deal,
growth that far exceeded that of three other municipalities to which
Bayonne has compared itself.
(Daniel Van Abs, an associate
professor at Rutgers University who specializes in water management,
said that a true apples-to-apples comparison of water rates in different
towns was “extremely difficult” because of the different factors
that can influence rates, including the size of the utility, the
municipality’s population, droughts and infrastructure investment —
or lack thereof. The Times analysis for Bayonne did not include sewer
Former Bayonne officials who
had promised the four-year rate freeze said in interviews that they had
not meant to mislead residents. They said they had earmarked some of the
K.K.R. team’s $150 million up-front payment to offset rate increases
in the contract’s early years.
But then voters ousted Mayor
Smith. And once he left office, the new administration put that money
“I think we could have
accomplished that four-year minimum,” the former mayor said in an
interview. The town’s water rates, he said, are now “exorbitant.”
“We gave away too much,” said Gary La Pelusa Sr., a Bayonne city councilman and a former commissioner of the town’s utilities authority.
Tim Boyle, who took over
Bayonne’s utilities authority after Mr. Smith was voted out of office,
said that various regulations required the city to use that money for
property tax relief rather than to stabilize rates. He also blamed
the previous administration for guaranteeing too much revenue to
K.K.R.’s team in the early part of the deal, calling those figures
Bayonne officials also stress
the deal’s benefits, including the up-front payment that let Bayonne
pay off more than $100 million in old debts. Within three months,
Moody’s Investor Service revised the city’s debt outlook from
“negative” to “stable” for the first time in five years, and it
has since upgraded the city’s credit rating.
K.K.R.’s team contributes
about $2.5 million annually to pay for repairs to water infrastructure,
plus $500,000 to the city itself. K.K.R. and Suez said they have
upgraded their safety equipment and replaced inoperable hydrants around
They also installed
sophisticated water meters that can detect leaks in people’s homes,
and sent nearly 2,000 letters to customers warning when such leaks
occurred. As such, use has declined, according to Mr. Henning, who said
Suez had received “many notes of thanks” for the warnings.
But more-sensitive meters
could lead to higher bills for some residents whose water use wasn’t
fully captured in the past. When negotiating the deal, K.K.R. called
this process “meter uplift,” according to emails obtained through
“We gave away too much,”
said Gary La Pelusa Sr., a city councilman and former commissioner of
Bayonne’s utilities authority, which approved the deal over his
Bayonne originally promised
residents that the city’s utilities authority would oversee K.K.R. and
Suez. But the City Council recently decided to shutter the agency and
handle the oversight itself.
Stephen Gallo, who headed that
authority when the deal was struck, still believes that it benefits
Bayonne. “But you’ve got to watch them, you’ve got to keep an eye
on things,” he said. “I don’t know who’s doing that now.”
In interviews with The Times,
more than a dozen Bayonne residents, including Ms. Adamczyk, expressed
dismay over the rate increases. One reason is that people who fall
behind on payments face long-term risks: Unpaid water and sewer bills
can be sold to investors who try to collect on that debt, a common
practice across the country. Failure to pay can ultimately lead to
In 2012, the year Bayonne
struck its deal, water bill delinquencies led to 200 government liens
against local properties, tax records show. That figure more than
tripled the next year, the first full year under K.K.R.’s team. In
2015, the most recent year with data available, the number remained
elevated, at 465.
Megan Matson and Peter Luchetti of Table Rock Capital, a private equity firm that has invested in a public water system in Rialto, Calif.
city publishes its lien notices in the local newspaper and residents
receive mailed delinquency letters.
Still, when a reporter asked
one Bayonne resident, Carlos Jimenez, about a water and sewer bill lien
that had been listed against his property, he expressed surprise, saying
he wasn’t aware of it. “I didn’t know this could happen,” Mr.
Jimenez said. “It’s a different ballgame.”
Is No “Free” Money’
One of the few things
Republicans and Democrats can agree on is that the nation faces an
In water infrastructure alone,
the nation needs about $600 billion over the next 20 years, according to
federal estimates. And yet federal spending on water utilities has
prompting state and federal officials to try to play matchmaker,
courting private investors to fix what needs fixing.
For years, the Obama
administration has been cheerleading public-private partnerships. In a
statement, the White House said it backed them “when they are well
structured, include strong labor standards, and when there is confidence
that taxpayers are getting a good deal.”
During the presidential
campaign, Mr. Trump’s team outlined a new plan to incentivize private
investors to take on large infrastructure projects.
Wall Street has responded to
the call to action. There are now 84 active financial infrastructure
funds, according to Pitchbook, a private financial data platform, up 25
percent in just three years. Some belong to big banks like Goldman
Sachs, but many are run by private equity firms.
“Across our country, we need
solutions for infrastructure deficiencies,” said James Maloney, a
spokesman for the American Investment Council, the private equity trade
group. “Private equity serves as one of these solutions.”
Some critics are wary of
expanding private investment in public infrastructure. Although cities
may get cash up front in these deals, “there is no ‘free’ money”
in public-private partnerships, says a 2008 Government Accountability
Office report. Using roads as an example, the report observed “it is
likely” that tolls will increase more on a privately operated highway
than one run by the government.
Ms. Matson, of Table Rock, who
has attended White House meetings on infrastructure, has tried to dispel
concerns about these deals. Table Rock is part of a team that finances
and manages the water system in Rialto, Calif., a deal that provided the
city about $41 million to improve the water and wastewater
infrastructure, she said.
Rialto residents have seen
their water rates increase about 68 percent since the deal, according to
the Times analysis, more than any other comparable city. But Table Rock
said rates were artificially low after the city had declined to raise
them for about a decade, giving it the lowest rates among those towns.
And unlike in most other deals, Rialto residents had a say in the
increases and ultimately approved them in a public vote, as required
under state law. This year’s rate increase was delayed.
When the deal closed in 2012,
all the public water utility employees kept their jobs. Everyone has
since received raises. And Table Rock, like its partner Ullico, has
committed to all 30 years of the arrangement.
“We don’t do flips, we
invest for life,” Ms. Matson said, meaning that Table Rock doesn’t
seek quick profits by unloading its investments. She also said that
Table Rock declined to make deals that provided big up-front payments to
towns without a sufficient commitment to infrastructure repairs.
“Those deals give the rest of us a bad name,” she said.
Control, but Then What?
In an upscale Washington,
D.C., restaurant in 2012, an executive from the Carlyle Group, one of
the world’s largest private equity firms, put his arm around the mayor
of Missoula, Mont.
“Mayor,” the executive
said, “are you ready to buy a water system?”
Three years later, the
comments by the executive, Robert Dove, were recounted from a witness
stand in the Missoula County Courthouse. The city was suing Carlyle,
which ultimately refused to sell to Missoula, to gain control of its
Missoula is one of several
places in recent years that have tried getting back their water systems
from a private company. But after waging costly battles, the towns
cannot always guarantee the same services at lower rates.
At the time of that dinner in
Washington, Missoula was the only city in Montana that did not own its
water system — and John Engen, Missoula’s mayor, wanted to change
that. So, months before, he had supported Carlyle’s purchase of the
regional water company (Park Water) that owned Missoula’s local system
(Mountain Water), believing that Carlyle would then sell Mountain Water
back to his town.
But the mayor’s plans
In October 2013, Missoula made
an informal offer to buy its local system. Carlyle declined. Missoula
made a formal offer. Carlyle declined again.
Missoula then sued, and it
won. But the court decided the system was worth $88.6 million,
substantially more than what the city had offered. On top of that, the
city must spend millions of dollars on legal and other fees and must
also pay some of its opponents’ costs, according to court records.
Those costs included
lawyers’ fees, limo services and dinners at some of Missoula’s
finest restaurants. They also included at least one order of boneless
chicken wings at Hooters, and one bottle of Metamucil.
In a statement, a Carlyle
spokesman said that the firm had considered the city’s offers in good
faith. “The city offered many millions less than the company was
worth, and an independent panel agreed,” the spokesman said.
He also said that under
Carlyle’s watch, “capital expenditures more than doubled, leakage
was reduced by 19 percent, water quality was excellent and employment
And under Missoula’s watch,
water rates may rise anyway. Further costly repairs are still needed,
for one thing.
For Carlyle, the deal was a
financial success. The firm sold Park Water in January to another
private company for $327 million, more than double what Carlyle had
Missoula is not the only city
seeking control over its infrastructure. Last year, Santa Paula bought
its wastewater recycling plant for about $70 million from Alinda
Alinda, which specializes in
infrastructure investing, had teamed up with a private water recycling
company to finance, design, build and operate the plant after the city
awarded them the contract in 2008. The new facility, Alinda noted,
replaced an old plant owned by Santa Paula that had been violating state
environmental regulations, saving the city from paying fines.
But after years of raising
sewer rates, partly to pay “service fees” to Alinda, Santa Paula’s
thinking changed: It would be better for Santa Paula to issue its own
debt to purchase the plant than to saddle citizens with annual rate
increases. Now the town — at the urging of its city manager, Jaime
Fontes, and several council members, including Ginger Gherardi — has
started issuing rebates to citizens.
Still, there will be bumps
along the road. After all, cities like Missoula and Santa Paula are now
responsible for running an important, and occasionally messy, public
Soon after Santa Paula
regained control of its sewer plant, an equipment failure let partly
treated wastewater pour from the plant. The discharge turned a pond
green and flowed onto a nearby organic farm.
And wastewater, Mr. Fontes
said, is “not the kind of organic you want.”
Abrams contributed reporting from Los Angeles. Kitty Bennett, Susan
Beachy and Alain Delaquérière contributed research.