PFM Group Advises Allentown, PA on Major P3 Water/Wastewater Concession

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PHILADELPHIA, Aug. 7, 2013 (GLOBE NEWSWIRE) -- PFM Group, the nation's leading independent municipal finance advisory firm and a leader in innovative Public-Private Partnerships (P3s), announced today that it has facilitated the transfer of responsibility for Allentown's municipal water and wastewater systems to the Lehigh County Authority (LCA) in an innovative public to public transaction. This is the first concession lease of public assets in the country to have been offered to both corporate and governmental bidding teams and to have then secured competitive final bids from both. The agreement calls for the LCA to create an independent special purpose entity to operate that city's water and wastewater systems on a 50 year lease.

The special purpose entity will enter into a 50-year concession agreement with the City of Allentown for the exclusive right to operate, manage, maintain, improve, and collect revenues from their water and wastewater facilities. In return, the City of Allentown will receive an up-front payment of $211.2 million which will be used by the City to defease all water and wastewater debt related to the systems, fund the City's pension plan, and set aside reserves. The City of Allentown will also receive annual payments from the system to offset current support of their general fund. In connection with the closing, LCA issued $307.7 million in bonds to fund the payment to Allentown, operating and capital reserve accounts, five years of capital improvement projects, and the cost of issuance.

In 2012, PFM was retained by the City of Allentown to serve as the City's Public-Private Partnership (P3) Advisor and was tasked with evaluating various funding alternatives to stabilize the City's rapidly growing unfunded pension liability. PFM evaluated different city assets and financing vehicles and determined that the most promising candidate was a concession lease of the City's water and wastewater systems.

"Our analysis confirmed market appetite for leasing these assets, the feasibility of a competitive procurement of the concession lease, and a threshold value for these assets that – if realized – would enable the city to dramatically reduce its large unfunded liability for the City's fire and police pension plans," explained Scott Shearer, the PFM Managing Director who headed up the effort and has served as a long-time financial advisor to the City. In this initial phase of its engagement, PFM also identified and organized the team of legal and engineering professionals required to perform due diligence on the water and wastewater assets, establish operating standards and prepare other documents for the transaction.

Having tested private sector interest, PFM managed the City's Request for Qualifications – distributing procurement documents to infrastructure investors and operators – which resulted in the pre-qualification of seven bidding teams. PFM subsequently managed a thorough due diligence and negotiation process with each bidding team, which included multiple on-site visits and document review, as well as extensive individual negotiation of contract terms. The due diligence and negotiation process took place over a six-month period and resulted in the City retaining active interest in the transaction by five out of the original seven bidders. This group of finalists included three corporate entities, one national not-for profit enterprise and a regional public authority.

"This level of competition assured the City of securing the best value bid for its water and wastewater assets, PFM's primary goal for this final stage of the procurement process," Shearer added. "This process culminated in the City releasing a Request for Bids and receiving bids from four pre-qualified bidding teams."

Based on the pre-defined bid specifications, two firms were invited to submit a best and final offer. Ultimately, the Lehigh County Authority, a public entity, was selected as the winning bidder with an upfront consideration of $211.2 million for the 50-year concession lease of the City's water and wastewater systems, an amount that exceeded the initial threshold value established over a year and half earlier by more than 50%.

The bonds issued in connection with the transaction are comprised of three separate tranches: Lehigh County Authority Water and Sewer Revenue Bonds (City of Allentown Concession) of approximately $245.6 million Water and Sewer Revenue Bonds, Series 2013A, $43.4 million in Water and Sewer Capital Appreciation Revenue Bonds, Series 2013B; and some $18.7 million in Water and Sewer Revenue Bonds, Series 2013C (Federally Taxable). Goldman Sachs served as underwriter.

"The biggest obstacle to Allentown's full economic recovery, as it is for many American cities, was the enormous unfunded liability for the City's fire and police pension plans," Shearer noted. "Allentown had to reduce this liability drastically, or in less than three years, the City's Minimal Municipal Obligation or "MMO," (the least amount a municipality must contribute by state mandate to any pension plan established for its employees) will exceed $23 million annually – approximately 25% of the General Fund Budget.

"The City faced a major dilemma," he continued. "The tax base would never be able to meet this challenge without dramatically raising taxes by over 35% or finding another major revenue source. The Allentown millage rate is already one of the highest in Lehigh County, despite the fact that the City has not raised taxes since 2006. Receiving the upfront payment for the water and wastewater assets was a far preferable alternative. This was the ideal solution."

The benefits to the City of Allentown from the Lease Concession Agreement are considerable.

  • Without selling any assets, Allentown receives upfront payment in excess of $100 million to immediately reduce unfunded liabilities for pensions and other post-employment benefits, thereby reducing the City's MMO.
  • Provides an economically viable long-term solution to financial stability.
  • Allentown will receive ongoing revenue share payments to offset costs currently funded by the water fund.
  • Ensures operational standards and rate controls will remain in place for the term of the lease.

There are a number of additional features that PFM built into this transaction for Allentown that addressed most community concerns that often impede P3 transactions of this type. The concession agreement allows the City to set operational standards and retain oversight over the many important public concerns related to these utility services. No City-owned assets are being sold. At the end of the lease, the City will take back the utilities as specified in the contract. Most important to the public, the agreement is designed to keep future rate increases appropriate through a control mechanism. It will also include protections for existing water and sewer employees with the goal that no jobs will be lost.

In addition to Scott Shearer of PFM's Harrisburg office, the PFM P3 team for Allentown also included Managing Directors Tim Carden and Tom Morsch, Director John Frey, and Senior Managing Consultant Jason Brockman, among others.

PFM Group is one of the nation's leading advisors in evaluating P3 transactions. For over three decades, PFM has built a solid presence in the municipal marketplace and has been involved in financing programs since 1986 totaling approximately $758 billion. For 2012, PFM advised clients on $56.9 billion of total debt issuances in 902 separate transactions.

The PFM Group currently employs more than 500 professionals serving a broad base of clients from 33 locations in every region of the country. Public Financial Management, Inc. is part of the PFM Group of companies, offering independent financial advisory services to a broad base of local, state, and regional government and non-profit clients throughout the United States. The firm is well-respected for providing clients with independent advisory services free of conflicts in their dealings with the capital markets in the fields of Higher Education, Public Power, Transportation, Healthcare, General Municipal, Environmental Utilities, and Management & Budget Consulting, among others. PFM is a registered municipal advisor with the SEC and the MSRB under the Dodd-Frank Act of 2010.

PFM Asset Management LLC (PFMAM) another member of the PFM Group of companies, provides independent and objective advice to institutional and government clients on investment consulting and asset management services, as well as strategic consulting and plan benefits for Public and ERISA Pensions, OPEB Trusts, Endowments and Foundations, and Insurance Trusts. PFMAM is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

CONTACT: Scott Shearer Managing Director PFM Group (717) 232-2723 Tim Carden Managing Director PFM Group (212) 809-4212 Sandra W. Sosinski Director of Communications PFM Group (215) 557-1405

Source:Public Financial Management, Inc.