Nicole Adamczyk’s drinking water used to slosh through a snarl of pipes dating from former US president Calvin Coolidge’s 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 municipal waterworks.
Four years later, many of those crusty brown pipes have been replaced by shiny cobalt-blue ones, reflecting a broader infrastructure overhaul in Bayonne.
Illustration: Mountain People
However, 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 Adamczyk, an accountant and mother of two who received a quarterly bill for almost US$500 this year.
She is 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 soaring.
Water rates in Bayonne have risen nearly 28 percent since Kohlberg Kravis Roberts (KKR) — 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.
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. 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 KKR, which is said to be shopping its 90 percent stake in the Bayonne venture, a partnership with the water company Suez.
“Bayonne had chronically underinvested in their water and sewer infrastructure, which has certainly contributed to rate increases during the past few years. We understand that these increases create stresses for ratepayers,” Suez spokesman Rich Henning said.
US president-elect Donald Trump has made the privatization of public works a centerpiece of his strategy to rebuild the US’ 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.
Trump himself promised in his victory speech “to rebuild our infrastructure, which will become, by the way, second to none.”
Private equity firms such as KKR have already presented themselves as willing partners 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.
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, Pennsylvania, raised its rates before striking a deal.
Now, some of these cities are trying to take back their water. Missoula, Montana, wrested away its water system, which had been owned by the Carlyle Group. Apple Valley, California, whose waterworks were also owned by Carlyle, has filed a similar lawsuit. Santa Paula bought its sewer plant from Alinda last year.
Of course, there is 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, Michigan, 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.
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. In addition, 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 might not spend on their own — and that the firms sometimes pay towns millions more upfront. Bayonne, for instance, got US$150 million upfront from KKR’s team, which the city used to pay off a pile of debt.
“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,” a KKR spokeswoman said in a statement.
In Bayonne, a city of about 65,000, 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 KKR’s top negotiators. 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.
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.
Then-Bayonne mayor Mark Smith later reiterated the four-year freeze in a magazine article.
That promise turned out to be fleeting. The contract allowed additional rate increases after only two years. There was no four-year freeze.
In fact, rates rose even more than the Bayonne contract predicted — in part because KKR’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 US dollars over 40 years — so water rates have jumped, in part, to make up the difference.
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 KKR team’s US$150 million upfront payment to offset rate increases in the contract’s early years. However, then voters ousted Smith, and once he left office the new administration put that money elsewhere.
Bayonne officials stress the deal’s benefits. The upfront payment let Bayonne pay off more than US$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.
KKR’s team contributes about US$2.5 million annually to pay for repairs to water infrastructure, plus US$500,000 to the city itself.
KKR and Suez said they have upgraded their safety equipment and replaced inoperable hydrants around town.
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 Henning, who said Suez had received “many notes of thanks” for the warnings.
However, more-sensitive meters could lead to higher bills for some residents whose water use was not fully captured in the past.
“We gave away too much,” said Gary La Pelusa, a city councilor and former commissioner of Bayonne’s utilities authority.
In interviews with the Times, more than a dozen Bayonne residents 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.
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 KKR’s team. Last year, the most recent year with data available, the number remained elevated, at 465.
One of the few things Republicans and Democrats can agree on is that the nation faces an infrastructure crisis. During his presidential campaign, 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 critics are wary of expanding private investment in public infrastructure.
Matson has tried to dispel concerns.
Table Rock is part of a team that finances and manages the water system in Rialto, a deal struck in 2012 that provided the city about US$41 million to improve the water and wastewater infrastructure, she said.
Water rates increased about 68 percent since the deal closed, according to the Times analysis, but Table Rock said the rates were artificially low after the city had declined to raise them for about a decade.
Rialto residents ultimately voted to approve the increases.
Matson said that Table Rock declined to make deals that provided big upfront payments to towns without a sufficient commitment to infrastructure repairs.
“Those deals give the rest of us a bad name,” she said.
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