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Published on Monday, November 16, 2009 by the Chicago Tribune

Privatizing Water System Could Be a Risky Move for Chicago

Mayor Richard Daley could learn from other cities' experiences

by Michael Hawthorne

Mayor Richard Daley says any part of city government is up for grabs if the price is right.

[ A water intake crib near Navy Pier in Lake Michigan. (Alex Garcia, Chicago Tribune)]But if he is tempted to dangle Chicago's vast water system as his next lease deal, he might want to first consult Atlanta, which is still smarting from a botched experiment with privatizing a big-city water supply.

Or the mayor could look someplace closer to home, like Bolingbrook, one of dozens of suburbs and downstate communities furious about steep rate increases imposed by a private water operator.

Daley is searching for more jackpots as his administration draws heavily on the money it reaped from leasing parking meters and the Chicago Skyway to ease the city through the recession. The mayor recently told the Tribune editorial board that he has met with consultants who outlined new privatization deals, but he would not provide details.

"Everything is always on the table," Daley said, though mayoral aides later insisted that nothing immediate is in the works.

If Chicago tried to sell off its water department to a private company, it would be the largest U.S. city to do so. Such a deal also would run counter to movements in dozens of smaller towns across the suburbs and the rest of the nation, where local officials are having second thoughts about private control of public water.

Mayors from Homer Glen to Urbana are threatening municipal takeovers of their local water systems, moved by complaints about skyrocketing rates and lackluster service from corporate operators. Fort Wayne, Ind., already wrested away part of its water system and is seeking to buy back the rest after accusing a private operator of putting shareholder interests before those of customers.

Backers of privatizing government services suffered a bigger setback in Atlanta, where city leaders tried during the late 1990s to turn over management of the water system to a corporate operator. In 2003, less than four years into a 20-year deal, Atlanta regained public control in response to cost overruns, service problems and breakdowns.

Similar concerns forced Milwaukee this year to scuttle a bid to lease its water system. Even the idea of studying a deal prompted such a fierce outcry that city leaders backed off, at least for now.

"Water is critical to a city's future management and growth," said Rob Hunter, Atlanta's commissioner of watershed management. "It's not something you want to turn over to somebody else."

It is unknown how much money could be raised by leasing Chicago's system, which pumps treated Lake Michigan water to 7 million people in the city and suburbs. The payoff likely would increase based on how much control the city would be willing to sign over to a private water company.

But given the public backlash over the mayor's controversial parking meter deal and mindful of what has happened in other communities that have experimented with private control of water, questions remain about whether the short-term windfall would be worth the potential long-term costs.

Mayoral critics want to make sure more safeguards are in place to ensure public debate of any future lease proposals. They note that Daley aides briefed aldermen on the parking meter deal just one day before the City Council approved it in December.

"The fact that they've refused to answer any questions (about a potential water lease) suggests there is something in the works," said Ald. Scott Waguespack, 32nd, one of only five aldermen who voted against the mayor's parking meter lease.

Lenders and investors are skittish to cut new deals in the wake of the financial crisis, but Daley says he wants to revive his proposed lease of Midway Airport when the markets recover.

Another target could be the water system, though Daley concedes that could be a tougher sell. The Department of Water Management currently is run by unionized employees, some of whom were hired through an illegal patronage system that rewarded pro-Daley campaign workers.

"You're giving this more weight than is warranted," said Jacquelyn Heard, Daley's spokeswoman. "The mayor is not thinking at all now or even in the near future about leasing any more assets."

Private operation of water systems already has become a contentious issue in the suburbs, where many mayors are fighting rate increases from a company that charges more for the same Lake Michigan water than neighboring municipal systems. They fear that privatizing the Chicago system could lead to even higher rate increases that would be passed along to dozens of suburbs that buy water from the city.

Homeowners in DuPage and Will counties will pay 30 percent more for their water next year if a private operator, Illinois American Water, wins state approval for a rate hike.

The company, which sells water to 44,200 suburban households and businesses, wants to charge its DuPage County customers $13.50 for every 1,000 gallons. Will County customers would pay $14.37 for the same amount of water.

By contrast, Chicago's water rates will jump 14 percent in January, to $2.01 for every 1,000 gallons of water. Naperville, a suburb that operates its own municipal system, charges $3 per 1,000 gallons.

"I certainly don't want to be crosswise with the good mayor of Chicago, but I'd rather own my own water system," said Bolingbrook Mayor Roger Claar. "We should control our own destiny, not turn it over to some private operation."

Claar and officials in nearby Homer Glen, Plainfield and Woodridge are threatening to use eminent domain powers to seize their water systems from Illinois American, which started buying up dozens of suburban and downstate systems in the 1980s.

Urbana and Peoria already tried to buy their water systems from Illinois American but failed to muscle proposals through the Illinois Commerce Commission. In response, mayors from across the state lobbied for a 2006 state law that eliminated the need for commission approval of water system purchases.

"Chicago would be crazy to lease its water system," said Urbana Mayor Laurel Prussing. Illinois American, she said, has "been able to take advantage of a monopoly for too long."

In an e-mail, Illinois American said it is unfair to compare its rates to those charged by municipalities. Cities can levy additional taxes and fees to fund services, and some have kept rates low by avoiding maintenance and upgrades, the company argued.

The company's proposed rate increase, the second requested in as many years, would pay for $184 million in new pipes, hydrants and other equipment statewide, said Kathryn Foster, an Illinois American spokeswoman.

"Even if the rate request were granted ... water remains a good value at around a penny a gallon," she said.

Other cities that have turned their water systems over to corporate operators or considered such a deal often promote privatization as a more cost-effective way to finance upgrades.

"Private operators can achieve greater efficiency and scale in their cost of capital improvement," claimed a Web site promoting a bid last year to lease the sewer system in Akron, Ohio.

Indianapolis Mayor Greg Ballard has solicited bids from two dozen companies to lease his city's water and sewer systems. Most of the proposals pledge to cut costs by combining billing and service fleets and by promising to lower the price of needed improvements.

Customers remain skeptical, if not hostile, to privatizing water. Last year, voters overwhelmingly rejected Akron's sewer lease. In Indianapolis, residents have filed a lawsuit accusing the company that already operates the city's water system of routinely overcharging 250,000 households.

Moreover, some cities that have experimented with privatization figured out that municipal bonds still are a cheaper way to finance improvements than turning over their water systems to companies.

"The pitch is that privatization will lead to lower rates," said Hunter, the Atlanta water commissioner. "That isn't necessarily true."

Still, mayors and other local officials keep pushing the idea. They see public asset leases as a way to avoid raising taxes, slashing services or firing workers.

Wally Morics, the elected Milwaukee comptroller, this year suggested leasing the water system to pump more money into city coffers. He estimates a 75- to 99-year lease could generate up to $600 million, which would be invested to provide an endowment of $30 million a year.

"We see budget gaps that are just going to grow and grow and grow in the future," Morics said. "People want services, but our model to pay for those services is broken."

Daley boasts that he had the foresight to lease Chicago's parking meters and the skyway before the financial markets collapsed. But at the rate his administration is spending money from those leases, most of the jackpots will be gone by next year.

Instead of investing the money and spending only the interest earnings, Daley's proposed budget would drain nearly $600 million from the $1.15 billion lease of city parking meters, on top of almost $400 million that will be spent by the end of this year. That leaves less than $800 million of the $2 billion reaped from the leases.

With Daley predicting that Chicago will continue to limp through the economic recovery, there will be pressure to find new sources of money to keep city government operating. Meanwhile, private companies will keep collecting all of the money generated by parking meters and the skyway for most of the next century.

"If you think the parking meter deal was a disaster, just think what could happen with water, something everybody uses and needs," said Woods Bowman, a professor of public service management at DePaul University and the former chief financial officer for Cook County. "What happens when the money runs out and there's nothing left to sell or lease?"

Copyright © 2009, Chicago Tribune
Posted in privatization, water,

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