Residents of Bayonne, New Jersey were gifted with an unexpected and unwelcomed surprise this week— a 13.25 percent increase in their water and sewer bills that will take effect next month. A private company controls both of these services there.
Bayonne leased its municipal utility authority to the multinational water corporation Suez (formerly called United Water) and the private equity firm KKR in 2012, in a much-ballyhooed agreement recognized by the Clinton Foundation and the Clinton Global Initiative. Bayonne agreed to hand control of these assets over to the companies in exchange for $150 million, $130 million of which went to pay off debts the authority racked up mostly by bailing out the cash-strapped city’s budget deficits.
Steve Gallo, executive director of the authority at the time, compared the deal to having one’s credit card debt “completely wiped out,” a promise that anyone with a Visa card and a grasp of personal finance can attest sounds way too good to be true. Turns out it was.
The deal was also controversial because, as we’ve reported in the past, private water companies are notorious for raising rates. Gallo claimed that after an initial 8.5 percent rate increase, rates would freeze for four years, followed by an automatic four percent a year increase. Rates did indeed rise as promised in 2012, followed by a second, unexpected four percent increase earlier this year, despite previous promises of a temporary moratorium on rate hikes.
Gallo and other officials advocating privatization promised one reality, but the one they’ve delivered hasn’t lived up to the hype. With this latest rate hike, Bayonne’s water rates have increased by 28 percent since privatizing, making water and sewer service costlier for residents than Gallo claimed they’d be if the system had been kept under public control. According to his successor, Tim Boyle, higher rates are necessary to compensate for the budget shortfalls created by inaccurate revenue projections and to pay the private operator. That’s likely because the contract guarantees the KKR/Suez venture a minimum payment regardless of customer water use and needs.
Only one member of the water authority board voted against the deal when it was originally inked. Former commissioner and current City Council member Gary La Pelusa explained his opposition in what now seems like a painfully prescient letter to the Jersey Journal in 2013: “I still feel that the city's ratepayers are going to bear the burden of this deal. This deal is going to severely increase rates that will break the backs of the citizens of Bayonne."
Despite all this, Bayonne is locked in a 40-year deal with Suez and KKR. The contract strictly forbids the authority from exiting the deal early, except if the company defaults, and if the authority does, it has to pay a steep price — the remaining amount of the $150 million upfront fee — an impossible prospect for the financially distressed city.
Unfortunately, this situation isn’t surprising given the track record of water corporations and their proponents, who often use false promises and rosy projections to push through deals that end up costing residents and local businesses much more than expected in the long run. But cash-strapped cities like Bayonne still see water and sewer privatization as a way to plug budget holes. This practice fails to address the reasons behind budget shortfalls, making them irresponsible and shortsighted quick fixes—not long-term, sustainable solutions.
Scranton, Pennsylvania, which announced a $195 million deal to sell its sewer system to American Water, should take heed of Bayonne’s predicament. The sewer authority there has claimed that rates will increase by about 2 percent a year over the first decade, after which higher rates will be phased in.
American Water already owns Scranton’s water system, and per a relatively new state law, it can now increase water rates to pay for sewer system investments. It is therefore likely that Scranton households and businesses would pay higher water and sewer rates to finance the sale. Moreover, selling Scranton’s sewer service to American Water cedes all local public control of the sewer system, including decisions about rates and future projects, to American Water under the oversight of appointed, unelected state officials.
If Bayonne isn’t enough of a cautionary tale for Scranton, its own experience should be since it leased its system to American Water fifteen years ago. Just five years into the 20-year deal, Scranton exited the contract after the company increased fees by 45 percent and proposed another 22 percent rate increase.
Cities should not use water and sewer systems to balance their budgets; public utilities are not commodities to be pawned for quick cash. And when these essential systems generate revenue, it should be reinvested into the systems themselves to make them better and more reliable for current and future users—not siphoned off to plug budget holes or fill corporate coffers. Ultimately, we need responsible, public operation and management of our water and sewer services, not privatization.