Lease and Service Agreement Solves Financial and Environmental Problems for Cranston's Wastewater System

It is a scenario familiar to many mayors: Twenty years ago the City of Cranston built a shiny new wastewater treatment facility which was generously subsidized with state and federal grants. During the past 20 years, though improvements were made to the facility on an as-needed basis only, costs of improvements added up to more than $26 million of Sewer Enterprise Fund debt. Sporadic sewer user fee increases generated revenues that barely met operational expenses as the City government attempted to keep fees affordable for ratepayers. From time to time the City's General Fund loaned money to the Sewer Enterprise Fund to meet overruns in operational expenses; this resulted in the Sewer Enterprise Fund owing $8.6 million to the General Fund. Stricter air and water quality mandates imposed by the federal government now require $30 million in upgrades to the wastewater facility - at a time when the state and federal grant subsidies have disappeared. The City projected that sewer rates would have to increase nearly 100 percent during the next five years in order to meet financial and capital improvement obligations - at a time when citizens are increasingly resistant to capital improvement bonds that may increase user fees or taxes.

On September 11, 1997 Mayor Michael Traficante solved these problems and more by signing an innovative 25-year Wastewater System Lease and Service Agreement with Triton Ocean State L.L.C. The agreement allows Cranston to meet all of its financial and capital improvement obligations and insures compliance with all air and water quality mandates while at the same time providing the most cost-effective wastewater services and long term stabilization of sewer user fees for Cranston's citizens. The agreement was the culmination of a two-year effort which addressed all of the technical, legal, financial, political, regulatory, public sector and private sector issues related to the transaction.

In 1994, Mayor Traficante commissioned a study of the long range plan for the City's wastewater facilities. The plan included paying back the General Fund the amounts due to it from the Sewer Enterprise Fund over a 10-year period. It also included paying the existing bond debt and installing advanced wastewater treatment facilities along with other mandated improvements that would cost another $30 million. The traditional solution would have resulted in the average residential sewer fee increasing from $231 to over $400 annually. In light of this, the Mayor and his administration chose to pursue other options. The first alternative studied was regionalization. In 1995, Cranston entered into negotiations with the Narraganset Bay Commission, a regional operator of wastewater facilities for three other municipalities in Rhode Island. Regionalization offered the economies of scale that could potentially lower the cost of wastewater services, but after a year of negotiations, officials determined that the transfer in ownership to the Commission would not meet all of the City's objectives. It would not cover the cost of the $8.6 million due to the City's General Fund, nor would it pay to defease the entire $26 million Sewer Fund debt.

In early 1996, the City became aware of Presidential Order 12803 which enabled municipalities to sell or lease their wastewater facilities to private companies. During 1996 and 1997, Cranston conducted a procurement process in which three private companies competitively negotiated contract provisions covering operation and maintenance, capital improvements, major repairs, financing, odor control, performance guarantees, air and water quality responsibility, Industrial Pretreatment Program administration and costs associated with the City's wastewater treatment plant, 21 pumping stations and 190-mile sewer collection system.

To assure proper decision making, the Mayor assembled a legal, technical and financial team headed by his Director of Public Works. While conducting the procurement process and contract negotiations, the team included the views and concerns of several agencies and organizations: The U.S. Environmental Protection Agency and the White House Office of Management and Budget had oversight of the Presidential Order 12803 approval process. The Rhode Island Department of Environmental Management reviewed and approved the water quality, operating and performance criteria, various consent decree issues and the capital improvement program. The State Public Finance Management Board along with the State S.R.F. Clean Water Finance Agency provided the CAP allocation and the financial structure to allow the private contractor tax exempt financing for capital improvements. The Laborers International Union of North America was consulted on the disposition of City employees who would transition to employment by the private contractor. The City Council was continuously involved in the procurement process and the review and approval of the privatization contract. And the City's residents concerned with the disposition of a major city asset and the future rate impact were given several opportunities to voice their concern and be briefed in numerous public hearings.

At the end of the year-long process, Mayor Traficante and his team determined that Triton Ocean State, L.L.C. had offered the best overall contract. On the day of the contract signing Triton presented the City with a contract payment of $48 million and provided an additional $30 million of private financing for the state and federally mandated capital improvements. The $48 million contract payment enabled Mayor Traficante to defease the $26 million Sewer Fund debt, repay the General Fund $8.6 million owed by the Sewer Fund, eliminate the $6.9 million General Fund deficit, and establish a $6 million General Fund surplus. Triton's $30 million private tax-exempt financing of the capital improvements guarantees the City will meet all state and federal mandates without incurring additional City debt and that the wastewater system will receive uninterrupted operation and maintenance during the 25 years and that odor levels at the plant will be maintained at acceptable levels. The City will pay Triton a monthly fixed price service fee that escalates over the 25 years in accordance with the Consumer Price Index and Chemical indices - a service fee that will save City ratepayers $35 million in comparison to the costs that had been projected for continued operation of the existing system for the same period.

Additional information on the Cranston lease and service agreement is available from Mayor Traficante at (401) 941-5380.

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The United States Conference of Mayors

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