Alton is a Mississippi River town in downstate Illinois. It’s about 300 miles away from Chicago, but only 20 miles away from St. Louis.
Like many other local governments in Illinois, a rising tide of retirement benefits for government workers has left Alton struggling with its finances.
The Mississippi River is a beautiful, clean and breathtaking natural resource.
What Alton is considering, however, is a proposal from a private company to buy and manage the city’s sewer and wastewater treatment facilities. Illinois American Water submitted the only such proposal, and the city government recently voted to go forward with evaluating the deal.
Some of those in favor of considering the proposal cited how growing obligations for funding government workers’ retirement plans are colliding with spending requirements for maintaining and repairing those sewer and wastewater resources.
Illinois American Water is part of a publicly-traded company, American Water Works Company. Since early 2008, the S&P 500 has roughly doubled, while the stock for American Water Works has gone up almost three times as fast as the S&P 500.
In its annual financial report, American Water Works describes its “Regulated Businesses” segment that “generally own the physical assets used to store, pump, treat, and deliver water to our customers and collect, treat, transport and recycle wastewater.” In turn, it notes:
“Typically, we do not own the water itself, which is held in public trust and is allocated to us through contracts and allocation rights granted by federal and state agencies or through the ownership of water rights pursuant to local law. We are dependent on defined sources of water supply and obtain our water supply from surface water sources such as reservoirs, lakes, rivers and streams; from ground water sources, such as wells and aquifers; and water purchased from third party water suppliers.”
Sounds like a fascinating business, one that has delivered great returns for shareholders in the last decade.
But what about the taxpayers’ riverboats?
In its annual report, American Water Works lists seven states in which the company currently provides its services. Listed in order from top to bottom in terms of revenue they are: New Jersey, Pennsylvania, Missouri, Illinois, Indiana, California and West Virginia. Looking across those seven states, the average Truth in Accounting Taxpayer Burden™ measure of state fiscal conditions runs three times as high as the other 43 states in the nation. And among those seven states, it may be worth noting that two of them that are in relatively good shape—Missouri and Indiana—border financially troubled Illinois.
In state and local government circles, you sometimes hear arguments that the balance sheets understate assets, given that carrying values for land and other capital assets don’t reflect current “market” values.
Trouble is, as soon as you consider this possibility, you better be darn well aware of the massive maintenance requirements for these assets, how much their maintenance has been put off, and the present value of those costs into the future.
Which raises a question or two about the transactions that companies like American Water Works undertakes with municipalities, buying their assets (and service requirements).
On the one hand, this ‘privatization’ could indeed be a blessing for shareholders and taxpayers alike, as a specialist company manages assets like these in an efficient solution for financially troubled municipalities.
On the other hand, there is a risk that such arrangements could prove to be more efficient at getting cash in the door for troubled governments in the short run, but with negative long-term consequences. Those assets might be sold at below “true-value” amounts, especially if the government retains obligations for maintaining infrastructure related to those assets.
Appraisals like these are complex, but a simple question underneath them is this: Do governments tend to put off the day of reckoning, and buy cash with long-run consequences?
American Water Works has been a great stock since it went public in 2008. Is that because it offers a good win-win proposition for its shareholders and the communities it serves? Or is it because the net present value of its agreements with governments are good for American Water Works, but negative for the taxpayers funding those governments?