The City of Scranton, Pennsylvania was faced with a series of severe financial challenges. Designated as a Financially Distressed Municipality in 1992 under Pennsylvania’s Act 47 (the Financially Distressed Municipalities Act), the City had struggled with financial issues for decades. The City was saddled with underfunded public safety pensions, aging infrastructure, high levels of debt, and a large, federally mandated Consent Decree associated with the operation and management of the Scranton Sewer Authority. In addition, the Authority was in the midst of carrying out a challenging, federally mandated long-term plan that had already exposed customers to three significant rate increases in excess of 44% each (in 2003, 2007 and 2012). The Authority was also projecting average annual rate increases of 4.57% a year for the next 30 years, resulting in “High Burden” sewer bills under EPA metrics.
Skip Stitt was brought in as a subcontractor to act as the City’s primary transactional advisor and lead the City’s efforts to monetize the local utility assets. The goals of the project included protecting the Authority’s customers by mitigating future rate increases, introducing industry best practices and providing consistently high-quality services to the Authority’s users, meeting applicable environmental requirements and exploring technological breakthroughs to more effectively comply with mandates, ensuring that the Authority’s assets (both existing and new) were properly maintained, and treating the Authority’s employees fairly and equitably and enhancing their career opportunities.
Using a competitive RFP process, the Authority identified four third-party providers interested in acquiring or leasing the sewer utility assets. After reviewing the providers’ responses, the Authority entered into an asset purchase agreement with Pennsylvania American Water Company (PAWC). In concert with the City, PAWC developed a series of industry-leading operational strategies to reduce costs, increase revenue and improve services as part of the sale, including:
- Consolidating and streamlining customer billing and collections practices;
- Improving capital planning and infrastructure development processes;
- Increasing overall levels of labor efficiency by cross training the water and sewer workforces; and
- Lowering the costs of purchased goods and services through procurement-related economies of scale.
The competitive RFP process generated an up-front purchase price of $195 million (which included about $75 million in existing Authority debt/loans to be paid off at closing). The acquirer also assumed responsibility for the Authority’s $139 million Long Term Control Plan, as well as ongoing environmental compliance. PAWC hired all of the Authority’s existing staff at comparable wages and benefits and PAWC negotiated a new, multi-year agreement with the union representing the employees (Teamsters Local 229) prior to closing. Importantly, the transaction also secured significant, long-term rate reductions for customers. When compared to the pre-sale rate schedule, the transaction will deliver approximately $350 million in rate savings over the next 28 years, about $7,650 per residential customer.