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Selling the Sewers: The Sweet Smell of Success

By Bruce Stahl, a research assistant at the Show-Me Institute promotes market solutions for Missouri public policy, says there a numerous benefits to Arnold selling its sewers.

Officials for the city of Arnold, Mo., are studying the possibility of privatizing the city’s sewer system. This would be a positive development for several reasons.

The city could raise a large amount of money through the sale of its sewer system — possibly millions of dollars.

First, the city could raise a large amount of money through the sale of its sewer system — possibly millions of dollars. This could be used to pay down debt, invest in needed public services, or lower taxes. The city of Florissant used the revenue from the 2002 sale of its water utility to finance several public improvements and establish a $10 million reserve fund.

Second, privatization would turn the sewers into a taxable asset. This means additional revenue for the municipality, possibly easing the tax burden on existing residents and businesses.

Third, privatization often results in lower costs, higher efficiency, and better service. For instance, Oklahoma City partnered with Veolia Water for wastewater treatment in 1984, and by 2001 had reduced treatment plant costs from $14 million to $11 million. As long as efficiency gains such as those in Oklahoma City are passed on to consumers, lower costs can lead to customer savings. And although government regulations tend to erode efficiency gains over time, the immediate benefits should not be ignored.

Arnold’s privatization option appears to be an opportunity for comparatively lower sewer rates and additional city revenue.

Make no mistake: Arnold’s wastewater system is aged and in need of extensive overhaul and repair. Over the next few years, a significant portion of the sewer system will reach the end of its usable life. When this happens, significant costs will be incurred to renovate the system. These costs will occur whether or not the sewer system is privatized, but privatization could help keep renovation costs as low as possible. Sewer user-fees have gone up twice in the last three years – and that is with government ownership of the system.

Private utility ownership is common throughout Missouri. In neighboring Saint Louis County, almost every resident purchases water, gas, and electricity from private companies. Although sewer privatization is less common, it is not unheard of; Missouri American Water, for instance, has several thousand sewer system customers throughout the state.

The possibility of public repossession of the sewer system is an important option to remember. In the sale contract, Arnold can reserve the right to take the sewers back if certain standards are not met. Such a provision can protect residents from the danger of quality degradation and monopolistic fees.

Only eight workers are employed at the municipal sewer system, and Arnold Mayor Ron Counts has already said that any sale will include protection for their jobs. Job protection means city residents can continue to benefit from the experiences of those employees.

Arnold’s privatization option appears to be an opportunity for comparatively lower sewer rates and additional city revenue. The city will have more money, sewer costs will be handled more efficiently, existing jobs will be preserved, and any concern about the quality and price of service can be addressed in the sale contract. Selling the sewers appears to be a situation where both the government and the people they serve can benefit.

Matt Hay February 08, 2012 at 03:27 PM
Bruce, I am not sure how much you know or understand about the situation in Arnold, and while I support Show-Me in the vast majority of their positions, I think you are missing the boat here, as there are is infrastructure which should be public. The increase in rates is the natural result of politics being played by many sticking their heads in the sand and refusing to deal with the reality of that for fear of losing their office. Most notably, the agreement with MSD that they pretended did not exist until the bill came due, rather than gradually increase rates to in expectation of the costs when the facility went online. That said, the last thing the City of Arnold needs is a surplus of cash which is not earmarked. This is like giving a heroin junkie a mass amount of heroin and thinking the outcome will be positive. This is no different than the city putting their infrastructure on hock just to experience that rush through their veins, so they can somehow attempt to paper over the huge financial hole they have dug themselves by overly optimistic budgeting, wasteful spending, and insane overhead costs. That said, you also omit the any reference to the strongest argument against privatization, and that is the margin component which must be accounted for which is not present within the rate structure currently. It is this margin that has lead to the request for a $76/yr increase in St.L county, and huge increases in Cedar Hill and elsewhere upon assumption of the systems.
Bill Moritz February 09, 2012 at 01:32 AM
For years prior city councils did not address these issues but was it deceit as implied above? I was elected to the council in 2007. It was in late 2008 that I learned of the debt the city faced for the MSD plant. I found it objectionable that we were not briefed upon election of such obligations. There was no head in the sand. We simply were not told. That got fixed. When it came out in 2008 that rates had to go up a few ideas were discussed and the one made/makes the most sense and is most fair is where billing would be based upon winter water usage from the prior year. The minimum amount of water for the year probably occurs for most of us in the winter and most all the water that comes into a home likely goes down the drain. There is no car washing, pool filling, grass watering, etc. Then Councilman Hay voted for this proposal in January 2009 and then called a special meeting in March to get it thrown out when people started receiving higher bills and complained to him. Talk about a head in the sand. The rates had to be raised and they were. It is fair to state that no one wants to pay more for the sewer system. Once the tank lever is pressed no one wants to think about where it goes. I ask that you all please do think about it. It goes into a system that is aging, in places crumbling and it must be maintained and repaired to function properly. Even though the city did not sell the system, we still have the responsibility to maintain it and keep costs down.
Doris Borgelt February 09, 2012 at 04:13 PM
Yes,I believe it was deceit & the fear of not being re-elected.Previous councils had a duty to monitor sewer funds & make adjustments along the way to ensure adequate funding for proper maintenance,needed repairs & impending costs related to the MSD project.Unfortunately even now, those needed repairs keep rolling further down the to-do list.Repairs haven't been made for projects that have been “top priority” for over five years that I've been keeping track.It's said we haven't had the money. Although,we had $500,000 that was “borrowed” from the sewer fund to purchase the Dixon property behind the Recreation Center in November of 2004.We've been renting that property out for $750 a month for years.Not a very good ROI or use of money that should have been used to make much needed repairs to the sewer lines below the Recreation Center and have suffered from excess storm water infiltration into the sanitary sewers and inadequately sized sewer pipes with too many angles that cause blockages and backups. Recently some street repairs have been put off because sewer repairs are needed, beforehand. Sewer repairs were also suspended due to the anticipated sale of the sewer system which is not going to happen.Just because you anticipate selling something,doesn't mean you just let it deteriorate until you do!Lets get these projects started & done.We need to deal with problems caused by past inattention over these many years so that we may move forward to improve our future.
Bruce Stahl February 10, 2012 at 07:26 PM
I appreciate the comments: Doris, it was simply bad luck that this was posted after the vote. However, the arguments in favor of privatization are still relevant. Matt, as I mentioned, the private sector is efficiently managing utilities of all types, including sewers, in other cities and states, and as you mention, the government is concerned with many other things besides infrastructure, such as politics – which can negatively impact its ability to maintain the sewers. I think it’s time the private sector has the opportunity to manage Arnold’s sewers. Also, I don’t claim that privatization will lead to an inexpensive service, simply a better service than the government will provide. For instance, when times get tough, the private sector can’t stick its head in the sand – if for no other reason than fear of bankruptcy. Bill, sometimes the government is involved in too many things to adequately manage them all. I think the fact you were able to serve in office a year without knowing the debt the city faced is an example of that. I hope the council will still consider privatizing the sewers, both for the reasons I’ve stated and because selling the sewers will reduce the number of issues the council will have to focus on, giving the council more time to adequately manage each one.
Doris Borgelt February 12, 2012 at 05:52 PM
Your arguments may be relevant, but at this point in time, moot. Actually, I would have to disagree that the private company could provide a better service for citizens than the local and personalized service we receive from our city employees. Our sewer department responds quickly to any calls for service, which has not been the case for the company that made the unsolicited offer. Yes, there was the dangling of the "big money" carrot, the shedding of future obligations and repairs, but those plusses did not outweigh the minuses. When all would have been said and done, there would not have been the big "windfall" to city coffers that you spoke of by comparing us to another entity. There are certainly improvements that can and will be made to our sewers in the future. That's why there was an infiltration and inflow study initiated and now close to completion. The City will only have to break even, they will not have to make a profit, so our citizens, not shareholders, will benefit. Our goal is to be as efficient as possible. Long needed repairs are inevitable. The return of $500,000 to the sewer fund would be a start. Mr. Moritz may not have known the impending debt the city faced at that time, the subject may have been avoided, but it wasn't any secret. The citizens of Arnold were against a sale and were vocal about it. This still is supposed to be a government of the people, by the people and for the people, I intend to see that it is.

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