Cincinnati: Water Works and the Commonwealth

It is not unusual for for core cities in America to own water utilities that provide service on a regional basis. Indeed, it might be the most common publicly owned regional utility service. Louisville does it, so do Indianapolis, Detroit (a massive operation that, among other things, supplies Dasani water – yup, I’m told it’s good ol’ Detroit tap water), and Cincinnati.

Many of these operate as non-profits, others as for profits. Cincinnati is in the former camp. In the latter, the Louisville Water Company is a corporation whose stock is owned by the city and from whom the city receives a dividend of millions of dollars per year.

With cities strapped for funds, they are increasingly looking at assets like water utilities as a way to raise money. Cincinnati is among these. Its city manager used to work in Louisville and wanted to know if it would be possible to transition to a Louisville like model.

Today, the Cincinnati Water Works operates as a city department that operates as a non-profit. It supplies water to 85% of the metro area’s population, including service in part of Northern Kentucky. By law, it cannot earn a profit. Also, by law, it cannot build facilities outside the city of Cincinnati that are not for the benefit of people in the city. The city believes this constrains its operations and ability to grow, however, also notes that water consumption is declining due to declines in industrial usage, so it doesn’t sound like expansion is necessary in any case.

The city manager has proposed that the city sell the water utility to a water district for a price of around $425 million. This would be paid in installments over 75 years, with the city collecting $5-6 million per year initially, expanding to $14-18 million over time. The district would remain controlled by the city, but would eventually bring suburban leaders on board, making it a truly regional district.

If this sounds a lot like a privatization, you are right. Some have argued that it is not necessary to truly sell or lease public assets to private entities in order to recognize the types of gains associated with the Indiana Toll Road or Chicago Skyway lease. Rather, cities can do it themselves. This proposed transaction demonstrates how. You create a special purpose government entity – in this case a water district – then, in effect, sell the assets to yourself. This was also recently done in Detroit, where Detroit and Windsor created a special purpose toll authority to take over the tunnel linking their two cities.

So, if this is a synthetic privatization transaction, where is the value coming from? How do you earn $425 million selling something you own to yourself? Well, as I noted before, if it isn’t obvious where the value is coming from, then there is either is none, or there is an embedded price in increase. In this case, water rates will increase starting in 2021 in order to cover that $425 million plus interest.

Cincinnati is, in effect, converting its water utility to a for profit enterprise and raising rates. This enables it to start drawing regular “dividend” checks, just like Louisville does. And, as a bonus for the city, a majority of that profit will originate outside the city limits. It creates an income transfer from the suburbs to the city, via water company profits.

Whether or not the conversion and rate increase is a good thing is one I will leave to the residents of Cincinnati to decide. It is like any other tax or fee increase. It depends on community values and the bets the community wants to take about the future. I am not taking any position on the ballot issue regarding this matter.

It is the regionalization aspect that I’d like to consider. I tend to think that some level of regionalization is a good thing in most communities. One of my core principles is that regionalization should build bridges and bind the city and suburbs together around common interests. Clearly, water service is a common interest. Yet getting it right is very difficult. It’s a fine line between creating goodwill and making people think they are being held for ransom. That’s a point I did not see covered in any of the materials and which I believe merits extensive evaluation prior to moving forward.

As I noted, rates are going up, and the reason they are going up is partially to let the city earn profits off suburbanites. It doesn’t seem realistic to think that people in the suburbs aren’t going to figure this out. What are they likely to think when they do?

Tocqueville noted that a decline in feelings of mutual obligation and respect often were accompanied by an increase in cash payments. When people do not seem themselves as part of a commonwealth or web of reciprocal duties, then transactions become merely financial. Or, to look at a it a different way, people may try to use money to buy themselves out of moral or social debts.

Think about our core cities, especially in the Midwest. They’ve got enormous legacy costs, bear a disproportionate share of regional social service obligations, have large amounts of institutions and institutional land that is not on the tax rolls and, while having a large percentage of key assets that benefit the entire region, are often obliged to fund the upkeep of those obligations themselves.

Clearly, the suburbs have a vested interest in a healthy core city. When the central city implodes, as in the case of Detroit, the entire region suffers. Indeed, Cincinnati and Hamilton County have lost significant population off their peak and I believe that right there explains a lot of the difference in regional economic and population growth between Cincinnati and places like Columbus and Indianapolis that are growing faster.

Beyond that, one can make the argument that there’s a moral duty as well. Should people be able to escape the problems that they (or their parents and grandparents) helped to create just by fleeing to an adjacent jurisdiction? Should they be able to wall themselves off in upscale enclaves, leaving the poor or others not so fortunate to look longingly at the gates?

Yet duty and self interest are often not enough to overcome the problems of the free rider or the diffusion of responsibility. Still, there are some things suburbs absolutely do need from the city. In this case, one of them is water. What do they have to offer in return? Clearly, the easiest thing for them to do is write a check. If they do, they can then sleep well at night knowing that they paid a “fair” rate for the one service they wanted. It’s a small price for them to pay to escape the call of duty or “self interest well understood”. Particularly this is the view that most of them are likely to take if the payments are actually forced on them by the city.

Cincinnati more so that most regions seems to have a serious city-suburb divide. I would encourage Cincinnati to view any Water Works transaction not just as financial engineering, but as an opportunity to engage in a regional dialog and figure out how to use this transaction to help bridge the divide and bring people together. It could be an opportunity to help have a broader discussion about advancing the entire region and creating a more complete regional commonwealth. For example, perhaps instead of profits from the Water Works, it would become a regional non-profit, with the city sharing control, but the suburbs would agree to help fund other regional assets or needs that are currently the sole or disproportionate responsibility of Cincinnati or Hamilton County.

If the city lets its suburbs off the hook for mere money, it way well live to rue the day. Believing that they “gave at the office”, they suburbs may feel more than justified even further turning their back on the fortunes of the city at the heart of the region in favor only personal growth and prosperity.

It is certainly in the best interests of the region as a whole that Cincinnati remain vital and fiscally solid. But it also of importance to have a region that realizes the real battle is with other cities and regions around the world, not within its own backyard. In an ever more complex, competitive world, every part of a region, city and suburb, needs to bring its “A” game. To do that, people in a region need to be thinking and acting like they are all on the same overall team.

Related:
Water Works Proposal Executive Summary
Imperial Columbus and the Principles of Regional Finance

Remember: Vote No on 9

Remember, Cincinnatians should Vote No on 9 on Tuesday. Here’s one more funny video on the subject. (Click here if the video does not display for you).

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