Greater community dialogue is needed to evaluate the details of the proposed agreement.
For the past 125 years, the City of Peoria has possessed a legal option giving it the right to purchase the Peoria-area waterworks from Illinois American Water Company, exercisable every five years. In recent months, some city leaders have proposed suspending this franchise agreement/buyout option and replacing it with a new agreement that defers any buyout option for 20 years.
For deferring this option, what would the City receive? Illinois American would remit to the City three percent of gross monthly receipts from customers located in the Peoria franchise area (approximately $1 million per year), and pay the City $1.45 million per year as a work permit fee for excavation and pavement degradation. It would also commit to capital expenditures averaging $8 million per year over a 10-year period.
Some would like you to believe this is a gift-wrapped present from a benevolent, regulated monopoly at little cost to area water users. The truth is that water users in the Peoria franchise area, residential and commercial, would pay for these new revenues and expenditures, as Illinois American would immediately seek to recoup these costs by requesting a rate hike through the Illinois Commerce Commission. Based on past experience, they will surely receive it, in addition to a guaranteed, allowed rate of return on equity approximating nine percent. In the event that Illinois American is not able to recover any of these fees or commitments through the Illinois Commerce Commission, the company would no longer be required to pay them.
Let’s examine the agreement’s details further. First, city leaders estimate the new franchise fee of three percent equates to only $1.33 per month for the typical residential user. Remember the garbage tax? Residents were told it would only be $6 per month; it has now grown to $14 per month. Look at the last line of your recent water bill—there is already a five-percent “gross receipts tax.” This new three-percent tax would be in addition to the existing water tax, and would not remain flat every year. The compounding effect, along with the average 15-percent rate hike every other year (since 2008), means the $1.33 per month (or $16 per year) would grow exponentially to $100 per year over the next 20 years.
Some inside City Hall rejoice over an agreement that requires the water company to pay $1.45 million per year for breaking into the city’s roads and degrading the pavement. Why is the water company not paying this expense currently? Illinois American’s commitment to spend $8 million per year in system improvements is less than the $10 million yearly average the company recently boasted of having expended over the last 10 years.
Since 1889, every Peoria City Council has protected and preserved its five-year buyout option. Now, some want to break with that historic precedent and tie the hands of future City Councils for the next 20 years. Again, I ask, for what? Instead of entering into a flawed agreement that largely benefits the water company and ensures large rate hikes for Peoria water users, perhaps the City Council should be proactive in mitigating rate hikes for its citizens and businesses. Since 2008, water rates in Peoria have been hiked three times by an average of over 15 percent. Peoria’s water rates are already two-and-a-half to three times higher than the national average.
As a home-rule community, Peoria has a broad range of options to create new revenue streams without giving up its valuable buyout option, which is the city’s only leverage to hold the water company accountable for rate hikes, service quality and system upgrades. This proposed agreement is not a solution to funding long-term road improvements. I encourage the City Council and City Administration to drop this proposed agreement and engage its residents, businesses and taxpayers in a broader discussion of infrastructure needs and funding alternatives. We need greater community dialogue and consensus—not another back-door tax. iBi
Robert D. Manning is a former councilman for the City of Peoria and associate vice president and financial advisor for Morgan Stanley Wealth Management.
