ACTION REQUESTED:
Title
Communication from the City Manager and Corporation Counsel with Request for the Following:
A. APPROVE an Appraisal Assistance CONTRACT with the CEO COUNCIL and ADOPT an ORDINANCE AMENDING the CITY OF PEORIA 2018-2019 BIENNIAL BUDGET Relating to the General Fund to Recognize the Receipt and Expenditure of $400,000.00 to Assist in the Purchase of the WATERWORKS (Requires a super majority vote); and
B. ADOPT a RESOLUTION to PURCHASE the WATERWORKS.
Body
BACKGROUND: In 1889, the City of Peoria entered into an agreement to sell its water utility to a private company, which is now Illinois American Water Company (IAWC). That agreement was amended in 1904. The Agreement provides an option that allows the City to repurchase the utility once every five years. This option will be before the City Council again in 2019; the deadline for final decision is May 3, 2019. Per the Agreement, the City must give IAWC notice of its intent to consider purchasing the utility no later than six months prior to the anniversary of the Agreement, or November 2, 2018.
According to the 1889 Agreement and subsequent amendments, when the City desires to exercise its right to purchase the waterworks, it must do so by approving a resolution to that effect no later than six months before the expiration of every 5 years (started with expiration of 10 years) from the date of passage, May 4, 1889. Hence, November 4th in the year preceding the expiration date.
If the Council desires, they should vote on a resolution to purchase the water company at the October 30, 2018 meeting. If the parties cannot agree upon a price to be paid for acquisition, a commission is set up with an appraiser appointed by the City, a second appraiser by Illinois American Water Company and a third appraiser appointed by the first two appraisers. This “appraisal commission” determines the price at which the City would have to buy the waterworks (also called the “award”).
Upon price determination, the City has the right to exercise the option of purchasing or refusing to purchase the water company for that set price. If the City elects to continue with purchase, it must give notice to IAWC within 60 days from the notice of the award price. If the City refuses to purchase the water company, it must pay for all the necessary expenses incurred by the three appraisers and their fees in making such award. If the City purchases the water company and the purchase is completed, the City and IAWC equally divide and pay for the appraisers' expenses.
In 2002, the Appellate Court upheld the City’s authority to purchase the water company. Illinois-American Water Co. vs. City of Peoria, 332 Ill.App.3d 1098 (3d Dist. 2002). While stating that most provisions of the franchise agreement were no longer binding, the Court held that:
(1) the City had the authority to include the purchase option in the agreement;
(2) the Purchase option is not perpetual in duration but continues throughout the life of the City;
(3) the Option was not terminable at will;
(4) the Purchase option was not preempted and superseded by the Public Utilities Act;
(5) the Purchase option is not unenforceable due to the doctrines of commercial frustration or impossibility of performance; and
(6) the water company did not have standing to contest the agreement between the City and PAAG.
History
The Peoria Journal Star has reported on the water company and through its archives, a history of this issue can be developed. The following timeline reflects this history.
|
Year |
Action |
|
1833 |
Stephen Stillman proposed conveying spring water from the head of Jackson Street to Courthouse Square using hollowed logs as conduit. |
|
1845 |
Peoria Water Company chartered to improve springs. |
|
1865 |
Voters rejected a bond referendum for a municipal water works. |
|
1868 |
Voters passed a bond referendum for a municipal water works. |
|
1889 |
Shaky public finances force City to sell water works to John Moffatt and Henry Hodgkins for agreeing to pay the remaining $450,000 debt. |
|
1894 |
New firm built a new pumping station and opened the water plant, but financial difficulties put it in receivership. |
|
1898 |
Water company bought by another group of investor. |
|
1909 |
Peoria Water Company merged with the Alton Water Company and the Illinois American Water Company. |
|
1936 |
City opens up acquisition talks with NY based owners after rate complaints. Asking price: $7.3 million, City counters with $5.5 million. |
|
1937 |
City threatened condemnation, Company countered with $6.45 million. Talks broke off after City's investment firm went out of business. |
|
1959 |
City pursues condemnation, also explores a buyout $13 million, water works argues its worth $30-35 million, arguments for included controlling growth and controlling rates. |
|
1961 |
City drops condemnation effort, questioning whether it would remain profitable. |
|
1977 |
Estimated purchase price $36 Million through 35-year bonds, arguments for included controlling growth and controlling rates. Momentum fizzles after Illinois American changed management and improved service. |
|
1989 |
City begins studying the water company question again. Commissioning a phased study that took 3 years to complete. |
|
1993 |
Purchase estimated at $41 to $215 Million, County Board weighs in asking for a joint study of the issue. $76 million was determined to be the break-even point. |
|
1993 |
Illinois American submits petitions for an advisory referendum on the water buyout question in March 1994. |
|
1993 |
Illinois American commissioned survey found 47 percent of respondents opposed the city buyout and 9 percent favored the buyout, with 7 percent holding mixed opinions and the remaining 38 percent answering "don't know." |
|
1993 |
Hallock and Medina Townships water district referendum approved. |
|
1994 |
City announces prior to election day that it would not pursue the water buyout. Voters in the `no' votes in the advisory referendum won 15,237 to 2,449, or 86 percent to 14 percent. |
|
1998 |
The Peoria City Council votes in favor of a $1 million loan to begin the study of a possible public buyout of the waterworks. |
|
1999 |
City consultant estimates that the City could collect $62 million over 10 years with a purchase price of $68 million. Alternative value of $90 million presented, based on method. |
|
2002 |
After a five-year legal battle, the 3rd District Appellate Court upholds the city's 1889 franchise agreement, forcing the water company to participate in the city's process of exploring a buyout. |
|
2002 |
Route 150 Water District approved by referendum. |
|
2004 |
The city estimates the utility to cost $96 million; the water company tags it at $300 million. |
|
2005 |
A three-member appraisal panel tagged Peoria's privately owned division of the water company at $220 million. |
|
2005 |
Voters overwhelmingly oppose the buyout. In an advisory referendum, 81.8 percent said the city should not pursue. |
|
2005 |
By a 6-5 vote, council votes against pursuing the water company buyout, even if another public entity wanted to help with the purchase. |
|
2006 |
Trivoli-Logan Water District approved by referendum. |
|
2007 |
The water company offers the city $1.5 million to purchase Peoria's option on the utility. City declines offer. |
|
2008 |
By a 7-4 vote, council votes against continued pursuing the water company buyout. |
|
2013 |
City granted a one month extension before deciding whether or not to buy out the water company. |
|
2013 |
Poll conducted at the behest of Illinois-American Water found that by a 73 percent to 23 percent margin, voters opposed the City Council pursuing a buyout. |
|
2013 |
By an 8-3 vote, the Peoria City Council did not exercise its option to purchase the water utility. |
|
2014 |
A proposal to monetize the franchise agreement option was presented to the City Council that included an annual $2.5 million franchise fee for 20 years. |
|
2014 |
No deal to suspend the city's option to purchase the municipal waterworks jointly announced by City and Illinois American. |
|
2016 |
In another survey by Illinois American, 69% of voters opposed, while 23% favor the buyout. |
|
2017 |
Appellate Court determines City breached the 1998 agreement and owes PAAG $1 million. The amount of accrued interest has been remanded back to the Circuit Court for determination. |
|
|
Source: Peoria Journal Star |
CEO Council Appraisal Assistance Contract
The 2018 recommended budget presented to the City Council in October 2017 included $400,000 to begin to study the legal, financial and operational issued with the purchase of the Peoria Assets of Illinois American Water Company (IAWC). The funding was removed from the budget adopted by the City Council. On January 5, 2018, the CEO Council sent a letter to the Mayor and City Manager informing the City that they had been successful in raising $400,000 of private funds to pursue the due diligence by the Peoria City Council prior to December 2018. The attached Appraisal Assistance Contract reflects the input between the CEO Council and the City Staff and the input from the City Council. A redline version of the agreement and a clean version of the agreement have been attached to this communication.
The Appraisal Assistance Contract states that the CEO Council and the City are committed to this partnering to establish the lowest possible fair purchase price of the Waterworks Facilities and agree to work in good faith to achieve that goal for the taxpayers of the City. The Contract is conditioned on (a) the City Council approving the City’s entering into this Contract and pursuing the actions contemplated by it by November 1, 2018, and (b) the CEO Council depositing no later than thirty (30) days after Contract Approval $400,000 into a special segregated deposit account the CEO Council maintains for funding Appraisal Team and other authorized expenses incurred by the City as contemplated by this Contract.
Promptly after receiving notice from the CEO Council that the funds have been deposited in an account, the City will engage in the process of selecting experts, consultants, accountants and attorneys of appropriate qualifications and experience to comprise the Appraisal Team to present, support and determine the fair and just price of the Waterworks Facilities in the Appraisal proceedings. The City shall select the Appraisal Team based on each proposed member’s - expertise, qualifications, and experience in respect to obtaining a fair and proper valuation of the Waterworks Facilities. The City shall consult with a committee designated by the CEO Council on their appraisal team selections and shall make available upon request and periodically to the CEO Committee the proposed rates of charge, costs, education, certifications, experiences, qualifications of the Appraisal Team and proposed appraisers or arbitrators in the Appraisal that the CEO Committee may determine relevant or important.
The City has the right to select the appraisers, consultants, experts, accountants and attorneys it chooses to make up the Appraisal Team, but only after consulting with the CEO Committee. If at any time the CEO Committee disagrees with the City on the City’s choice or selection of experts, consultants, accountants and/or attorneys to make up the Appraisal Team or the appraiser or arbitrator in the Appraisal, it may notify the City. If such notice is given, the CEO Committee will work with the City to resolve their differences over the selections and choices for the Appraisal Team, however, as stated above, the City is vested with the sole authority to select the Appraisal Team. The CEO Committee can suggest names and qualifications to the City of proposed members of the Appraisal Team or appraiser or arbitrator in the Appraisal. Prior to selection of the Appraisal Team or the appraiser or arbitrator in the Appraisal, the CEO Committee and City may, either jointly or independently, interview the proposed members of the Appraisal Team or the appraiser or arbitrator in the Appraisal.
The Contract City agrees that any moneys contributed to it by the CEO Council for the Appraisal Team must be used by the City only to pay the fees and expenses of the Appraisal Team’s pursuit of the Appraisal and such other purposes under or related to the Option or Appraisal that the CEO Committee approves in writing. The City will make all bills and invoices of members of the Appraisal Team available for review to the CEO Committee. Once the team has been assembled, the City will cause the Appraisal Team and appraisers or arbitrators appointed for the Appraisal to proceed with an investigation, support and present a persuasive presentation of the determination of the fair and just price of the Waterworks Facilities at a value fair and reasonable to the City. The City shall cause the Appraisal Team to report the issues and its progress in the Appraisal proceedings to the CEO Committee once per week and upon the CEO Committee’s request.
In order to pay for the costs of the Appraisal Team, the City is entitled to request advance monthly payments for the Appraisal Team from the CEO Council in amounts reasonably estimated to be the costs of the Appraisal Team for the monthly period. The CEO Council has requested that payment not occur until after January 1, 2019.
Any advances to the City and any funds remaining subject to the Agreement shall be returned to the CEO Council for return to the funders and contributors. If the City purchases the Waterworks Facilities funds contributed by the CEO Council or its members or other contributors to the City for the Appraisal will be refunded to the CEO Council without interest. If the City declines to purchase the Waterworks Facilities pursuant to the final valuation determined by the Appraisal, the City will not be obligated to repay any funds contributed by the CEO Council or its members or other contributors spent in pursuit of the Appraisal. If costs for the Appraisal Team exceed the $400,000, the CEO Council may endeavor to raise additional funds at its sole discretion. The Agreement include restrictions on lawsuits from either party and individual members or contributors to any of the funds contributed.
Under Illinois law, Municipalities cannot enter into contracts without a prior appropriation or funding of said contract. Therefore the City budget must be amended to execute this contract. A budget amendment requires a super majority vote.
Rules of Order for the Commission
As part of this process, the City and IAWC agreed to terms and conditions, the “Rules of Order for the Commission”, which would be followed in the execution of the valuation procedure set forth in Section 17 of the Agreement. The attached Rules of Order were last executed in 2003, and were adopted but not utilized as a framework in 2013. These Rules of Order are outlined in the following manner:
1. Amendments - Amendments or additional rules can be made by a majority of the Commissioners, with the mutual consent of the City and IAWC.
2. Commissioners - The City and the IAWC would appoint a Commissioner each, and mutually select the 3rd qualified Commissioner.
3. Issues to be determined - The Commissioners would determine the fair market value of the waterworks, including tangible and intangible property; and the definition of waterworks is also defined.
4. Meetings - The Rules allow the Commissioners to meet as often as they deem necessary.
5. Confidentiality - The parties, their respective experts and the Commission would sign confidentiality agreements to protect security-related and financial information.
6. Evidentiary Hearing - The Commission would be required to hold at least one Evidentiary Hearing in order to take testimony of the City and IAWC and their experts. Direct evidence, cross examination of experts, oral arguments and legal memoranda would be submitted to the Commission. The hearing would be held no later than 9 months after the Effective Date of the Rules of Order.
7. Discovery - Subject to the confidentiality agreement, IAWC would provide the City and its representatives with reasonable access to facilities, operations, books, records, contracts, business, commitments, and properties of IAWC pertaining to the water works. Expert reports would be shared ninety (90) days before the evidentiary hearing and depositions 30 days prior to evidentiary hearing
8. Expenses - The Rules outline how expenses are reimbursed. If the sale is completed, the expenses are split evenly between the City and IAWC. Should the City not proceed, the City shall reimburse IAWC for their costs.
9. Award - Within 45 days of the Evidentiary hearing, the Commissioners will make an award containing the fair market value of the waterworks and the reasoning behind the award. If the City elects to purchase, it must give notice to the water company within 60 days from the notice of the award.
10. Post Award Procedures - Should the City accept the award, the City is given 180 days of reasonable access to the facilities and records of IAWC to conduct standard due diligence following acceptance of the award to determine if the City wishes to complete the purchase or decline the purchase option. If the City does not execute the purchase option, the City will have to reimburse IAWC for their expenses.
These Rules of Order took eight (8) months to negotiate, at a considerable expense. Should the Rules of Order be revisited by the Council and the appointed Appraisal Team, it may be a considerable amount of time and expense to negotiate.
As a frame of reference, in March 2006, the City paid $210,128.38 to IAWC for their appraisal cost pursuant to the Commission Rules, their costs associated with the valuation process to be paid under Section 8 of the Rules of Order. In total, the expenses related to the water company acquisition including legal, appraisals, engineering and consulting during that time was $1,876,181. According to Finance, the amount of funds paid with PAAG funds is listed below:
|
ENTITY |
AMOUNT PAID |
|
DEFREES & FISKE |
5,967.00 |
|
HASSELBERG, ROCK, BELL & KUPPLER |
38,948.22 |
|
HOWARD AND HOWARD |
383,118.88 |
|
LE CHIEN LAW OFFICES |
4,534.71 |
|
MCNAMARA & EVANS |
10,218.79 |
|
QUINN, JOHNSTON, HENDERSON, PRETORIUS |
14,427.70 |
|
TOTAL LAW |
457,215.30 |
|
|
|
|
ENVIRONMENTAL SCIENCE & ENGINEERING INC. |
7,427.78 |
|
INTEGRATED UTILITIES GROUP |
92,142.36 |
|
MAURER STUTZ, INC. |
7,102.38 |
|
MR VALUATION CONSULTING |
20,148.00 |
|
RAFTELIS FINANCIAL CONSULTING |
359,420.75 |
|
TOTAL VALUATION |
486,241.27 |
|
|
|
|
CITY OF PEKIN |
13,869.00 |
|
PAAG(PRELIMINARY EXPENSES SEC. 1.06) |
5,371.50 |
|
ILLINOIS SECRETARY OF STATE |
1,075.00 |
|
ROSS ADVERTISING |
4,000.00 |
|
TERRY KOHLBUSS CONSULTING |
12,227.93 |
|
TRI-COUNTY REGIONAL PLANNING COMM. |
20,000.00 |
|
TOTAL MISCELLANEOUS |
56,543.43 |
Options under Consideration
The City Council has three options under consideration:
• Accept the Appraisal Assistance Contract with the CEO Council to assist with the valuation phase. This option requires the City to exercise the purchase option by approving the attached resolution and proceeding to the valuation phase;
• Reject the Appraisal Assistance Contract and continue to exercise the purchase option by approving the attached resolution and proceeding to the valuation phase; or
• Do not exercise the purchase option and revisit the matter in 2023.
While the City has the ability to accept or reject the Appraisal Assistance Contract, if accepted, the City is required to exercise the purchase option. The City could reject the Appraisal Assistance Contract and still exercise the purchase option by approving the attached resolution and proceeding to the valuation stage. If the City rejects the Appraisal Assistance Contract and does not exercise the purchase option the City can revisit the matter in 2023.
While many parties want the City to get a better understanding of the value of the water company, the only way to officially determine that would be to exercise the purchase option. This process is lengthy and costly, and the only way to actually determine whether the water company would generate additional revenue after debt service and capital improvements, the City would need to know the purchase price.
FINANCIAL IMPACT: Should the City accept the Appraisal Assistance Contract and exercise the purchase option, the City would be responsible selecting experts, consultants, accountants and attorneys of appropriate qualifications and experience to comprise the Appraisal Team to present, support and determine the fair and just price of the Waterworks Facilities in the Appraisal proceedings. The CEO Council funds would be available up to $400,000, and possibly more, but any costs in excess of the funds raised would be the responsibility of the City. If the City started down the path but choose not to purchase at the award price, it would be responsible for all of its own costs plus reimbursing IAWC for its costs related to the appraisal process (approximately $210,000 the last time the City went through this process).
Should Council vote not to accept the Appraisal Assistance Contract, they can still exercise the purchase option. The Council should be prepared to spend up to $1,000,000 for the valuation process in that instance.
NEIGHBORHOOD CONCERNS: The purchase of the waterworks affects the entire City.
IMPACT IF APPROVED: While the City has the ability to accept or reject the Appraisal Assistance Contract, if accepted, the City is required to exercise the purchase option. The City could reject the Appraisal Assistance Contract and still exercise the purchase option by approving the attached resolution and proceeding to the valuation stage.
IMPACT IF DENIED: If the City rejects the Appraisal Assistance Contract and does not exercise the purchase option the City can revisit the matter in 2023.
ALTERNATIVES: The alternatives are presented in the Council Communication
EEO CERTIFICATION NUMBER: N/A
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL’S 2017 - 2032 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Financially Sound City
2. Grow Peoria
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Have an efficient government.
2. Keep taxes and fees competitive.
3. Invest in our infrastructure and transportation.
DEPARTMENT: City Manager's Office