A privatized
Philadelphia Gas Works would pay very little city tax compared with the $18
million fee the utility now generates annually for the treasury, but Nutter
administration officials say its sale could yield far bigger long-term benefits
for city taxpayers.
City Budget
Director Rebecca Rhynhart acknowledged Thursday that the municipal utility, if
sold to a private buyer, would generate a "minimal amount of tax
revenue" for the city - less than $300,000 a year.
But Rhynhart said
proceeds from the sale, if used to pay down the city's underfunded pension
liability, could reduce the annual pension obligation by much more than the
utility now generates in income. "That expenditure reduction far outweighs
the loss of $18 million in annual revenue," she said.
In recent days,
Nutter administration officials and their financial adviser, Lazard Freres
& Co., have presented an updated cost-benefit analysis of a PGW sale to
political and business leaders as part of an effort to build support for a
sale.
Lazard now says
the utility could fetch as much as $1.9 billion, up $50 million from its
estimate in early 2012. In a low-interest-rate climate, utilities such as PGW
are fetching premium prices, said Frank Setian, a Lazard senior banker.
"This is one
of the best windows one could imagine to privatize an asset like PGW," he
said.
After paying off
liabilities, the city could achieve a net benefit ranging from $278 million to
$765 million from a sale, Lazard said. In 2012, Lazard estimated that the city
could net as much as $496 million.
The city's release
of its new cost-benefit analysis comes as prospective buyers are preparing
their initial bids for PGW, the largest municipal gas utility in the country.
The first round of bids is due Nov. 1.
A second and final
round of bidding, being managed by JPMorgan and Loop Capital Markets, is
expected to be completed in January.
The transaction
will require approval from City Council and the Pennsylvania Public Utility
Commission, which could take up to a year.
The sale is
opposed by PGW's union, and is regarded skeptically by some Council members and
the city's public advocate, Community Legal Services.
Mayor Nutter and
his deputies have stepped up efforts to sell the sale to civic leaders, to
stave off criticism about the loss of the $18 million fee.
According to new
estimates, a private PGW would pay only $278,000 a year to the city, mostly in
property tax, which it now does not pay. But the sale could generate a deposit
to the pension plan ranging from $272 million to $622 million after setting
aside money for contingencies, according to the city's analysis.
That one-time
infusion to the pension fund would yield an ongoing benefit by reducing the
city's annual minimum payment obligation by $27 million in 2016, and as much as
$72 million in 2016, under the most optimistic sale scenario.
Philadelphia
officials suggest that the reduced pension obligation would allow the city to
pay more into the pension fund, accelerating its return to financial health.
The fund has more than 64,000 members, including 26,000 current city employees.
"It enables
us to accelerate the help to the pension fund without increasing taxes or
decreasing services," said Suzanne Biemiller, the mayor's first deputy
chief of staff. "It's a way to get us into a better condition
faster."
The city's pension
fund is valued at about $4.7 billion, less than half the assets actuaries say
it needs to meet its obligations.
Though the city would
lose out on the annual fee, other taxing agencies would reap new revenue from a
private utility.
The Philadelphia
School District would collect $675,000 a year in property tax and
use-and-occupancy tax, for example. A private PGW also would pay corporate
income tax to Pennsylvania and the federal government that it does not pay now.
Source: Philly.com
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