Hempstead water system buyout found 'feasible' despite letter calling it 'serious risk'

An independent study of Hempstead’s potential acquisition of New York American Water's Hempstead territory concluded a buyout to be "feasible," with savings to customers from $70 to $383 a year.

The study stands in stark contrast to a summary of the study filed in a letter to the state Public Service Commission by the town’s water commissioner, who indicated a transaction would pose "serious risk" to the town’s bond rating and saddle it with "massive acquisition costs." While it "would reduce water bills, it would not result in net cost reduction to customers as they would absorb these costs in their own property tax bills," the Dec. 31 letter by Hempstead Water Department Commissioner John Reinhardt concluded.

Yet the study, by Walden Environmental Engineering, draws no such direct conclusion, and even finds savings for customers when a scenario takes into account a "full" payment in lieu of taxes. The study also noted that the likely acquisition cost to be around $465 million, lower than the "almost $500 million" mentioned in the town’s letter to the PSC.

The town provided a copy of the study to Newsday on Friday. Reinhardt, in an interview, said the study has been filed with the PSC, though it is not on the state agency's publicly facing filings for the case, which is reviewing alternatives to the proposal's sale of New York American Water to Liberty Utilities.

Reinhardt said his letter to the PSC didn't mention many of the study's findings because it was based on his subsequent discussion with the town comptroller about the prospect of borrowing to pay for the transaction.

"The report gave the town information to then judge the entirety of the transaction on a macro scale," he said. "I'm saying we can't do it because of the debt situation. It's not a situation we can take on without some kind of assistance from the state."

The Walden report is unequivocal about the benefits of a purchase, however.

"The potential acquisition of the water system by the town is determined to be feasible due to expected tangible cost savings for customers and intangible cost savings and other benefits for customers of the water system," the Dec. 15 study concluded.

State Sen. Todd Kaminsky (D-Long Beach) said he was surprised to find the study's finding and the water commissioner's letter reached starkly different conclusions.

"I think American Water ratepayers are owed an explanation as to why the town doesn't want to step up on their behalf based on what their experts are telling them," he said, noting that "no one from the town has ever contacted me about this issue," including to work on an alternative state-funding plan. "I think this is something that requires more scrutiny and attention."

New York American Water in 2019 reached an agreement to be sold to Liberty Utilities for $607 million, but consumer groups and public officials have objected, and the companies' needed approval by the Public Service Commission has been held up by a state request to study a public takeover. The Village of Sea Cliff, which also commissioned a study by Walden, found a buyout to be feasible for the more than 4,300 New York American Water customers there. The Massapequa Water District also found a buyout to be feasible.

New York American Water president Lynda DiMenna, in a statement, has said, "A transaction with Liberty Utilities is in the best interest of our customers," and added lowering taxes the company pays is the best way to make water more affordable.

The Hempstead study indicated that even under a worst-case scenario in which water customers paid a so-called payment in lieu of taxes to the town, customers could see savings, while gaining other benefits from public water.

Beyond rate relief, "non-tangible benefits could be realized with town ownership of the water system including better financial transparency and accountability, cost savings through synergies and local leadership," the study found.

While any newly created municipal water district would not technically have to pay property taxes it could make arrangements to create a payment in lieu of taxes for the town to recoup a tax base lost when the water company went public. Current estimated taxes paid by New York American Water exceed $36 million a year, the study noted.

The newly created town water district could pay "the same, similar or other amounts of funds to the same taxing agencies," the study reported.

Based on the estimated $465 million value of the system used by the study, the report says, "a positive range of customer rate reductions (savings) is demonstrated with each of the scenarios from a low of $70 per year (with a full PILOT) to a high of $383 per year (with no PILOT)." The savings for customers amounts to "a low of 8% per year up to 43% per year."

The study found with no tax payments at all the town could earn up to $50.1 million in net income per year to pay for the acquisition and invest in the water system, if it paid no PILOT. With a full PILOT it would still earn $14.49 million.

"The combination of tangible benefits to customers through a range of rate relief and various qualitative benefits are adequate to meet the standard of 'Public Interest' necessary to be declared feasible in this study," the report concluded.

Reinhardt said his letter to the state was "strictly to let the PSC know that we are not in a position to acquire this on our own," that there would "have to be state involvement in taking over the water" district in Hempstead.

He said he was not a debt expert but relied on the town's comptroller to advise him on the acquisition. "His statement was strictly that the debt load would be problematic for the rating agencies," driving up borrowing costs for other Hempstead debt issues, he said.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.