Americans used to take water for granted, but the water shutoff in Detroit has taught us all-important lessons. We now know that the private sector is willing to be ruthless in denying access to the most basic needs of living beings, and we also know that even those who have the least resources can also have power - if they are organized.
Knowing these facts can prepare us all for the current fight over the privatization of water. Here are the basic facts as to the players and the events that are leading us to this water war.
On May 21, as the Senate prepared to vote on the Water Resources Reform and Development Act of 2014 (WRRDA), Senator Boxer spoke on the critical roles the Water Infrastructure Finance and Innovation Act (WIFIA) section would play. Said Boxer,
We also have a new initiative to assist localities in need of loans for flood control or wastewater and drinking water infrastructure to receive those loans from a new funding mechanism we have named WIFIA, the Water Infrastructure Finance and Innovation Act.
WIFIA will allow localities an opportunity to move forward with water infrastructure projects in the same way that TIFIA works in the transportation sector. Where there is a local source of funding to reimburse the federal government, the federal government can front the funds in order to speed up the process.
These funding arrangements supplement existing programs and will help to leverage more investment in our nation's aging infrastructure. The conference report also updates the Clean Water State Revolving Fund to ensure that our existing sources of water infrastructure funding are able to continue to meet pressing infrastructure needs.
The conference report authorizes 34 critical Army Corps projects where the Chief of Engineers has completed a comprehensive study. These projects will strengthen infrastructure that protects lives and property, restore vital ecosystems to preserve our natural heritage, and maintain navigation routes for commerce and the movement of goods. IND
There is no question that we have long needed a new water law that can accomplish all these goals.
But, even before the ink from President Obama's signing pen had touched the bill, the finance and private water industries were reenacting their own version of the pivotal moment in Oliver Twist - when the starving orphan Oliver holds out his empty bowl and says, "Please, sir, I want some more."
Water is necessary to the lives of all beings on this planet. The water privatization industry knows this and wants to take advantage of our dependence on water and on the economic weakness of our country's finances.
The Campaign to Amend WIFIA – An Introduction to the Players
A must-read source in the finance sector is The Bond Buyer. It has been published five days a week since 1891 for an audience that includes municipal finance professionals, bond issuers, government officials and investors.
Bonds may seem similar to stocks because they are both reported in a newspaper's business section and both have something to do with finance. However, they play very different roles. Here is Wikipedia's description of how they operate:
Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and will be repaid before stockholders (who are owners) in the event of bankruptcy. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely.
Those who are interested in how infrastructure privatization is financed would find Bond Buyer reporter Jim Watts' May 28 story, "Groups Want Congress to Overturn Ban on Use of Bonds with WIFIA Program," particularly riveting. Watts reports that even before President Obama signed the new water law, water groups and state and local officials were lobbying to amend it and, in particular, to make big changes in its subsection - WIFIA. Watts describes lobbyists' feeding frenzy over the money-making opportunities that could be theirs, if only amendments could tweak WIFIA in their favor.
WIFIA's structure, as enacted, takes an experimental approach to financing water projects. Its five-year pilot program provides $350 million of low-cost loans and credit enhancements for ports, inland waterways, and water supply and treatment infrastructure projects.
However, $350 million is chump change in infrastructure circles, and an experimental approach is unlikely to win favor with major players in the water and finance sectors when far more money could be on the table. As they say, "When the trough is full, the hogs come running."
The trough the finance people want to fill is an amended WIFIA that will give the private sector tax-exempt bonds to finance water projects. Among those active in this campaign are private sector groups like the American Water Works Company (AWWC), Water Environment Federation (WEF), and the Association of Metropolitan Water Agencies (AMWA). They demand amending WIFIA's ban on tax-exempt bond financing, as part of making WIFIA more like the privatization friendly Transportation Infrastructure Financing Innovation Act (TIFIA).
Why does this matter?
The infrastructure privatization industry claims that tax-exempt bonds will "leverage" more investment by the private sector. To most of us, leverage is something that gives the one holding the lever more power, and more power sounds like a good thing. But that is not what "leverage" means in the finance sector. There, the word "leverage" has become the common way to describe what used to be called "debt."
Investopedia, for example, defines "leverage" as, "The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged."
In other words, news stories that talk about "leverage" are actually talking about debt. Investopedia explains that a leveraged loan means, "Loans extended to companies or individuals that already have considerable amounts of debt. Lenders consider leveraged loans to carry a higher risk of default and, as a result, a leveraged loan is more costly to the borrower."
To get an accurate understanding of debt, it is important to remember that governments are not the same as people. For example, they can legally print money, while people go to jail for the same thing.
Debt is not necessarily bad for people. There are many good reasons why rational people take out loans. Common reasons are buying a house, paying tuition to gain knowledge or build skills, and starting or expanding a business. Each of those reasons can be beneficial, not just to the individual, but to the wider society. We want well-trained doctors, teachers and construction workers, and their training takes time and money.
However, we also need to keep things in balance. When something is tax exempt, that means someone is getting a free ride on the taxpayers' dime. Tax exemptions are not inherently bad. Again, there are many good reasons to give people a tax break, in particular, when a tax break encourages people to take some action that benefits society.
Government financing can involve loans that exempt a bondholder from paying any or all taxes on the income the bond throws off. That makes a tax-free bond worth more to the bondholder, because taxes that a bondholder does not have to pay can add to the income the bondholder earns from the bond. Put another way, tax exemptions allow the bondholder to pocket more money.
There is a large downside to the government - and to all of us - in making an activity tax exempt. Those exemptions mean fewer taxes received and less money for the government to pay for roads, clean water, and important government services, such as the Centers for Disease Control.
Why WIFIA Does Not Now Provide Tax-Exempt Financing
According to Bond Buyer reporter Jim Watts,
The ban on tax-exempt bond financing was part of the WIFIA proposal in the original Senate bill and was included by the conference committee that reconciled the differences between Senate and House water bills that passed in 2013. . . . The House bill did not contain any WIFIA program.
"It was a budget decision," he said. "They wanted to avoid a hit on the U.S. Treasury from reduced revenue due [to] additional tax-exempt debt."
Concerns about governments at all levels taking a budget hit from tax exemptions are well founded. The argument in favor of tax breaks is that they get infrastructure projects done more quickly than would be the case without tax breaks because the tax breaks attract private money to fund infrastructure projects.
However, experience has shown that the hidden costs of tax breaks can hit local governments hard. For example, the United States Conference of Mayors 2013 report on water reveals what may be an economically perilous trend. Since 2001, the amount of long-term debt being held by local governments has steadily increased. A large part of that debt comes from tax-exempt bond financing for public water infrastructure. Between 2003 and 2012, the $1.65 trillion in tax-exempt bonds that were issued for public purposes has led to debt of $258 billion.
The US Mayors study reports, "Local government long-term debt exceeded annual revenues in 2008 for the first time in recent history." By 2010, the gap between long-term debt and annual revenues widened considerably and has signaled "concerns over level of debt and mounting debt service burdens on community households, and the perception of credit risk in the municipal bond market." Much of that debt is the result of failed and untested economic theories that have led Kansas and other states to think they could cut their way to prosperity.
The June 29 New York Times story, "Yes, if You Cut Taxes, You Get Less Tax Revenue" is an important warning. The reporter followed the effects of large tax cuts Kansas made in 2012. The effect was a large loss in tax revenue: "In April and May, the state planned to collect $651 million from personal income tax. But instead, it received only $369 million."
Water, Taxes, Finance, and Privatization
A situation similar to Kansas is now playing out with WIFIA and the lobbying to provide tax-free private activity bonds (PABs) to pay for water infrastructure. At the same time, European water companies are buying US water companies and are interested in using international trade deals to privatize water infrastructure under the Transatlantic Free Trade Agreement (TAFTA).
Even in the absence of TAFTA, major European water companies, such as Veolia, Thames, and Suez, are buying distressed US water systems. They are aided by major US water industry groups who are lobbying Congress for legislation to amend WIFIA to allow tax-free Private Activity Bonds for water projects and potentially use WIFIA to provide a path to privatization.
Opposition to those plans was voiced in a June 6, 2014, letter from five organizations to congressional representatives. Those organizations - the Environmental Council of the States, Association of State Drinking Water Administrators, Food & Water Watch, Council of Infrastructure Financing Authorities and National Rural Water Association contend that funding water infrastructure through tax-free bonds, such as PABs, competes unfairly with funding needed for important water projects, such as projects financed through State Revolving Funds (SRFs). The unfair competition between tax-free PABs and State Revolving Funds is that investors will prefer tax-free PABs because not having to pay taxes on PABs means investors earn more money.
State Revolving Funds are an important source of funding for important public needs. They were discussed in earlier parts of this water series and may be found at Water Wars and Creeping Privatization and Water Privatization: Coming to a Century Old System Near You?
Three Major Voices in the American Water Industry
Although not well known outside the water industry, three major players have joined together to campaign for water industry subsidies, including private activity bonds (PABs), tax-free investment funding, and amending WIFIA to provide government funding for the private sector. The three partners are the American Water Works Company, the Water Environment Federation, and the Association of Metropolitan Water Agencies.
American Water Works Company
According to Sourcewatch, the American Water Works Company (AWWC) "is the largest private, for-profit provider of water and wastewater services in the United States." To put that in perspective, 86 percent of us now receive water and wastewater services from publicly owned water systems. However, the percentage of public water services is likely to decline.
According to Food and Water Watch, the AWWC "targets struggling municipal systems for takeover, purchases other private systems adjacent to its existing network, and hikes water and sewer rates. . . . It seeks to influence state governments and regulatory agencies to authorize schemes and mechanisms that facilitate rate hikes, speed up investment returns and push corporate financial risks onto consumers." As a result, according to FWW, "American Water has been a major force behind the privatization of water services . . . "
PR Watch named AWWC's Jeffrey Sterba America's Highest Paid Water Worker. Sterba was paid "$8,311,925 in the three years that he has been a top executive at the company . . . . From 2008 to 2012, American Water's key executives made $32,232,667." According to Forbes, Sterba's total compensation for 2013 was $3,696,139.
On June 3, 2014, the people of Monterey, California, learned just how much clout AWWC had when voters there cast their ballots on a proposition to municipalize AWWC's private Monterey facilities. The proposition was defeated 55 percent - 45 percent, but the gap in spending was far larger. Of the spending on the ballot issue, 98 percent was by California American Water, a subsidiary of AWWC. CAW spent $453,971. The Water Not Politics committee spent $10,000, and the Democratic State Central Committee spent $1,029. More details on the election and its aftermath may be found at the Monterey Herald's post-election reporting.
Water Environment Federation
The second organization promoting tax-exempt financing, the Water Environment Federation (WEF) calls itself "the water quality people." However, WEF is not a provider of drinking water. Instead, WEF's focus is sewage.
WEF was founded in 1928 as the Federation of Sewage Works Associations. In 1950, it was renamed the Federation of Sewage and Industrial Wastes Associations, and, in 1960, was renamed the Water Pollution Control Federation. Finally, in 1991, it became the Water Environment Federation "to reflect an expanded focus of non-point and point sources of pollution."
According to its website, "WEF's diverse membership includes scientists, engineers, regulators, academics, utility managers, plant operator, and other professionals. WEF uses this collective knowledge to further a shared goal of improving water quality around the world." It lists as its three critical objectives driving innovation in the water sector, enriching the expertise of global water professionals and increasing awareness of the value of water. Its attempt to divert focus from its business of dealing with wastewater, that is, the things that get flushed down the drain and toilet, is puzzling.
WEF refers to what it does as "resource recovery," and the products of that resource recovery as "biosolids." On page 12 of its 2013 publication, "Enabling the Future - Advancing Resource Recovery from Biosolids," WEF promotes biosolids as an important part of sustainability in a period of climate change. The report presents three interlocking challenges among social, economic and environmental spheres and promotes resource recovery as having a key role in those areas.
On the other hand, Sourcewatch describes the Water Environment Federation as "the sewage sludge industry's main trade, lobby and public relations organization." WEF became famous - or infamous - in 1991 for its reaction to protests about its plans to spread sludge on local tree farms. WEF responded by creating a name-change taskforce for its products. The winning name was "biosolids," described by WEF as the "nutrient-rich, organic byproduct of the nation's wastewater treatment process." The Environmental Protection Agency has jurisdiction over biosolids. Check ingredient labels to see where biosolids can be found.
Association of Metropolitan Water Agencies (AMWA)
The Association of Metropolitan Water Agencies (AMWA) is the third partner in the memo that advocates redefining WIFIA's role. According to AMWA's website, it is an organization of the largest publicly owned drinking water systems in the United States, and its members serve more than 130 million Americans - from Alaska to Puerto Rico - by providing safe drinking water.
It is no easy task to understand AMWA's positions and operations. AMWA's 2013 annual report shows an organization engaged in dealing with many important issues related to water and the environment. However, AMWA continues to stand with its partners in the memorandum to amend WIFIA to provide private tax-exempt funding that would likely deplete the critically important State Revolving Funds that finance water projects. The report also applauds Senator Bob Menendez (D-N.J.) for his effort to amend WIFIA through a stand-alone bill titled the Sustainable Water Infrastructure Act.
According to Rep. Bill Pascrell, the Menendez bill "would allow for more private investment in repairs to water infrastructure by tweaking the federal tax code to allow tax-exempt private activity bonds to be used on water projects. The lawmakers say similar exemptions are already in place for financing projects like air and seaports and intercity rail construction."
The response to the bill was strongly positive among builders, construction workers, industry suppliers and the general public. The American Supply Association, for example, has focused on private activity bonds that would be made available under the law if enacted:
As you've long identified, the Sustainable Water Infrastructure Investment Act will encourage the market for private activity bonds to ensure that the financing costs incurred by state and local governments remains low. We agree that this would assist in reenergizing the modernization of our nation's infrastructure, which is desperately needed. Thank you again for your leadership on this important issue and your efforts to promote public-private investments in water infrastructure.
The boosters that support PABs as providing bargain financing rates for state and local governments ignore the effects of the Menendez bill. They assume that the federal government can and will fill the gap in lost tax revenue, and they gloss over the effects on the Water Revolving Fund. Indeed, AMWA also wants to "maintain" the federal tax exemption for interest earned on municipal bonds, which it sees as providing project financing at lower interest rates, even though that funding may weaken the Water Revolving Fund.
For those who are interested in learning more, Food and Water Watch has put together a number of informative reports on water, tax breaks, and privatization.