What can cash-strapped cities learn from the Stockton sewer saga?

Published August 3rd, 2012

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Insight from Christopher Gasson, GWI publisher

On June 28, the City of Stockton, Calif., became the largest in U.S. history to file for Chapter 9 bankruptcy protection. New construction hit rock bottom after the housing bubble imploded, and the city is mired in debt because of pension obligations and a soaring foreclosure rate. To top it all off, city leaders were told in mid-July that essential upgrades to the local wastewater treatment plant could cost as much as $156 million.

Under different circumstances, it might be easy to feel sorry for Stockton. For those in the O&M business, however, the city’s plight is more likely to evoke a strong and bitter-sweet sense of Schadenfreude. Those who followed the soap operaesque proceedings in 2007 will recall how anti-privatization “citizen” groups succeeded in forcing CH2M Hill OMI out of its 20-year, $600 million design-build-operate contract at the city’s wastewater treatment plant – the very same facility that is now in shambles. After throwing CH2M Hill overboard, advocacy groups faded back into the woodwork. The sewer plant, meanwhile, went downhill with the city’s financials. The city settled a lawsuit brought by a local environmental group related to combined sewer overflows in 2009, and the sewer plant is once again under scrutiny – this time from the EPA. Thanks to continuing overflow problems and dilapidated equipment (some of which dates back to the 1940s), the now non-negotiable upgrades must come out of the city’s non-existent coffers.

But could things have been different? Perhaps. Speaking to AWI, a Stockton official said it’s unlikely that CH2M Hill would have been on the hook for the upgrades, and the upgrades needed now are not the result of the contract being terminated. However, he also said the city could have argued that CH2M Hill would have been responsible for all major work, possibly making these upgrades less burdensome. Whether CH2M Hill’s contract would have required the company to pay for these upgrades, however, is a moot point. The city burned its bridge to the private sector, and now it’s paying the price.

Stockton now faces the embarrassing and next-to-impossible task of dragging itself back to the municipal bond market or begging Wall Street for an ill-advised loan. But with its recent bankruptcy casting an increasingly long shadow and its credit rating in the toilet, Stockton has the odds of a successful debt issuance stacked miles high against it. To say that there is a lesson here is to understate how preventable Stockton’s sewer plight was. Though the wider municipal bankruptcy has little to do with the upcoming wastewater upgrade, the city might have spared itself a massive project in the midst of a bankruptcy filing if it had allowed CH2M Hill to continue its work. Now, that possibility has been relegated to the realm of “what if?”

While it might be too late for Stockton, perhaps other cities in California can learn from its mistakes. Stockton is not alone in bankruptcy; the California cities of Mammoth Lakes and San Bernardino defaulted on July 2 and July 11, respectively. City leaders across the U.S. (and especially in California) would do well to learn from the Stockton’s failure. Embracing a long-term public-private-partnership could have potentially saved Stockton millions. Now, thanks to the short-sightedness of anti-privatization diehards, Stockton has costly sewer obligations in addition to the menagerie of financial horrors it’s already facing. If other cities are given a chance by private operators to sell or lease their water and wastewater assets, perhaps they will show a bit more common sense and take a good deal when they see one.