...release or approve $125 million for a River City concept.
Yes. In our general revenue bond ordinance under which we issue all of our debt, there's a provision, a covenant that we've made with bond holders that states that at any given time we will have in this fund enough money to pay one year's principal -- maximum principal and interest payment. 336 Whole - Operating Budget 4/28/04 And that fund is there primarily for the benefit of the bond holders. In other words, our debt service is approximately $160 million annually. And that fund is supposed to be funded at $160 million. It is... If you read the ordinance, you'll see that it is permissible to replace the cash in the Sinking Fund Reserve with a surety bond or a letter of credit. And so, that is perfectly permissible.
Yeah. I understand that we can do it. I just want to see if you can talk to me about... Do you see any negative effect? Are we going to take a good chunk of the money that's there out of there? How does that -- What happens if we ever -- if we need -- there's a real -- a big emergency? And we can -- Are we going to be okay to remove $125 million and still be able to deal with a big emergency?
I don't think that the money -- that particular pot of money 337 Whole - Operating Budget 4/28/04 is designed for emergencies. Actually, it is designed to be in place in case the Water Department cannot make the full principal and interest payment on its debt.
That would be an emergency. And then the... For instance, $125 million surety bond would cover $125 million of potential -- of cash. The other $35 million is there, as well, in cash. I believe $35 million would reside in cash in the Sinking Fund Reserve. And either one of those would be used to -- to come to the aide of the bond holder.
So you feel -- You feel -- What I'm hearing is that you feel comfortable that -- for the Administration to do this at no -- with no 21 major negative impact on the fund.
I think most departments have a kind of a parochial interest in having full control of all of its assets all of the time. 338 Whole - Operating Budget 4/28/04 But what I'm saying is that so long as this is done and it's done in a way that is neutral to the department and neutral to the bond holder for which this fund is there, then we should be fine.
More or less. There's -- There are different schools of thought. When interest rates are very low, like they are today, putting a surety bond -- buying a surety bond at... I don't know... three or four percent, rather than -- rather than going out and getting capital at five or six percent, you know, may make sense. But what I'm saying is, the real function of that fund is for the benefit of the bond holder. And as long as there's a surety bond or a letter of credit from a triple A rated company, then the bond holder, I think, would be reassured.
Thank you for 339 Whole - Operating Budget 4/28/04 your insight on that. I live near 9th and Girard Avenue, not too far away. What caused that rupture and how much would that -- how much did that cost to get repaired? I know you were there for many, many hours. I was coming home that evening, and...
Right. I want to say to everybody that -- You know, I was out there. And again, I was in the Operations Division for the first years 13 of my 33-year Water Department career. So the last 20 years I've been in finance, and I don't get to see too much of that. But I was out there. And I thought our employees did a marvelous job, quickly shutting down that pipe. It's not easy. It's a 30-inch main. There's 120 MGD, million gallons that can flow through that main in a 24-hour period. And you have to go find the valves. You have to be able to turn the valves. Sometimes these valves haven't been turned in a while. 340 Whole - Operating Budget 4/28/04 And they protected the property. There were no... No one go got hurt. One business had a wet basement. And you know, most of the damage was confined to the streets. And they cleaned up -- They cleaned up the area, and, you know, allowed two of the four lanes of traffic to get through. So...
But that itself wasn't the cause. I mean, perhaps. There could be maybe long-term corrosion or soil might have washed away in some of these heavy rains that we've been having. It happened during a day we had one and a half inches of rain. Maybe it undermined the support for the main in that particular location. 341 Whole - Operating Budget 4/28/04 We have a very scientific way of evaluating these pipes, and we know when they fail. We know -- We evaluate on the basis of age, what type of material was used. Some of the newer pipes than that failed quicker because maybe 50 years ago the Water Department tried some material that wasn't -- that has not held up, you know, with hindsight. So, we evaluate these pipes. And we also have a history of all of these pipes. And in my testimony there's a table there that indicates we've been accelerating the replacement of water main over the last 10, 12 years. And we have seen a drop in the rolling average of water main breaks.
What is the condition of our water pipe infrastructure? I know that you've just mentioned you've been doing --
-- some work around this area of improving, repairing, 342 Whole - Operating Budget 4/28/04 replacing. What is the status of our infrastructure, as far as you're concerned?
Based on looking at the national average for water main breaks, we are probably slightly better than average. And that includes newer utilities -- I mean, newer cities than Philadelphia. So we're pretty confident that we -- by doing to miles of water main 12 replacement each year, and now we used up 13 the liner, and we use very high quality 14 material, we believe that we -- you know, 15 if anything, things are improving. 16
Are you... If 17 you were to grade where our -- what's the 18 status of our infrastructure, what's your 19 grade? Is it... Is it... One of the 20 things that concerned me on 9/11 -- and I 21 worked at the Municipal Services Building 22 back then -- was: Do you know what happens 23 if, you know, these terrorists are, you 24 know, heading towards one of our, you know, 25 heading towards one of our plants. 343 Whole - Operating Budget 4/28/04 I mean, do we have infrastructure in place? What kind of long-term planning are we doing to make sure that our infrastructure is good enough to provide water to our citizens, but also how do we protect that structure?
That's a very good question for, you know, these times. We have done -- A lot of -- Some of the money in this rate hike that we are requesting is for safety, additional safety. We've -- We're changing out chemicals that could be dangerous for safer chemicals, as far as volatility, not safe as far as water treatment, but as far as... You flow, chlorine gas, for example. Chlorine can be a deadly chemical if used improperly. But we've weaned all of our waste water plants off of chlorine. We used to chlorinate before waste water would go back into the river. And one of our three plants, water plants, is now completely off of chlorine and the other two will shortly 344 Whole - Operating Budget 4/28/04 be off of chlorine. And we're changing to sodium hypochlorite, which is more expensive, again, one of the reasons that we need a bit more money. Status of our infrastructure? I'm familiar with a lot of what's going on around the country. And you'd be surprised how badly the infrastructure of a lot of water and sewer utilities have been allowed to deteriorate in this country. And it's a crisis. It's a crisis for water and sewer utilities. And they are looking to the Federal Government to help bail them out. Unfortunately, the Federal Government does not have the wherewithal right now to help very much. So, you have that business. On security, our water treatment plants have undergone a assessment, a security assessment. A vulnerability assessment, I should say. And most of the big water plants in the country have 345 Whole - Operating Budget 4/28/04 gone -- have undergone this. And we are -- We have taken steps, and we are continuing to take additional steps to improve security at all of our facilities.
Thank you, Commissioner. Good luck to you. And in whatever I can be of service to you, please feel free to call. MR. McPHERSON: Councilwoman Brown.
Thank you. Thank you. Thank you. Thank you. I just wanted some clarity. Your response was that it was a federal guideline that you must inform, alert citizens of the water quality, correct?
Yeah. I believe it actually -- I happened to pick up my copy the other day. And I think it actually says it on the front cover somewhere that...
...that this is the case. 346 Whole - Operating Budget 4/28/04
And traditionally you do it as a mailing? I guess what I'm getting to is, are there other cost effective measures to convey the message but less costly? And there may not be. I'm curious.
We look at this every year. And we look at our postage costs, and we look at -- As I said, the Inquirer was able to do this for us last year. For this year they could not, for whatever reason.
We could not get into agreement with them. And we do look at the lowest cost. I'm going to introduce Ed Grewshefski (phonetic), who's head of our public affairs group and is responsible for seeing this gets to everyone.
Good afternoon, Councilwoman. 347 Whole - Operating Budget 4/28/04 In fact, one of the reasons we have been praised for this document is that we've looked at it as an educational document as well, to try to put all of this in context.
These figures about what's in the water. The E.P.A. actually requires that we present to our customers are pretty confusing. And so, a lot of the... A lot of the water quality report focuses on generally telling people what the issues are for them.
Vis a vis each of these particular chemicals are possible pollutants that might be in our source water. The other thing is that we have looked at many ways of trying to cut the cost. And one is that we're presenting it in a newspaper format.
Originally we 348 Whole - Operating Budget 4/28/04 probably cut the cost in half by going from a sort of newsletter paper quality to this news print. And last year we went into discussions with the Inquirer, and they really -- It seemed like they were going to be able to get it to even more people. Right now we send it to all of our rate-paying customers.
Rate-paying customers. And that looked like it was very promising for us because we'd like to have as many people see it as possible. However, we were not able to legally set up a contract with them, with the Inquirer.
And it had to do with sole source. And it also had to do with some of the issues the Inquirer has with the City contracts. But at any rate, we're -- you know, 349 Whole - Operating Budget 4/28/04 we're back to this format and trying other ways to get it through the apartment owners' associations, and groups like that, so that more people will have access to it.
Can get it. Thank you. Thank you again for your testimony, and your clarification. Thank you.
I could just read into the record, if you don't mind... This is the drinking water quality report. And it does state on the front cover, this report is being mailed to you as a requirement of the Federal Safe Drinking Water Act.
Thank you. Thank you. MR. McPHERSON: Councilman Nutter.
Thank you, acting Chair. Good afternoon. Good evening, Commissioner. Welcome. Congratulations to you. I would only echo comments made by 350 Whole - Operating Budget 4/28/04 Council President Verna about your predecessor, both or predecessors, Commissioner Kishenshawn (phonetic) and Deputy Commissioner Roy. And from time to time we will have our little situations out there. And now I'll be calling you in the middle of the night, asking what's going on with the water somewhere in the District. I wanted to go back to the topic raised by Councilman Ramos, with regard to the Water Department, that reserve fund, and the proposal to remove $125 million. What I'd like to ask is, those funds could also be used for infrastructure improvements to the normal network of infrastructure that we presently have; is that correct?
Okay. And if we were to use those funds for that purpose, is it also true that we could put off probably for at least a year or so additional borrowings by the Water 351 Whole - Operating Budget 4/28/04 Department for infrastructure improvements or capital program; is that right?
Yes. I mean, you could -- you could push the next bond issue back or make it smaller.
Right. And if we did that, wouldn't it also reduce the amount of debt service impact to the General Fund for such an offering, if we're going to push it back a year or so?
There would be -- There would be some impact. But again, that's a part of the larger revenue requirement need.
In other words, yes, that's a portion of our revenue requirement debt service. And we're going out for a four-year plan, so what -- if we were able to push that -- 352 Whole - Operating Budget 4/28/04
For rates. So that bond issue would still occur within the four-year plan, but a bit later than what we have projected.
Right. And we're going to go into this much more extensively, so give me the shorter answer. I mean, what is... What's driving such a significant rate hike? And what, if any, positive impact could we have on the size of the rate hike by using those debt reserve funds in a different fashion?
Councilman, I've prepared some booklets that kind of summarize what that rate filing was all about, and it will indicate how it breaks down.
...at the hearing. Have you been involved in the discussions about utilization of this debt reserve account for the proposed purpose?
Okay. And I understand you're new in the position. Do you expect to?
I would presume that, you know, I will be brought in at some future time. I mean, I've heard the testimony of the Finance Director. And so long as these funds, this $125 million is used for -- is limited to water and sewer infrastructure, then it is within, I believe, the scope of all the bond ordinances and what have you.
Has the City ever done something like this before? Have we ever used those reserve funds for anything like this?
No, not to -- Well, I think in -- I think I just read where the 354 Whole - Operating Budget 4/28/04 Airport has done something like this in the recent past, a small size, the issue.
Okay. And what would those funds normally be used for?
Normally it sits there and earns interest. It sits there and it's there, again, as a security to the bond holder. It's a promise that we've made to the bond holder, through our ordinances, that we will have on hand at least one year's worth of principal and interest payment, so that they can rest assured they will get their coupons paid.
Now, as a result of the removal which will then be secured by the surety bond, but as a result of the removal we will then not get the benefit of 355 Whole - Operating Budget 4/28/04 the interest, at least on the $125 million; is that right?
Well, I don't know how to answer that yet because $125 million would presumably be placed in some other account before it's spent, thereby hopefully earning interest.
Well, I understand that. But based on the proposed use, it's probably not going to sit in that account very long. It's being moved to be used. It's not being moved to be invested. Right?
Okay. Do you see any way that the -- that a different use, other than that proposed for economic development purposes, but a different use of those funds could then help to reduce the amount necessary or the amount that's been proposed for the water rate increase?
I guess if you're looking at it year by year, there would be a reduction, for instance, in year one of 356 Whole - Operating Budget 4/28/04 our rate increase, I suppose, but --
It's more of a deferral, because we continue to go out and require additional debt. I think --
I understand that. But I mean, what's the first part of your -- under what scenario could we use the -- If we were going to use the 125 -- If a decision was made that we were absolutely going to use the $125 million, not let it sit in the debt service account and just accumulate interest, but we were going to use it for some purpose to directly benefit the rate payers, what would it be?
It would be to use it for capital purposes; and, again -- and deferred debt service on new bonds.
And what would the savings -- What would the savings be and how would that -- and what would then be the reduction to the proposed 43 percent rate increase? 357 Whole - Operating Budget 4/28/04
Well, if you're talking about $125 million, my guess is you would have about $8 million, eight and a half million dollars less of debt service expense.
Is that a one-time expense or is that an annual expense?
Oh, that would be -- I guess... Yeah, it's a one-time savings.
It's a one-time savings of eight and a half million dollars?
That's right. Instead of 17 -- Instead of $17.2 million in debt service which we are associating with our upcoming $250 million bond issue, half of that, $125 million would presumably drop the $17.2 million debt service approximately in half, to eight... you know, 8.6.
But if you push off the borrowing and make the savings, 358 Whole - Operating Budget 4/28/04 isn't there more than just a one-time savings? If you're going to use the 125 for capital, aren't you going to in effect borrow $125 million less?
Yeah. You won't be paying the 8.5 on an annual basis, that's right, for that chunk of money.
Okay. Now, 14 it's... I don't know. Maybe it's... What 15 do they call that? Sheer -- Sheer luck 16 or... There is a word; can't think of it 17 right now. 18 Where's representative Dewice 19 (phonetic) when you need him? $8 million 20 is, coincidentally, the exact amount that 21 would restore full funding to the 22 Recreation Department and the arts and 23 culture that are presently proposed to be 24 cut. 25 So, you're suggesting that if we use 359 Whole - Operating Budget 4/28/04 the $125 million to directly benefit the rate payers, we've already paid for the bonds that were floated earlier, which created the reserve fund in the first place, improved the infrastructure that presently exists, did not do that borrowing at that particular point in time, would save $8 million on an annual basis, and be able to restore funding to some pretty significant entities in the City.
If the money was permitted to be used for other entities, yes.
No, no, no. Oh, he's been jumping up from the back. I've seen him out of the corner of my eye. I've just been stretching it out to give him time to get up to the table because I know he desperately wants to get back up there, so...
It's late in the day. I mean, it's a bonus. 360 Whole - Operating Budget 4/28/04
That's right. It's savings in the Water Fund, so it couldn't be used for General Fund purposes. So what it could be used for is what you were saying earlier. It could have some impact on the size of the rate increase. It couldn't be used to restore General Fund dollars.
Okay. So let's talk about a rate increase. If you have that amount of savings, what does that take off of the proposed 43 percent increase, to the rate payers?
Well, it would be... I think we are -- our four-year rate increase would accumulate $307 million worth of revenue. $8 million times four, it would take 32 million off of that. So, it would drop the overall revenue requirement by a little more than ten percent, I guess. So...
So instead of a 43 percent rate hike, what would it be?
Well, it -- it -- 361 Whole - Operating Budget 4/28/04 it -- it wouldn't be -- it wouldn't be exactly measure for measure because the way we show the rate increase going out is for the typical residential customer. The actual rate increase, overall rate increase, is 7.4 percent each of the four years. The residential customer, because of the pipeline warrantee or pipeline program that's been proposed, that --
Laterals. The lateral program cost of maybe $3.50, for instance, a month is a higher percentage of a residential customer's bill. So, that's why they're getting a 9.7 percent rate increase because their service charge --
The typical residential customer, the one who uses 800 cubic feet per month.
I thought in 362 Whole - Operating Budget 4/28/04 some other testimony or discussion, there's been an ongoing dialogue about this, with regard to whether or not the sewer lateral program should be covered by the capital budget.
There is a dialogue. There are some outstanding issues that would have to be resolved before that would happen.
Well, let's say it was -- Let's say those issues were resolved.
Yes. Wouldn't that, then, reduce what we're talking about?
It would... It would in the early years, and eventually it would cost more, as you continue to accumulate $20 million of debt on an annual basis.
Well, why don't we do this: Can you... The discussion 363 Whole - Operating Budget 4/28/04 that we've had and the numbers and the scenarios and the like, could you lay out for us and forward to the Chair a... I don't want to call it a plan, but your best thoughts on utilizing the $125 million in a way that directly benefits rate payers for the present infrastructure that we have, and the resulting scenarios of doing that, and what that means in the context of the rate increase, built into your assumption a resolution to the sewer lateral issue.
Oh, I know you will. And Commissioner, I know you had that look of how in the world could I get up at this table. But you know, look: I mean, you've been on the job three days. I mean, what do you expect? I mean, you know, get with the program. (Laughter.)
I'm sure you'll do fine. I have the greatest confidence in 364 Whole - Operating Budget 4/28/04 you, and I look forward to working with you.
Thank you. The Chair recognizes Councilwoman Brown.
Thank you. Thank you, Madam President. Again you are at a disadvantage. You may not be aware of this case. If you are, you can comment. If not, then I want to make sure you get a copy of the letter. July 14, 2003, I sent your predecessor a letter expressing concerns about McWayne, Inc., and the contract they had or have with the Philadelphia Water Department. They have been reported to be uncivilized with regards to their workers, in terms of they have a lot of bad practices, a lot of injuries on the job. So I was curious to know is McWayne 365 Whole - Operating Budget 4/28/04 a company that the City of Philadelphia is still doing business with? And if you're not aware of it, could you look into it? I'll give you a copy of this letter. And could you look into it and get back to us. There's just a sentiment in a number of different quarters that this is not the kind of company the City of Philadelphia should be doing business with, with regards to the way they treat their employees.
Okay, then. We'll make sure you get a copy of the letter. And then if you could be so kind as to forward a response to Madam President.
We will address 366 Whole - Operating Budget 4/28/04 that.
Thank you very much. Thank you, Madam President. I'm done.
Wonderful. Are there any other questions from members of the Committee? Any comments? (No response.0
Thank you so much. Again, I wish you both the best, and this committee will stand in recess until Monday, May 3, at 9:30. Thank you very much. (Hearing concluded at 5:50 p.m.) 367 CERTIFICATE I HEREBY CERTIFY that the proceedings and evidence are contained fully and accurately in the stenographic notes taken by me upon the public hearing of The Philadelphia City Council, taken on April 28, 2004, and that this is a true and correct transcript of same. _____________________________ DAVID A. DEIK, RPR and Commissioner of Deeds ____________________________ Michele L. Murphy (The foregoing certification of this transcript does not apply to any reproduction of the same by any means, unless under the direct control and/or supervision of the certifying reporter.)