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Do these lawsuits over Suez water and sewer lease make sense financially?: Editorial

Posted 6/27/18

Why is the borough of Middletown spending what is potentially hundreds of thousands of dollars in legal fees over its 50-year water and sewer lease with Suez?

What end benefit is there to the …

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Do these lawsuits over Suez water and sewer lease make sense financially?: Editorial

Posted

Why is the borough of Middletown spending what is potentially hundreds of thousands of dollars in legal fees over its 50-year water and sewer lease with Suez?

What end benefit is there to the borough and its residents, financially or in terms of quality of service? What is the best-case scenario for the lawsuits filed against:

• Middletown Water Joint Venture LLC, which includes Suez. The borough filed suit in Dauphin County Court, seeking to block Suez from imposing an 11.5 percent surcharge being added to water and sewer bills because of a water use shortage during the last several years.

• Its former solicitor (McNees Wallace & Nurick) and former financial consulting firm (Susquehanna Group Advisors Inc.), both of which provided advice in 2014 regarding the borough’s decision to go through with the lease.

The borough believes that the surcharge involves a level of water use that was impossible to meet, making the additional fee a foregone conclusion. It also believes McNees Wallace & Nurick and Susquehanna Group Advisors Inc. advised them poorly.

It’s possible these claims are true. If the borough was wronged, then looking at ways to make it right is admirable. Protecting borough residents is part of its job. It’s possible that if the borough wins its suits against McNees Wallace & Nurick and Susquehanna Group Advisors Inc. that it will recoup some of its legal fees. And make no mistake, there will be some big bills coming.

Eckert Seamans is the new firm hired to be the borough’s solicitor.

The borough also has hired Gibson & Perkins, a Media-based law firm, to “investigate potential claims” against “borough professionals and/or individuals who provided advice and representation or direction during the drafting and negotiation of the lease,” according to council’s motion to hire the firm. The borough is paying $5,000 to retain Gibson & Perkins. Hourly rates are $300 and $350 an hour, depending on the attorney doing the work.

The law firm of Dilworth Paxson is representing the borough in the lawsuit regarding the surcharge now before federal court Chief Judge Christopher C. Conner. The borough is paying Dilworth Paxson “a blended hourly rate of $400.”

Bills totaling tens of thousands of dollars have already come to the borough council.

Council also during the April 17 meeting hired cb3 Solutions LLC of Bellefonte, as a consulting engineering firm related to the lease lawsuit. The borough will pay cb3 Solutions $105 an hour for consulting, and $180 an hour for expert witness testimony.

It’s clear what the legal action against McNees and Susquehanna is intended to do: Recoup money for what the borough considers poor advice on the lease.

More hazy is the end game with Suez. The current council — none of whom were members of the body when the agreement was signed — don’t like the decision that the previous council made, and believes bad advice was given.

Is the borough trying to get out of the lease? That “would be a blessing if we could accomplish that,” Council President Damon Suglia told the Press & Journal on May 4. “It would better suit our town if this water and sewer would be back under control” of the borough, as it was before the lease went into effect on Jan. 1, 2015.

We doubt Suez shares his point of view. And we are sure it’s not going to simply allow the borough to keep the $43 million up-front payment it made when the lease started.

What is the cost to you of the surcharge? For residential customers, it’s about 20 cents a day, Suez has said — roughly $6 a month, or about $72 a year. We realize for people living on a fixed income or paycheck to paycheck that $72 a year is not an insignificant amount.

Also, starting in January 2019, residents and businesses will see an annual rate hike equal to the rate of inflation and continuing for each of the remaining 46 years of the lease, Suez has said. So yes, rates will rise. But of course rates are going to rise over the course of such a long lease.

We are surprised that Suglia contends the borough isn’t better off today because of the lease — despite getting the $43 million payment that made the borough debt free overnight, by retiring all of Middletown’s pension debt and debt tied to building a new wastewater treatment plant. Also, annual payments to the borough over the 50 years will exceed another $45 million.

Asked how the borough could repay $43 million, Suglia told us: “Long-term bonds is one possibility of getting the funds.”

Is it wise for the borough to take on debt, even though the borough got out from under it through the lease, so that residents won’t pay a $72-a-year surcharge? If the borough takes on debt through long-term bonds, who will pay? That’s right — the residents are still on the hook in the long run.

Borough officials have stated in testimony regarding the water usage lawsuit that the surcharge will be a deterrent to businesses and potential residents moving here, and that some current residents will get fed up and move away because of it. We don’t buy into that argument. If the fight costs more than the benefit, then why do it? Also remember that if the borough takes over the water and sewer service again, it will have to hire employees to run it, incurring more costs.

Here’s a suggestion. Take those annual payments to the borough over the next nearly 50 years that will exceed $45 million and each year pay Suez to offset the surcharge, and maybe a bit of the annual rate increases as well.

This entire situation is very complicated. We urge the borough council to give specifics to Middletown residents and businesses about:

• How much is expected to be spent on legal fees related to the water and sewer lease.

• What is the expectation for the lawsuits against McNees and Susquehanna if they win.

• What kind of costs will there be if the borough is forced to take on long-term bonds if the lease is broken and the $43 million must be repaid. Would that cost be more or less for residents than simply riding out the last 4 1/2 decades of the lease?

We assume borough officials have these answers. Discussing the numbers would bring some clarity.

Is it worth winning the lawsuits if it costs residents more money in the long run?