Back to the money issue (June 2, 2015)

Yesterday (June 1, 2015) the Town of Apple Valley (TOAV) posted a blurb on Facebook that said:

Many are asking if the town can afford to pay for a takeover of Apple Valley Ranchos. The answer is yes. By eliminating the profit and some high salaries paid to administrators, the town can afford to buy the water system at a fairly appraised price. We have answers on our blog.

Let’s look at this statement in detail.

TOAV continues to refer to profit as if it’s a disease. It doesn’t matter whether your company is Apple Valley Ranchos Water Company, Carlyle Group, Western Water Holdings, Liberty Utilities, or even NAPA Auto Parts, if you don’t make a profit you’re not doing something right. (For more about the role of profits, I refer you to Walter Williams on this subject.)

Thus, when TOAV claims it is eliminating profit, it is admitting that it is up to no good (or lying, but we’ll get to that later). And when TOAV pretends to decry high salaries paid to administrators, it’s difficult to know whether to laugh or weep. The hired manager of TOAV makes in excess of $300,000, and when you add up the compensation for everyone who works enough to get benefits, you find that TOAV paid a whopping $8,842,280.00 in compensation in 2013 . To look at it another way, of the 116 employees whose position gains them benefits, 84 of them (72 percent) made more than the average income for private sector employees in 2013.

Oh, and that fair appraisal? That apparently was made by their resident expert (Assistant Town Manager Dennis Cron, who claims to have 40 years of experience working with water utilities) after a few minutes of touring the massive AVRWC system. When the AVRWC employee who accompanied Cron on his tour, pointed out the cursory nature of Cron’s appraisal, a TOAV attorney had the gall to blame AVRWC for not showing Cron everything! In other words, Cron could have pulled the permits for every single inch of AVRWC’s holdings, but didn’t, so he didn’t know where to look. Some expert. Then, being an expert, he didn’t realize that in touring only one or two facilities, he wasn’t seeing everything. Some expert. Then on the basis of this unbelievably shoddy ground work, he told TOAV council members that AVRWC was worth some $45 million. That’s for 450+ miles of mains, pumps, reservoirs, buildings, and roughly 13,800 acre-feet of water rights (worth roughly $5,000 per acre-foot, or $69,000,000). Some expert! No wonder the Town pays him a couple hundred grand a year. If TOAV proceeds with this insanity to its illogical conclusion, you can be certain that the purchase price will be three times this amount, or more. But by that time, TOAV will be committed; there will be no turning back.

To purchase AVRWC, TOAV is going to have to borrow money. Let’s face it: The United States is broke. This means that if you borrow this kind of money, you’re likely borrowing it from abroad, such as from Communist China.

I don’t understand how turning profit for a U.S.-based company — which is a good thing — into debt service to the Communist Chinese is such a wonderful idea.

This brings us to a key point: TOAV doesn’t care about the purchase price, because the loan payments are made by the taxpayers. The Town cares only about the cash flow it stands to get from the seizure of a well-run local business. Why does the Town need that cash flow so desperately? That’s the question we should each be asking. We should also be asking why, if the fair market value is really $45 million, as the Town would ask us to believe against all evidence, it is willing to pay in excess of $200 million to purchase Ranchos — not all three water companies, just Ranchos? Either the Town is represented by idiots who don’t know what they are talking about, or the Town is hoping we’re idiots, who won’t figure out that they is lying to us at every turn.

When they say the town can afford it, what they mean is they can stick the taxpayers with this bill, and others associated with this hostile take-over. And again, they claim to be eliminating profit and high salaries and generally saving money like mad, but the Town has already said it will not be reducing rates. So, where is all the money from that saved profit and eliminated high salaries going to go?

Well, some of it will go to salaries for Town employees. As you probably guessed from the compensation table reference above, public sector employees on average make about 35 percent more for the same job as those in the private sector, not only because of higher base wages, but also because of generous pension plans that are all paid for by the taxpayer. That’s you. Don’t forget, because you are guaranteeing the pensions of public sector employees, you’re on the hook even if a downturn in the economy means you lose your pension plan.

No doubt the bulk of it, though, will go to debt service.

Here are some of the things I don’t understand.

  • The Town says it will save money, but rates will not go down.
  • The Town says that unlike Ranchos, it will be able to charge only what it actually costs to deliver water, but the rates will not go down.
  • How is the Town going to replace some or all of the existing AVRWC employees (who are earning normal wages and benefits) with TOAV employees (who typically receive far above average wages and benefits), and save us money?
  • The Town promises that monies from the general fund and monies from the water utility will not be commingled, so where will all that surplus money be going?
  • Is the Town planning on selling the water rights it seizes from Ranchos to its own Wastewater Fund for millions of dollars, and then leasing back its own water from itself, as it did with the water rights from the AVCC?

This post linked to a screed on a TOAV website (blog?) with the title How the Town Will Pay for Acquisition (avh2ours.com/2015/06/how-the-town-will-pay-for-acquisition/).

June 1, 2015

Apple Valley Ranchos and its corporate parents have been conducting an expensive campaign that does not provide accurate information about the sale of the water company.

For instance, AVR claims that the Town is trying to buy a water system that is not for sale. But the fact is, the water system was for sale — just not for sale to the Town. Instead, a deal was struck with a Canadian-based company, Algonquin Power & Utilities, to acquire three water companies — including Ranchos — that are owned by the Carlyle Group. Minus assumed debt, the net price Algonquin would pay is about $257 million — well more than double the $102.2 million purchase price paid by Carlyle in 2011.

We believe that this price is inflated and will harm ratepayers as Algonquin seeks to recover its excessive purchase price — another reason to get out from under corporate ownership.

To determine a real fair market value, the Town hired an independent appraiser expert in water system acquisition. That firm explored a variety of options, ultimately determining the value of AVR — purchased separately — at $45.54 million.

Based on this fair purchase price, the savings from eliminating the profit margin and other costs would be more than sufficient to cover the debt without raising rates beyond what you are currently paying. Even if AVR’s owners assert — as they are likely to do — that the company is worth more, the savings from profits and other costs will be sufficient to cover the purchase price.

Complaining that AVRWC isn’t for sale separately is a very weird argument. It’s similar to saying that even though your neighbor is selling his car, he refuses to sell you just the chassis and upholstery, as if that makes you a victim somehow. Complaining that the owner of something that is not for sale won’t give you a price is an epic fail.

But, what if the already agreed-upon purchase price for AVRWC and the other two water utilities is excessive? What’s to stop Liberty Utilities from recovering this excessive price? Easy. The California Public Utilities Commission (CPUC) and the Office of Ratepayer Advocates (ORA). TOAV should know this, because it’s spent thousands of dollars sending people (well, attorneys mostly) to Sacramento to whine about water rates. Remember, this is the same group that believes AVRWC is worth $45 million, and is so concerned about rates that it is on record as stating it will not reduce them.

Furthermore, Liberty Utilities knows about the CPUC and ORA. It knows it can’t charge whatever it wants, because the CPUC/ORA isn’t going to let it. And because Liberty Utilities is in it to make a profit, clearly it does not feel it is paying too much for AVRWC.

In the end, of course, it doesn’t matter a whit what TOAV believes is a fair price for Ranchos, because the price will be set by the court after the eminent domain and condemnation trial, after which the fun really starts.

TOAV must pay Western Water Holdings the fair market value of the property being acquired, which is the highest price that the property would sell for if sold on the open market to a buyer knowing all of its uses and attributes. This includes the value that is the most advantageous, profitable and probable under the circumstances of its size, shape, location, zoning, and other characteristics. To put it another way, this means that the $45 million figure is at best just eyewash for people who aren’t paying attention to what the TOAV is really up to.

Because AVRWC is only part of a package deal, the court might find that there is a loss of value or damage to the remainder property, which is referred to as severance damage. Owners of property that is only partially taken by the government are entitled to be paid for any loss of value to the remainder, which must also be appraised to determine whether its value has been diminished.

After the conclusion of the trial, if the TOAV’s $45 million settlement offer made at the mandatory settlement conference is determined to have been unreasonable and the owner’s settlement demand is determined to have been reasonable, when compared to the evidence at trial and the verdict, the court may award the owner reasonable litigation expenses, including attorneys’ fees, appraisal fees, and other expenses reasonably related to the litigation.

You almost have to wonder if the TOAV is deliberately trying to make this transaction as expensive as possible.

Greg Raven is Co-Chair of Apple Valley Citizens for Government Accountability, and is concerned about quality of life issues.