A.G. Gancarski
During a Wednesday public notice meeting regarding the pros and cons of selling JEA, John Crescimbeni, who chairs a special committee on the “potential sale” of JEA, advised a Council colleague who thought the local utility’s electrical component could fetch $5 billion on the open market to “stay tuned to our special committee.”
That special committee met Thursday afternoon in Jacksonville City Council chambers. It was must see TV, in large part because of a report from the Council Auditor that challenged inflated valuations and unexamined assumptions about benefits of a sale: probably the biggest bombshell of the day.
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Council Auditor Kyle Billy offered reports discussing “things to consider” regarding a potential JEA sale, including a look at franchise fees and taxes, a look at JEA revenue, expenses, and debt retirement over the last ten years, and a schedule of future contributions from the utility.
Going into Thursday’s meeting, Billy was not expected to cheerlead a sale. The Council Auditor’s office has been bearish in the past when the sale question came up, and Billy questioned the “unusual” use of a third party group (one that was at least strongly considered to help with the mechanics of the sale) to provide what skeptics see as an optimistic valuation report.
Proceeds from the sale were less, by billions, than the valuation report presented in February posited.
In 2012, City Council Auditor Kirk Sherman noted that while the city would receive an infusion of cash that could be as high as $50 million in 2012 dollars, it would be offset by variables, such as a loss of jobs, the loss of the JEA contribution, and other factors.
The 2018 Council Auditor report was more bearish than the one JEA commissioned.
It contended “the net proceeds to the City from selling JEA could range from a low of $1,702,795,000 to a high of $5,202,795,000. However, these numbers alone do not answer the question of JEA’s value and numbers alone do not answer the question as to whether the City should sell JEA.”
To put that in perspective, the JEA commissioned report anticipated a $3 to $6 billion profit, should the utility be sold free and clear.
The JEA contribution of $116.1 million per annum (currently) would also be axed, and would leave a hole in the budget.
As well, “Assuming that a private utility would pay $60 million in ad valorem taxes (calculated on all JEA real property and all JEA tangible personal property except for St. Johns River Power Park and the downtown headquarters tower), this would leave a hole of approximately $57 million in the budget.”
If the city were to fill that hole by paying off debt, the proceeds would be less. And said Billy, that number would change over time.
Three scenarios for utilization of funds were presented:
“A portion of the sale proceeds could be used to pay off the City’s General Fund supported debt, which is approximately $850 million and would save approximately $90 million per year in debt service, thus filling the hole by reducing required expenditures. This option would reduce the net proceeds available to the City to a range of $850 million to $4.35 billion.”
“Option #2: A portion of the sale proceeds could be used to pay down the City’s pension debt. We estimate that if the City paid down the police and fire pension debt by $1.1 billion, it would reduce the City’s required pension payment by approximately $75 million per year, thus filling the hole by reducing required expenditures. This option would reduce the net proceeds available to the City to a range of $600 million to $4.1 billion.”
A third option: “A portion of the sale proceeds could be permanently set aside to generate a revenue stream equal to the approximate difference between the JEA contribution and the ad valorem taxes estimated to be paid by an Investor Owned Utility (IOU). ($2 billion invested in 30-year U.S. Treasury bonds at 3.0% would generate $60 million annually.) This option would reduce the net proceeds available to the City to an approximate range of $0 to $3.2 billion.”
These numbers, of course, account for a lock, stock, and barrel sale. There is little belief that a private electric company would have incentive or interest in acquiring water and sewer.
JEA also, per the report, partners with the city on issues ranging from infrastructure to septic tank phaseout to chiller plants in city buildings and helping in financial ways large and small, “making the dollar go farther” in Billy’s words.
JEA’s economic impact per annum, as of a few years ago, was $860 to $910 million, per the report.
As well, JEA being a public utility makes it eligible for FEMA reimbursement, the JEA contribution helps to pay down $300 million of bonds, and moreover, investor owned utilities pay much less (4.2 percent of revenue) than JEA did last year (6.7 percent).
The report also suggests that private utilities pay less in ad valorem taxes than one might think. And it says the city is out of luck if it gets “seller’s remorse.” And it contends that millions of dollars may be spent on a sale that never closes.
The hottest line of the report? “JEA has approximately 2,000 employees. Most of these jobs are well paid with benefits. If JEA were a company thinking of moving its headquarters and 2,000 jobs to Jacksonville, the Office of Economic Development would likely ask the City Council to approve millions of dollars of incentives to lure them here.”
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A corollary narrative point: hiring an outside consultant to help Council get an unbiased take on whether a sale is a good idea. The consultant being considered has already talked to media, and has said that if a sale happens, it would be done in components — another potential complicating factor for the transaction, and profits that may or may not be realized.
Per minutes from a March 19 meeting, the Jessie Ball DuPont Fund is willing to fund an outside consultant, via “the Public Utility Research Center at the University of Florida to gauge their interest in undertaking the task and to invite Ted Kury, Director of Energy Studies for the Center, to attend a future special committee meeting to discuss the project and the Center’s potential interest.”
Kury has already gone on record with preliminary thoughts on a sale. He thinks the utility would have to be split up among two or more entities, and with skepticism on a sale ruling the committee, it’s easy to see how Kury’s testimony will help to guide said skeptics’ talking points in terms of the very real considerations of divesting local control to private operators.
Council President Anna Brosche discussed how to “onboard” this consultant. including the DuPont Fund contracting someone. More to come on this one.
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A representative of the Office of General Counsel confirmed, meanwhile, that JEA CEO Paul McElroy would be subpoenaed for the March 29 meeting. He will have to produce documents including volunteer hours from 2013 to 2017, JEA’s strategic plan to offset the recent revenue decline, reports on damages and FEMA reimbursements from the last two hurricanes.
Also discussed: the potential variability of responses from witnesses. And possible “perjury charges down the road,” which could lead to more direct questions.
“He’s going to be here, I imagine, unless he files something,” said John Philips of the OGC regarding McElroy.
