Deja Vu: Back to 2002

In 1993, city staff began looking at selling the Municipal Water system, which the City of San Jose currently owns. Municipal Water covers approximately 10 percent of the city serving portions of Council districts 2, 4 and 8. The main service provider, San Jose Water Company, a private company, provides approximately 80 percent of San Jose residents with water. The remaining 10 percent of water is provided to residents in District 2 by another private company, Great Oaks Water.

The staff report that started in 1993 was completed in 2001 and finally made its way to Council in 2002. (Hope we can move faster than this when it comes to selling the Hayes Mansion, Old City Hall and one of three golf courses.) So on May 21, 2002, by a 6-5 vote, the council directed staff to move forward with negotiating a 30-year lease of the San Jose Municipal water system to the San Jose Water Company. The ayes were Dave Cortese, Pat Dando, John Diquisto, Ron Gonzales, Chuck Reed and George Shirakawa. The nays were Nora Campos, Cindy Chavez, Forrest Williams, Ken Yeager and Linda LeZotte.

I think the basic question is, “Should San Jose provide water to 10 percent of the residents when 90 percent is being done today by the private sector?” There are some advantages for the City to own a public utility, like lower rates then those of who get water from private water retailers since the city does not charge those residents a franchise fee and there are no shareholders to pay. Yet those same property owners have an assessment on their property taxes to pay for bonds for Municipal Water. Another positive is being able to get water from Hetch Hetchy for North San Jose since Hetch Hetchy will not sell water to private utilities. However even with a public utility water from Hetch Hetchy is not guaranteed and must be negotiated from time to time.

The cost to run Municipal Water is $22 million annually and employs 30 full time employees whose costs are covered by the ratepayers, not the general fund. Municipal Water transfers $815K a year to the general fund to pay overhead for a portion of salaries for people who support Municipal Water in other departments like HR, attorneys, payroll, etc.

Prior to passage of Prop 218 in November 1996, San Jose and other cities could charge more for services and make a profit to pay for other city services. Prop 218 was given as the main reason our negotiations that started in 2002 fizzled. However, if we had sold or leased Municipal Water prior to the passage of Prop 218 it would have been a different story. We discussed this item during our budget hearings this week. This is where the Council does a deep dive into specific department budgets. The structural deficit has renewed our interest in looking at selling or leasing the Municipal Water system.

San Jose Water Company would like to buy the Municipal water system and has offered the city an upfront payment of $54 million and allowing a franchise fee on the San Jose Water company which would bring in approximately $4 million to the general fund each year. Or a lease arrangement where they would pay $25-40 million upfront depending on the terms and length of the lease. The upfront payment could be used to pay off outstanding bonds and the balance into capital improvements like street paving. Another issue is what would happen with the current 30 employees? Would they transfer over to San Jose Water company and retain all of their seniority, compensation and benefits?

Personally I think there is an advantage in San Jose controlling recycled water as this allows the city to control its destiny on growing jobs for the long term. But I am not sure we get the same advantage by being a water retailer where we are not allowed to make a profit to fund core city services and be on the hook for all the future maintenance of that system.

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  1. You need to check some of your facts. The San Francisco Public Utilities Commission (owner of the Hetch Hetchy System) does “sell” water to privately owned water companies. Simply, public or private is not the issue. The issue is if the SFPUC sells too much water to private utilities as a percentage of the total they sell, they risk loss of their tax exempt status. So, if San Jose sold their water utility to a private company, the SFPUC would have to determine if continuing sale of water for the service territory would jeopardize their tax exempt status.

    There are lots of issues surrounding privatization of water service. Trying to plug a deficit with the sale of a municipal utility is short sighted at best.

    • Assuming Pierluigi’s other facts are correct, 90% of San Jose’s water is already provided by private companies.  The decision over whether water service should be privatized has already been made.  Why hold on to the last 10% if the city is legally prevented from running it for a profit?

  2. I tend to believe the public utility customers tend to get a better deal.  I believe the City of Santa Clara and maybe Palo Alto run municipal utilities (power, gas, water, etc.)  The ratepayer cost is lower, which is a selling point when someone is looking to purchase a home.

    Since SJ has only a 10% service coverage, it gets weird as to what the city wide benefit is to staying in the business when you can sell out and get some quick cash.  As far as existing employees, you can’t expect a private company to take on existing city workers at the same benefits and scale.  A fair offer would be to give them first right of refusal on new jobs created after the transfer of ownership, and an opportunity to de-vest and transfer from the city pension system to the new one.  Otherwise, sadly, they may have to look for work elsewhere, unless they are qualified for comparable positions in the city (wastewater treatment?).

    I’d say take the sale price, and focus on core services.  San Jose Water Company has a good reputation for service and San Jose customers would probably do just fine in the deal.

    If you really want to talk about utility issues, lets talk CABLE Television and Internet Service Providers.  The monopoly system and franchise fee structure has benefited the city and hurt the citizens for years.  Poor service, high customer costs, and almost zero competition. 

    Also, the hidden subsidy for all our rapid growth and development is the deferred infrastructure maintenance and rebuilds.  Out of sight, out of mind means that sewer lines, water mains and below ground infrastructure are ignored while we exceed their service life and capacity.  Wasn’t it interesting that after City Hall was built neighbors really started noticing smells from the overloaded sewer lines?  Add demand to the system and don’t upgrade means trouble.

    A nice idea would be to plan for a complete rebuild of our infrastructure (sewer, water, electrical, telecom, etc) with excess capacity and ease of access for upgrades and repairs built in.  In such a scenario, private and public systems could be combined into a modular below ground system. I’d even go for public ownership of basic infrastructure including fiber optic lines, with leased access available to all vendors (ending the cable TV monopoly.)

  3. Regarding SFPUC sales to private utilities

    My understanding is that the Raker Act (which enabled San Francisco to dam the Hetch Hetchy Valley in Yosemite National Park) prohibits SF from selling Tuolumne River water to private water agencies. Since they cannot track the molecules, SF complies with the Raker Act by selling only 15% of its total supply to private water companies (primarily CalWater), since about 15% of their water is derived from local watersheds – i.e. not the Tuolumne River.

  4. Blair,
    While you have many interesting ideas in your blogs, they would be much more readable if they were shorter, with way less details. You tend to lose me half way through your responses.

  5. Nice post, Pierluigi. Thoughtful and insightful.

    And, best of all, you didn’t use an angry tone. You didn’t point a finger at anyone.

    More posts like this would be great. Thank you.

  6. San Jose Fire Sale 2010

    Another thought…sell the arena if we could make any return on the investment.  What did it take to build? $200 million?  What’s the rent, $2 million a year?  And we’re stuck having to pay for upkeep, upgrades and maintenance?  Dump it for some quick cash to pay off the pension funds.

    Chicago privatized downtown parking meters, giving a private company the franchise in return for the right to operate the concession (including ticket/towing vehicles, etc.)  Quick cash, kick-backs possible with the right company, everyone is happy (except the customer/citizen).

    Where are we duplicating services offered by the private sector?  Are convention centers a public business?  Seems like lots of hotels and places run private convention facilities, maybe we could cash out and turn it over to someone and get a lump sum payout (although we’d probably take a loss on the original investment.)

    City Vehicles?  Does the organization really need its own fleet?  Would about long term leasing like the GSA does for 40 cents per mile and turn in at 50k miles.

    Do we really need fire stations in small old buildings all around town?  Does it really help response time?  Would about a land swap where we take a profit on undersized stations and build a few large, modern, regional stations (north, south, east and west).  What’s response time now and how would it be affected.

    What about combining Fire/Police in some fashion like Sunnyvale where police are also firefighters, and can respond to either call (and provide back-up for the engine crews.)  What about letting fire department paramedics bill for service like the private ambulance companies who show up after the fire department and gouge the insurance company for whatever the market will bear.  How about putting on call firefighter as second men in police patrol vehicles, increasing the man on the street coverage in the face of budget cuts.  Set up a special POST Academy for all firefighters and give them 2 years to get either paramedic or POST certified as a condition of employment.  Then use some of these cross trained firefighters to support community policing.

    Community Centers, Libraries and Parks: Charter Schools are always looking for room to operate.  In the past closed down schools could be taken over but as the city and enrollment grows, more room is needed.  Could we expand some community centers to accept educational facilities and then make the school the master tenant (like NASA is with Moffett FAF) responsible for operations and upkeep in return for lower rent considerations.  Could this clustering work in other ways, such as getting county medical and social service offices to locate at these community centers and also serving as master tenants in some?  How about state offices like DMV, or even federal offices (social security, immigration, etc.)  Partnership benefits everyone and would keep expensive centers able to stay open 5-7 days a week (providing the citizens a better return on their bond money for construction investment).  Could even (god forbid), private business be co-located in some places that would bring in revenue to keep libraries and community centers operating.  Maybe not a bookstore, but seems like a Starbucks franchise would be a no brainer.

    Any other outside the box ideas out there?

  7. Blair,

    Shorter is better Your posts run 450-600 words + 

    Try 150-200 words ( Use Word Tools – Word Count )  more people will read

    Keep up good ideas but shorter comments with 1-2 ideas  

    Major problem with selling Arena, City Hall, Water Plant, Golf Courses, Hayes Mansion and city property is they will go for undermarket prices to local political insiders who want high profit city deals

    Council will require political conditions driving most out of town bidders away since they don’t know insiders and will have to pay millions to local political lobbyists and campaign contributions to get inside City Hall to win great under-market property sales, city land and property leases , parking lot leases, favorable planning rezoning , density or tax or redevelopment subsidy deals

    Also bad idea to sell city property to pay for city mis-managment until fix city political insider high profit sweetheart deals and city mis-mamagment in jobs and business rich Silicon Valley

    160 Words

    • Shorter good but no need leave out words. STOP
      This internet not telegraph. STOP
      Whitney posts good. No need change. Your attention span too short. STOP
      Will write when find work. END

  8. Great post Blair,

    Clear, short and positive comments about how to solve a long time city facilities problem that results in increased San Jose budget deficits.  Thanks

  9. Okay, shorter posts with key points.

    Part of structural problem is capital projects that build facilities without operating budget.  This won’t help short-term budget problems, but in promoting long term fiscal health, operating costs should be planned for as part of every capital project.

    New paradigm of partnerships would emphasis building projects that have outside means to underwrite operations, so a clustered community center/library/social service/retail center could be built ahead of others because co-tenants could underwrite operating costs.  Taken further, private capital and expertise could even aid in capital project costs.

  10. To all those defenders of public employees who say they all work their asses off, I give you the following from Mr. Oliverio:“The staff report that started in 1993 was completed in 2001 and finally made its way to Council in 2002.”

    Thank god they don’t make national security assessments—we’d ALL have died on 9/11.

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