When Tom Murphy became mayor in 1994, PWSA was merely a financial vehicle for the city to raise money to invest in its water infrastructure. The water department was still a city agency. But the city was facing increasing regulatory pressure to make its drinking water safer and its rivers cleaner — improvements that would cost billions to address.
Murphy wanted PWSA to be more professionally run and be able to raise the funding it needed by increasing prices. “The idea was to have essentially an independent company,” Murphy said.
But the city was facing financial challenges. As a state takeover loomed over the city’s finances, Murphy was able to generate $100 million in additional revenue for the city by leasing the city’s sewer lines to PWSA. An additional $200 million in water system repair work was put on the authority’s books at a time when the city didn’t want the expense to make its finances look worse.
The city was trying to keep the water system’s future profits but unload its future debts. “It was never set up to succeed,” said Mayor Bill Peduto, who was not yet even on city council at the time. “It was set up to save the City of Pittsburgh from having to raise taxes.”
Murphy inherited a city that was losing people fast, sometimes as many as 50,000 people were leaving the region per year. And after the steel industry crashed, there wasn’t a clear economic anchor to take its place. So Murphy tried to generate economic development through large projects: Southside Works, Washington’s Landing, Frick Park, Heinz Field. But developers were reluctant to take on large-scale projects in the city, especially in areas where industry once dominated. Once they started digging, they could run into expensive contamination.
So Murphy frequently tasked PWSA with building new water and sewer lines for these large developments, even though the developers would have been responsible for these costs on their own in the suburbs. And it was becoming more expensive. PWSA had to separate the sewage pipes from the stormwater pipes, as regulators were beginning to crack down on the city’s sewage flowing into the river. So instead of rejuvenating the city’s old pipes, PWSA was spending millions to build new ones for developers.
The city also charged PWSA up to $7 million per year for work it did, without specifying what it was, and city-owned properties like the zoo could use unlimited amounts of water without having to pay for it. PWSA took on all of the city’s water employees but kept them on the city’s pension.
The problems began to show at the end of Murphy’s term. In 2005, a large water main broke Downtown, swamping three different parking garages, including Gateway Plaza, flooding hundreds of cars and shutting down the electricity that ran the elevators.
Murphy would have preferred to stay focused on his bigger development work, such as Southside Works, where his dad had once gone to work in the steel mills. But problems plagued PWSA that made Murphy’s administration leery of how it was being run. One of its contractors LMD Inc. was convicted of stealing nearly $350,000 in work it didn’t actually perform.
So when PWSA board members asked Murphy if they could hire a private company to manage the authority in 2001, Murphy did not object. Ellen McLean, his finance director, had been worried about rumors of corruption at the authority and so avoided local firms in favor of U.S. Water LLC, a subsidiary of a British company with thousands of employees in the industry. “It has huge, big, deep pockets and insurance, in the event they totally screw up our water system,” she told PublicSource recently.
Its contract lasted two years. PWSA management was local again until eight years later, in 2011, the PWSA board began looking for another professional management company — which would ultimately turn out to be Veolia Water North America. State Rep. Dan Deasy, PWSA board chair at the time, argued that hiring a private management company was a safe idea by pointing to the private management contract during Murphy’s tenure.
“I just think right now things are overwhelming,” Deasy said at the time. “We have so many things going on, I don’t think it hurts the organization to go out [and] see if there are some things we can do to help them out.”
Why an opponent of privatization and a fiscal conservative agreed on outside management
Mayor Luke Ravenstahl made his plans for PWSA clear from the outset, according to Scott Kunka, his finance director: Put an end to the rate increases. Murphy was “borrowing his way to prosperity” in a way that wasn’t sustainable, Kunka said, adding that Ravenstahl fired the previous PWSA director in large part because he had been pushing rate increases.
Ravenstahl’s philosophy was to look at how much money PWSA actually had and then figure out how best to spend it, Kunka said. (Ravenstahl didn’t respond to multiple requests for comment and a spokesperson for his current employer, Aqua America, said it doesn’t allow its employees to talk about their previous public roles.)
Rate increases largely came to an end when Ravenstahl took over in 2007. The cost of 1,000 gallons of water increased by only 2.5% per year under Ravenstahl, whereas it had increased by an average of 6% per year in the prior administration and has increased by 12% per year since. The philosophy at the time was, “If it ain’t broke don’t fix it,” Kunka said.
So even though Murphy and Ravenstahl took opposing tacts — using PWSA resources for city projects versus putting a cap on PWSA’s budget — the effect was similar. There wasn’t enough money to fix the water infrastructure.
And there were increasing signs the system wasn’t functioning. Between 1982 and 2009, the city’s daily water consumption increased by 14 million gallons per day, even though it lost more than 100,000 residents. The leaky system was later described by a consultant as “the largest irrigation system in the country.”
Kunka could see PWSA needed major renovations when he visited the authority’s water treatment plant. “The control boards were out of a 1950s science fiction movie,” he said.
The only way to pay for such large improvements is to borrow money, but typically this is paired with rate increases to pay the money back. That second part didn’t happen. In 2007 and 2008, PWSA took out new bonds with what appeared to be favorable but variable interest rates. It seemed like a great deal, as long as there were enough interested investors to keep the interest on the bonds down.
But these investments tanked almost right away when the economy crashed. PWSA wasn’t the only public entity to be burned. But the miscalculation cost the agency millions of dollars in extra interest. A spokesperson for PWSA said it didn't have a straightforward way to compare how much these extra costs have added up over the long run because refinancing the bonds is so complex. Public estimates from board members and activists put the total additional financing costs between $10 million and $100 million.
“Mayor Ravenstahl wanted us to do credible capital financing without a rate increase,” Kunka said. “That was a direct mandate from the mayor: that we would not raise rates at that particular point in time. So that is how we had to do it.”
Kunka didn’t want to raise the salary of PWSA’s executive director either, which he said would range from upward of $300,000 to $500,000. And for a while, PWSA neglected to hire one at all. The board left two interim executive directors in charge, one over operations and one over finance.
But the leadership experiment failed, Kunka said. The director in charge of operations would spend money without getting approval from the director of finance because he was trying to keep the system running. By the time new leadership came in, PWSA was often spending 20-30% more on contract overruns, according to Bob Weimar, who was hired in 2014 to do long-term planning. The two directors were both interested in getting the top job, so they didn’t communicate well either, Kunka said. “We make mistakes like everybody else,” Kunka said. “Having a two-headed boss wasn’t the best thing.”
But when PWSA was criticized for not hiring permanent leadership at the time, Ravenstahl said the concerns were overblown. "I think it's a bit self-serving to say that people are in danger," Ravenstahl said. "I don't believe that.”
Although Kunka didn’t want to pay top dollar for an executive director, he thought a private management firm could bring in expertise without having to hire the experts full time.
“If you’re going to get your heart operated on, you want someone who has some familiarity with the human heart,” he said. “Do you want the cheapest eye surgeon? No, you want the best one. That’s what we were trying to do.”
Preparation
Ravenstahl decided not to run for reelection amid a scandal at the police department and then-Councilman Bill Peduto won the nomination. Patrick Dowd, a fellow city councilman and a PWSA board member, began corresponding with Kevin Acklin, Peduto’s chief of staff during his first term. One key issue was getting a new director that could replace Veolia. “We basically have a brewing personnel crisis,” Dowd wrote.
It meant the city would have to do more to attract talent to PWSA. “What is (sic) appetite for Peduto admin to pay salaries required to attract talent required for this area?” Dowd emailed Acklin that June. “New ED, for example, may cost $200k. Thisnis (sic) critical asset. Keep in mind I can show you how former Dir of Engineering - an incompetent - cost us millions.”
Dowd pushed for urgency since Veolia had a history of trying to become permanent fixtures at public utilities. “Goal should be to wean PWSA off of Veolia and leave PWSA with personnel necessary to continue the culture of operational excellence established by Veolia. Veolia obviously wants to move from Interim to permanent managers. They do this all over the country.”
This wasn’t the only forewarning of problems from over-relying on private contractors. In 2009, PWSA commissioned an internal study and one of its key recommendations was to change its approach to engineering. Chester Engineers, a private contractor, was serving as the de facto engineering department for years, which put PWSA leaders at the mercy of the private company’s judgment about how much to spend and what needed work. PWSA had taken on private management with U.S. Water in 2001. But there was a perception in the organization that, though U.S. Water had some good ideas, they weren’t able to implement many of them.
Veolia was only supposed to take over PWSA for a year, with options to renew for another six or 12 months. Dowd wanted to incentivize the company to make real improvements and put it on better financial footing rather than just come up with good ideas. He said he thought improvements would help protect the authority from Republicans who wanted to privatize it. The contract was written so that, in addition to about $2 million in annual income, Veolia could earn up to 50% of the cost savings it achieved.
In the final months of Ravenstahl’s tenure, just as Veolia was entering its second year of leadership, Kunka admitted, “Maybe the eye was taken off the ball.”
Read the next story in this series: "Part 3: Cronyism: Was PWSA overrun with unqualified political hires?"
Explore more stories in this series: “A water crisis swept through Pittsburgh five years ago: This is the fullest account of what happened.”
Oliver Morrison is PublicSource’s environment and health reporter. He can be reached at oliver@publicsource.org or on Twitter @ORMorrison.
This story was fact-checked by Matt Maielli.
