03-14-77 Council Meeting Minutes

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J' RFC,TTT,AR MFFTTNG MARCH 14, 1977 COMMITTEE OF THE WHOLE MEETING (CONTINUED) Mayor Peter Nemeth indicated that one of the questions that must be addressed is why should the City of South Bend purchase Clay Utilities, what is its value to the City. He asked Jon Hunt, Deputy Director of Human Resources to provide background information as to why the City was interested in this purchase. Mr. Hunt gave a slide presentation showing statistical information on housing permits issued in South Bend, indicated a' drastic decline; the population of the City which also declined approximately 10,000 in the last five years. Mayor Nemeth indicated he felt something had to be done about the problem of housing and population. He indicated that the revenues had increased in Clay Township. He said that a substantial portion of Clay Township was annexed in 1973, and that unless the City does something about water and sewage they will lose the annexation in Court. He indicated he thought the City would be able to make revenue from Clay Utilities. He indicated there had been some discussion about delaying this matter. He said he thought it already has been.made clear that the cost, or the valuation, of Clay Utilities would have to be determined by fair market value. He said the Administration had negotiated a price approximately 9% below the asking price. He read a letter from Mr. Helling, Clay Utilities' at- torney that indicated that unless the ordinance received favorable vote at this meeting there was no possibility of future consideration of the present lease figures. He said the Administration could go no further because they had done the best they could. Council Member Kopczynski made a motion to suspend the rules to allow the Council to make presentations only on this matter, not questions and answers, before the public was allowed to speak, seconded by Council Member Dombrow- ski. The motion carried. Council President Parent commended the Council for spending so much tim, on this proposed purchase. He indicated they had only five weeks to study this lease purchase agreement, where the Administration had three months to prepare it. He said he was going to ask the Council to continue public hearing on this matter. He indicated he was in favor of the pur- chase, and he was willing to do anything he could to expedite the purchase at a fair and reason- able price. He said it was the Council's job to determine the fair price. He said the price was negotiated down from 2.3 to 2.2 million and when the Council exerted pressure it was cut to 2.1 million. He said that the interest rate of 7% is the highest it could be at this time. He said he was going to ask the Mayor's office to renegotiate the purchase of Clay Utilities. He said the City should immediately stop helping to repair and maintain Clay Utilities' facilities. He said we should look at the 1965 contract, since we are not in the same situation as Mishawaka, because we provide the water and sewage to them. He indicated that the Council was the only one:. attempt- ing to bring down the price. He indicated he would not vote for Clay Utilities until the price was right. Council Member Miller indicated there were two basic issues the Council was concerned about, the unreasonable price and whether they should delay the matter. He said the unreasonable price revolves around contributions in aid of construction which amounted to 1.2 million. He said the actual investment in capital stock was $305,000 and there is a long term debt of $570,000. He said that $875,000 is at least the minimum investment by Clay Utilities. He said that on the surface it would seem that Clay Utilities was getting a "wind fall" profit, however, there has been a net loss over twelve years, therefore there has been no actual gain. He said in regard to the interest rate, he had been given figures that the current rate today for utility bonds is 7 %. He said that in regard to continuing this matter, he thought each Councilman who was for continuance should guarantee that the rate will be less in the future. He said he felt a vote to delay was a vote against the lease purchase. Council Member Adams indicated that the $875,000 was in the entire system, Mishawaka, Elkhart and the system the Council was considering. She read the following statement: "One of the issues before us this evening is determining whether the rental payable to Clay Utilities is fair and reasonable. I would like to address myself to the reasonableness and fairness of the price which has been negotiated. There is no required formula to determine fair value. I believe it requires a reasonable judgment grounded in a proper con - sideration of all relevant facts. A public utility is charged with administering a public trust delegated to it by the state; it performs a function of the state andis created for public purposes) If we agree to the negotiated price, it is obvious that the construction costs and contributions in aid of construction made by the users in the area will be converted into a monetary profit by the owners of Clay Utilities and that said users will pay again through rates for parts of a water and sewer system which they have already paid for. I believe this to be unfair. It is not in the public's interest and contributions in aid of construciton and donated property should not be in- cluded in arriving at a fair price. When one seeks to buy a business, one might apply the yard- stick of a price of earnings ratio. In acquiring a business this ratio is approximately five to one. Assuming profits of $75,000 this would make the facilities have a fair value of $375,000. I would like the Council to ask that Clay Utilities present us with the documents giving informa- tion in regard to the actual investment by Clay Utilities in the system (excluding aids in con - struction). Particular concerns I have regarding the lease itself are: 1. Will Clay Utilities assume responsibility for all claims for damages occurring before June 1? 2. The cost of pro- viding insurance and the possibility of not being able to obtain insurance which could cause the city to be in technical default. 3. The constitutionality of having one lease contingent on the other. 4. How can other funds be used to add or extend the system when state law specifically states that these costs can be met only from revenue derived from rates. 5. The lease should be changed to include that notice be served on the Board of Works before Clay Utilities can under- take any repairs at the City's expense. 6. Notice of default should be served on the Mayor, membe of the Board of Works, City Clerk and President of the Common Council. We also have to explore th question of whether the City of South Bend would be liable for injuries or damages resulting from the conditions of the waterworks and sewage facilities. In particular I am concerned about the in- adequate pressure and supply of water to extinguish fires." She indicated pressure was brought to bear on the Council four weeks ago regarding the resolution they were asked to.pass, and now pres- sure was being exerted again. She said she felt the Council should make a reasonable effort to determine the fair price. Mr. Joseph Helling, attorney, spoke on behalf of Clay Utilities and its stockholders. He gave the background of the utilities, which started in 1965. He said that Clay Utilities showed a profit for the first time in 1975. He said they anticipated approximately 200 new apartment units, 50 single family dwellings and 4 commercial customers this year, without having to lay any more pipe. He gave the revenue from water and sewer. He indicated there was a provision that the corporation completely dispose of all of its assets and distributes them to their shareholders within a 12 month period, there will be only one capital gain. He said that tomorrow morning that tax advantage will be gone, due to the time element involved. He said the users should be given some thought, since there is no way Clay Utilities can reduce the rates, such as the City is capable of doing. He indicated they pay 20% more than any customer the City of South Bend has. Council Member Adams asked if Elkhart has already entered into an agreement such as this. Mr. Helling indicated he did not know.