Category Archives: New Jersey

Phil Murphy wins in NJ! Public Banking on the ballot and wins!

BREAKING: Phil Murphy wins New Jersey’s governor’s race. But it’s not only a win for Murphy, it’s also a win for Public Banks. As John Nichols of The Nation put it today, “Public banking is on the ballot today—not as the sort of statewide referendum issue … but in the form of a candidate who knows a thing or two about banking.”

Phil Murphy describes Public Banking as “the type of big thinking we need to get back on track.” He wants to do even more with a NJ state bank than the successful model of the Bank of North Dakota. “This is money that belongs to the taxpayers of New Jersey, so it should be invested in them.”

PBI’s Chair Emeritus Walt McRee says,

“Phil Murphy has distinguished himself not only in the race for New Jersey governor, but nationally as well with a policy innovation actually capable of turning the state’s economy around.”

Murphy’s win, as John Nichols says, could lead to a different way of talking about economic renewal nationally. PBI believes public banking is a non-partisan issue — conservatives and liberals alike embrace it as a solution for many of the problems facing our country. We are encouraged that so many candidates for office are putting Public Banking on their platform.

The Public Bank Option – Safer, Local and Half the Cost

Phil Murphy, a former banker with a double-digit lead in New Jersey’s race for governor, has made a state-owned bank a centerpiece of his platform. If he wins on November 7, the nation’s second state-owned bank in a century could follow.   

A UK study published on October 27, 2017 reported that the majority of politicians do not know where money comes from. According to City A.M. (London) :

More than three-quarters of the MPs surveyed incorrectly believed that only the government has the ability to create new money. . . .

The Bank of England has previously intervened to point out that most money in the UK begins as a bank loan. In a 2014 article the Bank pointed out that “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

The Bank of England researchers said that 97% of the UK money supply is created in this way. In the US, the figure is about 95%. City A.M. quoted Fran Boait, executive director of the advocacy group Positive Money, who observed:

“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are shockingly ignorant of where money actually comes from.

“There is in fact a ‘magic money tree’, but it’s in the hands of commercial banks, such as Barclays, HSBC and RBS, who create money whenever they make loans.”

For those few politicians who are aware of the banks’ magic money tree, the axiom that the people should own the banks – or at least some of them – is a no-brainer. One of these rare politicians is Phil Murphy, who has a double-digit lead in New Jersey’s race for governor. Formerly a Wall Street banker himself, Murphy knows how banking works. That helps explain why he has boldly made a state-owned bank a centerpiece of his platform. He maintains that New Jersey’s billions in tax dollars should be kept in the state’s own bank, where it can leverage its capital to fund local infrastructure, small businesses, affordable housing, student loans, and other state needs. New Jersey voters go to the polls on November 7.

That means New Jersey could soon have the second publicly-owned depository bank in the country, following the very successful century-old Bank of North Dakota (BND). Other likely contenders among about twenty public banking initiatives now underway include Washington State, which has approved a feasibility study for a state bank; and the cities of Santa Fe in New Mexico and Los Angeles and Oakland in California, which are exploring the feasibility of their own city-owned banks.

A Bank Is Not Simply an Intermediary

An article in City Watch LA critical of the idea of a city-owned bank observed that Los Angeles formerly had a bank that failed, closing its doors in 2003 due to insolvency. The argument illustrates the confusion over what a bank is and what it can do for the local government and local communities. The Los Angeles Community Development Bank was not a bank. It was a loan fund, and it was designed to fail. It was not chartered to take deposits or to create deposits as loans, and it was only allowed to lend to businesses that had been turned down by other banks; in other words, they were bad credit risks.

With a loan fund, a dollar invested is a dollar lent, which must return to the bank before it can be lent again. By contrast, as the Bank of England acknowledged in its 2014 paper, “banks do not act simply as intermediaries, lending out deposits that savers place with them.” A chartered depository bank can turn one dollar of capital into ten dollars in bank credit, something it does simply by creating a deposit in the account of the borrower. If the bank’s books don’t balance at the end of the day, it borrows very cheaply from other banks, the Federal Home Loan Banks, or the repo market. It borrows at bankers’ rates rather than retail rates, and that is one of the many perks that a publicly-owned bank can recapture for local governments. Borrowing from banks rather than the bond market actually expands the circulating money supply, stimulating the local economy.

Compelling Precedents

Public sector banks, while rare in the US, are common in other countries; and recent studies have shown that they are actually more profitable, safer, less corrupt, and more accountable overall than private banks.

This is particularly true of the Bank of North Dakota, currently the only publicly-owned depository bank in the US. According to the Wall Street Journal, it is more profitable than Goldman Sachs or JPMorgan Chase. The BND is risk-averse, lends conservatively, does not gamble in derivatives or put deposits at risk. It is able to lend at lower than market rates because its costs are very low.

The BND holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. It has seen record profits for almost 15 years. It continued to report record profits after two years of oil bust in the state, showing that it is highly profitable on its own merits because of its business model. It does not pay bonuses, fees, or commissions; has no high paid executives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which either distributes them as dividends to the state or uses them to build up its capital base in order to expand its loan portfolio.

The BND does not compete but partners with local banks, which act as the front office dealing with customers. It does make loans that community banks are unable to service, but this is not because the borrowers are bad credit risks. It is because either the loans are too big for the smaller banks to handle by themselves or the smaller banks cannot afford the regulatory burden of lending in rural communities where they get only a few loans a year.

Among other cost savings, the BND is able to make 2% loans to North Dakota communities for local infrastructure — half or less the rate paid by local governments in other states. The BND also lends to state agencies. For example, in 2016 it extended a $200,000 letter of credit to the State Water Commission at 1.75% and a $56,000 loan to the Water Commission to pay off its bond issues. Since 50% of the cost of infrastructure is financing, the state can cut infrastructure costs nearly in half by financing through its own bank, which can return the interest to the state.

If Phil Murphy wins the New Jersey governorship and succeeds in establishing a New Jersey state-owned bank, expect a wave of public banks to follow, as more and more elected officials come to understand how banking works and to see the obvious benefits of establishing their own.

 

 

Phil Murphy opens on Broadway

“People focus on the big companies a lot, but small businesses are the big employers in the state, and if you look at where we’re going to get employment going forward, it’s going to be small business more than anything else,” said Democratic gubernatorial hopeful Phil Murphy standing in the 18th Street Farm Fresh Market on Broadway.

“Look down Broadway. You don’t see Apple, you don’t see General Motors. These are small businesses, and they need leadership from the state.” – Phil Murphy

Murphy, the former ambassador to Germany under President Barack Obama, is coming off a commanding victory in the primary election in June. He doubled the number of votes of the next strongest performers, Assemblyman John Wisniewski and Jim Johnson, combined. He’s in full campaign mode, with the November elections coming up fast, where he will face Republican Kim Guadagno, who served as Lieutenant Governor under Gov. Christopher Christie.

Bayonne is a city of small businesses, unlike Hoboken, which is home to major corporations like Jet and Pearson, or Jersey City, with offices that house Advance Digital, Forbes, Mack Cali, and Murphy’s former employer, Goldman Sachs.

Murphy, who visited Bayonne on Friday, July 21, said, “Look down Broadway. You don’t see Apple, you don’t see General Motors. These are small businesses, and they need leadership from the state.”

Instead of Microsoft or Exxon Mobil, Broadway houses small businesses like Herbert’s Army and Navy store, Hendrickson’s Corner, and Garden State News. “You don’t see places like this anymore,” Murphy said at Garden State News, which provides perhaps the widest selection of print news and magazines in town. “I love it.”

Half-banked

Murphy is not known as a progressive thought leader, but rather, by many, as another financier running for office. However, he brings both progressivism and finance to the table with an old idea from a populist uprising in North Dakota a century ago and adapted for modern capitalism –a public bank.

“You ask a small business person the reason you didn’t get bigger, what’s the reason your business failed, why you couldn’t get started to begin with; it’s invariably [lack of] capital,” Murphy said. “So one of our ideas is to start a public bank that the citizens would own. And one of the main lines of business would be lending money to small businesses through community banks. So we’d work with community banks, not compete with them. We want to get more capital to them and through them.”

A public bank would, in theory, funnel tax revenue through local community banks, such as Bayonne Community Bank, to provide loans and credit to small businesses and help fund small-scale infrastructure projects, while returning the profits from interest back into state coffers. It could be a more efficient way to lend than the current system, which relies heavily on a few multinational financial conglomerates and a shrinking number of community banks.

Skepticism about the idea abounds in the finance hub of New Jersey, which ranks dead last in fiscal health in an annual George Mason University Mercatus Center study. Meanwhile, North Dakota, which created its public bank in 1919, and remains the only state to ever have done so, ranks second.

Garnering support

Murphy is shoring up early support in Hudson County, a vital political battleground for any gubernatorial candidate. His tour through Bayonne was facilitated by Assemblyman Nicholas Chiaravalloti, Mayor James Davis, Bayonne Business Administrator Joe DeMarco, and members of the Bayonne City Council, who were on hand for the event.

“I think it’s great that he came out. Hopefully he can make an impact,” said City Council President Sharon Ashe-Nadrowski. “It’s not every day you get an opportunity like this.”

Mayor James Davis, who first met Phil Murphy before he ran for mayor, strongly supports his candidacy. Davis said the most vital policy decision Murphy can make as governor would be to create an equitable and stable school funding policy.

“The thing is, you have to turn around and make it fair for everybody,” Davis said. “I really believe that is going to be one of the staples of his administration. I think school funding is going to become fair for everybody in the state.” He’s confident that Murphy’s experience in finance will be an advantage. “I really believe that his fiscal prowess is going to be something that he is going to show in the first two years of his administration.”

Murphy has heavily criticized Christie’s school funding policies in the past, and said on Friday that more resources need to be dedicated to infrastructure improvements and public education to achieve fiscal health for communities across the state.

“The fact of the matter is, we haven’t had investment in public infrastructure,” Murphy said. “We’ve taken money from infrastructure, from public education. We haven’t really done much for small businesses over the past seven and half years.”

What a State-Owned Bank Can Do for New Jersey

Phil Murphy, the leading Democratic candidate for governor of New Jersey, has made a state-owned bank a centerpiece of his campaign. He says the New Jersey bank would “take money out of Wall Street and put it to work for New Jersey – creating jobs and growing the economy [by] using state deposits to finance local investments … and … support billions of dollars of critical investments in infrastructure, small businesses, and student loans – saving our residents money and returning all profits to the taxpayers.”

A former Wall Street banker himself, Murphy knows how banking works. But in an April 7 op-ed in The New Jersey Spotlight, former New Jersey state treasurer Andrew Sidamon-Eristoff questioned the need for a state-owned bank and raised the issue of risk. This post is in response to those arguments, including a short refresher on the stellar model of the Bank of North Dakota (BND), currently the nation’s only state-owned depository bank.

Which Is Safer, a Public Bank or a Private Bank?

Sidamon-Eristoff warns, “[W]e need to remember that a public bank would be lending the state’s operating cash balances – we’re not talking about an enormous pool of unused, unencumbered cash – and that any repayment shortfalls or liquidity restrictions could potentially impact the availability of funds for employee salaries and other regular operating expenses.”

As the Bank of England recently confirmed, however, banks do not actually lend their deposits. The deposits at all times remain in the bank, available for withdrawal. They are no less available to the state when deposited in its own bank than in Bank of America. In fact, they are more at risk in Bank of America and other Wall Street banks, which with the repeal of Glass-Steagall are allowed to commingle their funds. That means they can gamble with their deposits in derivatives and other risky ventures, something a transparent and accountable state-owned bank would not be allowed to do.

Today, government deposits are at risk in private banks for another reason. Banks across the country are telling governments of all sizes that they can no longer provide the collateral required to fully protect these deposits while paying a competitive interest rate on them, due to heightened regulatory requirements. FDIC insurance covers only the first $250,000 of these deposits, a sum government revenues far exceed. The bulk of these deposits are thus left insufficiently protected against a banking collapse like that seen in 2008-09—something that is widely predicted to happen again.

In North Dakota, by contrast, state revenues are deposited by law in the state-owned Bank of North Dakota and are guaranteed by the state. The BND pays a competitive interest rate on these deposits that is generally at about the midpoint of rates paid by other banks in the state. The BND, in turn, guarantees municipal government deposits, which are generally reserved for local banks. Unlike in other states, where local banks must back public deposits with collateral to an extent that makes the funds largely unavailable for lending, North Dakota’s community banks are able to use their municipal government deposits to back loans because the BND provides letters of credit guaranteeing them.

The concern that a New Jersey state-owned bank might make risky loans can be obviated by limiting lending, at least initially, to the same sorts of loans the state makes now, using the same underwriting standards. Sidamon-Eristoff observes that “the state already maintains a comprehensive range of economic development, infrastructure finance, housing finance, and student assistance programs.” What financing through the state’s own bank would add is leverage. State and local governments routinely make loans through revolving funds, in which the money has to be there before it can be lent out and must come back before it is lent again. Chartered depository banks are allowed to leverage their capital into 10 times that sum (or more) in loans, acquiring the liquidity for withdrawals as needed from the wholesale markets (Fed funds, the repo market or the Federal Home Loan Banks). A bank with adequate capital will lend to any creditworthy borrower, without first checking its deposits or its reserves.  If the bank has insufficient reserves, it can borrow from a variety of cheap sources that are normally the exclusive province of the banking club, but that local governments and communities can tap into by owning their own banks.

That is one of the major benefits to the state of having its own bank: it can borrow very cheaply in the money markets. It can get the sort of Wall Street perks not otherwise available to governments, businesses, or individuals; and it is backstopped by the Federal Reserve system if it runs short of funds.  This is the magic that allows banks to be so profitable, and it is what makes a publicly-owned bank exceptionally useful at state and local levels of government.

Cutting the Cost of Infrastructure in Half

Consider the possibilities, for example, for funding infrastructure. Like most states today, New Jersey suffers from serious budget problems, limiting its ability to make needed improvements. By funding infrastructure through its own bank, the state can cut infrastructure costs roughly in half, since 50 percent of the cost of infrastructure, on average, is financing. Again, a state-owned bank can do this by leveraging its capital, with any shortfall covered very cheaply in the wholesale markets. In effect, the state can borrow at bankers’ rates of 1 percent or less, rather than at market rates of 4 to 6 percent for taxable infrastructure bonds (not to mention the roughly 12 percent return expected by private equity investors).  The state can borrow at 1 percent and turn a profit even if it lends for local development at only 2 percent—one-half to two-thirds below bond market rates.

That is the rate at which North Dakota lends for infrastructure. In 2015, the state legislature established a BND Infrastructure Loan Fund program that made $150 million available to local communities for a wide variety of infrastructure needs. These loans have a 2 percent fixed interest rate and a term of up to 30 years; and the 2 percent goes back to the State of North Dakota, so it’s a win-win-win for local residents.

The BND is able to make these cheap loans while still turning a tidy profit because its costs are very low: no exorbitantly-paid executives; no bonuses, fees, or commissions; very low borrowing costs; no need for multiple branch offices; no FDIC insurance premiums; no private shareholders. Profits are recycled back into the bank, the state and the community.

In November 2014, The Wall Street Journal reported that the BND was actually more profitable than the largest Wall Street banks, with a return on equity that was 70 percent greater than for JPMorgan Chase and Goldman Sachs. This remarkable performance was attributed to the state’s oil boom; but the boom has now become an oil bust, yet the BND’s profits continue to climb. In its latest annual report, published in April 2016, the bank boasted its most profitable year ever. The BND has had record profits for the last 12 years, each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on equity of a whopping 18.1 percent.

The BND Partners, Not Competes, with Local Banks

Sidamon-Eristoff argues that “a new public bank would inevitably compete against New Jersey’s private banks for routine business.” But the BND does not compete with private banks either for municipal deposits or for loans. Rather, it partners with local banks, participating in their loans. The local bank acts as the front office dealing directly with customers. The BND acts more like a “bankers’ bank,” helping with liquidity and capital requirements. By partnering with the BND, local banks can take on projects in which Wall Street has no interest, projects that might otherwise go unfunded, including loans for local infrastructure.

The BND helps local private banks in other ways. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It offers secured and unsecured federal funds lines to over 100 financial institutions, along with check-clearing, cash management and automated clearing house services.  Because it assists local banks with mortgages and guarantees their loans, local banks have been able to keep loans on their books rather than selling them to investors to meet capital requirements, allowing them to avoid the subprime and securitization debacles.

Due to this amicable relationship, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks.  Indeed, it may be the BND that ultimately saves local North Dakota banks from extinction as the number of banks in the US steadily shrinks. North Dakota has more banks per capita than any other state.

Bolstering the State’s Budget

The BND also helps directly with state government funding as needed. Between 2009 and 2016, the BND retained its profits because the state did not need them and the bank needed the additional capital for its rapidly expanding loan portfolio. But in December 2016, Governor Jack Dalrymple proposed returning $200 million from the bank’s profits to the state’s general fund, to help make up for a budget shortfall caused by collapsing oil and soybean proceeds. Dalrymple commented, “Our economic advisers have told us there is no similar state in the nation that could have weathered such a collapse in commodity prices without serious impacts on their financial condition.”

The BND also served as a rainy day fund when the state went over-budget in 2001-02 due to the dot-com bust. The bank simply declared an extra dividend for the state, and the next year the budget was back on track: no massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no capital appreciation bonds at 300% interest.

Having a cheap and ready credit line with the state’s own bank can have similar benefits for New Jersey and other states. It can reduce the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks; allow the state to leverage its funds, expanding its current credit facilities without adding to the state’s debt burden; cut infrastructure costs nearly in half; and jumpstart the economy with new development,  new employment, and an expanded tax base.

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Ellen Brown is an attorney, founder of the Public Banking Institute, a Senior Fellow of the Democracy Collaborative., and author of twelve books including Web of Debt and The Public Bank Solution. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

 

In American Towns, Private Profits From Public Works

BAYONNE, N.J. — Nicole Adamczyk’s drinking water used to slosh through a snarl of pipes dating from the Coolidge administration — a rusty, rickety symbol of the nation’s failing infrastructure.

So, in 2012, this blue-­collar port city cut a deal with a Wall Street investment firm to manage its municipal waterworks.

Four years later, many of those crusty brown pipes have been replaced by shiny cobalt-­blue ones, reflecting a broader infrastructure overhaul in Bayonne. But Ms. Adamczyk’s water and sewer bill has jumped so much that she is thinking about moving out of town.

“My reaction was, ‘Oh, so I guess I’m screwed now?’” said Ms. Adamczyk, an accountant and mother of two who received a quarterly bill for almost $500 this year. She’s not alone: Another resident’s bill jumped 5 percent, despite the household’s having used 11 percent less water.

Even as Wall Street deals like the one with Bayonne help financially desperate municipalities to make much ­needed repairs, they can come with a hefty price tag — not just to pay for new pipes, but also to help the investors earn a nice return, a New York Times analysis has found. Often, these contracts guarantee a specific amount of revenue, The Times found, which can send water bills soaring.

Water rates in Bayonne have risen nearly 28 percent since Kohlberg Kravis Roberts — one of Wall Street’s most storied private equity firms — teamed up with another company to manage the city’s water system, the Times analysis shows. City officials also promised residents a four-­year rate freeze that never materialized.

In one measure of residents’ distress, people are falling so far behind on their bills that the city is placing more liens against their homes, which can eventually lead to foreclosures.

In the typical private equity water deal, higher rates help the firms earn returns of anywhere from 8 to 18 percent, more than what a regular for ­profit water company may expect. And to accelerate their returns, two of the firms have applied a common strategy from the private equity playbook: quickly flipping their investment to another firm. This includes K.K.R., which is said to be shopping its 90 percent stake in the Bayonne venture, a partnership with the water company Suez.

Rich Henning, a Suez spokesman, said that “Bayonne had chronically underinvested in their water and sewer infrastructure, which has certainly contributed to rate increases during the past few years.” He added, “We understand that these increases create stresses for ratepayers.”

President-­elect Donald J. Trump has made the privatization of public works a centerpiece of his strategy to rebuild America’s airports, bridges, tunnels and roads. Members of his inner circle have sketched out a vision, including billions of dollars of tax credits for private investors willing to tackle big infrastructure projects. And Mr. Trump himself promised in his victory speech “to rebuild our infrastructure, which will become, by the way, second to none.”

Private equity firms like K.K.R. have already presented themselves as a willing partner, and Bayonne provides an important case study. Its arrangement is one of a handful of deals across the country in the last few years in which private equity firms have managed public water systems. While these deals are a small corner of private equity’s sprawling interests, they represent the leading edge of the industry’s profound expansion into public services.

For residents, the financial trade­offs from these water deals can be painful.

The Times analyzed three deals in which private equity firms have recently run a community’s water or sewer services through a long-term contract. In all three places — Bayonne, and two cities in California, Rialto and Santa Paula — rates rose more quickly than in comparable towns, which included both publicly and privately run water systems. In Santa Paula, where Alinda Capital Partners controlled the sewer plant, the city more than doubled the rates. A fourth municipality, Middletown, Pa., raised its rates before striking a deal.

Now, some of these cities are trying to take back their water. Missoula, Mont., wrested away its water system, which had been owned by the Carlyle Group. Apple Valley, Calif., whose waterworks were also owned by Carlyle, has filed a similar lawsuit. Santa Paula bought its sewer plant from Alinda last year.

Of course, there’s a reason many communities look for private partners to begin with: Their water systems are in poor shape. Budget shortfalls and political mismanagement can represent a real threat to both infrastructure and citizens. For evidence, look no further than the crisis in Flint, Mich., where the drinking water became tainted with lead.

“Keeping rates down may sound like the ultimate righteous good for ratepayers, but the truth is, not if you’re failing to provide basic care and maintenance,” said Megan Matson, a partner at Table Rock Capital, the boutique private equity firm that invested in Rialto’s water and sewer system. She added that it helps for deals to “provide more obvious public benefits,” noting that her firm partnered with Ullico, the nation’s only labor-­owned insurance and investment company.

Proponents of the public-­private partnerships, citing recent studies in Canada and Europe, argue that private businesses operate more efficiently than governments do and that this translates into cost savings for citizens. And private equity firms, lacking technical expertise in how to manage infrastructure, often team up with private water companies.

Supporters also say that the deals require private equity to spend millions of dollars a year to fix things (money that towns may not spend on their own), and that the firms sometimes pay towns millions more up front. Bayonne, for instance, got $150 million up front from K.K.R.’s team, which the city used to pay off a pile of debt.

In a statement, a K.K.R. spokeswoman said, “Our partnership has provided Bayonne residents with better service, modernized technology to detect leaks and conserve water, improved infrastructure and safer conditions for workers — all without a tax increase or public expenditure.”

Desperate Measures

In Bayonne, a city of about 65,000 on a peninsula in the shadow of the fallen twin towers, a crucial test for its private equity deal came in July 2012. By then, Bayonne had already spent nearly a year haggling with some of K.K.R.’s top negotiators.

Next, city officials presented the deal to a more skeptical crowd: their own residents.

Bayonne’s sales pitch to its citizens illustrates the bold steps town officials can take — including making promises that are at odds with the actual terms of the deal — to attract private equity money. Private equity, in turn, can earn significant returns.

At a public meeting in city hall, a lawyer for the city promised that, after an initial rate bump, there would be “a rate freeze for four years,” according to a meeting transcript. Bayonne’s mayor, Mark Smith, later reiterated the four-­year freeze in a magazine article.

That promise turned out to be fleeting.

The contract allowed additional rate increases after only two years. There was no four­-year freeze.

In fact, rates rose even more than the Bayonne contract predicted — in part because K.K.R’s team had to make unexpected infrastructure upgrades, but also because residents were using less water than expected. The contract guarantees revenue to the team — more than half a billion dollars over 40 years — so water rates have jumped, in part, to make up the difference.

The city said it saw the revenue requirement as a way for K.K.R.’s team to earn steady returns, but not a windfall.

But the Times analysis showed that Bayonne’s water rates grew almost 28 percent under the deal, growth that far exceeded that of three other municipalities to which Bayonne has compared itself.

(Daniel Van Abs, an associate professor at Rutgers University who specializes in water management, said that a true apples-­to­-apples comparison of water rates in different towns was “extremely difficult” because of the different factors that can influence rates, including the size of the utility, the municipality’s population, droughts and infrastructure investment — or lack thereof. The Times analysis for Bayonne did not include sewer rates.)

Former Bayonne officials who had promised the four­-year rate freeze said in interviews that they had not meant to mislead residents. They said they had earmarked some of the K.K.R. team’s $150 million up­front payment to offset rate increases in the contract’s early years.

But then voters ousted Mayor Smith. And once he left office, the new administration put that money elsewhere.

“I think we could have accomplished that four-­year minimum,” the former mayor said in an interview. The town’s water rates, he said, are now “exorbitant.”

Tim Boyle, who took over Bayonne’s utilities authority after Mr. Smith was voted out of office, said that various regulations required the city to use that money for property tax relief rather than to stabilize rates. He also blamed the previous administration for guaranteeing too much revenue to K.K.R.’s team in the early part of the deal, calling those figures “wildly optimistic.”

Bayonne officials also stress the deal’s benefits, including the up­front payment that let Bayonne pay off more than $100 million in old debts. Within three months, Moody’s Investor Service revised the city’s debt outlook from “negative” to “stable” for the first time in five years, and it has since upgraded the city’s credit rating.

K.K.R.’s team contributes about $2.5 million annually to pay for repairs to water infrastructure, plus $500,000 to the city itself. K.K.R. and Suez said they have upgraded their safety equipment and replaced inoperable hydrants around town.

They also installed sophisticated water meters that can detect leaks in people’s homes, and sent nearly 2,000 letters to customers warning when such leaks occurred. As such, use has declined, according to Mr. Henning, who said Suez had received “many notes of thanks” for the warnings.

But more­ sensitive meters could lead to higher bills for some residents whose water use wasn’t fully captured in the past. When negotiating the deal, K.K.R. called this process “meter uplift,” according to emails obtained through records requests.

“We gave away too much,” said Gary La Pelusa Sr., a city councilman and former commissioner of Bayonne’s utilities authority, which approved the deal over his objections.

Bayonne originally promised residents that the city’s utilities authority would oversee K.K.R. and Suez. But the City Council recently decided to shutter the agency and handle the oversight itself.

Stephen Gallo, who headed that authority when the deal was struck, still believes that it benefits Bayonne. “But you’ve got to watch them, you’ve got to keep an eye on things,” he said. “I don’t know who’s doing that now.”

In interviews with The Times, more than a dozen Bayonne residents, including Ms. Adamczyk, expressed dismay over the rate increases. One reason is that people who fall behind on payments face long­term risks: Unpaid water and sewer bills can be sold to investors who try to collect on that debt, a common practice across the country. Failure to pay can ultimately lead to foreclosure.

In 2012, the year Bayonne struck its deal, water bill delinquencies led to 200 government liens against local properties, tax records show. That figure more than tripled the next year, the first full year under K.K.R.’s team. In 2015, the most recent year with data available, the number remained elevated, at 465.

The city publishes its lien notices in the local newspaper and residents receive mailed delinquency letters.

Still, when a reporter asked one Bayonne resident, Carlos Jimenez, about a water and sewer bill lien that had been listed against his property, he expressed surprise, saying he wasn’t aware of it. “I didn’t know this could happen,” Mr. Jimenez said. “It’s a different ballgame.”

There is No Free Money

One of the few things Republicans and Democrats can agree on is that the nation faces an infrastructure crisis.

In water infrastructure alone, the nation needs about $600 billion over the next 20 years, according to federal estimates. And yet federal spending on water utilities has declined, prompting state and federal officials to try to play matchmaker, courting private investors to fix what needs fixing.

For years, the Obama administration has been cheerleading public-­private partnerships. In a statement, the White House said it backed them “when they are well structured, include strong labor standards, and when there is confidence that taxpayers are getting a good deal.”

During the presidential campaign, Mr. Trump’s team outlined a new plan to incentivize private investors to take on large infrastructure projects.

Wall Street has responded to the call to action. There are now 84 active financial infrastructure funds, according to Pitchbook, a private financial data platform, up 25 percent in just three years. Some belong to big banks like Goldman Sachs, but many are run by private equity firms.

“Across our country, we need solutions for infrastructure deficiencies,” said James Maloney, a spokesman for the American Investment Council, the private equity trade group. “Private equity serves as one of these solutions.”

Some critics are wary of expanding private investment in public infrastructure. Although cities may get cash up front in these deals, “there is no ‘free’ money” in public-­private partnerships, says a 2008 Government Accountability Office report. Using roads as an example, the report observed “it is likely” that tolls will increase more on a privately operated highway than one run by the government.

Ms. Matson, of Table Rock, who has attended White House meetings on infrastructure, has tried to dispel concerns about these deals. Table Rock is part of a team that finances and manages the water system in Rialto, Calif., a deal that provided the city about $41 million to improve the water and wastewater infrastructure, she said.

Rialto residents have seen their water rates increase about 68 percent since the deal, according to the Times analysis, more than any other comparable city. But Table Rock said rates were artificially low after the city had declined to raise them for about a decade, giving it the lowest rates among those towns. And unlike in most other deals, Rialto residents had a say in the increases and ultimately approved them in a public vote, as required under state law. This year’s rate increase was delayed.

When the deal closed in 2012, all the public water utility employees kept their jobs. Everyone has since received raises. And Table Rock, like its partner Ullico, has committed to all 30 years of the arrangement.

“We don’t do flips, we invest for life,” Ms. Matson said, meaning that Table Rock doesn’t seek quick profits by unloading its investments. She also said that Table Rock declined to make deals that provided big up­front payments to towns without a sufficient commitment to infrastructure repairs. “Those deals give the rest of us a bad name,” she said.

Gaining Control, but Then What?

 

In an upscale Washington, D.C., restaurant in 2012, an executive from the Carlyle Group, one of the world’s largest private equity firms, put his arm around the mayor of Missoula, Mont.

“Mayor,” the executive said, “are you ready to buy a water system?”

Three years later, the comments by the executive, Robert Dove, were recounted from a witness stand in the Missoula County Courthouse. The city was suing Carlyle, which ultimately refused to sell to Missoula, to gain control of its water system.

Missoula is one of several places in recent years that have tried getting back their water systems from a private company. But after waging costly battles, the towns cannot always guarantee the same services at lower rates.

At the time of that dinner in Washington, Missoula was the only city in Montana that did not own its water system — and John Engen, Missoula’s mayor, wanted to change that. So, months before, he had supported Carlyle’s purchase of the regional water company (Park Water) that owned Missoula’s local system (Mountain Water), believing that Carlyle would then sell Mountain Water back to his town.

But the mayor’s plans derailed.

In October 2013, Missoula made an informal offer to buy its local system. Carlyle declined. Missoula made a formal offer. Carlyle declined again.

Missoula then sued, and it won. But the court decided the system was worth $88.6 million, substantially more than what the city had offered. On top of that, the city must spend millions of dollars on legal and other fees and must also pay some of its opponents’ costs, according to court records.

Those costs included lawyers’ fees, limo services and dinners at some of Missoula’s finest restaurants. They also included at least one order of boneless chicken wings at Hooters, and one bottle of Metamucil.

In a statement, a Carlyle spokesman said that the firm had considered the city’s offers in good faith. “The city offered many millions less than the company was worth, and an independent panel agreed,” the spokesman said. He also said that under Carlyle’s watch, “capital expenditures more than doubled, leakage was reduced by 19 percent, water quality was excellent and employment was stable.”

And under Missoula’s watch, water rates may rise anyway. Further costly repairs are still needed, for one thing.

For Carlyle, the deal was a financial success. The firm sold Park Water in January to another private company for $327 million, more than double what Carlyle had paid.

Missoula is not the only city seeking control over its infrastructure. Last year, Santa Paula bought its wastewater recycling plant for about $70 million from Alinda Capital Partners.

Alinda, which specializes in infrastructure investing, had teamed up with a private water recycling company to finance, design, build and operate the plant after the city awarded them the contract in 2008. The new facility, Alinda noted, replaced an old plant owned by Santa Paula that had been violating state environmental regulations, saving the city from paying fines.

But after years of raising sewer rates, partly to pay “service fees” to Alinda, Santa Paula’s thinking changed: It would be better for Santa Paula to issue its own debt to purchase the plant than to saddle citizens with annual rate increases. Now the town — at the urging of its city manager, Jaime Fontes, and several council members, including Ginger Gherardi — has started issuing rebates to citizens.

Still, there will be bumps along the road. After all, cities like Missoula and Santa Paula are now responsible for running an important, and occasionally messy, public service.

Soon after Santa Paula regained control of its sewer plant, an equipment failure let partly treated wastewater pour from the plant. The discharge turned a pond green and flowed onto a nearby organic farm.

And wastewater, Mr. Fontes said, is “not the kind of organic you want.”

Rachel Abrams contributed reporting from Los Angeles. Kitty Bennett, Susan Beachy and Alain Delaquérière contributed research.

© 2016 The New York Times Company

PROFILE: THE WOMAN LAYING THE GROUNDWORK FOR A PUBLIC BANK IN NEW JERSEY

Joan Bartl believes taxpayer-owned financial institution would be ‘logical and practical’ because of the state’s ‘significant fiscal problems’

Who she is: Joan Bartl, state coordinator in New Jersey for the nonprofit Public Banking Institute.

Where she calls ‘home’: Bartl, who was born in Philadelphia and attended the Wharton School of Business, has been a resident of Princeton for nearly 50 years.

Why she matters: Since 2012, Bartl has been leading the effort in New Jersey to establish a public bank that would be modeled on the Bank of North Dakota, the nation’s only state-owned banking institution. The push to create a similar bank in New Jersey received a big boost last month when Phil Murphy, a Democratic candidate in New Jersey’s 2017 gubernatorial contest, outlined an economic platform that included the goal of launching a public bank here.

Bartl is also the founder and president of Payment Management, a credit-card processing company.

What is public banking? While most taxpayer funds right now are deposited in commercial banks, the mission of a taxpayer-owned bank would be to create a new financial institution in New Jersey that could hold those deposits without having to involve the commercial banks. The public bank would also eliminate the profit motive of a commercial institution, meaning taxpayer deposits could be leveraged through the writing of loans that encourage public-policy goals like building new schools or funding infrastructure repairs. And for local governments that rely heavily on revenue collected through property taxes, the public bank could become a new source of capital that could be tapped without having to pay the high fees and interest rates generally charged by big commercial banks.

How she got involved: Bartl was first drawn to the public-banking issue by a friend, Walt McRee, the Public Banking Institute’s national chairman. She read up on the topic, attended conferences, and also learned more about the Bank of North Dakota, which was founded in 1919 by North Dakota’s Legislature. Seeded with $2 million, the Bank of North Dakota now has over $270 million in capital and 168 employees. And while other states, including New Jersey, struggled during the Great Recession, North Dakota was in a much stronger position thanks to its bank.

“It just seemed like such a logical and practical concept,” Bartl said.

Why New Jersey? The public-banking idea may make a lot of sense for a state like New Jersey, which has a number of significant fiscal problems, including heavy per-capita debt, a grossly underfunded pension system and near-annual budget crises, she said.

“It became obvious that the financial situation for New Jersey was not working long-term for the people, and it was not going to get better,” Bartl said. “If we have our own bank for New Jersey, we can lend to ourselves and New Jersey can take back control of where and how the money is invested.” As an advocate for establishing what would be the first new public bank in nearly a century, she’s met with local and county officials, and some state lawmakers, to share information about public banking and gauge interest in launching one here. “We realized that everybody liked the idea,” she said.

The Murphy factor: With Gov. Chris Christie’s two terms in office coming to an end in early 2018, the Public Banking Institute has been working to provide information about the issue to candidates from both parties who’ve shown interest in running in next year’s election. Murphy, a former Goldman Sachs executive who declared in May he is running as a Democrat, met with the group in Princeton. “His ears perked up. He was so interested and kept asking us more questions,” Bartl said of that meeting.

Murphy then announced last month during an economic policy speech that if elected he would seek to establish a public bank in New Jersey. The former U.S. ambassador to Germany who has quickly become a frontrunner in the gubernatorial race said he believes the public bank could help local governments in New Jersey when they need to borrow money for capital projects. He also said during the speech delivered at the New Jersey Institute of Technology in Newark that small businesses and college students could stand to benefit from a public bank. New Jersey right now deposits more than $1 billion in commercial banks, some located overseas, he said.

“It’s time to bring the money home,” Murphy said. Bartl called Murphy’s decision to include the public bank in his economic platform “very exciting and very rewarding.” She said, “It’s the right thing to do, and it’s the right time to do it.”

Latest developments: Bartl and McRee are working to get a task force started with other New Jersey stakeholders to begin establishing the mission of the state’s public bank. That will include ensuring proper safeguards are put in place to insulate the proposed bank from political interference and also requiring full transparency.

Other interests: A divorced mother of a daughter and a deceased son, Bartl has a history of social activism. She was a member of Women on Words and Images, a group that published the analysis “Sex Stereotyping in Children’s Readers” in 1972. “It took four or five years, but we changed the way girls and boys were portrayed (in the media) … That was a really powerful time in my life.”

Bartl is a longtime board member of Womanspace, a Mercer County-based nonprofit that serves individuals and families impacted by domestic and sexual violence by offering crisis intervention, emergency shelter, counseling and other services.