Thursday, March 17, 2011

Profiles In Discouraged – Part VII

The Town Manager’s Latest “Deal”


Kenneth M. O'Brien

 
The Town Council Meeting of March 14 approved a financing plan for the installation of electrical services along Commercial Drive (also known as the access road to the industrial park which in reality only goes as far as the landfill). It had previously been determined that the town, as a result of what Councilor Nikkola at the time referred to as a “good contract”, was obligated to do so. (It should be noted that, subsequently, interim Town Manager Jack Healey termed the same contract, “a terrible contract”.)

In this agreement it is provided that the town will pay National Grid $461,097.67 for the installation of electric lines necessary for the Landfill Gas to Energy Project (LGE, provided for in the contract) to proceed. Under the agreement reached to finance this, as voted by the council on March 14, Casella will issue a check to the town in the amount of $461,097.67 to fund the agreement with National Grid. In return, the town will issue Casella a check in the amount of $180,000. These are funds remaining from the bond originally issued for the construction of the access road to the landfill (i.e. “Commercial Drive”).

In addition, the town will subsequently repay $140,543 of the balance by granting 50% of the revenues from the LGE project that were supposed to come to the town after the project is underway until that amount is liquidated.

Finally, the remaining balance of $140,543 will be forgiven and absorbed by Casella.

The town manager was so pleased with the result of his negotiations on this matter that he has remarked to several councilors that he has repaid a year’s worth of his compensation with this agreement.

While the agreement with Casella to finance the provision of electricity by National Grid appears to be a good deal, it should not be viewed in a vacuum.

Rather, it should be viewed against the backdrop of the savings that Casella has realized by the fact that the town used its bonding capacity to finance the construction of Commercial Drive, which, under the contract, was Casella’s responsibility.

There was a very real opportunity cost to the town in doing this. First, our future bonding capacity was restricted, thus limiting our flexibility in dealing with future eventualities. Second, the strictures resulting from this action required several efforts, involving the expenditure of time, and thus money, to develop a financing plan for the new school. Third, there was the inherent business risk of relying upon repayment by another party.

In order to truly evaluate the “generosity” of Casella in this deal, the forgiveness of $140,543 in up front costs must be compared to the financial benefits given to Casella by our assumption of the bonding of the road. From a financial standpoint this should be done on a net present value (NPV) basis.

In fairness to Casella, they must also be credited with the fact that the repayment of the $140,543 over time is not being charged interest.

Thus, in order to compare the relative financial advantage of these two arrangements, we should calculate the NPV of costs that Casella would have incurred if it had to finance the road on its own. From this we would subtract the NPV of what they are actually paying as a result of the town financing plus the interest foregone on the time payments from LGE revenues to reimburse the outstanding balance.

For those who would like, a formula is available for calculating this. Any amount greater than zero would indicate that Casella has still achieved a financial advantage at the town’s expense. Keep in mind that, in a refinancing completed concurrently with the acceptance by the town of the obligation to finance the road with its own bonds, Casella paid an interest rate of 12%.

Even without doing the calculation, I am confident that they still maintain a substantial financial advantage.
Thus, if the town manager wants to claim that this arrangement has repaid a year’s worth of his compensation, shouldn’t he also agree that he owes us as many years’ compensation as required to liquidate the sellout that he also negotiated?

3 comments:

  1. Ken, Do you think The Who are "lip-syncing?"

    ReplyDelete
  2. I'm not sure, but there are plenty of times that I'm sure that the town manager is lip-syncing for his trash dumping overlords.

    ReplyDelete
  3. Clark is pleased with himself because, once again he demonstrated that the guy running the rigged game can pick the right shell.

    Sleight of hand, sleight of mind.

    ReplyDelete

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