State comptroller scolds Egg Harbor for selling water systems ‘in violation of law’

Egg Harbor City failed to hire an independent financial adviser, as state law requires, in the sale of its water and wastewater systems, and instead improperly paid its municipal engineer to do the job, according to the New Jersey Office of the State Comptroller.

But the municipal engineer was far from independent: In 2018, in his capacity as a city employee, he reviewed both systems to identify problems, recommend fixes, analyze operations, and determine costs and impacts to the city and residents.

Having the same professional do both tasks was illegal and failed to protect both taxpayer dollars and the integrity of the process, acting State Comptroller Kevin D. Walsh said in a letter he sent Mayor Lisa Jiampetti Tuesday rebuking the city.

“Compliance with all applicable statutory requirements is vital to protecting taxpayer funds, encouraging free and fair competition, and ensuring government efficiency and transparency,” Walsh wrote. “These principles enable New Jersey residents to trust public officials are making well-reasoned and unbiased decisions that best serve their public health and financial interests.”

The hubbub has to do with the New Jersey Water Infrastructure Protection Act (WIPA), a 2015 law that allows municipalities to sell their water supply and wastewater treatment systems to a private or public entity without a public referendum if emergent conditions exist, such as high contaminant levels or the need for repairs.

Egg Harbor was the first municipality to sell its systems under the law.

Egg Harbor officials broke the law from the get-go, Walsh said, by failing to send the $21.8 million contract to the comptroller’s office for review before soliciting buyers. State law requires the comptroller’s office to review all contracts over $12.5 million.

The comptroller’s office heard about the sale last April, two months after the city and buyer agreed on the sale, according to Walsh’s letter. The office ordered the city to hand over the contract — and during its review discovered  the conflict with the engineer.

Allowing the engineer to do both jobs fails to ensure the independence WIPA requires for the financial analysis, Walsh said. It also denies the municipality and the public the ability to review a report from an expert who is detached from the proposed sale of a key public infrastructure, he said.

A different firm – one uninvolved in assessing the systems’ conditions  – should have examined whether a sale would have less of a financial impact on residents than retaining and upgrading the systems, according to Walsh.

Jiampetti disputed Walsh’s findings, saying the city followed the law and the New Jersey Department of Environmental Protection “reviewed and approved every step of the process,” with assistance from the New Jersey Department of Community Affairs and the New Jersey Infrastructure Bank.

“The city has proceeded through the entire WIPA process in good faith,” Jiampetti said in an email. “We have been open and transparent with our actions and invited the public to participate throughout the process.”

Jiampetti added: “This is the first WIPA transaction in the state so the city was in constant communication and has been in lock in step with the guidance provided by these state agencies.”

Legislative remedy needed?

Walsh said his office will retain oversight of Egg Harbor’s agreement of sale until it’s completed. But he acknowledged holes exist in the process that might require a legislative fix or directives from the Board of Public Utilities or the state Department of Community Affairs.

“It is not clear what will happen,” he wrote.

No agency has been given explicit authority to ensure financial advisers in such sales are independent and provide objective, unbiased analyses, Walsh said. Instead, three state agencies each review various components of the process, with no single agency overseeing it from start to finish, he said.

“In view of the permanence of a sale of municipal infrastructure, and of the Legislature’s effort to ensure public participation by residents impacted by the sale, a review at the state level of the process for initiating a WIPA sale may be appropriate,” he wrote.