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Waterworks: The story behind Lawrence's controversial utility contract
Disputed water deal cut quickly, quietly
Working without lawyers or council approval, then-Mayor Thomas Schneider handed over his city's water system to 3 supporters and crafted rate hikes that doubled monthly bills
November 21, 2004
When then-Lawrence Mayor Thomas D. Schneider put together a deal giving several political supporters control of the city's $14 million-a-year water operations, he says not a single lawyer was present, not a single note was taken. "Everything was pretty well verbal," Schneider recalled during a court deposition in July regarding the controversial 2001 deal. Schneider said he had been in a hurry to protect the water utility from an outside buyer. And he trusted two ex-city officials who had approached him with a plan for letting their new company take over the city's sewer and water operations. Schneider testified that he had ruled out taking bids, figuring no one else could have provided such a smooth transition. His haste would prove costly. The water deal helped drive Schneider from office, prompted an FBI-led investigation and left Lawrence residents paying some of Central Indiana's highest water rates. Schneider awarded the contract to Lawrence Utilities LLC, a newly formed company run by two former Lawrence officials, Michael L. Lawson and Mark H. Branaman, and a local developer who had managed city construction projects, Micheal R. Couch. Schneider said he never checked the company's finances or asked the men how much of their own money they intended to invest. He didn't have to, because the contract Schneider wrote in mid-2001 gave the company almost everything it needed, including a $4.84 million infusion of start-up cash, vehicles and other assets from the city. And for all that, Lawrence Utilities' owners had invested just $1,000 to get their company going. To seal the deal, which could last 50 years, Schneider helped craft a series of water-rate increases that doubled the monthly bills of Lawrence's more than 40,000 residents. In return, the owners of Lawrence Utilities agreed to make guaranteed payments to the city of at least $2.85 million a year. The 2004 payment will make up 17 percent of the city's $16.6 million budget. Lawrence Mayor Deborah Cantwell, the Democrat who defeated Schneider in 2003, is suing to break the contract. She says Schneider should have sought bids. And she says that water rates the all-Republican City Council signed off on in December 2001 are excessive. In public forums, she has accused water company officials of spending millions in customer money to buy lavish homes and luxury cars. The utility is fighting back, hiring Lou Gerig, president of Sease, Gerig & Associates, and a well-known public relations professional. He has called Cantwell's allegations outrageous. Water company officials, through their Indianapolis law firm, Ice Miller, said they had invested "well over $1 million in cash and loans" in Integrated Resources LLC, the water company's parent company. However, company officials would not say when these investments occurred or provide documentation. Among the transactions raising questions: an $800,000 loan from Lawrence Utilities' parent company, after the infusion of cash from the city, that two water company executives used to buy a Florida condo from another company official. At The Indianapolis Star's request, Michael A. Mullett, a lawyer and expert on utility law, reviewed the water contract and related transactions. "It's a classic case of getting wealthy on other people's money," he said. "There are all sorts of indications that this is a sweetheart deal pervaded by conflicts of interest and collusion." The heart of the deal Schneider, an ex-Marine corporal and former Indianapolis police detective, has not responded to The Star's repeated requests for interviews since April 7, when the U.S. attorney in Indianapolis confirmed the FBI was making inquiries. The FBI, State Police and the Treasury Department are trying to find out whether Schneider personally profited, according to a half-dozen Lawrence residents who have spoken with authorities. Investigators won't comment. In a brief phone interview in March from his second home in a Phoenix suburb, Schneider, 63, said he had never had financial ties to Lawrence Utilities or its owners. Schneider said he knew the FBI was asking questions about him and water company officials, specifically Branaman, Couch and Lawson. Most of what is known about Schneider's views on the water deal comes from testimony in the new city administration's lawsuit to sever the city's ties with Lawrence Utilities. By early 2001, Schneider said he especially was concerned because the city of Indianapolis was looking to buy the assets of IWC Resources Corp., the subsidiary of a Merrillville-based company then operating Lawrence's water utility. Lawrence is fiercely independent. The city never joined Uni-Gov, Marion County's consolidated government. And local officials have long viewed the city's deep-well water supply as superior to Indianapolis' reservoir water. Schneider said Lawson, one of the ex-city officials who formed Lawrence Utilities, had come to him with this proposal: As of July 2001, the city would own the utilities, but Lawrence Utilities would run them. Schneider said he saw the deal as a way to keep local control over a valuable resource. "I wanted the utility back as quickly as we could get it," Schneider testified. City records show Schneider contacted IWC Resources' officials in April 2001 to break a 20-year contract that included an option for that company to buy Lawrence's water utility. To get out of that deal and into the one with Lawrence Utilities, Schneider agreed the city would pay IWC Resources $2.24 million. In exchange for giving Lawrence Utilities the right to operate the water system, the city received $6.74 million in guaranteed payments from the company through the end of last year. Schneider said he supported the water rate increases partly because of the yearly payments to his cash-strapped city. The money helps Lawrence officials keep taxes down and pay for services such as police and fire protection. In this northeastern Marion County city, a typical family of four uses 7,500 gallons of water a month and pays $40.29, not including monthly sewer and trash pickup charges. That's up from $19.05 before rates began rising in 2002. The same family in Indianapolis pays $20.55. Lawson, the water company's president, said the water rate increases were long overdue. He said they were needed to dig new wells, upgrade water treatment plants and add storage capacity to meet demands of a growing city. Water rates had not gone up since December 1989. "The public sees the rate increases, but they don't see all of the work that's going on," Lawson said in April. "I think a lot of people got used to an artificially low rate." After that interview, company officials would answer questions only in writing and only through the utility's law firm, Ice Miller. The contract Schneider wrote also included provisions for annual water rate increases to keep pace with inflation as well as larger increases the city can share in as often as every other year, beginning next year. The City Council would have to approve those increases. However, attorneys for Lawrence Utilities say "no further rate increases are scheduled or contemplated." Lawrence Utilities' own records show nearly all of the company's assets have come from city accounts, customers' monthly utility payments and an $11.1 million loan last year from a state-run borrowing authority to undertake capital projects. The company assumed $3.83 million in utility-related debt and other liabilities. These liabilities include complying with an environmental order to stem sewer overflows into Geist Reservoir. Water company officials say that Lawrence Utilities assumed the risk of cash shortfalls from inadequate rates while agreeing to provide good service and make annual payments that bolster the city's budget. In addition, the water company has pledged to spend at least $15 million on capital projects over 20 years. The company is meeting this goal through the sale of bonds last year backed mostly by customers' monthly utility payments. Lawrence Utilities' owners can walk away from the long-term contract at any time by paying the city $1 million. The city's lawsuit alleges that Schneider should have sought competitive bids from companies seeking to operate the utilities, that Lawrence Utilities LLC has denied the city reasonable access to its books and records, and that the City Council approved excessive water rates. Unless Cantwell wins in Marion Superior Court, the city is locked in for at least 20 years. The city can end the deal during any of the three, 10-year extension periods by assuming the water company's debts and paying the owners seven years' worth of profits. Several council members said they were never given many of the contract's details. "I must admit, had I seen the enormity of the contract's total time frame and the difficulty of breaking it, that would have given me some pause," said Lawrence City Council President Paul Whitehead, a Republican who wishes he had asked more questions. Despite Schneider's stated desire of keeping local control, the contract has left Lawrence officials at the mercy of the private water company, which controls day-to-day operations and chooses where to undertake capital projects. Lawrence Utilities was the only option Schneider presented, said George Keller, who was defeated in 2003 after 32 years on Lawrence's council. Schneider never actually sought council approval of the water contract. Lawrence Utilities was on the job for five weeks when he asked the council to endorse the concept of doing business with the company. The council voted unanimously to do so. Council members say they went along to keep the utility from falling into the hands of Indianapolis officials and to get the guaranteed payments. "The mayor sold us on the idea," Keller said. "It was pretty much of a hurry-up deal." Following the money Criminal investigators are encountering a web of small companies owned by some of the same people involved in Lawrence Utilities that carry out many water company functions in private. For instance, Lawrence Utilities' corporate offices are in Harrison Centre, a retail and office complex in Fort Benjamin Harrison owned by Couch, one of the water company officials. In the same building are offices for Integrated Resources and other companies owned by -- or doing business with -- the water company or its officials. These include Congdon Engineering Associates Inc., Innovative Mapping Solutions LLC and Integrated Realty LLC. Last year, Lawrence Utilities reported losing $1.76 million. Critics say the existence of these related companies offers plenty of ways for water company officials to profit even as the company posts financial losses. For instance, they can make money from Lawrence Utilities' payments to other firms they own, such as Integrated Resources. Nearly 20 percent of customer revenue -- or, up to $2.7 million -- went to the parent company in 2003. This year, Lawrence Utilities expects to collect $14.2 million from water and sewer customers. Nearly $5 million will come from the water rate increases. Meanwhile, water company officials have done well financially in the more than three years since Schneider signed the contract that gave them control of the utilities. Lawson, president of Lawrence Utilities and Integrated Resources, earned $50,251 as deputy mayor in 1998, his final year on the city payroll. In February 2003, Lawson, 41, and his wife disclosed paying $650,000 for a 3,880-square-foot house with a 987-square-foot-finished basement in Lawrence Township's Sargent Woods subdivision. Soon after, they added a 1,576-square-foot, one-story addition, along with a wooden deck and in-ground swimming pool at a cost of at least $245,000, city building permits show. Four years ago, Branaman, vice president of Lawrence Utilities and Integrated Resources, made $65,432 as chief engineer on the city's payroll. Last year, he paid an undisclosed sum to buy Congdon Engineering Associates, a firm also known as CEA, which specializes in civil engineering, surveying and landscape architecture. And in July, Branaman, 39, and his wife reported paying $430,000 for a 2,820-square-foot house in Brendonwood that's undergoing a $925,000 renovation, according to city and county records. Couch, 47, owned a home in Indianapolis near Geist Reservoir before the water company deal. After the deal, he acquired a 36-foot yacht, Caribbean Soul, whose hailing port is Naples, Fla., U.S. Coast Guard records show. The Cobalt 360 sells for between $241,000 and $341,000, according to manufacturer's records. Some City Council members, including Whitehead, said they had assumed city workers would run the water utility when Schneider talked about making changes in 2001. Whitehead, a captain with the Indianapolis Police Department, said he questioned Schneider's relationships with Lawrence Utilities' owners all along but never openly raised concerns. "No one investigated. No one ever looked into it," he said. Now, Whitehead wonders: "Was it simply a very good deal? Or is it too good?" Star librarian Terri Wall contributed to this report. Call Star reporter Kevin Corcoran at (317) 444-2770. A brief look at how Lawrence utility changed hands The business structure Vendors to Lawrence Utilities Where the water company’s money goes Note: The remainder of the money is going to other entities doing business with Lawrence Utilities, including the city of Indianapolis, Ice Miller and Gilliatte General Contractors. Sources: Summary of vendors paid $25,000 or more provided by Lawrence Utilities LLC and 2003 Lawrence Utilities audit by Crowe Chizek and Co.
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