Above Photo: Tobias McCarthy peers out of his front door on September 3, 2022 in Jackson, Mississippi. Joshua Lott / The Washington Post/Getty Images.
Jackson, Mississippi – The City of Jackson, the capital of Mississippi, is in crisis. Its 150,000 residents lack access to safe drinking water. Many have not had enough water to bathe or flush their toilets. Those with enough water pressure are being instructed to shower with their mouths closed. Public schools have been closed.
The immediate crisis was brought about by severe flooding, which caused a water treatment plant to fail. But the problems with Jackson’s water supply date back decades.
The integration of public schools in the 1960s prompted an exodus of affluent whites from Jackson, eroding the city’s economic resources. Jackson’s declining economic fortunes also prompted the departure of middle-class Blacks, causing an overall population decline. The city went from over 200,000 people in 1980 to less than 150,000 people today. More than a quarter of the population lives below the poverty line. Mississippi is the poorest state in the nation, but Jackson is even poorer than the state as a whole. Per capita income is just $21,906.
But while the city’s population and tax base shrunk, it still has 114 square miles of aging water infrastructure to maintain. The state, dominated by Republicans, has been largely unwilling to help a city populated by Black Democrats. In 2021, for example, intense storms left Jackson residents without drinking water for a month. The city asked the state for $47 million in funding for emergency repairs. Mississippi allocated $3 million.
Mississippi lawmakers have blocked “attempts by the city to raise infrastructure funds through a sales tax hike.” Meanwhile, top state officials, including Mississippi Governor Tate Reeves (R), have said that Jackson needs to solve its own problems. After the city lost access to clean water in 2021, Reeves said that the city needs to do a better job “collecting their water bill payments before they start going and asking everyone else to pony up more money.”
Reeves is right that Jackson has had difficulties collecting fees for water. But those difficulties — and its struggles to generate enough revenue to cover even routine maintenance — can be traced back to the actions of a multi-billion dollar corporation: Siemens.
Siemens Offers Jackson A Lifeline
For years, Jackson faced a shrinking population, declining tax revenues, crumbling infrastructure, and a disinterested state government. It’s a seemingly intractable problem. Then Siemens, a multinational conglomerate based in Germany with extensive operations in the United States, appeared with a solution.
In 2010, Siemens began pitching Jackson officials to hire the company to install all-new automated water meters and a new billing system. Siemens would also “make repairs to the City’s water treatment plants and sewer lines.” Where would cash-strapped Jackson get the money for such a project? Siemens assured Jackson that the project would more than pay for itself. Jackson would have to pay Siemens $90 million — the largest contract in city history — but Siemens promised the new system would generate “$120 million in guaranteed savings” in the first 15 years, according to a lawsuit later filed by the city.
Siemens argued that Jackson couldn’t afford not to take this deal. In a December 2010 email, Siemens told a Jackson official that “[r]ight now the city truly needs this project b/c you are losing thousands of dollars each day the project is not implemented.”
According to an analysis performed by Siemens, the previous manual meter and billing system in Jackson was 86% to 94% accurate but would drop to as low as 79% accuracy over the next 15 years. The new system, Siemens promised, would be 98.5% accurate.
The savings, Siemens said, would be generated from more accurate billing and reduced operational and maintenance cost from automated meters that could be read remotely.
What Siemens was promoting was known as an “energy performance contract.” It allows municipalities to finance energy projects through projected future savings. Under a new Mississippi law championed by Siemens, such contracts could be signed without a competitive bidding process.
Siemens told the city there was “no risk” and represented in emails that “Siemens will have to reimburse the city for the difference to pay for the debt service.”
In 2013, Siemens inked a $94.5 million deal with the city. That included the $90 million cost of the meter and billing upgrades, plus $4.5 million for Siemens to measure the savings the new project generated.
The city issued a bond to cover the upfront cost of the contract. The bond issue will ultimately cost Jackson more than $200 million to repay the principal plus interest. Jackson is obligated to pay $7 million a year through 2041.
Siemens’ Disastrous Rollout Of New Water Meters
Siemens and its subcontractors installed the new automatic water meters. Soon, many residents “reported not receiving any [water] bills.” Residents who received water bills “reported inaccurate—and unusually high—amounts, which they often did not pay.”
According to the city’s lawsuit against the company, “[m]ore than 20,000 water meters were installed incorrectly or were unable to transmit meter readings to the system.” That was about one-third of all meters in the city. Worse, the new meters “were also incompatible with the new billing system.” Siemens, it seems, “had never paired the water meter and separate billing systems together, using Jackson as a ‘$90 million test case for an unproven system.'”
There were other problems. As part of its proposal, Siemens had promised that 58% of the work would be done by minority-owned subcontractors. But the city alleged that, instead of finding qualified minority-owned businesses to do the work, Siemens contracted with “sham subcontractors” who merely acted as pass-throughs.
For example, the city alleged that U.S. Consolidated, a company owned by “former Mississippi state politician and lobbyist Tom Wallace” was paid $19.5 million “for water meter supply and logistics.” In reality, “U.S. Consolidated [was] a passthrough entity involved in the supply of water meters on paper only.” U.S. Consolidated purchased the water meters from the manufacturer, Mueller Systems, and then sold them to Siemens at a markup. The meters were then installed by yet another company. U.S. Consolidated, the city claimed, didn’t do any actual work.
In the end, Jackson was stuck with a $7 million annual bond payment, a $2 million monthly shortfall in water fees, and a system of water meters that was not working.
In 2019, Jackson filed a lawsuit against Siemens seeking $450 million in damages. The suit sought to recover the $200 million Jackson paid to finance the project, $175 million in lost revenue, and $75 million to stabilize and repair the water meter system. The city claimed its actual damages exceeded $700 million, taking into account that “the Siemens project destroying the City’s credit rating and ability to borrow necessary funds.”
Siemens, which has had very little to say about its work in Jackson or the lawsuit, claimed that it went “above and beyond its contractual obligations to help address the city’s well-known challenges, which are complex.”
In 2020, Jackson reached a settlement with Siemens. Under the settlement agreement, Siemens paid Jackson $90 million, the original cost of the contract.
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Why $90 Million Couldn’t Make Jackson Whole
No one will ever know if Jackson would have recovered more (or less) if it had taken the case to trial. But $90 million was not nearly enough to make Jackson whole after the Siemens contract.
First, one-third of the settlement ($30 million) went to the private lawyers that Jackson hired to represent the city in the case. That left $60 million. Another $36.7 million “was set aside to bring the city into compliance with its water and sewer bonds.” The bonds required Jackson to maintain a reserve to make payments when “water and sewer collections run short.”
Another $14.25 million “was transferred to the water/sewer enterprise fund or sanitation fund to make up for shortfalls in billing collections.” That represented only a fraction of the $83.1 million in lost water billing revenue since the new meters were installed in 2014. The city was forced to dip into general funds or borrow money to make up for funding shortfalls due to the faulty meter system. The remaining money, about $10 million, was “earmarked for water meter and billing fixes.”
That’s why, despite the $90 million settlement, Jackson’s water system is still not functioning properly. For Jackson residents, things continue to get worse.
Siemens is faring much better. In its most recent earnings report, covering the period April 1 to June 30, 2022, Siemens reported over $17 billion in revenue and over $2 billion in free cash flow.
In response to a request for comment, a Siemens spokesperson sent the official joint statement from the February 2020 settlement agreement with the City of Jackson:
Following a meaningful dialogue between both parties, the City of Jackson and Siemens have reached a mutual and final agreement to settle this issue. The parties are pleased to resolve this matter, and although the project did not end as either party hoped, the City recognizes the efforts of Siemens personnel to identify solutions to challenging issues throughout the course of its work.
The spokesperson said Siemens could not comment further “due to the nature of the agreement.”