Water Bondage

In too deep...
John Perry

Our City Council plans to sell another $18 million in bonds to support the expansion of the Ground Water Recovery Plant (GWRP) and to finance the pipeline system to distribute recycled water. This bond sale is in addition to the previous bond sales which amount to over $72 million since 2002.

For those of you unfamiliar with bonds, they are defined as debt instruments with the purpose of raising capital by borrowing. Government agencies such as cities and other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest. The city has sold a number of bonds to finance such things as capital improvements and land purchases.

The principal and interest are repaid with city funds (your taxes). The City Council has repeatedly increased water rates since 2002 to provide funding for these water bonds over a period of 30 years. The rate increases imposed by the City Council in February 2010 included the anticipated bond funding of the $18 million in capital improvements to our GWRP, as outlined in a “Water Rate Study” prepared for our city by utilities consultant Black & Veatch and adopted by the Council in February 2010.

I am concerned by the continued reliance on bond debt financing by City Treasurer Cindy Russell, who seems quite at ease with the overwhelming debt obligation facing the City in the future. Already we are discovering danger signs that point to even more water rate increases that will be required if the City approves the staff recommendation that the bonds are necessary to meet future water needs of the City.

The question that needs to be answered is “why is it necessary for the City to maintain its own tremendously expensive water source when we have the option of purchasing water at far less cost from Metropolitan Water District?”

The GWRP has only produced its design capacity of 4800 acre-feet (AF) of water in one year since its inception. The original design/builder, Eco Resources Inc., was quietly fired by the City several years ago for failure to maintain the GWRP and failing to meet design output standards.

The facility is now being run by the City at greater cost with even more dismal results. From September 2009 to September 2010 for example, the GWRP only produced 1798 AF of water at a cost of over $2400 per AF while the same water could have been purchased from the Metropolitan Water District (MWD) for $600 per AF. The water was available and no capital investment would have been required. A report issued by the Utilities Commission (called the “Utilities Dashboard”, available on the city’s website) provides fiscal insight into the workings of the City’s water enterprise. The report shows that from September 2009 to September 2010 the water rates paid by city residents increased by 62.5% and the service charge for being connected to the water system increased by 54.3%. This resulted in the rate increases imposed by the City Council in February and again in July of 2010.

However, this increase was still insufficient to cover the cost of Debt Service Expense (bond interest and principal payment) for the prior bond sales of $6.2 million, leaving the water department account in the hole by a total of $3.4 million. The amount of the current debt service expense is staggering. When we divide the $6.2 million by the number of water meters in the City we find that each ratepayer would have to add $47 per month more to their current monthly water bill just to cover the current debt service.

If the City is unable to maintain the current debt service expense without running a deficit, how can they afford to sell additional bonds and incur an ever greater expense? The answer is clear; Cindy Russell plans to propose another increase in water rates!

So what’s the solution? Maybe it’s time to sell the GWRP to a corporation who will run the water facility as a business. The GWRP would have to compete with the MWD in pricing its water. To be successful the GWRP would have to run efficiently and within budget, to sell its water to the residents of San Juan Capistrano and make a profit for its owners. Is such a deal possible?

We will never know if we don’t give it a shot.

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