Eye on Sacramento’s Final Report on Proposed Water and Sewer Rate Hikes

EYE ON SACRAMENTO’S FINAL REPORT – City of Sacramento Water and Sewer Rate Hikes and Infrastructure Repair Plan

 EXECUTIVE SUMMARY

Through years of neglect and under investment, the city’s water and sewer infrastructure is a mess.  The mess is a consequence of several factors: (1) the city council’s historic failure to focus on long-term needs and its “core” government mission; (2) the failures of the city council and city managers to adequately oversee the Department of Utilities (DOU); (3) broken promises by DOU management on how revenues from earlier rate hikes would be spent; and (4) unsound city policy that has allowed escalating labor costs to crowd out infrastructure spending.

Even if the problem is fixed with massive new investment in utilities infrastructure, how can the city ensure that it doesn’t backslide into such a mess again?  The DOU can avoid a repeat of the current mess by returning utility tax revenues back to the DOU to sustain ongoing infrastructure investment, by adopting smart DOU oversight reforms, by providing specialized oversight of infrastructure spending, by securing concessions from city unions to free up funds for infrastructure spending and by adopting a number of labor reforms.

While framed as a proposed three-year hike in water and sewer rates, the DOU’s plans to borrow $1.8 billion over the next several years will “lock-in” double-digit annual rate hikes for the next 10 to 15 years, as set forth in DOU rate projections  The city council and the public need to be aware that, with the tripling of Regional Sanitation’s sewer rates over the next eight years, the water and sewer rate hikes proposed or projected by the DOU, along with future expected hikes in storm drainage and solid waste rates, will push up the monthly city utility bills for a typical homeowner from $120 per month to over $380 per month over the next 15 years.

The city’s proposed and projected rate hikes will have a profound impact on middle class and working class residents and those on fixed incomes.  The proposed infrastructure repair program will impose an effective lien of $32,500 on the typical Sacramento home.  With local unemployment now back up to 11.4%, 51% of all Sacramento homes underwater on their mortgages and an 8.1% drop in Sacramento home values last year and a further drop of 2.1% projected for the rest of the year, the city council could not pick a worst time to impose a major new financial burden on Sacramento’s citizens and communities.

The recently discussed life-line subsidy idea fails the test of fairness as it would reward better off homeowners while doing nothing to assist worse off renters.

The proposed hikes will have major negative impacts on commercial property, the housing stock, new construction, property tax collections, local school districts and local economic growth prospects.

Before launching a project of this magnitude, the city should install a permanent DOU director with significant experience and expertise in planning and overseeing major, complex utilities infrastructure projects on the scale that is being proposed.  The city council and the public must have confidence in the oversight capacity of DOU management, particularly in light of longstanding concerns with the functioning of the DOU.

With the planned rehab of the city’s two water treatment plants and the city’s placement of numerous underground, stand-by holding tanks in the central city over the past 10 years, the city has substantially diminished the risk of a water or sewer infrastructure failure causing either a significant threat to public safety or a serious disruption of life in Sacramento.  According to DOU director Dave Brent, the principal risk of infrastructure failure is now limited to highly localized impacts that are not expected to endanger public health.  Consequently, there is no public safety reason to initiate major rate hikes in the depths of the current recession and no reason to finance the bulk of the needed work with massive borrowings instead of funding the work on a “pay-as-you-go” basis.

City treasurer Russ Fehr has consistently advised the city council to limit the use of debt financing to only those big-ticket projects that simply cannot be financed out of current cash flow.  He states that the city is “facing a debt nightmare” and that “borrowing for routine maintenance is insane.”

Overreliance on utility debt financing and poor management of utilities infrastructure projects has led to two major municipal bankruptcies this year, in Harrisburg, PA, and Jefferson County (Birmingham), AL.  Bond covenants, including coverage rations, can have capricious effects on utility rates and communities, particularly during sharp economic downturns.

The proposed first tranche of bond financing should only be used to rehab the water treatment plants.  It should not be used to accelerate the installation of water meters, a strategy that would substantially increase ratepayers costs with no significant corresponding benefit.

The DOU’s $250,000 public relations campaign to sell major rate hikes and infrastructure repairs to the public and the city council has been largely a waste of ratepayer funds.  The DOU has maintained a false and misleading narrative on the nature and extent of the proposed rate hikes and has doggedly withheld from public view 15-year rate hike projections and financial plans that would have revealed the full extent of future rate hikes and infrastructure financing.

Eye on Sacramento advises the city council to: (1) to approve single-year hikes in water and sewer rates as a “place setter” to provide the city with the time to renegotiate key labor agreements to unlock cost savings and enact needed reforms and DOU and project oversight measures; (2) authorize debt issuances only to finance the rehab of the city’s water treatment plants; and (3) direct city staff to redesign its infrastructure repair program and its financial plan to fund the lion’s share of the repairs on a prudent, less costly, less risky “pay-as-you-go” basis.

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About Craig Powell

Craig Powell is an attorney, businessman and community activist. He serves as President of Eye on Sacramento