Dipping into water bill revenues poses problems

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While it was Mayor Pro Tem Alvin Mason who brought up the notion of dipping into water bill revenues to ease the city’s budget woes at the last commission meeting, the biggest proponent of the idea has been Commissioner J.R. Hatney.

The super District 9 commissioner has long been eyeing the funds to take pressure off the commission every fall when the time comes to balance the next year’s finances. About once a year, the Utilities department gets a request from Finance, initiated by Mr. Hatney, asking for a report on net income and cash on hand.

“I’m still talking about it,” Mr. Hatney said.

For 2010, commissioners face what City Administrator Fred Russell called “the toughest budget that we’ve had to put together in the eight years that I’ve been here,” with a deficit of nearly $8.6 million and a likely tax increase to make up a $5.9 million shortfall in law enforcement.

With Utilities currently having $65.8 million in its enterprise fund, it’s easy to see why some commissioners might be salivating.

But under current agreements, that money is untouchable, and the reasons why go back to the water and sewer debacles of the 1990s – water main blowouts, turbine failure, countywide watering bans during a drought, brown water and a sewage spill into the Savannah River – brought on by the old pre-consolidation city government’s quiet use of water revenues to balance the budget instead of improving the system.

Mr. Hatney remembers those days well; he was one of the old city’s last council members.

SINCE THEN, in order to raise the money to finally bring the system up to speed, the consolidated government vowed never to transfer water revenues into the general fund or any other account. It was written into bond covenants so the city could get favorable ratings and underwriting. If the city broke its word, bonds values could drop and the city could be sued on multiple fronts by bond holders, bond attorneys and insurers, according to Utilities Department Assistant Director Finance & Administration Steve Little.

Mr. Hatney says that’s not what he’s looking to do. He said he wouldn’t want to repeat the mistakes of the past by digging into water funds. Instead, he wants to set up an arrangement where around 15 or 20 percent of future water bill proceeds go to funds other than Utilities.

“What I’m suggesting is that they do not need the whole 100 percent,” Mr. Hatney said. “That’s all I’m saying.”

Perhaps 5 percent could go to public safety, 5 percent could go to the bus system, 5 percent could go to the general fund and 5 percent could go to reserves, he said.

“I’m sure that would be enough to bring us out of the hole,” Mr. Hatney said.

Jerry Brigham, one of the commissioners who warned against raiding water coffers at the Oct. 20 commission meeting, called the idea “Charles DeVaney Governmental Finance 101.”

It would still amount to a transfer, violating the bond agreements, he said.

“If it’s in the water rates, it’s got to go into the water department,” Mr. Brigham said. “That’s stupid. That would be an accounting nightmare.”

What’s more, he said, water rates would inevitably be raised, and because water customers are also taxpayers, it would be tantamount to a back-door tax hike.

MR. LITTLE said 15 percent of Utilities’ annual revenues would amount to $12 million – plenty enough to plug the city’s budget hole. But then there would be a $12 million shortfall in Utilities, leading to cuts in services and layoffs.

“That would suggest that we have a 15 percent profit margin on our department, which we don’t,” Mr. Little said of Mr. Hatney’s idea.

Last week, he turned over a summary of the department’s cash-flow situation, along with passages from the bond covenants, to the city administrator’s office. Packets were to go out to commissioners on Friday, and Mr. Little said he’s hoping they’ll see that water funds aren’t the solution to the deficit.

A lesson learned in the 1990s was that a water department has to keep extra funds on hand in case of a catastrophe. And most of Utilities’ $65.8 million on hand has been set aside for work yet to be done, he said.

Of it, $48.6 million is contractually obligated; $5 million is money paid in advance by Fort Gordon for improvements there; $4 million is for a cash reserve required by bond covenants; and the remaining $8.2 million will go toward capital projects budgeted this year, according to data provided by Mr. Little. An additional $40 million in needed projects still has to be funded, and Utilities is already looking into stimulus funds and state loans.

If the old city’s water revenues in the 1990s ever had any such earmarks, the mayor and council members didn’t give them much credence.

According to Chronicle archives, city officials found out in the late 1980s that they needed more than $60 million to upgrade their water and sewer systems to meet federally mandated requirements. They borrowed $10 million through a 1991 bond issue and raised rates to upgrade the wastewater treatment plant and city sewers, with a plan of setting aside $5 million per year for the projects.

But as the city sank deeper into debt with riverfront projects such as the marina at Riverwalk Augusta, it plundered water revenues through straight transfers to stave off property tax increases.

In the eight years before 1996 consolidation, the former city diverted $74 million from water revenues. The consolidated government would later transfer another $18 million, Chronicle articles reported.

THEN CAME what former Utilities director Max Hicks calls “terrible times.”

In summer 1998, the consolidated city went through a two-month water crisis after one of two turbines at the pumping station broke down, then the backup emergency water-pumping system failed in the heat of a horrendous drought. There were countywide watering bans, which when lifted led to watering frenzies that drained supplies. In some areas, levels got so low that the water flow reversed itself and picked up sediment, leaving residents off Washington, Wheeler and Tobacco roads with brown water.

Then-Mayor Larry Sconyers faced a public relations nightmare, and the Richmond County grand jury launched an investigation of the Utilities department, concluding in the end that it should appoint a finance officer and that the city should stop raiding its revenues.

Mr. Hicks said the problems were repaired for the short term with money from the old Richmond County government’s water fund.

On the sewer side, in 1999 the city had to pay $160,000 in state Environmental Protection Division fines for a series of violations and spills, including a line collapse that backed 1 million gallons of raw sewage into the Savannah River. Before that the city had been issued at least 10 consent and administrative orders for deficiencies dating to 1982 and had paid fines totaling $203,690.

Problems in both systems were finally addressed this decade, and the solution involved still more debt. A $97 million bond was issued in 2000, a $149.5 million bond was issued in 2002 and a $160 million bond was issued in 2004. Part of the money was used to hire consulting firm CH2M Hill, whose subsidiary, Operations Management International, took over operations of the wastewater treatment plant.

Bond conditions included yearly rate increases – which tapered down from 11 percent per year to 3 percent in 2008 – and guarantees that revenues would stay in the water department, Mr. Little said. The restrictions stand until the bonds are paid off around 2040, he said.

AS NEXT year’s final budget numbers are crunched, how hard Mr. Hatney and others will press to tap water revenues remains to be seen.

Mr. Russell said he expects a final vote on the budget in late November. A public hearing is scheduled Thursday at 1 p.m. in commission chambers.

Mr. Hatney concedes that, given the resistance to the idea, mustering enough votes to change how water monies are distributed would be a long shot.

“That would be as hard to get as a chicken growing teeth,” he said.

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