This was deemed crucial by the fiscal finaglers running this town, and seen as the way of getting us out from behind an eight ball of many millions of dollars in water bond debt. Debt that is financially crippling Sierra Madre's water company, and so much else in this community. Pay more for water said City Hall, and everything will become right again. Or at least that is what they were promising.
Mayor Nancy Walsh, in an August of 2013 interview with the Pasadena Star News, which was given prior to our most recent water rate increase being approved, shared the following reasons for raising the cost of the wet stuff to those living here in Sierra Madre (link).
Sierra Madre expects to raise water rates once again: Mayor Nancy Walsh said Wednesday that residents can expect future water-rate increases to offset the city’s low credit rating. Though a current study determining the effects of water rates is still under review, “no doubt there will be an increase” again, she said.
“We need to make sure we’re good on our bond covenant,” the mayor said.
When the rates were discussed in 2010, Walsh was a council member and advocated an initial rate increase of 15 percent, followed by 3 percent increases the next four years. That proposal angered residents and the council ultimately approved 7.5 percent, Walsh said.
“I did not support the rate that was proposed, but I was outvoted,” she said of the 7.5 percent increase. “In the end, I had to vote for it. Any money helped.”
“Shortly after, our credit was downgraded,” Walsh said. “This is really talking about our credit. It’s our No. 1 priority.”
That seems pretty clear, right? Raise the water rates 61%, refurbish our troubled water bond covenants, and life would be good again. Our bond ratings would recover, opening the door to the refinancing of our sadly out of whack water bonds.
As an example, the interest rate on our 2003 Water Bonds is at a very high 5.3%. And since the financial geniuses running this town back then decided it would be best to pay only the interest on that controversial $6 million dollar bond issue, we now find ourselves having unnecessarily added another $9 million dollars in hard debt. Bringing the total debt load on just the 2003 bonds alone to nearly $15 million dollars.
And it wasn't just Mayor Nancy Walsh who said that we needed to raise water rates to repair our Moody's water bond ratings. Our hard working City Staff was getting the word out as well. This from the vast stacks of water rate propaganda to be found on the City of Sierra Madre website:
Without proper revenue to cover operational expenses, which include the City’s bond covenants, the City’s Water Fund credit and bond rating could further deteriorate. In September 2011 Moody’s investor service downgraded the City’s Water Enterprise bond to an A3 rating from an A1 rating. The rationale for the downgrade was insufficient debt service coverage levels and slow implementation of increased rates.
So water rates were raised substantially, and now our bond ratings have returned to health, right? As promised? Well, not quite. This from a press release issued by Moody's Investors Service on Thursday (link).
Rating Action: Moody's confirms Sierra Madre (CA) water revenue bonds at Ba1; removes from review - Global Credit Research - 27 Feb 2014 - $2.6M debt affected
New York, February 27, 2014 -- Moody's Investors Service has confirmed the Ba1 rating on the City of Sierra Madre (CA) Water Enterprise's 1998 Revenue Bonds, of which there is currently about $2.6 million outstanding. The enterprise has an additional $7.9 million in outstanding debt not rated by Moody's but considered in our analysis, including $6.8 million Series 2003 parity bonds. The 1998 bonds are secured by a senior lien on the net revenues of the water enterprise. Concurrently, we have removed the rating from review.
The rating was placed under review for further possible downgrade on December 12, 2013 in anticipation of the outcome of Proposition 218 rate increase protest. The protest failed and a rate increase ordinance has been adopted by the city.
So rather than our ratings recovering, Moody's has instead mired our water bonds at the exact same junk level they were before the rate hike. These bonds will still be considered very risky by investors, even though the cost of water in Sierra Madre has been radically increased.
Here is that original Moody's announcement (link) dropping our water bond ratings to junk. It was released in December of 2013, prior to our latest water rate hike:
Rating Action: Moody's downgrades Sierra Madre (CA) water revenue bonds to Ba1 from A3; rating placed on review for further downgrade- Global Credit Research - 12 Dec 2013 - $3M debt affected
New York, December 12, 2013 -- Moody's Investors Service has downgraded to Ba1 from A3 the City of Sierra Madre (CA) water enterprise's 1998 Revenue Bonds, of which there is currently about $3 million outstanding. The enterprise has an additional $8.1 million in outstanding debt not rated by Moody's but considered in our analysis, including $6.75 million Series 2003 parity bonds. The 1998 bonds are secured by a senior lien on the net revenues of the water enterprise.
Concurrently, we have placed the rating under review for possible further downgrade, pending the outcome of Proposition 218 rate increase process scheduled for late January 2014.
So it appears that all we got out of this from Moody's was a decision to not drop our water bonds to an even deeper level of junk. Is that worth paying 61% more for water?
How is it our water rates were substantially raised, and the Prop 218 protest effort thwarted, yet Moody's still has our water bonds rated at exactly the same junk level? Wasn't raising water rates supposed to remedy this situation, making the refinancing of all of our water bonds at a lower interest rate economically feasible?
Apparently the message from City Hall last fall, and what is really going on, are once again very far apart. In other words, we are about to endure a 61% water rate increase, yet our water bonds will remain rated mired at the same level of junk as before.
And because of this junk rating there will now be no refinancing at any lower interest rate. Nobody gives favorable interest rates for junk bonds. We will continue to pay nearly a million dollars a year in bond debt service, and much of it at the very expensive 2003 level interest rate of 5.3%.
That is not among the results we were promised by when our community leaders were campaigning to raise our water rates last fall.
Add yet one more cause for City Hall's credibility crisis.