By Sherry Twamley
Ratepayers get stuck footing a $38 Million Bill
Cottonwood AZ (July 29, 2014) – It was a watershed moment when Suzanne, an elderly widow surviving on social security income in the Verde Village — a rural suburb of Cottonwood, AZ — opened her water bill in November, 2013 and was shocked to see her water rates had jumped 67%. She thought the pipes had broken or ‘there must be a big billing mistake’ that could be corrected… All she had to do is call the billing office at Cottonwood Municipal Water & Wastewater Utility (CMWWU) and they would fix it. In the meantime only a block away, another water utility customer inside city limits received his water bill with only a 30% water rate increase. What Suzanne didn’t realize at the time was, she and 9,000 other city utility customers were stuck with footing a bill for the city’s staggering $38 million in municipal bond debt the city issued to buy five private water companies between 2004 to 2010. The main reason rates jumped up so high had little to do with the cost of maintenance, operations and electrical costs of the water utility; it was to pay debt service for CMWWU’s municipal revenue bond debts secured by water revenues (water bills). The debt burden added more than $23.00 a month to customers’ water bills.
Private Water Company Takeovers
In October 2004, city officials led by Mayor Ruben Juaregui, Vice-Mayor Randy Lowe; city council members Diane Joens, Karen Pfeifer, Bob Rothrock, Clarice Shamrell, Joan Cerny and Steve Dockray; and city manager, Brian Mickelson, and finance director, Rudy Rodriguez, started a water utility company and issued a $14 million revenue bond secured by future water bill revenues to seize three private water companies by condemnation (eminent domain) including Clemenceau Water Company, Cordes Lakes Water Company (Cottonwood Systems), and Verde Santa Fe Water Company in Cornville, AZ in Yavapai County suburbs, with total existing accounts of 4,736. Before this, the city had no experience in running a water utility. The city had run a sewer system since 1990. In 2009 and 2010, the city acquired two more private water systems, Spring Creek Water Company and Quail Canyon Water System. In 2009, the city had 9,135 total water accounts, mostly residential and about 3 percent business accounts.
Standard & Poors’ Summary: Cottonwood Municipal Property Corp., Arizona; Feb. 1, 2010. In 2014, the city water utility had 9,000 customers.
The city’s purchases for water companies in 2004 and 2006 came from borrowed money in the total amount of $37,545,000 ($13,580,000 for Cordes Lakes, Verde Santa Fe, and Clemenceau Water Systems; $16,580,000 for the Cottonwood portion of the Cottonwood Water Works System, and $7,385,000 was loaned to the city of Clarkdale to purchase their portion of the Cottonwood Water Works System). The city also borrowed a significant sum of money to repair, maintain and upgrade the purchased water companies’ infrastructure, fueling the city’s debt. In 2010, the city racked up $20 million more in municipal revenue bonds to build a recreation center, and the debt is being paid by a city utility 1% tax until the year 2027.
The first three municipal private water company takeovers were done by condemnation (eminent domain). Because these water systems were acquired “as is”, city officials have reported finding significant piping and problems with the private water companies’ wells and infrastructure since their acquisition, which could continue to significantly impact the water utility’s maintenance and operations costs in the future.
In a news article published July 2014, Rudy Rodriguez, the city’s finance director, told the news reporter that the city is considering raising rates approximately 8% in October, 2014 and that future rate increases will be about 42.2% over the next six years.
Outstanding Bond Debt and Water Rate Increases
Cottonwood’s borrowing practices have put CMWWU heavily in debt. In 2014, $31,750,000 in water company purchase municipal revenue bond debt was outstanding; and $975,000 in principal payments has been made since 2004. A whopping $12,264,000 in interest payments have been made as of June 30, 2014.
Source: Arizona Report of Bonded Indebtedness – www.azdor.gov/ReportsResearch/ReportofBondedIndebtedness.aspx
The City plans to increase its Enterprise Fund borrowing by $15,697,100 in Fiscal Year 2015 beginning in 2014 and ending June 30, 2015 to build a Water Reclamation Wastewater Plant and a regional communications center.*
Excerpts from the city of Cottonwood’s FY 2015 budget: “The largest planned single increase is in the Enterprise Fund, which includes the refinancing of the 2004 Bank of New York Water Bond. A general discussion about the funds follows; however, in-depth information is in the Key Issues section of this document. The FY 2015 Enterprise Fund budget, which consists of water and wastewater, has increased from last fiscal year’s revised amount of $16,956,265 to $32,653,365 for FY 2015. The $15,697,100 increase can, in part, be attributed to the Riverfront Wastewater Reclamation Plant, which is expected to begin construction in FY 2015, and the refunding of the 2004 Water Bonds. WATER ISSUES: One recent issue is the downgrading, by Standard and Poors, of the Water Utility Bonds due to inadequate debt service coverage. This was addressed during the budget process in FY 14 with a rate increase and will be looked at again in FY 2015. A rate increase is not calculated into the budget due to its uncertainty of coming to fruition. Any rate increase should guarantee the 1.35X coverage required by the bond covenants.
Bond Debt Per Customer
Based on 9,000 water ratepayers, the city water utility’s projected 2015 Fiscal Year Revenue Bond Debt per customer is $8,006.00 each.
WATER RATE AFFORDABILITY: The Environmental Protection Agency’s (EPA) benchmark criterion for affordable water utility rates is 2% of an area’s Median Income Household (MHI) pre-tax income (50th percentile), or no more than 2.5% of MHI.Those below the 50th percentile may need government assistance in paying water bills. For comparison,Federal (HUD rent subsidies) low income rental assistance is provided to low income families of four with income of $32,880 year.
In July 2014, the U. S. Census’ estimated MHI for Cottonwood was $36,870 pre-tax income. A family of four who consumes 10,000 gallons of water per month outside Cottonwood city limits will pay an est. $990.00 a year for water, including taxes and fees, which is 2.69 percent of the family’s annual gross income. Added together, estimated annual 3% sales taxes and water added together will consume about 3.8% of the Median Household Income.**
*City of Cottonwood MHI Source: **Using the 3% city sales tax rate, a family of four earning $36,000 a year will pay about$409.00 annually (based on the IRS’ deduction calculator). Added together, water service + city privilege tax = $1,399.00 yr. = nearly 3.8% of a family of four’s pre-tax income.
** U. S. Census Est. Median Household Income (family of 4) in Cottonwood/Verde Valley = $36,870 MHI* If a family of four uses 10,000 gallons of water per mo. In the suburbs, they will pay about $990.00 a year for water delivery, fees and taxes*; which is 2.69% of gross annual income per year for water service. Using the 3% city sales tax rate, a family of four earning $36,000 a year will pay about $409.00 (based on the IRS’ deduction calculator). Added together, water service plus city privilege (sales) tax = $1,399.00 yr. = nearly 3.8% of a family of four’s pre-tax income.
Factors That Could Impact CMWWU’s Water Rates:
- CMWWU relies on its ability to collect increased revenues as expenses increase from ratepayers (water bills). In Oct. 2013, CMWWU water rates jumped dramatically by 67% to outside ratepayers, and 30% to city ratepayers. The CMWWD’s leveraged takeovers resulted in property owners here spending double to triple of what they spent for the same water system and service they always had. For the next generation or two, property owners will pay a bond tax that in most cases far exceeds what they could ever pay in water bills. It is equivalent to a 24% increase in a property’s assessed (taxable) value for the rest of most homeowners’ lives.
- Water rate affordability in the Verde Valley for most customers vanished after the 2013 rate increases, which drives down consumption and could decrease the ability for ratepayers’ to pay water bills, or drive up CMWWU’s cut-offs and debt collections’ rates. In 2013, CMWWD had 3,250 closed accounts that totaled $358,610 in delinquencies, which management said it could not collect. (Standard & Poors)
- Suburban ratepayers pay propertytax to Yavapai County, plus a 3% sales tax to Cottonwood (note: Because Cottonwood does not levy property taxes, they levied an additional 1% on to the 2% city sales tax in lieu of property taxes); a 3% food tax; and a 1% utility tax that is also levied utility bill fees.
- CMWWD’S extremely high, 175% debt-to-plant ratio (2013; Standard & Poors) is a big concern, with the city adding an additional $16 million more bond debt in FY 2015 to finance its new water reclamation plant and communications center; and plans to refinance its 2004 water company purchase bond adding $2 million more debt to build water lines.
- Currently, there are over 28 wells in the City’s system with a customer base of about 10,000 – an unusually high well-to-customer ratio compared to parts of the United States with more rainfall, which takes more electricity to pump. (http://www.danfoss.com/NR/rdonlyres/4BD52671-4FF0-41FC-94EF-CD164878B675/0/AQUA_Story_Cottonwood.pdf)
- The municipal water utility’s credit rating has been downgraded multiple times over several years by both Standard and Poors and Moody’s, and has consistently violated the bonds’ 1.35 debt service covenant.
Conclusion
There are huge risks to public water utilities who are highly leveraged and under-capitalized with enormous implications (financed big projects with too little equity and too much debt). It is counter to public interest to under-capitalize utility operations. Under-capitalization creates potential for debt default and disruption of sale of water and efficient water utility service, and raises the cost of acquiring debt capital besides violating fiscal discipline. The original bondholders could raise interest rates and demand the utility increase its customers’ water rates, to lower the probability of default. Raising rates on loans conflicts with providing utility service at the lowest reasonable cost to the customers. The debt must be refinanced at the end of the loans and if the economic environment changes to one of tight money, refinancing rates could go much higher.
Debt And Water Rates, Part 1: Cottonwood Municipal Water Utility
1 Comment
I just wanted to say thank you to the staff at Sedona.biz for covering this important issue. It needs to be addressed because as the residents in Detroit and really around the world are expressing, water rights is human rights issue. Additionally, Sherry Twamley is doing an outstanding job of leading these educational articles. Finally, great steady speakers in the video. I understand that there needs to be cost involved in water maintenance and infrastructure, but there also needs to be a balanced approach to this.