Public Utilities Flush with Cash but behind on Projects

by Kelly Thornton and Kevin Crowe | inewsource

When San Diego city officials launched a series of utility-rate hikes in 2007, they expected to spend more than a billion dollars on projects to shore up aging water and sewer systems rife with leaks.

But things have not gone as planned.

Five years later, the Public Utilities Department reports completing 39 of 111 projects promised to ratepayers, and it’s sitting on hundreds of millions of dollars in unspent cash, according to an analysis of city records by inewsource, a journalism nonprofit based at San Diego State University.

The buildup of funds has civic watchdogs questioning how ratepayers’ money has been managed and asking whether rates should be rolled back rather than increased, a prospect the utilities department plans to study.

“You have here $630 million sitting there unused while every two weeks you hear a story about a water main breaking,” said Andrew Hollingworth, a credit union executive, CPA and member of the mayor’s committee overseeing use of the rate funds.

Hollingworth and others monitoring the utilities’ funds say money in the bank is a missed opportunity to take advantage of low construction costs and create jobs in a slow economy.

“You have people sitting unemployed who could be employed on these projects and we really do need to fix our infrastructure and it’s not happened as planned,” he said.

Hollingworth, the San Diego County Taxpayers Association and Councilman Carl DeMaio, who is a member of a council committee that monitors the city’s public utilities, are asking for a full accounting of the ratepayer funds before another increase is considered. The city is only now commissioning an independent audit to do just that – eight months after the conclusion of the four-year rate increases. Such studies were supposed to be an annual component of the program.

The City Council approved a series of rate increases for water and sewer services on Feb. 26, 2007. At the time, regulators were demanding that the city bolster its flagging system of pumps and pipes to stop the spills and provide a safer supply of water.

From July 1, 2005 through July 1, 2010, San Diego raised residential water rates between 16 and 22 percent a year to pay for capital improvements and to cover the increasing costs of imported supplies. That means the average residential water bill skyrocketed by between 82 and 111 percent. Sewer rates also jumped over that period, though not as dramatically.

Public Utilities Director Roger Bailey says he appreciates concerns over rates but he believes the city provides commensurate service. “When you get up in the morning and turn the spigot on it comes, when you flush it goes without fail,” he said. “I think we do a fantastic job given the complexity of the system.”

Bailey likened the hundreds of millions in the water utility funds to a personal bank account after payday — it might seem like a lot of money until the bills are paid. “It’s premature to say you have a surplus before you have completed your obligations,” he said.

An imminent study to examine department finances will address some of the issues raised by skeptics, he said, explaining that the study “is key to figuring out whether you are overcollecting, undercollecting or just about right.”

Bad news, good news

Water officials acknowledge they are up to two years behind schedule on some projects because the city’s financial problems prevented them from accessing the public bond market. They also cited trouble ramping up the capital program because they lacked in-house engineering expertise at the start. Documents show delays for other reasons, including design changes, rebidding and permit problems.

In 2007, the Public Utilities Department projected it would spend $585 million on water capital improvements by the close of fiscal 2011. But, the department spent only $372 million on projects promised as a part of the rate increases.

Documents show the department planned to spend an additional $648 million on wastewater projects through fiscal year 2013, but has only spent about $239 million on projects related to rate increases.

The good news for ratepayers is that a down economy since 2008 has kept construction costs low. City records indicate that half of the 21 “completed” water projects came in under budget for an 18 percent savings.

The completed projects are the ones the department estimated would be the most expensive. They accounted for more than 70 percent of the projected expenditures for the rate increases.

The single biggest water project — at a cost of more than $100 million — is the replacement of 75 miles of aging, corroded cast iron pipes that account for most of the system’s ruptures. That project is listed as “completed” by the city, but its own documents show only 51 miles of that kind of water main pipe have been replaced. The city did not respond to questions late last week specifically about this project.

It’s a paradox that while the rest of the city struggles financially, the water and sewer funds are flush. About $214 million — from four years of rate increases and bond sales — is sitting in the water account and roughly $419 million in the sewer account. Some of it is costing money every day it goes unused. The city paid more than $100 million in interest on utility-related bonds in the last fiscal year alone, according to an official year-end audit.

Each year since 2007, the city has collected more than it spends for operating expenses and bond service by about $10 million to $25 million in the water fund, with a $25 million surplus recorded each of the past two years. On the sewer side, those surpluses were $62.7 million in 2011 and $56.8 million in 2010.

“They might have a problem that there is just way too much cash,” said David Peffer, who manages the water program for the Utility Consumers’ Action Network watchdog group. “…There is a question of not only public accountability, but internal controls.”

He noted a June report by the City Auditor that found several weaknesses in the city’s system for managing capital projects, including water and sewer work. It faulted the city for not having a systematic way to set capital spending priorities. “Without appropriate analysis to justify projects, officials cannot ensure that capital decisions are well-supported to decision makers and the public,” the auditor said.

The city’s accounting is not detailed enough for city watchdogs like Hollingworth, who chairs the city’s Independent Rate Oversight Committee’s finance subcommittee and has experience with large, complicated projects. He managed the finances for a multi-billion-dollar capital improvement program for Los Angeles Unified School District and used to advise the state legislature on construction infrastructure programs for the Office of the Legislative Analyst.

Hollingworth said the financial reports he receives from the Public Utilities Department are fragmented and incomplete and that he has had to create his own analysis using the city’s annual reports from outside auditors and bond prospectuses. He trusts those documents because material misstatements and omissions on those amount to possible violations of federal securities laws. Such a violation occurred in the mid-2000s when the city failed to disclose unfunded pension fund obligations which led to an SEC investigation.

“They really can’t tell you the economics of their program,” he said. “So I have to estimate what the economics are based upon these audited financial statements.”

Demands for accountability

Hollingworth has battled for his criticisms and recommendations to be included in the oversight committee’s annual report, but the utilities department resisted, and some fellow committee members rejected his findings for last year’s report. The latest annual report comes up for a vote by the committee Tuesday. After a couple of special meetings to hammer out differences, Hollingworth’s version made it into the current draft report.

The San Diego County Taxpayers Association is exploring whether the city can legally keep rates at current levels when the increases were approved by the City Council for only four years. And it is wondering how the city can justify selling more bonds in the near future.

“If there is an execution problem, why borrow more money that immediately is going to start incurring debt until you get those issues sorted out?” asked association president Lani Lutar.

As critics demand more accountability, the Public Utilities Department is planning to produce numerous studies. In addition to an audit of rate hike funds, it will assess the condition of the water system’s pipes and its 84,000 valves, as well as examine revenues plus project operating and capital expenses to determine what rates should be. It also will look at how San Diego compares to other cities for water main breaks and water loss.

Despite myriad changes and challenges, San Diego has impressed regulators. The California Department of Public Health, which oversees water supply systems, said the city has completed all of its required tasks with the exception of ongoing mandates.

And the EPA’s Clean Water Act compliance chief in San Francisco praised San Diego’s turnaround from being a flagrant polluter a decade ago. “There are definitely some noteworthy accomplishments the city has made,” said Ken Greenberg. “We are hopeful they will continue to stay in compliance.”

Bailey, the director of Public Utilities, dismissed criticism from people outside the system – like DeMaio, a mayoral candidate.

“This issue pops up time and time again and I go back to an analogy of the spectator and the person who actually plays the game,” he said. “It’s a totally different perspective. When you sit outside you think it’s simple but when you are on the inside you know it’s not that simple.”

U-T San Diego’s Mike Lee contributed to this report.

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