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Austin Water officials share concerns over bond downgrade

Monday, April 7, 2014 by Heydn Ericson

At the most recent meeting of the Joint Committee on Austin Water Utility’s Financial Plan, utility officials shared concerns about the fate of their bond rating.

 

Due to similar financial circumstances, Ft. Worth’s Tarrant Regional Water District was recently downgraded by rating agencies. Assistant Director of Finance and Business Services David Anders was worried that Austin could be next.

 

Officials said the utility’s low debt service coverage is the most important factor influencing this potential downgrade.

 

Though it is difficult to anticipate the exact results of a downgrade, Anders predicted one possible result would be a 1 percent increase in the water utility’s bond rate. “It could be a $10 million impact for each bond that we sell over that 30-year period. It can be significant as it stacks up,” he said.

 

“(This would have) a profound impact on future demand for bond buyers,” Anders continued, adding that it would take 10 bond issues to recover an AA rating despite taking only one to lose it.

 

A decreased rating would also lower the value of water utility bonds for current bond holders, a point Committee Vice Chair Kris Bailey later echoed, though with hesitance. “These are people’s pensions, these are people’s retirement plans.”

 

Bailey went on to question if this utility was a good investment for a pension at all. “From what I’m hearing, this is not a AA+ bond rating anymore,” he said. “I’m beyond trying to keep that;, I’m looking at it more (from the) perspective of saving the utility.”

 

Also referring to the bond rating downgrade, Committee Chair Mickey Fishbeck commented, “You know, at least in my household, sometimes we just have to swallow those kinds of things for a while.” Her goal is to prevent rates from skyrocketing. “To do it all in one year is a lot,” she said.

 

The purpose of the meeting was for the water utility to present a variety of financial forecasts and rate design options. All the forecast options that the utility proposed saw a 13-16.6 percent increase in systemwide rates in the first year, with rates continuing upward between 2-7 percent for the next four years.

 

Commissioner Hank Kidwell observed that the current financial state of the utility seems to be approaching “crisis mode” and that “we need to be able to explain to the citizens of Austin what the utility has done to deserve the rate increases.”

 

Kidwell also asked why the discussion was focusing so much on revenue generation instead of expense cuts.

 

Several Commissioners had similar remarks, reluctantly supporting a rate increase while wanting to see the utility find ways to cut expenses.

 

Utility officials agreed that expense cuts are necessary, and pointed out that in the past year they had already removed around $150 million in their five-year capital improvement spending plan. They also presented to the committee a 5 percent  expense reduction plan, resulting in around $4.4 million in savings.

 

“We want a (…) thorough expense examination. I think we are going to have to make cuts to get out of this, and we’ve made some already,” said AWU Director Greg Meszaros.

 

Based on feedback from the committee, the utility will present a more complex financial forecast model at the next meeting, one that likely will further reduce capital improvement projects, reduce the amount of cash used to cover such projects, utilize the entirety of the reserve fund, maintain low debt service coverage, and raise rates.

 

Several commissioners were also interested in seeing how a reduction in the general fund transfer would affect the utility’s financial forecast model.

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