Economist: ‘Risks of a (water system) takeover are extremely high’ (April 13, 2017)

APPLE VALLEY — A new analysis of the town’s ongoing water-system acquisition effort shows that water rates could be significantly higher under municipal ownership, a conclusion that contradicts assertions made by public officials.

Conducted by economist John Husing, the analysis focuses on Measure F, which Apple Valley residents will vote on in a June 6 special election. Utilizing data from previously published research, Husing analyzed the potential impact incurring 30 years of revenue-bond debt might have on the town and its residents.

According to the analysis, which looked at multiple possible cost scenarios, a $150 million bond paid back over 30 years at a maximum 12 percent interest rate — figures associated with Measure F — would result in much higher rates for customers.

This bond’s annual payments would be $9.2 million at 4.5 (percent) to $18.6 million at 12.0 (percent), the analysis shows. More likely payments would range from $10 million at 5.25 (percent) to $12.4 million at 7.25 (percent) as (interest) rates rise over the next two or three years during which any condemnation proceeding would be occurring.

Husing concludes the average increase in cost to customers would be $502 or $620 per year equal to $84 or $103 per bi-monthly bill. Additionally, for the 92 (percent) of customers whose average bi-monthly bill is $129 … this would increase their average bi-monthly water bill to $212 or $232.

That amounts to increases of 65.1 or 80.4 percent, according to the analysis, which said the full average water cost increase per customer for 30 years at those rates would be $15,056 to $18,589.

In response, Town Manager Frank Robinson said Husing did not consult the town in preparing his analysis, adding, his analysis appears to be based on data cherry-picked by his benefactor, Liberty Utilities.

Robinson criticized Husing for using previously published work paid for by Liberty, such as the Analysis Group’s recent report that found contested government takeovers are typically very costly while local governments tend to underestimate acquisition costs by more than 100 percent.

Robinson was also suspicious of Husing’s use of both California Public Utilities Commission data and the outdated conclusions of the 2011 Blue Ribbon Committee.

For the record, the California Water Association — a consortium of investor-owned water utilities of which Liberty is a member — funded the Analysis Group’s report.

Husing’s report, meanwhile, was financed by the Apple Valley Taxpayers Against Higher Water Fees — the group opposing Measure F — but Husing said the group was not allowed to edit his research, and he chose to release it independently.

Husing’s most dire conclusions are based on the maximum interest rate of 12 (percent), Robinson said, which he says himself is an ‘outside rate’ and that 8.25 (percent) would be unusually high, historically.

Further, Assistant Town Manager Marc Puckett has said the town expects to pay far less, at a much lower interest rate, for Liberty’s water system than the $150 million Measure F suggests — something closer to the nearly $87 million assigned to the system in Missoula, Montana.

Eliminating profits, taxes and company executives would make nearly $12 million available for debt service toward the town’s purchase of Liberty’s system, according to a report provided by Puckett on Wednesday. In March, before the release of that report, Puckett said the amount was $10.7 million.

Those additional resources … could in fact be used to do additional capital improvement projects … or lower rates, he said recently. Not in 30 years. Not in year two, three or five. But immediately upon completion of the acquisition process.

But Husing called Puckett’s assertions unbelievably optimistic considering acquisitions elsewhere were not less expensive and did not result in more efficient water systems.

The contention that they can lower rates … (includes) a lot of heroic assumptions, Husing told the Daily Press on Tuesday. I really think that that’s just not in the cards. I understand why, superficially, you’d support it, but I don’t think the data supports it.

Husing’s analysis also discussed staffing increases and the impact those increases would have on the town’s operating budget.

He used an Urban Futures study — conducted in 2014 for the town — that identified a warning sign concerning the concept that a Town with no water agency knowledge would be able to efficiently operate such a complex system to augment his findings.

Between Fiscal Years 2010 and 2017, the town has had 123 to 140 full-time employees, the analysis shows, noting if the 2017 budgeted level is maintained in 2018, and the 41 full-time employees needed to operate Liberty Apple Valley are added, the town’s staffing would jump to 172 — the highest in history and up 31 (percent) over 2017.

As a result, the town’s operating budget would increase by 43 percent, from an approved $54.2 million in 2017 to $77.4 million, an increase that would be exacerbated by customer-related issues, technical problems of obtaining water, keeping that water safe and maintaining approximately $6.4 million in system upgrades, according to Husing.

Taken together, these facts show that Urban Futures’ warning about the Town of Apple Valley’s ability to efficiently manage a complex new water system should be taken very seriously, the analysis shows.

Excluding upper management, Robinson said the town anticipates the employees of Liberty Utilities would continue in their roles as experienced professionals.

He also detailed the qualifications of Greg Snyder — the director of Public Works — hired by the town in December 2015 for his experience that covers 26 years in public works in which he has managed and operated water and wastewater collection systems.

While Husing acknowledged the increased costs on water customers would be less than what’s outlined in his analysis should the town pay an amount close to what was assigned to the Missoula system, he maintained that the risks of a takeover and management of Liberty’s (system) are extremely high.

The history has shown that for municipalities with no experience in this kind of operation, to try to take it by eminent domain has simply not worked, he said. This is a risk I would be very cautious of taking just given everything that I’m seeing.

Read Husing’s full report here.

Source: Matthew Cabe, Daily Press