Apple Valley has ignored its consultants’ warnings (May 12, 2017)
As an economist, I learned long ago that speaking truth to power often leads hostile reactions from politicians. Such has apparently been the case with the research I recently completed on Apple Valley’s desire to acquire Liberty Utilities’ water system. They were unhappy with my analysis that an eminent domain lawsuit would likely lead to bond costs that would force monthly water bills for ratepayers up, not down.
Let me clarify. Central to my analysis were four warnings provided to Apple Valley by Urban Futures, the prestigious consultants the town hired and paid to advise them. In each case, the data shows the town ignoring these warnings while contending it can buy the system and lower water rates.
First, they warned that the acquisition cost will be unknown until all eminent domain lawsuits are over. Apple Valley has guessed a low cost. However, it will be at least 2019 before lawsuits are finished and a court sets the real cost. My work pointed out that the high market price recently set for Liberty’s assets could cause a court to follow suit, making bond payments higher than the city expects.
Second, Urban Futures warned that the town should expect to need annual investments to maintain the water system. Apple Valley set this at zero. My work showed that this has averaged $6.2 million per year across several different owners. That money will not be available to retire bonds and is $2 million over the water system’s net after costs.
Third, Urban Futures warned that towns with no experience in running complex water systems would likely find savings hard to achieve. Here, Apple Valley’s math indicates they will be able to devote about 50 percent of the system’s revenue to bond payments. I pointed out that such an efficiency gain is extremely doubtful given that buying the water utility would increase the city’s workforce by 31 percent and its budget by 43 percent.
Fourth, Urban Futures warned that potential interest rate increases could make an acquisition bond so costly it would be too expensive to buy the water system. However, the town used the historically low current rate to calculate bond interest costs for buying the system. This is a serious error since no borrowing can occur for two or three years until all legal issues are settled. I simply pointed out that the Federal Reserve is already causing all rates to start rising and that bond rates will certainly be higher by then.
Given these facts, my conclusion was that Urban Futures’ warnings were correct. Since ratepayers and taxpayers must pay to retire any water revenue bonds if the town’s math is incorrect, they would be ill advised to allow the system’s purchase and face the likelihood that monthly water bills would go up, not down.
Was I paid for this work? Of course. While I have volunteered at High Desert conferences and meetings for years, this is my professional work for which I charged the same amount as for any other important study. As always, my client was told upfront that my work is mine, not theirs, and they would have to accept my results.
John Husing, Ph.D., is an economist who is vice president and chief analyst for Economics & Politics, Inc.
Source: Daily Press