Metro debt may drive up water bills

Rate hikes could reach double digits By MICHAEL CASS • Staff Writer(Tennessean) • February 20, 2008 Several years of “double-digit annual rate hikes” might be needed to pay for Metro Nashville government’s upcoming water and sewer building projects, a major rating agency said in downgrading the city’s credit. At the same time, the two other major rating firms have put the city on notice that its credit for other building projects could be lowered if it doesn’t put its financial house in better order. The Tennessean reported last week the reserve funds Metro sets aside to pay off debt on most projects dropped by more than $50 million in the past two years, forcing a rethinking of what the city can afford to build. Late Tuesday, Fitch Ratings reduced Metro’s bond rating for about $375 million in outstanding debt on water and sewer projects because of declining reserve funds, reduced financial flexibility and significant building needs. The agency downgraded Metro from an AA rating to AA-, it said in a news release. The top possible rating is AAA, but AA is considered good, said Metro Finance Director Rich Riebeling. Fitch’s announcement read, in part: “Fitch believes the overall reduction in reserves leaves Metro with little flexibility to address growing capital needs. Further, Fitch believes the growth in Metro’s capital plan coupled with a prolonged period of rate inaction will likely compel double-digit annual rate hikes over the next several years.” Metro Councilwoman Emily Evans, who used to work in municipal finance and keeps a close eye on the city’s water and sewer program, said she expects a rate increase in Metro’s next operating budget. The city hasn’t raised water and sewer rates since 1996, and it cut sewer rates in 1999. “I don’t think it would be prudent to avoid it any longer,” Evans said. Riebeling said “some form of rate increase” would be required to fund capital projects for Metro Water Services. “How much of one is the question,” Riebeling said. “When we make a recommendation, we’ve got to be comfortable that it’s enough to do the job but as low as possible for ratepayers.” A rating downgrade can make it more expensive for the city to borrow money. But Evans said the Fitch downgrade is “modest enough” so that it won’t have much impact on Metro’s ability to borrow for water and sewer projects. Outlook turns negative The other rating agencies, Moody’s and Standard & Poor’s, changed Metro’s outlook for $315 million in general-obligation bonds, which are repaid with property tax revenues, from “stable” to “negative.” Riebeling said Fitch had already given Metro a negative outlook after voters won the right in 2006 to decide whether the city can raise property taxes. “Reserve levels are currently not commensurate with the rating level, and continued draws on reserves without any long-term, recurring fiscal solutions would lead to a downgrade,” Standard & Poor’s wrote Wednesday. None of the agencies downgraded the city’s credit for general-obligation debt. But they want to see improvement, Riebeling said. “We understand the issues, we know the problems, and we’re going to try to make it better,” he said.