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KPBS Midday Edition

Public Utilities Flush With Cash But Behind On Projects

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Kelly Thornton On Utility Rates
On Midday Edition: We look at Investigative Newsource's story on water rate hikes and where the money has gone.
GUESTSRoger Bailey, Director, Public Utilities, City of San Diego Kevin Crowe, Investigative NewsourceKelly Thornton, Investigative Newsource

CAVANAUGH: Our top story on Midday Edition, residents of the City of San Diego are paying a lot more for water than they used to. In the last seven years, most users have seen their bills did you believe. Some of the rate increases were supposed to go toward fixing the aging water delivery system. As the city considers another increase, a new report is asking why many of those promised improvements have yet to be made. The report can be found on the website. It is by Investigative News Source, a journalism nonprofit based at San Diego state university. My guests, Kelly Thornton is a reporter with Investigative News Source. Welcome. THORNTON: Thank you. CAVANAUGH: Kevin Crowe is with Investigative News Source. Welcome. CROWE: How are you? CAVANAUGH: And Roger Bailey, director of public utilities for the city of San Diego, welcome back to the program. BAILEY: Thank you, Maureen. CAVANAUGH: Tell us the defense between rate hikes. CROWE: Mr. Bailey can attest that the majority of the hikes over the last several years have been the result of passthroughs. That's the water department having to pay more money for the water it's getting than ratepayers. CAVANAUGH: Your report focused on those that have been earmarked for improvement. CROWE: It was a series of 46.5% increases if July. CAVANAUGH: How much have water rates gone up in San Diego in recent years? CROWE: If you take all of that combined, are the oversight committee said 82 to 111%. CAVANAUGH: That's the passthroughs, and the infrastructure increases. Tell us why you hooked at this story. CROWE: Origin eel I was looking at water main breaks. And we got to talking to someone from the mayor's oversight committee that's appointed, and they were pointing to some deficiencies in project spending. CAVANAUGH: And there were questions that were raise in your mind. And Kelly, break down for us if you would, what you found as far as the money invested in these projects, how the money has been spent, and how much is still in the bank and unused. THORNTON: Well, it electrics like the city has about $633 million of unrestricted cash on hand. That's according to want city's outside annual audit. They projected as part of this rate increase that they would spend about $545 million by the end of 2011. For the sewer department, they planned to spend $648 million through 2013, and so far they spent about $239 million related to the rate increases so far. CAVANAUGH: Government is very not often charged with not being able to spend money fast enough. I'm wondering why it's taking so long to finish or in some cases even to start some of these improvement projects for the water delivery system, and the sewer system. BAILEY: Thank you, Maureen. Just a few corrections before I get into that. I think that quite often we look at report it is, and we -- I think the first thing we have to try to figure out is what is means. So Kelly just mentioned the city's annual comprehensive financial report. And basically what she's mentioning here is that these $630 million in what she termed unrestricted asset, and the question that I would have is do you know what that means? If you assume that this is cash that is available, that is unrestricted, then you'd be mislead. And let me just get into that a little bit more. When you look at the $630 million, a few things we need to keep in mind. We have a water fund and a waste water fund, and trying to combine these two things is tempting, but you really cannot combine the two, no more than you can combine apples and oranges. The, when you look at the unrestricted fund that is mentioned here, we need to keep in mind that we have financial obligations that are not really detailed in that number. We have a requirement to keep a reserve in place because people -- we actually borrow most of the money that we invest for our capital improvement. So we are obligated to make sure that we have reserves in place so that we have a sound financial system. The second part of that that needs to be kept in mind, that is when you look at that number, it also includes what we call encumbrances. These are projects that we have already obligated the city to, but in the process of being completed. So we have the contracts in place, and they are under construction or design. So when you look at that number, it's a significant number, and to assume that that is unrestricted I think is totally misleading. CAVANAUGH: Let me ask you, let me interrupt you if I may, this kind of audit accounting and this breakdown is something that I'm going to talk about a little bit later because I know there are some people who have criticized the audits. But let me go to the heart of this report if I may. There are still a lot of water improvement, a lot of infrastructure projects that were promised to be delivered by this time, and they're not. And I'm asking you why BAILEY: Good question. And again, the devil is in the details with these types of report as Kelly mentioned in her report. 111 projects were on the list, and she indicated that 36 are completed B. You when you look at that, you ask what exactly were those projects? And the example that I will pull is we requested to money to invest in replacing pipelines, and of that pipeline, there were 75 miles. Pipeline this we said we were going to do. Today, we have completed 100 miles of pipeline replacement. So when you just take a number like 111 and say we have only completed 33, it's misleading. The second part of that was water treatment plants. We had to upgrade our treatment plants in order to comply with regulations. And those regulations require us to do things at those plants that are very costly. We upgraded all of our water treatment plants, and they are completed to date. So it's important that you realize that the water pipeline replacement program is on track, and those projects have been completed. So if you just go down the list, it is tempting to say you have only completed 33 projects. Of the 111 projects we talked about, it is important to notice that 26 of those projects have either been canceled or are on hold. And the other part of that is that there is a portion of that list of projects that will be ongoing for a long time to come. It is your annual repayment of pipeline because we have to keep in mind that in our system we have over 3,000 miles of water pipelines, and over 3,000-mile was waste water pipelines. If you're maintaining this system, you're doing annual replacement of those pipelines. When you look at that list, it is tempting to assume that at some point, that list comes to an end, but probably not. CAVANAUGH: I want to give our reporters, Kevin and Kelly a chance to respond what you've heard. CROWE: I would challenge that the report is misleading. 39 out of 111, but we also stated, of the projects that were completed, they were the big ones, all right? So the water plant improvements; correct we said that it was about 70% of total planned expenditures. Those projects have either been completed or changed funds or along those lines. So we were pretty explicit in saying that. In terms of the 26 that have been canceled or on hold. That's accurate. 26 have been canceled or on hold. But 39 have been completed. And of one of those, and of one of the main ones that Mr. Bailey mentioned was ongoing, they counted the project as completed but to date only about 51, was it at the close of fiscal 2011, 51 plus or minus miles of water main pipe had been replaced as opposed to the 75 that were promised by the close of fiscal 2011. Now, thieve planned to do a lot more. But there were promises made that by the close of 2011, certain things would be done. THORNTON: Well, that lead into what I was going to say. Important point here that's being made by some of the oversight committees and organizations, is that the city said it was going to do certain things and they haven't been accomplished. And perhaps there should be a better balance between collecting and spending. There's three things we know here from documents. There's been $330 million in incomplete projects. And it's more a matter of what they said they were going to do. And this includes encumbrances as well. But the point of that is, the money is not being spent. Some of the civilian wash dog groups, they're saying they have a lot of money in the bank, the rates are going up, we're not feting what we paid for, the infrastructure projects are not done, and that's what we paid for. People are not employed who could be employed, and the ratepayers are struggling from a bad economy, and struggling to pay their utility bills. CAVANAUGH: Would you agree there has been a problem in getting some of these prohibits started? BAILEY: I think the city has room for improvement on its program, and we are currently working on that process. So I think you will see in the near future an opportunity for the city to accelerate some of those programs. But is think it's easy to put a large bumper sticker idea and put them together and assume they make a lot of sense, and they don't. The idea that we don't want to do the audit, I just want to make sure that everyone understands that from my perspective, doing an annual audit is a sound business practice. And we should do it, and the city does an annual financial audit, and if the policy makers. Us to do something totally different to that, I think that's fine with me. Secondly, in regards to the cost of service, I think that everyone should understand that that is really a sound business practice that gives us an opportunity to really figure out whether or not we are collecting more money than we need to or are we under-collecting or are we just right, on par. CAVANAUGH: Don't we know that already? BAILEY: Well, we have an idea of where we are, but I think it's always a good practice to do a formal cost of service assessment. Am what that does is this. It looks at all of your costs and all of your obligations that you have, from an annual standpoint, and it figures out whether or not you have structure in place to recover your cost is accurately recovering those costs. It is a fantastic business practice, and I don't think we should prejudge it one way or the other, whether it's going to be a rate increase or reduction. I think we should allow the study to be completed, and figure out at the end ever the day the results of it and move forward. CAVANAUGH: Well, let me ask you a question. I think that's the first time I've heard you mention rate reduction. There are some people that say that there is so much money sitting in the bank unspent for water projects that have yet to materialize, that instead of talking about a water rate increase, we should actually be talking about rolling back some money to ratepayers. Would you be in favor of that? BAILEY: Again, I think that when we mention these things, it has to be in the context of what needs offered the department. I think it's so easy to take a snapshot of where we are today, and say we should do one thing or the other. From my standpoint, what we ought to do is look at our needs for the system, and that's what we're going to do, and at the end of the day, if our needs are that we need to invest more in the system, we have to figure out a way to pay for it. But we have as I indicated over 3,000 miles of pipe in our water system, and the same on the waste water side, of that 3,000 on the water side, over 25% is over 50 years old. The rate case that you looked at talked about replacing 75†miles. So in context, we have to be very careful and understand that we have an ongoing need, and we need to make sure that we don't make promises that is going to jeopardize the system or that we captain fulfill. And from my standpoint, I think we ought to wait until we complete the cost of service study. MAUREEN CAVANAUGH: When is that side going to be competed? BAILEY: By the end of this year, we are hoping. CAVANAUGH: Isn't the San Diego City Council considering another water rate increase? CROWE: That's one of the things that will be coming out of the cost of service study, not necessarily an increase but an just want. Mr. Bailey can attest to that the cost of service is their first glimpse at whether or not the levels of funding that are coming in are going to finished the levels of project work they foresee in the future. CAVANAUGH: I want to tell everybody that they can read this investigative report from the Investigative News Source on our website at kpbs.org. And of course Mr. Bailey, you are quoted in that report as well.

Public Utilities Flush With Cash But Behind On Projects
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.

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 Investigative Newsource, 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.

(Story continues after video.)

Roger Bailey, Director of Public Utilities for San Diego

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.”

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