Water and Sewer Upgrade Costs -- $274,000,000?

[Mark Kindt]

Water and Sewer Infrastructure Costs Could Reach $350,000,000
http://media.lakewoodobserver.com/media/docs_1539811479.pdf

Please review carefully the attached letter from Mayor Summers to City Council. (I have highlighted some key points in the letter.)

There are some whopping numbers in this letter.

$83,000,000 in completed/planned upgrades.

$274,000,000 for future system upgrades.

Potentially all under a federal court order.

For the time being, I will limit my comments as I do more research.

[Stan Austin]

I am thinking that I posted a few years ago that a fair market sale of the Hospital's physical and business assets could have been equitably reinvested to meet these costs.
Oh--- the "what ifs"

[Mark Kindt]

Accountability and Transparency in Public Fund Accounting

Please be patient, this thread will have some rather "nerdy" moments.

Above, I have attached the letter from the mayor dated October 1, 2018 that identifies a probable remedial liability of $274,000,000 that the city faces in compliance with state and federal requirements for its water and sewer system operations.

If you take the time to review the 2017 Comprehensive Annual Financial Report of the City of Lakewood (2017 CAFR), you will see that it is silent on this claim and its estimated costs. However, the city has been working on this issue for 15 years and is under a series of government administrative orders related to compliance and the implementation of expensive remedial measures.

From a citizen perspective, the annual audit document fails in terms of accountability and transparency.

Why? Because it fails to report on material financial assets and liabilities.

1. The hospital building and real estate are on the county tax rolls at a valuation amount of over $20,000,000, but do not show-up as an asset in the 2017 CAFR; and

2. The estimated compliance costs in the amount of $274,000,000 to comply with state and federal permit requirements to operate the Lakewood water and sewer system to do not show up as liabilities in the 2017 CAFR. (Not even as a footnote disclosure.)

So for purposes of financial transparency, a non-local reader of the 2017 Lakewood CAFR such as a broker of municipal bonds would have no idea that these assets and liabilities were sitting out there somewhere in the ozone.

Are city financial statements used by municipal bond investors providing a full and complete disclosure of material financial issues that might affect an investor's decision to purchase Lakewood municipal bonds? Probably not.

[Mark Kindt]

U.S. Securities and Exchange Commission Guidance for Accountability and Transparency for Public Officials

U.S. SEC City of Harrisburg Release 2013 1.jpg (617.74 KiB) Viewed 5652 times

U.S. SEC City of Harrisburg Release 2013 2.jpg (681.84 KiB) Viewed 5652 times

[Mark Kindt]

How Would We Ever Know?

My initial reaction was that Lakewood was not in the same circumstances as Harrisburg.

BUT, how would we ever know?

Here's what the SEC writes about Harrisburg: "The misstatements and omission in this case were not the result of an isolated incident but were recurrent and stretched from one fiscal year into the next."

Well, I've been writing for two years now about material financial misstatements or material omissions by the city administration. (See "Civic Accountability -- Honesty In Local Government I" viewtopic.php?f=7&t=23643 ).

In any given year, tens of millions of dollars in assets, rights, or liabilities are not truly or fully reported or reflected in the city's accounting. This is exactly the transparency problem that the Securities and Exchange Commission is concerned about for public entities that issue public bonds.

If Lakewood was on the brink of bankruptcy, the bond market would never know about it, until the city stopped paying the bills and the employees or defaulted on debt payments.

In my next post, I will describe this transparency problem in more detail.

[Mark Kindt]

Why Is This Important?

1. The City of Lakewood will need to maintain a high bond-rating to float future municipal bonds to finance any federally-mandated upgrades to its water and sewer system (up to $274,000,000 or more.)

2. The "off-book" assets and liabilities can be significantly higher than the city's actual revenues and expenditures, that is, "north" of what the city actually collects and spends.

Let me give you two examples of assets and liabilities that are not very transparent to the municipal bond market (or citizens for that matter):

1. The City of Lakewood owned Lakewood Hospital and leased that asset to a non-profit. Aside from reporting lease revenue and employee income tax revenue, the rest of the financial activities in terms of assets and liabilities were carried on the books of the non-profit, even the land and the building. While there has been considerable debate over the value of this asset and how it was liquidated, it was probably in the range of >$100,000,000 in value. (Only a fraction of the liquidation appears in the City of Lakewood accounting for contractual reasons). So for several decades, we can see an example of a municipal asset not reflected, or only partially reflected, in the City of Lakewood accounting. But it was a big one.

2. The City of Lakewood is now faced with a demand from the U.S. EPA to enter into a federal consent decree (an agreed-to federal court order upon a U.S. DOJ legal complaint) to plan and execute a plan to continue the upgrade of its water and sewer system with an estimated total project cost of $274,000,000. (That amount could be lower or higher.) The City of Lakewood has understood this liability for a number of years and has been implementing water and sewer system upgrades under EPA administrative orders on consent. Again, we can see an example of a municipal liability not reflected, or only partially reflected, in the City of Lakewood accounting. Again, this is a big one.

What is really fascinating about this is that the asset described in point 1 and the liability described in point 2 significantly exceed the City of Lakewood's annual revenues or expenditures.

There is a tension between the SEC duties of public officials and standards of government accounting practice. In the situation that I am describing above, it seems clear that the SEC obligations would take precedence.

[Mark Kindt]

This Liability Is Not In The 2018 City Budget

Here is a test. See if you can find the estimated ($274,000,000) Water and Sewer Upgrade Costs in the 2018 City Budget. [Clue: See pages 170-172. The Five-Year Capital Plan]

Whoops!

Transparent or not?

You be the judge.

[Mark Kindt]

The Liability That Ate Lakewood

Well, based on the financial documents from the City of Lakewood, I would have to assume that this $274,000,000 liability was sprung on us overnight. So, I went and reread the mayor's letter. No, I'm wrong.

Let me quote the key paragraph:

"Our extensive, decade-long engineering analysis has resulted in the identification of 10 major projects intended to bring the City to a capture & treatment rate of 98% for all water in a typical year. We know that these 10 projects are estimated to cost approximately $274 million, with the last $100 million having dramatically diminished returns for water capture & treatment."
(emphasis added.)

Engineers have been estimating MAJOR project costs for years, but those compliance costs haven't even made a footnote in the recent CAFR.

By the time these projects are actually bid-out to contractors this estimate will be well over $300,000,000. I know this from professional experience with environmental remediation costs.

[Bridget Conant]

There were articles in the PD years ago about this EPA mandate and how expensive it would be for the city to comply. It’s easily googled. The city HAS known about this for a long time.

I shudder to think how much this will cost the Lakewood resident each month, especially considering how high the water and sewer bills are currently. My last bill, for one month, was $132. The usage was in line with past usage. The bill has increased a lot in the last 4 years.

Along with the property tax increases and coming school levy, it’s mighty expensive to live here.

[Jim O'Bryan]

There were articles in the PD years ago about this EPA mandate and how expensive it would be for the city to comply. It’s easily googled. The city HAS known about this for a long time.

I shudder to think how much this will cost the Lakewood resident each month, especially considering how high the water and sewer bills are currently. My last bill, for one month, was $132. The usage was in line with past usage. The bill has increased a lot in the last 4 years.

Along with the property tax increases and coming school levy, it’s mighty expensive to live here.

Ed FitzGerald and Mayor Summers were fully aware of this. While they closed an asset that would supply $120 million over the remainder of the contract. Leaving us land and a fully repaired and operational hospital(money siphoned off by Three Arches) that could have been sold to Metro for $100 million, and or prime land sold for more than $1.

When you add in the squandered millions on other things, you get pretty damn close to paying the bill, and certainly would have left in a much better position to deal with the EPA and put together a reasonable plan.

Mismanagement of epic proportions.

.

[Mark Kindt]

Budget Silent On Hospital Give-Away

As you review the City's 2018 Budget, you will learn that the document is silent on the proposed give-away of the hospital site to the selected developer for $1.00. By the City's own estimate this is more than a $5,000,000 transfer in asset value.

In the civil prosecution of Harrisburg (PA) by the SEC, the undisclosed amounts were not more than $2,500,000.

In Lakewood, the undisclosed amounts or misrepresented amounts have been in the tens of millions of dollars and can be documented over the past several years.

My goal here is to be cautionary and informative. While I have further observations to make about the liquidation of Lakewood Hospital, I will keep those comments in other threads.

[Mark Kindt]

A Citizen With A Calculator

So, how real is real?

If the City of Lakewood had a present liability of $274,000,000, then it would be insolvent. It does not have the legal debt capacity to fund this amount in the bond market as a present liability.

How much of these estimated costs and when they must be incurred will relate to how successful the lawyers for the city administration are in negotiations with the U.S. EPA. This remains an unknown.

Given the available numbers we can make some useful ballpark estimates. The 2010 U.S. Census reports Lakewood as having 25,274 households.

Scenario No. 1

If the City of Lakewood is legally obligated to implement $200,000,000 in infrastructure upgrades across the next 6 permit periods (30 years), then the average cost would be more than $30,000,000 in each permit period.

The average household rate increase above current rates would need to be over $20.00 per month to cover this cost. (This does not include individual homeowner retrofit or connection costs.)

Scenario No. 2

If the City of Lakewood is legally obligated to implement $300,000,000 in infrastructure upgrades across the next 6 permit periods (30 years), then the average cost would be $50,000,000 in each permit period.

The average household rate increase above current rates would need to be about $33.00 per month to cover this cost. (Again, not including any individual homeowner retrofit/connection costs.)

The timing requirements for implementation under a federal court order could be considerably shorter; then the average monthly rates increases above current rates would then have to be higher.

Given the proposed scale of these projects, Lakewood might soon be in a position where most of its debt capacity could not be used for other purposes other than the mandated sewer upgrades.

Some narrow portion of these costs might be supported by funding from other governmental sources; most of the burden will fall on the City of Lakewood and its rate-payers.

[Mark Kindt]

The State Of Ohio Has A Loan Program

WPCLF 1.jpg (371.43 KiB) Viewed 5237 times

[Mark Kindt]

A Citizen With A Calculator

How much of these estimated costs and when they must be incurred will relate to how successful the lawyers for the city administration are in negotiations with the U.S. EPA. This remains an unknown.

Given the available numbers we can make some useful ballpark estimates. The 2010 U.S. Census reports Lakewood as having 25,274 households.

Scenario No. 1

If the City of Lakewood is legally obligated to implement $200,000,000 in infrastructure upgrades across the next 6 permit periods (30 years), then the average cost would be more than $30,000,000 in each permit period.

The average household rate increase above current rates would need to be over $20.00 per month to cover this cost. (This does not include individual homeowner retrofit or connection costs.)

Scenario No. 2

If the City of Lakewood is legally obligated to implement $300,000,000 in infrastructure upgrades across the next 6 permit periods (30 years), then the average cost would be $50,000,000 in each permit period.

The average household rate increase above current rates would need to be about $33.00 per month to cover this cost. (Again, not including any individual homeowner retrofit/connection costs.)

The timing requirements for implementation under a federal court order could be considerably shorter; then the average monthly rates increases above current rates would then have to be higher.

Given the proposed scale of these projects, Lakewood might soon be in a position where most of its debt capacity could not be used for other purposes other than the mandated sewer upgrades.

Some narrow portion of these costs might be supported by funding from other governmental sources; most of the burden will fall on the City of Lakewood and its rate-payers.

These scenarios only provide approximate estimates for the 5-year period that will come before counsel soon. They are very informal approximations, but may give some sense of the possible range.

The key issue to watch for is to determine which proposed projects carry individual homeowner costs outside of the rate increases. This has the potential to be a double-whammy.

"Given the proposed scale of these projects, Lakewood might soon be in a position where most of its debt capacity could not be used for other purposes other than the mandated sewer upgrades."

For me, this seems to imply that not just water and sewer rates will have to go up, but that the City's other infrastructure needs will require higher taxes to support the debt capacity to fund such non-water&sewer improvements.

[Bill Call]

Thanks for the information Mr. Kindt.

The Northeast Ohio Regional Sewer District is required to finance a similar infrastructure project. The NEORSD serves about one million residents and will spend three billions dollars, about $3,000 per person. The City of Lakewood will spend $274 million or about $5,500 per person.

Mayor Summers and City Council don't give much thought to the long term implications of their actions.

As the Director of the First Suburbs Consortium Mayor Summers has been a leader in efforts to regionalize local government. His efforts to move the business of Lakewood Hospital to Lorain County are the best example. In that case he "regionalized" City assets.

Was any thought given to merging the City's sewer department with NEORSD? I am guessing the answer is no.

Mayor Summers and Council are eager to surrender City assets but hold on to our liabilities. I am not a politician so I don't know why that makes any sense. Wouldn't it be better to hang on to assets and regionalized liabilities?