ATLANTA Atlanta Mayor Shirley Franklin late Tuesday vetoed water and sewer rate increase legislation passed by the City Council last week because it would not generate enough revenue to operate and maintain the citys combined system.
The legislation substantially reduced Franklins proposed rate increase proposal for water and sewer customers and cut the newly created Department of Watershed Managements budget by $25 million. Franklin had called for a tripling of rates by 2008 to pay for more than $3 billion of repairs to the system, and that total includes roughly $1.7 billion of fixes that have been mandated by federal and state consent decrees and orders. The rest, according to Franklin, is needed to maintain the system and avoid future mandates.
Her veto essentially incapacitates the city from moving forward with the improvements, and stalls a $1 billion water and sewer bond deal that had been planned for April. The domino effect is extensive, as Atlanta faces intervention from the federal courts. Penalties include fines, having its system placed in a receivership, or a moratorium on sewer hookups.
The latter could indirectly affect the citys general obligation rating, which is Aa3 by Moodys Investors Service with a negative outlook, and AA-minus by Fitch Ratings and Standard & Poors. On Tuesday, Standard & Poors changed the outlook to stable from negative. Analysts say anything that slows economic development could impact the Atlantas finances as a whole.
Regardless, Franklin stressed that she could not sign off on the council proposal, saying simply the rate structure did not work. In statement released yesterday, she said the proposal does not allow the city to demonstrate to investors that it will have a solid five-year financial plan or revenue stream to cover its current and future bond obligations. Fortunately for bondholders, Financial Guaranty Insurance Corp. and MBIA Insurance Corp. insure the outstanding debt.
According to a letter from budget chief Renay Blumenthal to the City Council and Franklin Monday, if the city were to move forward with bond funding more than $3 billion of projects by 2006, debt ratios could drop below the 1.1 times coverage levels required by bond covenants. If that happens, the city stands in default of its bonds, the letter goes on to say.
Fitch and Moodys have already downgraded the water and sewer debt because of the rate increase debacle. Fitch has dropped its rating to A-minus from A and placed the $1.7 billion of outstanding water and sewer debt on rating watch negative. Moodys dropped it two notches to Baa1 from A2 and changed the outlook to negative. Standard & Poors rates the debt A, and has not taken any action so far, but is expected to release a report by tomorrow or early next week.
Market players agree the city is between the proverbial rock and a hard place in trying to comply with mandates and ensure clean drinking water, while not overburdening ratepayers to make that happen. Most agree that until a plan has been adopted, it is difficult to comment on the ramifications to the citys debt.
Some council members have offered up alternatives to Franklins plan, including imposing impact fees on developers, implementing storm water fees, and increasing connection fees.
Yesterday, some of those who voted against Franklins proposal appeared willing to compromise. We are saying to the mayor we are at the table. We never left it. Now, if she can come and join us, we would be greatly appreciative, Councilman Derrick Boazman said. But if her mantra is, Its my way or hit the highway, its going to be a rocky road from this point on.
Unless a special meeting is called to discuss the issue this month, the full council will not revisit it until Jan. 5 when the reconvene.
