Chicago takes small dip into $8.5B replacement of lead service pipes

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Chicago took initial steps Thursday toward what may shape up to be a long-term $8.5 billion program to replace lead-based water service lines in the city.

Mayor Lori Lightfoot, joined by members of her water management and health departments, put forth several modest programs with limited costs and said it was too early to talk about future water revenue borrowing or rate hikes as the plan expands in the coming years.

Market sources said bankers had already begun exploring financing ideas.

“This is an important first step in a long-overdue process,” Lightfoot said, stressing the city’s treated water from Lake Michigan meets all regulatory standards for safety. Lead service lines are a “legacy issue” and pose “a steep and costly mountain” to climb.

“This is an important first step in a long overdue process,” Chicago Mayor Lori Lightfoot said Thursday in launching initial, small steps toward replacing the city's lead water service lines.

The city is launching a voluntary replacement program for low-income residents with homes that meet eligibility based on lead levels to apply for line replacements with the cost being covered by the city with $15 million of grant funding.

A second program allows for homeowners to seek approval to hire their own contractors with the city waiving fees that can amount to $3,000. The city will connect the new service line to the water main and install a free water meter upon completion of the replacement.

The city will also launch a pilot program replacing lines in one neighborhood with the goal of getting a better handle on construction costs. The city is seeking $15 million in funding from state and federal loans.

Lightfoot will seek city council approval for the initial programs. The programs — along with a city-commissioned report on construction and financing options and establishment of a working group to review the report — will lay the groundwork for a city-wide plan to replace lead lines. Such lines currently are in 380,000 single-family and two-flat homes.

Some aldermen and groups quickly criticized the program as too small and slow and some questioned whether the city could afford any new investment until it solves a $2 billion 2020 and 2021 budget hole due to rising costs and tax blows stemming from the COVID-19 pandemic economic shutdown and recession.

“The reality is our estimates are that this is an $8.5 billion dollar program … and that money doesn't exist right now but we are aggressively investigating further assistance that we can get from the state and federal government and as we get those resources in we are going to accelerate and expand” to the next phases of the program, Lightfoot said.

The budget gap also won’t pose any delays as the funds are in hand for the initial project costs.

Lightfoot said “it’s way too early to be talking about issuing bonds” for the project or how much of the price tag will fall on taxpayers through water rates or shared contributions toward the costs. The city is currently seeking state revolving fund help and federal funds. SRF borrowing is done through the Illinois Finance Authority and the city has previously sought loans for water and sewer work through the program.

The replacement is complicated by the mix of city-owned mains and service lines that are the responsibility of homeowners. Underground infrastructure also complicates the construction issue and costs.

Prior administrations have long taken the position that service lines are safe based on treatment mechanisms despite various environmental studies and local investigations that have shown elevated levels of lead in some homes that pose health risks. During her 2019 mayoral campaign, Lightfoot was critical of the city’s lack of planning to replace lead service lines.

The city has about $2 billion of second lien water bonds outstanding. They carry ratings in the single-A to double-A category Fitch Ratings, S&P Global ratings, and Kroll Bond Rating Agency depending on the lien status although the city has little senior lien debt left. Fitch downgraded the second lien rating to A-minus from AA-minus this summer as part of criteria changes linking the rating off the GO.

Lightfoot’s predecessor, Rahm Emanuel, won phased in, double-digit water and sewer rate increases to accelerate capital spending soon after taking office in 2011 and since 2016 rate hikes are tied to the consumer price index.

Lead pipes were banned by the federal government in 1986. The 2014 water contamination crisis in Flint, Michigan brought national scrutiny to the issue. The state recently agreed to pay $600 million to settle lawsuits filed by Flint residents whose water was contaminated with lead and other contaminants because state emergency managers of the fiscally distressed city sought to save money as part of the city’s shift to a new, bond-financed water pipeline.

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