BRADENTON, Fla. Southeast cities and counties are facing increasing federal scrutiny of their sewer systems because of new standards aimed at reducing violations of the Clean Water Act.
Those efforts to stop sewer systems from polluting drinking water supplies, marine life habitat, and coral reefs bring financial consequences.
Bond financing, in most cases, is a critical tool for local governmental to resolve violations and avoid expensive, daily fines, but doubt about the future of tax-exempt bonds in Congress is raising concern about how governments will continue to finance efforts to meet federal consent decrees.
The U.S. Environmental Protection Agency has focused most of its enforcement efforts in the Northeast and Midwest. However, there are areas of the Southeast with some of the oldest sewer systems under multiple consent decrees, according to the agency’s records.
Since now-bankrupt Jefferson County, Ala.’s $3 billion consent decree in 1996, the Department of Justice, the EPA, and various state agencies reached agreement on enforcement cases at a rate of about one a year through 2011, according to a review of posted Justice Department and EPA notices, and consent decree court filings.
In 2012 and so far in 2013, the number of annual consent decrees has increased at a faster pace.
In the last two years, at least seven local governments have promised to repair flagging programs at costs ranging from $12 million for the 3,200-resident town of Timmonsville, S.C., to $1.6 billion in Miami-Dade County, which has a population of 2.6 million.
“Sewage overflows are a significant problem in the Southeast because of inadequate and aging infrastructure,” Acting EPA Regional Administrator Stan Meiburg said June 6 when announcing the agreement involving Miami-Dade.
Meiburg repeated the statement in July when announcing a settlement with Wilmington, New Hanover County, and the Cape Fear Public Utility Authority in North Carolina, and again last week speaking about the consent decree with Columbia, S.C., which is implementing a $750 million sewer system improvement program.
The EPA did not respond to a request for comment on its enforcement program in the region.
Some costs related to court orders are “breathtaking” and present extreme financial challenges for many cities, according to Tommy Holmes, legislative director for the American Water Works Association. Most of AWWA members represent water utilities but many work for combined water and sewer systems, he said.
For the most costly utility programs, the only existing financing source is tax exempt municipal bonding, which is in question as Congress reviews tax reform, Holmes said.
Eliminating the tax exemption for municipal bond interest and reducing the tax reduction for high-income earners are among the concepts on the table before Congress.
“We’re concerned because our utility managers say high earners are the principal investors in their bonds,” he said, adding that issuers should let their representatives know how important munis are to financing utility projects.
Cities such as Columbia are stepping up capital programs to address consent-related projects, and expect most of the costs to be financed with bonds.
Columbia has been fixing leaky and aging sewer lines and upgrading wastewater-treatment plants for years to comply with EPA standards, long before the consent decree was finalized, according to Joey Jaco, the city’s director of utilities and engineering.
Now the program, recently dubbed Clean Water 2020, covers consent decree projects and additional water and sewer upgrades at a cost of about $100 million a year, he said.
Columbia plans to sell $90 million of water and sewer revenue bonds in late October or early November with up to $80 million of proceeds going toward the 2020 program, said attorney Michael Seezen with McNair Law Firm PA, bond counsel for the transaction.
Though ratings have not been released for the upcoming deal, Columbia’s existing water and sewer bonds are rated Aa1 by Moody’s Investors Service and AA by Standard & Poor’s.
Some 80% of the $750 million Clean Water 2020 program is expected to be financed with bonds and 20% with cash from system revenues, according to Chief Financial Officer Jeff Palen. A consultant is helping to identify rate increases and to identify cash-flow needs for future bond issues.
Across the region, consent decrees impose significant costs in addition to improvements for modernization and expansion.
In Miami-Dade, officials said delaying rate increases to keep residents’ costs low and dipping into the sewer system’s revenues to boost the general fund were among the reasons the south Florida county’s plumbing system needs a $12.6 billion overhaul.
In May, Miami-Dade commissioners, faced with federal penalties up to $37,500 per day against the county, approved the latest consent decree that took more than a year to negotiate, and promised to do $1.6 billion in repairs. The county has been under some form of consent decree since 1994.
Commissioners ultimately approved a $4.2 billion initial bond program supported by sewer rate increases of 8% later this year, 6% in each of the following two years, and another two years of rate hikes at 5% each year.
In July, Miami-Dade sold $340.3 million of new water and sewer revenue bonds for the program. Moody’s rated the bonds Aa3 while Fitch and S&P assigned A-plus ratings.
The use of consent decrees to enforce federal regulations is not new.
Kentucky’s double-A rated Louisville and Jefferson County Metropolitan Sewer District signed its first consent degree in 2005. It was amended in 2009 and the district is in the midst of an $850 million improvement program.
According to the EPA, the MSD’s sewer systems were often overwhelmed by rain, which would discharge untreated sewage into the Ohio River and its tributaries.
To fund capital projects, some related to the consent decree, Louisville and Jefferson County plans to sell $226 million of bond anticipate notes and $100 million of revenue bonds in early November.
Munis have also been the central financing element in the Southeast’s largest sewer system under consent decree Atlanta’s $4 billion program, which has been ongoing since the late 1990s.
The city complied with a 1998 consent decree completing more than $700 million of sewer system rehabilitation projects on time and under budget, and continues to work on a 1999 decree to reduce sewer overflows into the Chattahoochee River.
All three major rating agencies upgraded the city’s water and wastewater bond ratings ahead of a refunding in August. Moody’s Investors Service raised its rating to Aa3 from A1, while Fitch and S&P upgraded their ratings to A-plus from A on more than $3.1 billion in outstanding water and wastewater system revenue bonds.
Analysts cited improving financial results, stabilization of rates with extension of a water and sewer sales tax, and a 13-year extension to complete a federal consent decree among the factors lifting the ratings.
With the future of munis in question and the era of large federal grants lost past, Holmes said water and sewer utilities facing major expenses stand to benefit from the Water Infrastructure Finance and Innovation Act now being considered by Congress.
“We realize there’s a need for a low-cost tool,” he said. “WIFIA is aimed at providing loans for large projects at low long-term interest rates.”
WIFIA is modeled after the existing federal low-interest loan program for transportation projects, created by the Transportation Infrastructure Finance and Innovation Act.
“TIFIA is considered a budget success,” Holmes said. “We see WIFIA providing low-cost loans for communities facing these large infrastructure renewal or replacement projects.”