CHICAGO - The Metropolitan St. Louis Sewer District would like to ask voters next year to support $919 million in new borrowing for wastewater projects and to revamp its stormwater fee structure.
The district launched the process that will lead to a ballot measure by laying out its plan in a rate change proposal sent to its 15-member public rate setting commission.
The plan would set rates for 2017 to 2020 and provide funding for $1.5 billion in projects planned over those four years. They are part of a larger, $4.7 billion long-term infrastructure program of capital projects, many required under the 2012 consent decree struck with the U.S. Environmental Protection Agency.
"MSD's rate proposal is the product of the district and is based on the strategic and financial implications .of its wastewater and stormwater service obligations to the St. Louis region," the proposal says. "The financial plan recommends senior lien debt issuance levels designed with the objective to maintain credit rating metrics consistent with strong credit ratings and in consideration of the district's operational and capital funding needs."
The district faces a balancing act to maintain its high-grade ratings.
District spokesman Lance LeComb said the aim of the overall financing is to protect the district's financial strengths "which result in lower financing cost for our customers" by maintaining "at least a double-A rating."
But the district recognizes it will be taking on larger amounts of debt that could potentially hurt its current ratings, he said. With ratings at the AA-plus and triple-A levels, LeComb said the district has room to take a potential hit and still keep its ratings at a targeted level.
The plan relies on the proposed senior-lien revenue bonds, service charges, grants, and state revolving fund support. MSD does not anticipate receiving financial support from the federal government other than $100 million in federally funded and state-administered subordinate series of revenue bonds issued under the Missouri State Revolving Fund, according to the rate proposal.
If approved, the district doesn't intend to tap the new capacity until fiscal 2018 as borrowing authority remains from a $945 million authorization approved by voters in 2012. The district intends in fiscal 2016 to sell about $150 million of bonds and then $174 million in fiscal 2017. Financial teams will be selected from pools previously established, LeComb said.
The proposed plan going forward relies on issuance under the new authority of $216 million in 2018, $235 million in 2019, and $293 million in 2020.
Like past borrowing proposals sent to voters, MSD is promoting it as the most affordable means to fund projects, many of which are required under its federal consent decree. If the borrowing authorization goes to voters and is approved, rate increase would be kept to an annual range between 9.8% and 13.1% compared to significantly higher annual spikes.
"Debt financing of the majority of the Capital Improvement and Replacement Program allows the financing burden to be appropriately shared by both present and future users benefiting from the wastewater system improvements," said the rate proposal.
To service its debt and maintain targeted operating reserve balances, the rate report projects the need for a 9.8% annual increase of revenue through 2020.
The capital program was developed with the help of the district's financial advisor Public Financial Management Inc. The rate proposal was also crafted with the advice of Raftelis Financial Consultants Inc. and Vertex Business Services.
Headed into the next stage of its capital program, MSD is proposing a shift in how its funds stormwater projects, which are separate from its wastewater program. It wants to move to a districtwide 12-cent uniform tax per $100 of a property's assessed value. The funds would pay for $70 million of stormwater projects. The current rate structure sets fees based on location, so if the change is approved rates would go up for some but down for others.
The district had sought to shift the burden away from property taxes and impose a fee based on a property's area in 2011 but that plan was later struck down by the Missouri Supreme Court which found it was a tax that required voter approval.
Approval in 2012 of the consent decree by a federal judge brought to a close a nearly five-year-old lawsuit over clean-water violations. The settlement resolved claims brought against the sewer district in 2007 by federal and state authorities and others, including the Justice Department, the Environmental Protection Agency and environmental groups.
The claims alleged violations of federal clean-water laws for allowing untreated sewage to seep into waterways and the ground. The litigation resembled action taken by the EPA against other major cities alleging violations of federal clean-water laws. The district later that year won voter support for its $945 bond authorization and rate hikes.
Projects in the works and planned in the coming years cover infrastructure improvements to reduce combined sewer overflows, reduce sanitary sewer overflows, improvements at a wastewater treatment plant, collection systems improvements, and planning and maintenance work.
Ahead of a sale in 2013, Fitch Ratings affirmed the district's AA-plus rating, Moody's Investors Service affirmed its Aa1 rating, and Standard & Poor's affirmed its AAA rating. All three assign a stable outlook to the credit.
The district reports $741 million of outstanding senior lien revenue bonds from issues between 2004 and 2013 and $315 million of subordinate lien bonds issued under the state revolving fund loan program. Its senior lien bonds are secured by the system's net revenues.
"The rating reflects our assessment of the district's strong and diverse service area economy, covering the City of St. Louis and St. Louis County, and large, diversified customer base," said Standard & Poor's.
Moody's said its rating reflects the system's large and diverse service area; its demonstrated willingness and ability to raise rates at regular intervals; declining but still sound debt service coverage; and debt levels that will significantly increase to fund extensive capital improvements.
The district is challenged by debt levels that are expected to double over the next two decades due to planned capital improvements under the consent decree and other regulatory requirements. Substantial rate increase put in place to support the current $1 billion capital program into 2016 "could impair voter support of future needed borrowing requests," Moody's warned.
Fitch said total debt coverage of 1.9 times in fiscal 2013 was lower than expected but still adequate to support its rating. Coverage is expected to hover around 1.7 times through 2016.
A recommendation from the commission to the MSD board of trustees is expected over the summer after a series of public hearings. If approved, the measures would go to voters in 2016. The district, which began operations in 1956, is the fourth-largest wastewater treatment system in the nation.