How a water quality crisis impacts the credit of Oregon's capital

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A water safety crisis in Salem, Oregon, is a credit negative to the city although planned fixes would reduce that risk, according to Moody’s Investors Service.

A health advisory in the state's capital city has been in place since May after cyanotoxins – bacteria formed in algae bloom -- were found in the drinking water supply.

The city advised vulnerable populations – such as young children, the elderly and pregnant women -- not to drink tap water.

The city set up filling stations around the city to provide safe water to residents and Gov. Kate Brown declared a state of emergency, dispatching the National Guard to help deliver water supplies.

City officials, who have been testing the water regularly, say the water remains safe for most residents with toxins below the federal advisory level. The advisory may be lifted by late June, according to the city’s website.

“We remain committed to the health and safety of our residents and water customers,” a city statement said. “And, we continue to work on new approaches to Salem’s drinking water infrastructure to ensure safe drinking water – including exploring alternative testing and treatment, and additional water sources.”

The Detroit Lake reservoir, from which Salem draws water, has a harmful algae bloom containing cyanobacteria, according to city and state advisories.

City officials say they have purchased a new testing system and are looking at alternative treatment methods to ensure cyanotoxins don’t enter the water system. In the long term, the city is looking into possible new water sources for the city’s drinking supply.

Improving the city’s water system could increase costs by $3 million to $5 million over the next 18 months and up to $30 million in additional capital spending, according to a Moody’s report.

The city and its water and sewer enterprise are both rated Aa2 by the agency.

“The unplanned spending through at least the next 18 months will raise operating and maintenance expenses by up to 5%,” the Moody’s report said. “Based on consistently conservative budgeted projections, the additional expenses will reduce net revenue and debt service coverage by 17%, not including non-operating revenue.”

While those unanticipated costs are a credit negative, the report notes that the “the additional capital investments will enhance the system’s resiliency to respond to future and long-term water quality risks.”

The city should have additional debt capacity due to rapid payout of existing debt and declining future payments, Moody’s said.

Salem’s water crisis is a sign of how the effects of climate change can challenge local governments with unexpected costs, the report noted.

Last month, the region saw near-record heat and dry conditions, which health officials say is one of the factors leading to increased algae growth.

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