Moody's is warning that Phoenix's failure to increase water rates to fund badly needed infrastructure could hurt its top-notch credit rating of the city's water utility.
For a city predicated on growth, maintaining pristine credit ratings is crucial to investing in infrastructure and upholding promises of a flourishing future.
In a 5-3 vote on December 12, the city council rejected two proposed rate increases of 6 percent in 2019 and 2020, even though in October it had unanimously approved a notice of intent to raise rates.
"A newfound pattern of unwillingness to raise utility rates to support capital needs and operations would be credit negative," the ratings agency said in a credit opinion on Phoenix Water Enterprise, issued Tuesday.
Phoenix's water utility has a credit rating of "Aa2 stable" — just two rankings below AAA — thanks to its "large and stable service area with ample water supply and treatment capacity," Moody's opinion said. S&P gives the utility a AAA bond rating; Fitch does not rate it.
Julie Watters, a spokesperson for the city, said in a statement that the council would revisit the proposed rate increase on January 9. "Staff is working to provide information to the City Council for their further reconsideration at that time,” she added.
The Water Services Department says it needs the additional revenue and infrastructure for two reasons. The first: A shortage on the Colorado River could be declared as soon as 2020. If that happens, Arizona will take cuts of at least 18 percent to its allocation of that water, and Phoenix will have to start relying on other supplies, including water it has stored underground. It needs the infrastructure to pump and move that water.
The second reason is aging infrastructure. The water utility has operated for 111 years. Some of its pipes are a century old.
Before the council voted last week, one member asked Kathryn Sorensen, the director of Phoenix Water Services, and Denise Olson, the city's chief financial officer, how they settled on two 6 percent increases.
"We have some financial indicators that we need to sustain to keep a AAA rating," Olson said.
That rating helped them borrow money at a very low rate, she said. After looking at capital needs, the city "backed into 6 percent."
The credit opinion from Moody's listed three factors that could prompt it to downgrade the utility's credit rating: a trend of deteriorating debt service coverage, a trend of declining liquidity, and an ongoing drought that would make water more expensive.
It also praised Phoenix's water managers.
"We view the management team as deep and experienced," it added. "Management also demonstrates reasonable and conservative multi-year projections and budgets."
The City Council last approved of water rate increases in January 2016, leading to hikes of 3 percent in March 2016 and 2 percent in March 2017.
When the previous increases were proposed, "there wasn't a discussion that this was going to be the last rate increase for infrastructure," Kathy Ferris, a former director of the Arizona Department of Water Resources and an architect of the state's 1980 Groundwater Management Act, said. At that time, Ferris testified in support of the rate hike.
"Fast forward, and we have a very different situation than we had almost three years ago," Ferris said, referring to a looming drought on the Colorado River. "The city staff is really saying, 'Look, we’ve gotta be proactive here — we need to be sure that we can get our water where it needs to go.' Well, that is such a smart thing to do, and in the long run, it’s going to save the city money."
At least three City Council members would appear to disagree, with one of them especially prominent in this "newfound pattern of unwillingness" to increase water rates — the firebrand councilman from District 6, Sal DiCiccio, who has been mischaracterizing the increase as an enormous and painful tax for Phoenix families.
Last week, DiCiccio described the proposed water rate increase in tweets as a “$1.5 BILLION new water tax.” He mentioned that figure during the City Council meeting, which he, in signature DiCiccio fashion, attended by phone. He dropped the number into several tweets and included it in a statement. Others, including a local radio host, have since parroted it.
On Wednesday, the day after Moody's issued its opinion, DiCiccio ramped up his rhetoric even more.
"The politicians who voted for this have gone insane and are showing their disrespect to you and your family who will be forced to pay this tax," he said in a statement that once again, called the rate increase a "massive tax hike" of $1.5 billion. He thanked councilmembers Michael Nowakowski, Jim Waring, and Laura Pastor for voting against the rate increase.
But DiCiccio is leaving out another crucial number. The $1.5 billion will be collected over the next 30 years.
Here's a breakdown that's a little more to scale: If the rate hike is approved, the average customer will pay about $2 more per month starting in February, and an additional $2.37 per month in 2020. By 2020, after increases were fully realized, the hike would bring in additional revenues of $49.1 million per year.
The infrastructure for groundwater recovery and upgrades would cost the city about $1.5 billion. The city plans to build those wells, pumps, and pipes over the next few years, and pay back the cost over the next 30.
The city assumes that it will sell $600 million in bonds for the capital improvement program, said Olson, Phoenix's chief financial officer. The $49 million per year from the rate increase which would cover debt service payments, she said.
Sam Stone, DiCiccio's chief of staff, disputed the notion that tossing out the $1.5 billion figure was misleading.
“It’s designed to make people stop and pay attention,” Stone said.
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Greta Rogers, a 90-year-old Phoenix resident who made national headlines last week for giving councilmembers a public tongue-lashing over a proposal to spend $150 million in taxpayer dollars on renovating a local sports arena, has been outspoken in the past on the need to increase water rates in Phoenix.
She said it was common sense that city managers would be asking for another increase now, because "the economy of manufacturing any resource or product is commensurate with the cost to meet to demand ... In any municipality that is experiencing growth, you have to keep up with providing safe potable water," she said.
"It isn’t a matter of trying to artificially gouge the public. It’s essential," Rogers said. She said she planned to attend the next City Council meeting in January, when the water rate hike is expected to resurface, although she didn't know whether she would weigh in on that subject.
Until then, she offered some advice: “People who squeak about a rate increase — ignore [them].”