Fact vs. Fiction: Another MWD Rate Cycle, Another MWD Spin Cycle

It’s another rate-making cycle at MWD, with proposed rate hikes, more tax hikes and more illegal rates that will overcharge San Diego taxpayers and water ratepayers more than $134 million over the next two years – this, doesn’t even include the potential additional cost the new treatment charge MWD’s concocting to impose would add to San Diego’s ratepayers’ water bills. But, to hear it from MWD officials, the Los Angeles-based agency is a paragon of financial virtue. In commentaries in San Diego news media over the past several days, MWD has made astounding claims about its proposed rates, charges and property tax increases.

Please read on to see the MWD claims and the facts that refute them.

MWD Statement:   “Metropolitan Water District is proposing overall rate increases of 4 percent for each of the next two years.” (Voice of San Diego, April 7, 2016.)   “To meet future needs, we are proposing overall 4 percent rate increases for the next two years and projecting increases in the 4.5 percent range in the subsequent eight years…. There is nothing unusual or underhanded in how the percentage increase varies for the different rate components. Overall, it is a 4 percent rate hike.” (The San Diego Union-Tribune, April 8, 2016.)

FACT:  The 4 percent figure is an MWD talking point that has no relevance to San Diego County ratepayers. For San Diego ratepayers, MWD’s proposed rates will increase the untreated water rate by 12 percent, the treated water cost by a whopping 77 percent (or under another alternative, by 115 percent), and the water transportation rate by 6 percent. These do not average to 4 percent – not even close.

See page 5 of the April 12, 2016 MWD board memo here.

Tax Increases
And, MWD is also proposing to increase property tax collections from San Diego County taxpayers by more than $20 million over the next two years, by freezing its tax rate rather than lowering it as intended by the California Legislature and required by MWD’s own Act.   Even MWD’s rate “projections” must be taken with a grain of salt: MWD’s track record of keeping rate increases within its projections is abysmal. Take a look at this chart, which showing MWD’s 2004 10-year rate forecast. Compare MWD’s range of projected rates with the actual rate increases MWD subsequently approved and imposed.

Read the 2004 Long Range Finance Plan here.

MWD Statement:   “…strong financial practices at Metropolitan are essential to maintaining the backbone of the region’s water infrastructure.” (Voice of San Diego, April 7, 2016.)   “In the coming weeks, Metropolitan and its board of directors will be making important budget decisions to help meet the region’s future water needs with vision and fiscal responsibility.” (The San Diego Union-Tribune, April 8, 2016.)

FACT:  The claims about “strong financial practices,” and “vision and fiscal responsibility” at MWD are exposed when one considers some of the actions MWD has taken over the past several years:

Overcharges

  • Set rates far higher than necessary to pay all of its expenses, overcharging all of its ratepayers $847 million just since 2012. In fact, MWD’s Chief Financial Officer says it is MWD’s budget and rate strategy to over-collect revenues from its ratepayers in seven of every 10 years. For San Diego County ratepayers, these over-collections amount to $188 million – revenue collected by MWD without having shown any need to these revenues.
    • “You know the 1.7 when we set that, as well as the 1.75, I think we were pretty clear with the board that in seven out of 10 years we’re going to do a little bit better.” MWD Chief Financial Officer Gary Breaux at MWD’s April 8, 2013 Finance and Insurance Committee Meeting

To view MWD Chief Financial Officer Breaux’s full statement, click on video link here (fast-forward to 24:21).

  • Spent $1.2 billion on unbudgeted spending since 2013, completely outside of its budgets that already exceed $1.6 billion annually.

  • Approved unplanned borrowing of $500 million in November 2015, and proposes to take out $400 million more in lines of credit from commercial banks to replenish its Water Rate Stabilization Fund, which it depleted paying for such unbudgeted “gimmicks” like turf removal rebates.

MWD memo determining MWD’s interests require the use of $500 million in revenue bonds (Oct. 13, 2015

Memo authorizing $400 million in short-term revenue certificates (March 8, 2016)

Read the story in the LA Times here (Title: “Not much bang for the buck in DWP turf rebates, city controller audit says”).

Raiding PAYGo Funds

  • Raided $226 million in funds collected from ratepayers to pay for water infrastructure and used them instead to pay for operating expenses. And in its February memo forwarding proposed rates and charges, staff said it plans to recommend see advanced authority from the Board so it could raid another $240 million over the next two years without additional Board oversight. It appears that even MWD is no longer seeking the authority to raid PAYGo revenues without letting the Board know first. But it is unknown if staff will not return to the Board to ask for such authority over the next two years. How would MWD replace the cash paid by ratepayers? You guessed it – with even more long-term debt. Read the MWD board memo on proposed biennial budget and revenue requirements (Feb. 9, 2016).
  • Since 2014, MWD has increased property tax collections from taxpayers throughout its service area by almost $100 million more than allowed under the MWD Act. And yes, now it is proposing to increase property taxes again — by more than $100 million over the next two years, claiming that the additional tax revenues are “essential to the fiscal integrity of the district.”

MWD board actions to increase property tax collections:

In all, just since 2012, MWD has approved $3.3 billion in reckless fiscal actions – nearly all of it outside of the agency’s biennial budget.  

MWD Statement: Just about every year, the San Diego County Water Authority uses ratepayer funds to bus local citizens to the Metropolitan Water District of Southern California’s final budget meeting in downtown Los Angeles. They are customers who have ended up with some unfortunate misimpressions about Metropolitan’s financial practices and proposed budget, and they come to urge Metropolitan to collect less revenue than what is proposed. And then the bus goes home. (Voice of San Diego, April 7, 2016.)

FACT:  Besides insulting and deriding San Diego civic leaders and ratepayers who have to take a day out of their lives to travel more than 100 miles to MWD to exercise their First Amendment rights to petition this government agency, MWD gets it wrong again. Our civic leaders and ratepayers don’t have “unfortunate misimpressions about Metropolitan’s financial practices.

They are well informed and armed with the facts about MWD’s reckless unbudgeted spending, deliberate over-collections, higher property taxes, unplanned borrowing, and raids of funds intended for water infrastructure to pay the exorbitant salaries of MWD’s top management and other overhead costs. They are also well aware of another fact that was mentioned nowhere in MWD’s Voice of San Diego commentary: a court has already invalidated the rates MWD charged in 2011-2014, finding that the agency systematically and illegally overcharged San Diego ratepayers for transporting its independent Colorado River water supplies and awarding the San Diego County Water Authority $244 million in damages, interest, costs and attorneys’ fees. The Water Authority has already filed suit to collect over another $113 million in over-charges for 2015 and 2016. Despite the Court’s ruling, MWD’s board is continuing its illegal rate allocation and, if approved on April 12, will overcharge Water Authority ratepayers another $134 million in 2017 and 2018. Over just eight years, MWD’s overcharges – illegal taxes imposed on all San Diegans — will amount to more than one-half billion dollars. MWD is on pace to overcharge San Diego ratepayers more than $1 billion per decade.  We think it’s well worth the bus ride.

MWD Statement: “Metropolitan has been developing its next two-year budget over many months – multiple workshops, hundreds of pages of detailed financial information, all public and all transparent.” (Voice of San Diego, April 7, 2016.)

FACT:   Far from being “all public and transparent,” MWD stonewalled the Water Authority’s requests for all of the information and data it used to develop its proposed rates and charges, including its cost of service report and the rate model it uses to allocate its costs to various rates and charges. MWD refused to release this information prior to its March 8, 2016 public hearing on its proposed 2017 and 2018 rates and charges. And, MWD still refuses to release the most vital information needed to review its rates and charges: its rate model.  MWD claims its rate model – dubbed Financial Planning Model – is proprietary and a trade secret. That’s right: the largest public water agency in the United States claims the methodology it uses to allocate its costs and impose water rates and charges imposed on 19 million Southern Californians is a “secret.” The Water Authority has filed a formal demand for the rate model under the California Public Records Act.  MWD general counsel’s letters refusing to release the rate model:

MWD General Counsel response to Water Authority Public Records Act request  letter (Feb. 26, 2016) 

MWD General Counsel response to Water Authority Public Records Act request letter (March 11, 2016)

MWD General Counsel further response to Water Authority Public Records Act request letter (March 30, 2016)

MWD General Counsel further response to Water Authority Public Records Act request letter (April 11, 2016)

MWD is well aware that without the rate model, the papers MWD released SUBSEQUENT to the public hearing are meaningless. “All public and transparent?” Hardly.

MWD Statement: “Metropolitan plans to use cash on hand to pay 60 percent of the costs for capital projects over the coming decade. For Metropolitan, relying too heavily on the credit card would have long-term consequences.” (Voice of San Diego, April 7, 2016.)

FACT:   Since 2014, MWD has already raided $226 million of the money it budgeted to spend on water infrastructure to instead pay for operating expenses of the agency, including turf removal gimmicks. To make up for it, MWD then borrowed money and increased its long-term debt to pay for the water infrastructure. In February, MWD actually proposed doing the same thing over the next two years:

Read the MWD board memo on proposed biennial budget and revenue requirements (Feb. 9, 2016)

Although MWD ratepayers have dodged this bullet for now, we won’t be surprised to see the idea brought back later as it has been in prior years. MWD needs to stop using ratepayer money collected to pay for infrastructure to instead pay operating expenses. That has real, long-term consequences for water ratepayers.

MWD Statement: “Paying off the credit card: Metropolitan seeks to have on hand twice the net revenues (annual operating revenues minus annual operating costs) to meet its debt obligations. It helps to assure that Metropolitan can borrow money at low rates. For Metropolitan, shaving budgets too closely would have potentially expensive long-term impacts for ratepayers.” (Voice of San Diego, April 7, 2016.)

FACT:  MWD has a financial policy to maintain 2.0-times debt coverage, its proposed budget and long-term forecast in the budget show that MWD will drop below that target in six consecutive years.  MWD Board memo on fixing and adopting water rates and charges (April 12, 2016) Given its $847 million in over collected revenues to date, and its budget process, calculated to over collect from ratepayers in seven out of 10 years, we doubt anyone at MWD has to worry about “shaving budgets too closely.” The fact is that not one single dollar was cut by the MWD board of directors from the staff recommended budget. That would have been almost impossible to do since the staff refused to provide the board in a timely fashion – during budget deliberations and “workshops” – with the level of budget detail necessary to understand how staff was proposing to spend money or where reductions might be found.

MWD Statement: “Meeting targets for reserves: Metropolitan has a baseline target and a maximum target for maintaining reserves. Metropolitan is projecting to have reserves on hand sufficient to meet its baseline target for the next 10 years. For Metropolitan, failing to meet a minimum reserve target would be a big red flag to lending institutions and credit-rating agencies.” (Voice of San Diego, April 7, 2016.)

Fact: Since 2012, MWD over-collected $847 million from ratepayers, but spent $1.2 billion on unbudgeted expenses. To make up the difference, MWD raided its cash funds that were budgeted for water infrastructure and issued more unplanned, long-term debt. It drove the balance of its Water Rate Stabilization Fund so low that it now proposes to take out $400 million in lines of credit to backfill the fund. Without this extraordinary borrowing, MWD’s Water Rate Stabilization Fund would fall far below its minimum reserve level. MWD is right about one thing: because MWD uses the cash in its Water Rate Stabilization Fund to maintain bond coverage promises it makes to its bondholders, “failing to meet a minimum reserve target would be a big red flag to lending institutions and credit rating agencies.” Taking out commercial lines of credit to replenish its cash reserves to meet its bond coverage minimum target are just be the kind of red flag the big three credit rating agencies — Standard & Poor’s, Moody’s Investor Services, and Fitch Ratings – might raise.

MWD board memo authorizing $400 million in short-term revenue certificates (March 8, 2016)

MWD Statements:   Metropolitan fully understands the need to keep costs down so that local projects such as San Diego’s Pure Water can advance.” (Voice of San Diego, April 7, 2016.)   “Keeping our rate increases modest, as is planned, will also create the financial opportunity for cities such as San Diego and projects such as Pure Water to move forward. Keeping Metropolitan on a strong financial footing will prevent sudden spikes in rates that can disrupt local projects.” (The San Diego Union-Tribune, April 8, 2016.)

FACT: MWD’s proposed budget is going up, not down, and has grown by 45.7 percent over the past decade – even as MWD sales declined by 38.3 percent over that same period. And, MWD’s own long-term forecast shows its budget will grow by another 37.6 percent over the next decade.

 MWD Board memo on fixing and adopting water rates and charges (April 12, 2016)

MWD has increased its treated water rate by 126.3 percent and its untreated water rate by 82.2 percent since 2004 to 2016. These annual increases averaging 9.7 and 6.3 percent, respectively, far exceeded MWD’s own 10-year rate forecast, issued in 2004. MWD’s reckless fiscal practices and rate increases drain available ratepayer dollars from the City of San Diego, the Padre Dam Municipal Water District and other local agencies who are developing new local water resources including the City’s Pure Water Program and Padre’s Advanced Water Repurification Project.

MWD’s $847 million in over-collections alone since 2012 drained $189 million from water agencies in San Diego County and their ratepayers. Of that amount, $75 million was picked right out of the pockets of ratepayers in the City of San Diego – funds the City could have invested in its Pure Water Program. The more money local water agencies send to Metropolitan, the less they have to invest in local facilities – because around here, affordability matters. Of the $244 million awarded to the Water Authority in its rate litigation victory against MWD, nearly $100 million was illegally collected from ratepayers in the City of San Diego. MWD’s platitudes to local water supply development ring hollow when you consider how much money it has drained from local agency coffers.   Despite MWD’s reckless fiscal practices, San Diego water agencies are forging ahead with projects that are more cost-effective than ever when compared to the steadily increasing cost of MWD’s imported water. Local supplies are also more reliable that MWD’s supplies. They’re drought-proof, and – importantly for ratepayers – locally controlled, and you don’t have to get on a bus and travel 100 miles away.