Courier-Journal.com

By James Bruggers • This e-mail address is being protected from spambots. You need JavaScript enabled to view it • June 13, 2010

The Metropolitan Sewer District is carrying its highest level of debt ever -- $2.7billion with interest payments -- and its borrowing for a court-imposed $850million rehabilitation program has just begun.

For decades, MSD customers likely will be reaching for their checkbooks to pay for the 19-year program, which breaks down to $3,800 for each Louisville resident. And customers who have already seen their rates rise 5 to 7 percent a year since the mid-1990s -- and 33 percent in 2007 -- can expect more of the same.

By 2024, the estimated annual rate for a typical Louisville household is projected to go from $402 in 2010 to $810 -- and it could rise even higher if the district has to borrow more money for other capital construction needs, or if federal regulators follow through with promises to make cities do more to curb polluted storm water runoff.

Further, the debt and future obligations raise questions about how MSD will pay for other big-ticket projects, such as renovating aging flood pumping stations that protect Louisville from the Ohio River, building new flood storage basins and covering MSD's share in a possible new multi-county sewage treatment plant on the Salt River.

Jeff Frank, executive director of Future Fund, a conservation group that has tracked MSD finances, called its debt "staggering" and said the agency should pay more up front, to reduce borrowing costs.

Across the country, sewer rates have gone up for the last several years at double the inflation rate, and they are up 8.5 percent this year nationally, said Adam Krantz, government and public affairs manager for the National Association of Clean Water Agencies, a lobby group.

"It's becoming a very tricky issue at the local level," he said.

MSD Executive Director Bud Schardein said the agency doesn't have cash reserves to cover the work, so paying up front would require much bigger customer rate increases. Borrowing with a 30-year pay back is designed to keep customers' bills from exploding, he said.

"You can bludgeon people up front with higher annual rate increases, and a lot of your customers become bad debt because they can't afford to pay their rates and we can't afford to extract it from them," Schardein said. "My bottom line is keeping this as affordable as I can and still meet our regulatory requirements. I am trying to do the balancing act."
So far, bond rating services are generally looking favorably on MSD. For example, Moody's recently upgraded the agency from a negative outlook, scoring it in its fourth highest rung, Aa3, in the "adequate" range, said Robyn Rosenblatt, an analyst with Moody's Public Finance Group.

Rosenblatt said MSD officials have demonstrated they can manage their debt. "To their credit," she added, "they do have a history of raising rates," which Moody's sees as a sign of financial stability.

Even so, there remains some criticism and push-back locally.

"Obviously, we have to have a sewer system," said state Sen. Dan Seum, R-Louisville, and an MSD critic. "But you kind of wonder where (the debt) is going."

Last month, Seum lent his support to a lawsuit by the group Stop Invisible Taxes, which seeks to force Metro Council approval of MSD rate increases. MSD cites a city ordinance that says it only needs approval of rate increases greater than 7 percent.

"People aren't making much money," said Helen Jupin, an MSD customer, noting the affects of economic recession. "You have to wonder ... how much more can people afford to pay."
It used to be that the federal government helped cities comply with the Clean Water Act, but those monies evaporated with Ronald Reagan's presidency in the 1980s, said Gordon Garner, a retired MSD executive director who now works as a consultant.

And Robert Steuer, a spokesman for U.S. Sen. Mitch McConnell, said that federal funding isn't likely to happen. "It's primarily the responsibility of local governments to maintain their sewer systems, and given the current fiscal crisis faced by the federal government, this is unlikely to change," he said in an e-mail.

Louisville's financing jam is mirrored across the country. Indianapolis plans to spend $3.5billion on its sewer system; Cincinnati, $3.1billion; and Atlanta, $3billion. In Kentucky, Lexington will have to spend between $250million and $300million, and Sanitation District No. 1 of Northern Kentucky could spend between $1.2billion and $3billion.
All this is coming as the Environmental Protection Agency has been suing cities, alleging illegal sewage overflows, then settling through agreements known as consent decrees.

Louisville's consent decree was signed in 2005 and amended in 2008. It followed a lawsuit by the Kentucky environmental cabinet and the U.S. Environmental Protection Agency over massive sewage overflows into local creeks and the Ohio River, a drinking water source for 5 million people.

The goal is to reduce the overflows dramatically, and MSD officials said they have already cut them by about 25 percent.

An MSD survey shows its monthly rate for a typical home of about $33 is competitive. Schardein told Metro Council in May that it compares with a typical Indianapolis sewer bill of about $24 a month; Nashville, $37; Cincinnati, $54; and Atlanta, $96.

Schardein said Louisville's consent decree was less than some of the other cities', in part, because of projects the agency undertook in the 1990s and early 2000s. And that past spending, he said, explains most of the current debt.

MSD eliminated 44,000 often-polluting septic tanks; got rid of more than 300 small, private treatment plants that routinely spilled raw sewage; built two sewage treatment plants and expanded four others; and built 11 flood storage basins capable of holding 1 billion gallons of floodwaters.

"The Ohio River is getting billions of gallons less of sewer overflows," Garner said.

MSD paying as it goes
But of the $1.4billion in principle that MSD still owes, only about $180million is from spending on the 2005 consent decree, said Marion Gee, MSD's finance director. Later this year, the agency plans to borrow $300million more, largely to fund consent-decree projects, he said.

The goal is for MSD to pay as it goes for 25 percent of the $850million, and borrow the rest, Gee said. That creates a large debt service -- $96million in 2009, or 49 percent of the agency's operating revenues and its largest expense.

MSD is doing what it has to do, said Steven G. Kovan, who directs the University of Louisville's master of public administration program and teaches classes in public sector budgeting. He reviewed MSD's most recent annual financial report and said the agency has little choice but to borrow to pay for the EPA mandates.

But there are potential consequences, Kovan said, since paying back the debt comes first.
"They'll just have less money for other things," he said.

Schardein said he wishes he had more money to build more storm water retention basins in low areas of Louisville. And looming, there is talk in Frankfort of the need for a regional sewage treatment plant in Bullitt County, which could cost tens of millions of dollars.

He said anticipated tighter rules on controlling pollution from storm water also could affect customers' rates.

"When I know what it means, I will take it ... to everyone in the community, and say this is what is going to be required to raise water quality in this community, and this is where we see the budget," Schardein said.

Weighing the need
But perhaps the biggest MSD need not yet funded is for renovation of the city's aging Ohio River flood-protection system.

Schardein says Louisville is at risk of "being another New Orleans," referring to the deadly floods around Hurricane Katrina in 2005, when that city's flood-protection system was overwhelmed.

The Louisville system was built after the 1937 flood, and nine of its pumping stations designed to push water to the Ohio River are more than 50 years old. MSD is spending $17.5million to rebuild the one Schardein said is in greatest disrepair -- the 57-year-old Western flood pumping station, which protects 137,000 west Louisville homes. Congress allocated $5million in federal stimulus money to help.

But Schardein said eight others also need major renovations at an estimated cost of $50million to $70million -- and he argues that the federal government should help cover more of the cost.

"They will inspect them," he said of federal agencies. "They will give you a passing or failing grade. But for whatever reason, they will not participate financially. I think that needs to be addressed."

McConnell, the Republican from Louisville and the Senate minority leader, declined to comment on whether the federal government should help pay for renovating the pumping stations.

U.S. Rep. John Yarmuth, D-Louisville, said failing infrastructure is a national problem and that the House Ways and Means Committee, of which he's a member, is exploring how to fund a national infrastructure bank to help.


"We're looking at all sorts of options," he said.

Garner, who said MSD borrowed about $1billion under his watch, said the spending is necessary if Louisville residents want clean water.

"It's an investment," he said. "Louisville had a lot of (sewage) problems, and it still has a lot of problems, but it has come a long way in the last 30 years. People who don't want to pay for clean water should go to a country that doesn't have it, and then decide what it's worth."