This morning, a municipal water client finished (and passed) the bond rating agency equivalent of a TSA strip search. Our client was a bit surprised at the heightened scrutiny and widened scope of this year’s version of a process that used to be the equivalent of renewing a motor vehicle registration, but understood and cooperated admirably when we put the agency’s new approach into context.
After getting torched by Congress, the bond raters (Moody’s, S&P and Fitch) are a bit touchy and defensive today, so issuers need to be well prepared when their turn comes to justify their ratings each year. One question in the Moody’s review that ended today (copied below, along with the client’s answer) blew us away and brought us to our feet to applaud.
Moody’s surveillance question: “The percentage of MGD’s lost over the last 5 years?”
Client answer: “The Town has held unaccounted water consistently under 10% i.e. within the “green” zone for unaccounted water).”
For decades, we have tried to get the agencies to look at unaccounted water percentages (water that is treated and delivered into the system but not billed to customers) as a critical measure of management effectiveness, efficiency and professionalism of operations as well as the condition of water system assets. Moody’s obviously finally got it! The question above actually appeared at the top of the first page of their list!
Another question that appeared at a higher priority than in prior exams, is not new to the annual review process. Moody’s wanted to know how the client’s water rates compare to rates for other communities in the region. While the client’s water customers could not just call the town next door and switch water suppliers, like cable and phone customers routinely do for those services.
Moody’s was focussed on comparative water rates because they know from experience that political constraints on rate increases needed to protect bondholders can come into play when water customers who are also voters get fed up with high rates and decide to fire management (elected officials). Our view is that the tax-revolt sentiment that contributed to 2010’s election results helped bump this question up on the list.
What does all of this have to do with Cohasset? Plain and simple, with 40% unaccounted water reported in last year’s forensic accountant’s report, the Town has shown that it lost control of the revenues that support its water operations and water-related debt service. Now, Town Meeting is being asked to approve an opaque process that would prospectively result in a concession or a contract/bundle of contracts/agreements that presents a very strong potential (based on language in the Town’s recent RFP) that it would deprive Cohasset of control (not directly by overturning government, but indirectly, through bond covenants and contract provisions) over its water rates.
An implication is that maintaining Cohasset’s bond ratings may be more of a challenge if a good case cannot be made that the Town has its water system back under control. A fundamental message is that there is no substitute for diligence. If Town Meeting shrugs its shoulders and consents to a deal in the dark (granting discretion to make an unseen deal without publication and coming back to Meeting) then Cohasset residents stand a very good chance of finding out what residents of Atlanta found out a decade ago (just Google “Atlanta water privatization fiasco”): if you try to solve your problems by kicking by the can down the road (lateraling your water system to a private “partner”), it may come back to hit you in the head.
Note: Cohasset Board of Selectmen, Advisory Committee and Water Commissioners meet tonight at 7 to discuss the Water Commissioners’ operating contract proposal (bids were opened some time this week) and the Water Commissioners’ 2013 budget. The meeting is expected to be televised.© Copyright 2012 Tanna K, All rights Reserved. Written For: Tinytown Unleashed