Friday, March 31, 2006 | As the departments that manage the city’s water and sewage conclude another fiscal year without bond money to update and improve San Diego’s water infrastructure, the two departments are dipping deeper into their reserves in order to stay compliant with health regulations.
In one of the more tangible impacts of the city’s fiscal crisis, spending on repairs and renovations in the water and wastewater systems is slated to be dramatically lower in fiscal year 2007 as the city continues to deal with the impacts of a tattered credit rating and its suspension from Wall Street.
The Metropolitan Wastewater Department expects to spend about $40 million on upgrades and improvements to such things as sewer pipes in the fiscal year that begins July 1, compared to the $125 million to $150 million it would have otherwise spent.
Likewise, the Water Department expects to spend about $25 million to $30 million on improvements to the plants that treat the region’s tap water; under normal circumstances it would have spent between $90 million to $100 million.
Despite the severe curtailing of the capital projects, both departments have had to reach into previous year’s profits to cover their expenses and are in danger of exhausting their back-up funds.
Charles Yackly, acting director of the Water Department, said his reserve fund has dropped from an estimated $70 million three years ago to $15 million in the coming year, and he expects his reserves to only stretch until the end of fiscal year 2007. Wastewater officials believe they could make it through fiscal year 2008 on reserves.
“It’s a concern that they’re being drained down,” said Assistant Auditor Larry Tomanek. “And the concern is that once they’re drained down, No. 1, there won’t be anything left and No. 2, it will take years to build them up.”
In total, the city’s enterprise funds are expected to run a deficit of $26 million this year, largely because of the funding issues in water and wastewater, according to a report released this week by the City Auditor’s Office. Enterprise funds, such as the airports, golf and wastewater departments, operate separate from the city’s daily operating budget and rely on user fees to cover expenses.
The city expects to return to Wall Street’s good graces in fiscal year 2007 upon the completion of an investigation into city finances and the release of audited financial statements. But city officials have been hopeful that such a scenario was approaching since fall of 2004, as the city’s credit rating has been suspended because of questions surrounding the veracity of its financial reporting to investors.
In the meantime, both departments must meet certain U.S. Environmental Protection Agency regulations governing healthy sewage systems and clean drinking water. The Mayor’s Office is contemplating borrowing $800 million in private loans to keep the city in compliance with the federal regulations or simply waiting until its long-delayed audits are completed to access the public markets.
Both agencies have essentially stopped doing new projects, instead focusing resources on the completion of projects already underway. Wastewater ran out of bond funds in 2004 and the water department’s bond funds are expected to dry up this month, leaving departments to rely on money that would normally be used to cover operations.
The freeze has meant a lack of work for engineers in both departments. Patti Boekamp, director of engineering and capital projects, said 50 of the 190 engineers working on water and wastewater projects have left the city since the end of 2005.
“It’s principally because of the bond funds,” she said.
Other engineers have been reassigned to different departments, but Boekamp said she hopes to hire many of the engineers back when the city regains its access to bond markets.
The city is under an EPA order to replace 45 miles of its sewer piping annually because its 3,000-mile piping system was found to be aging. However, the expects to only be able to replace 30 miles this year and 30 miles in the coming fiscal year, which begins July 1.
The city has a temporary waiver from the EPA until June 30. Scott Tulloch, wastewater director, said he hopes to negotiate another waiver with the EPA or secure $300 million in private financing by that deadline.
Mayor Jerry Sanders announced in January that he would seek rate increases for water and wastewater departments to fund necessary upgrades, but has since pulled back on the idea until an audit of the two departments has been completed.
City Councilwoman Donna Frye, who asked for the audit, has questioned whether the money that came from previous rate increases was properly spent within the two departments.
Sanders spokesman, Fred Sainz, said the mayor will decide on public or private financing after the audit’s completion, which is expected in about 45 days.
The wastewater department has already taken out $152 million in private financing that it has been forced to restructure because of the city’s woes.
In total, its spending on capital projects has dipped to an anticipated $40 million next year, a gradual decrease from nearly $140 million in fiscal year 2004.
Likewise, the state Department of Health Services has issued a compliance order against the city because of deficiencies in its water system. Without upgrades at its three water treatment plants, the city has been told it will be out of compliance with new EPA regulations that are meant to protect against cryptosporidium, a potentially deadly parasite found in fecal matter.
The wastewater department spent more than $100 million in capital projects on fiscal year 2005, $66 million in fiscal year 2006 and is anticipated to spend between $25 million and $30 million in fiscal year 2007.
“At some point they aren’t going to be able to build anything and then not be in compliance with the EPA,” Tomanek, the assistant auditor, said.
The three plants, Alvarado, Otay and Miramar, deliver tap water to more than 1.2 million residents in the city of San Diego and surrounding areas.
The two departments operate off of the money collected directly from users of the systems, and are independent of the city’s day-to-day budget, known as the general fund.
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