Republished from today's San Diego Union Tribune. click here to see the full article with sidebars and related stories.

U-T SPECIAL REPORT
City sags under weight of water, sewer demands

By Matthew T. Hall
and Mike Lee
STAFF WRITERS

February 21, 2007.

San Diego's water and sewer improvement plans have been in flux for years because of borrowing difficulties tied to the city's financial troubles, skyrocketing building costs, emergency repairs to a crumbling network of pipes, and state and federal mandates.

City officials compounded the problems with their historic reluctance to raise fees, poor infrastructure planning, unfair billing and inadequate oversight, according to an analysis of hundreds of pages of public records requested by The San Diego Union-Tribune. Along the way, they have shelved hundreds of millions of dollars of work once considered crucial while starting many new projects.

The erratic changes will contribute to a cycle of annual rate increases likely to continue for at least a decade.

On Monday, the City Council will consider Sanders' proposal to boost the typical monthly residential utility bill by about $27, or 35 percent, over the next four years. The rate increase, along with one for businesses, would help finance the escalating costs of operations and an expensive lineup of water and sewer projects.

The council's meeting is likely to draw watchdog and business groups that question whether the city underestimated the cost of its latest plan and whether it can manage the massive maintenance and upgrade needs.

At stake is an infrastructure crucial to people's daily lives: San Diegans use about 210 million gallons of water daily for everything from irrigation to washing machines, then expect the sewer system to carry wastewater away without fouling the ocean and beaches.

Sanders and his top aides insist they have a manageable and effective blueprint that will help restore the public's trust in city government.

The mayor points to state and federal regulators' growing confidence in San Diego's efforts to upgrade its water and sewer systems. He promises annual audits of the water and sewer departments, a revamped utility oversight board and a reserve fund to protect any savings the departments generate.

"I now believe the systems are being well-run and the ratepayer funds are being used wisely," Sanders said. "I also believe that we must make absolutely certain that this will always be the case."

A rising tide of costs

Cities nationwide are struggling to maintain water and sewer systems as the cost of upkeep escalates and expanding populations put more pressure on aging infrastructures.

San Diego has tried for years to meet increasingly stringent state and federal requirements for its substandard utility systems. Since 1997, the City Council has raised sewer rates nine times and water rates eight, excluding increases passed on from wholesale water suppliers.

During the same time, the city's documents show, San Diego officials ignored some of their spending safeguards.

City administrators diverted more than $1 million from the water and sewer departments to cover municipal operating costs. They also disregarded a City Council requirement that the water department's staffing remain at 2003 levels through this year. Instead, the department added 59 employees, increasing the total to 914.

Going forward, it is unlikely that San Diego has earmarked enough money for its water and sewer expenses.

For starters, Sanders' rate proposal doesn't account for employee pay raises past 2008 or the expected increases in wholesale water prices beyond this year. More significantly, it doesn't address the potential $1 billion bill for upgrading the city's wastewater treatment plant in Point Loma.

In addition, San Diego's newest construction plans show that several proposed projects won't be done until 2015 or later, well past when the city's managers can reliably predict costs. City officials admit they're being conservative in estimating that construction costs will creep up 4 percent a year.

Last month, City Attorney Michael Aguirre cautioned that putting a large number of projects out to bid in 2008 "could result in contractors becoming overwhelmed with work."

He wrote in a report: "If only 2-3 bidders respond to publicly bid contracts, the bid results can be 10 to 25% over estimates."

City officials have a "track record of not accurately estimating . . . costs," said Lani Lutar, head of the San Diego County Taxpayers Association.

"It's a big question mark in people's minds as to whether . . . they are actually going to complete the projects on that list," said Craig Benedetto, spokesman for the San Diego Building Owners and Managers Association.

In Linda Vista, resident Susan Matheson said she doesn't mind paying her fair share for water services. But she worries that San Diego's rates, already high in comparison with other big cities, might increase in perpetuity because of poor planning.

Matheson recently contacted the Union-Tribune about wanting to formally protest the city's proposed rate boost. She said she threw away a city flier on the proposal without realizing it contained a protest form she could return to City Hall to try to prevent the increase.

"San Diego just seems to be a town that has its head in the sand," she said.

A knotty problem

San Diego's sewer and water problems are so complex that even the most basic details about what needs fixing are muddy.
In 1997, California health officials said San Diego had 160 miles of crumbling cast-iron water pipes. San Diego's estimate at the time was 180 miles. Now, city officials say they've replaced 90 miles of cast-iron pipes since 1999 and have 195 miles to go.

But San Diego leaders are sure on this point: The city must raise rates now or face worse breakdowns and fines from regulators. Alexis Strauss, regional director of water programs for the U.S. Environmental Protection Agency, said it's important to take action.

"EPA has kind of patiently waited through the process of the city coming to terms with its financial situation," she said. "It's time to get on to business."

Frustrated by the frequency and size of San Diego's sewer spills in recent years, the agency is working with environmentalists to shore up San Diego's wastewater system through a pending legal settlement that would set federal mandates through 2013.

The state Department of Health Services has issued a separate set of demands for the water department and threatens to withhold substantial grant money from San Diego if it can't offer matching funds.

Combined, the state and federal agencies require roughly $2 billion of work.

That's about how much money the water and sewer departments have borrowed since 1993 for capital improvements, many of them mandated by the government or court orders.

Some of that money hasn't yielded the expected results.

In 1997 and 2002, the city opened water reclamation plants that together cost more than $330 million. Today, these facilities are operating at 12 percent of capacity.

City officials also commissioned a $900,000 study of how to improve use of recycled water, but the issue has languished because Sanders opposed the study's top recommendation - an effort to turn wastewater into drinking water.

Several other projects were halted after the city spent hundreds of thousands of dollars on planning and engineering.

In all, San Diego officials deferred or canceled some $336 million of water projects and about $113 million of sewer projects that were supposed to be funded the last time the council approved multiyear rate increases.

Awash in debt

Managing funds has never been so vital in San Diego.
The city expects to borrow so much money to ramp up construction that its annual payments for utility debts would reach $205 million in four years - a rise of nearly $80 million. By 2011, $1 out of every $6 in the water and sewer departments' costs would go toward paying down debt.

More borrowing would be needed to meet the departments' other mandates. In addition, a growing portion of their operating budgets is dedicated to pension and retiree health benefits that the city ignored for years.

From 1987 to 1997, tax-averse city councils didn't raise water rates to cover rising construction costs. The result is a huge backlog of projects that some wonder whether San Diego can handle effectively.

The skepticism is centered on the contention that city officials haven't been upfront with the public.

Five years ago, for example, Larry Gardner, then the water department's director, issued a letter to ratepayers filled with glowing language about his department's "virtually unmatched" record.

"We're constantly remembering the past in order that we can repeat it," he wrote.

He didn't mention that San Diego reported 166 water-main breaks that year. He also didn't disclose that state regulators had ordered extensive upgrades to the city's water infrastructure.

More recently, Sanders has used water-main breaks to promote a rate increase without mentioning that they have dropped by about a third in the past five fiscal years.

Sanders also has tried to generate support for higher rates by touting a fairer cost breakdown between homeowners and businesses, along with the idea that conservation would lower bills.

Despite Sanders' assertions, only single-family homeowners who use 400 cubic feet of water a month would get a rate reduction in 2008. The typical San Diego home uses 3.5 times that amount of water.

While most homeowners will pay higher bills next year and beyond, a city consultant said a range of restaurants, supermarkets, laundry services and shopping centers will see their rates go down.

Consumer advocate Michael Shames called it "a bailout for business."

The city has tentatively settled a lawsuit Shames filed to fix a rate imbalance on the sewer side, but he contends that Sanders' current water-rate proposal still unfairly burdens residential customers.

Some businesses have benefited from rate changes for years.

In 1996, water and sewer hookup fees for developers were slashed from $11,000 to $5,000. That led directly to cutbacks in city sewer construction projects and the loss of $55 million in water hookup charges over five years.

Today, the fees are still far below where they were a decade ago. Sanders' proposal would boost them less than $1,000 - to about $7,100.
Councilwoman Toni Atkins noted the inequities between residents and big business in 2002 but supported a water rate increase anyway.

"It unfairly dings working families and smaller struggling businesses in a way that is not as equitable as I would like to see," she said at the time.

Boosting oversight

Sanders has pledged not to repeat the problems of the past.
To that end, he detailed on Thursday his proposal for a new advisory board: the Independent Rates Oversight Committee, which he said will include specialists in accounting, engineering and science, along with representatives of each ratepayer class.

Separately, Shames is trying to set up a nonprofit, independent organization to oversee San Diego's sewer and water agencies.

The Public Utilities Advisory Commission now oversees the departments. The all-volunteer commission, established when the City Council approved the last multiyear rate increase, has no regulatory or enforcement powers.

Yet at the commission's inception, Councilman Brian Maienschein said the panel's scrutiny would comfort a skeptical public.

"I don't want to sit up here four years from now and be in the same exact boat we're in today," he said at the time.

In a city now famous for fiscal mismanagement, the commission's results may not be exactly what Maienschein envisioned.

"What we are weak on is the financial side," said commission Chairman Chuck Spinks, an engineer. "The current board doesn't have anyone that I would consider a financial or audit expert."

When Sanders' advisory board convenes, it will likely examine $70 million in state grants that San Diego could get if it increases its rates.

The water department will decide how to divvy up the money. Such handouts are widely welcomed - if they really get spent on improving the city's water infrastructure.

"There are plenty of places to use that money effectively," said Jim Peugh, an environmentalist and veteran member of the current utility advisory commission. "I don't want to see it frittered away."

Coming Sunday: Why San Diego has some of the nation's highest water and sewer rates.

Addendum: UCAN urges you to protest the rate hike.

This story was originally published in the San Diego Union Tribune on February 21, 2007 To view the story in its orginal context with photographs, side bars, and related articles, please click here.