Debt is the great local government crisis of our time. Massive unfunded pension liabilities. Local agencies taking on debt because they lack the cash reserves to fund long-postponed infrastructure repairs or other capital expenditures. It’s a rare local government not in this fix.
Most think it is wise to pay as you go and avoid indebtedness, especially deep debt. Here in Orange County, there are two special districts which serve roughly the same population but with starkly different philosophies of spending, saving and debt. What’s more, the spendthrift district is trying to take over the thrifty one.
The special districts in question are the Mesa Water District and the Costa Mesa Sanitary District. Mesa Water is, pardon the pun, under water in terms of debt. Its total debt is just over $31 million. $6.7 million of which is unfunded pension liability. That unfunded pension liability amount will more than double to more than $13 million in 30 years unless Mesa takes action to address it.
To its credit, Mesa Water recently announced some positive steps in that direction. It re-financed of debt at a lower rate, and claims it will be paid off in $10 years. It also touts creation of a “pension trust” it will use to pay-off its unfunded pension liability. On the other hand, just setting aside money in a pension trust does not reduce their pension liability. The only way to do that is actually paying PERS.
The Mesa Water press release fails to disclose key information such as amount of debt being re-financed, explain what the pension trust is or how long it will take to pay off the unfunded pension liability. Transparency is still an issue for Mesa Water.
Still, it represents progress, but it doesn’t wash away the reality that Mesa Water is simultaneously taking on a large debt load to fund long-neglected infrastructure replacement and repair.
Like most local agencies, Mesa Water for many years postponed investing in the unavoidable repair or replacement of pipelines, pumping stations and associated infrastructure. Procrastination increases the ultimate price tag. In Mesa Water’s case, procrastination leads to taking on nearly $25 million in long-term debt to fund the necessary infrastructure repairs.
Prudent homeowners pay for repairs when the need presents itself and sock money away in an emergency fund they can use for major repairs, such as replacing the roof. Live-for-the-day homeowners who wait until the pipes burst are forced to pay for it with their credit cards.
Those years of procrastination have forced Mesa Water plans to put $200 million on its credit card over the next 10 years to fund those repairs. Because they will be debt-financed, the infrastructure improvements will cost far more than if the Mesa Water had been paying out-of-pocket over the years. Ultimately, the price tag is passed on to Mesa Water ratepayers. As Mesa Water Director Jim Fisler himself stated in 2013, “The ratepayer’s wallet is going to be hit very hard.”
The Costa Mesa Sanitary District, by contrast, operates like the prudent homeowner. As CMSD President Mike Scheafer noted in an article last year, “In the last five years, CMSD has spent more than $7 million replacing pipeline, pumps, valves, control panels and related equipment. CMSD is video recording the entire wastewater system to evaluate its condition, and when a pipe deficiency is identified, CMSD repairs or replaces it immediately.”
Last year, the CMSD Board of Directors voted to spend $3.2 million to upgrade a pump station and fix a pressurized pipeline. It also approved plans to spend another $10 million during the next five years on infrastructure improvements. Between 2010 and 2020, CMSD will have spent $18.1 million replacing wastewater infrastructure.
The district has also managed to twice lower its trash collection rates due to the accumulation of excess solid waste reserve funds. The CMSD is able to accomplish this without incurring debt.
In fact, the district is one of the few public agencies in the state that is debt-free in terms of infrastructure and pension obligations. While Mesa Water was taking the first steps toward paying off its unfunded pension liability, CMSD cut a check for $320,417 to CalPERS to completely wipe out its pension liability.
Mesa Water cites a consultant study to claim that consolidation with CMSD would generate savings of $15.6 million, which it could distribute to every ratepayer as a rebate. [CMSD, naturally, disputes that claim and the validity of the study] This alleged savings comes entirely from CMSD wastewater cash reserves.
A debtor special district proposes merging with a debt-free, fiscally-prudent special district in order to write a check to each of its constituents. It brings to mind Margaret Thatcher’s observation that “the problem with socialism is eventually you run out of other people’s money.”
We’re all familiar with the Aesop’s fable in which the happy-go-lucky grasshopper, having failed to store food for the winter, begs the industrious ants to share the food they’ve spent their summer storing. Imagine the grasshopper proposed “consolidating” with the ants and then distributing the stores to his grasshopper friends who had relied on him to put away food for the winter. You’d have a fable resembling the reality of Mesa Water’s attempted merger with the CMSD.
In the meantime, Mesa Water takes on hundreds of millions in debt to fund long-ignored infrastructure revitalization, while regularly, quietly giving General Manager Paul Schoenberger $10,000 “incentive” payments. You could say its borrowing from Peter to pay Paul (Schoneberger).