In the end, the one that Morro Bay really hurt was itself.
This—according to Ray Stokes, executive director of the Central Coast Water Authority (CCWA)—is the result of years without a water rate increase despite repeated requests for one. And now, after nearly six years of no action, the authority is facing a damaged bond rating from Moody’s Investors Service because of Morro Bay’s inaction.
Namely, Moody’s reaffirmed the authority’s Aa3 rating, but added a negative rating outlook. While that makes a significant impact on the CCWA, which is the purveyor of state water for a number of municipalities on the Central Coast, Stokes believes Morro Bay will feel the bigger hit in its ability to borrow money.
“It could have a major impact,” Stokes told New Times. “I would admit it will have a major impact on Morro Bay’s ability to issue debt.”
Issuing debt will likely soon become a necessity as the city moves forward with such projects as the long-belated and deeply controversial water reclamation facility, a vital component in weaning the city off of state water.
As towns and cities throughout California continue to grapple with water issues in the wake of the most severe drought in recent history, Morro Bay remains in a unique position of being almost entirely dependent on state water. In fact, of all the San Luis Obispo County customers for which the CCWA provides water from the State Water Project, Morro Bay takes in the largest share, according to a recent bond rating from Moody’s.
But it was that very rating that recently drew the ire of the authority as Morro Bay’s inability to adjust water rates caused the investment agency to issue a negative outlook.
“Their coverage obligation continues to go down and down and down, and they’re going to create a problem,” Stokes said of Morro Bay.
Simply put, Moody’s determined that Morro Bay isn’t charging ratepayers enough to fund its debt for the state water project. As a part of its contract with the Central Coast Water Authority, the city agreed—as did every other customer—to maintain a 1.25 percent coverage ratio, essentially a minimum cost recovery to ensure the city won’t slip in payments. Though the city isn’t being accused of shorting the CCWA on debt payments for its state water infrastructure, investors now question whether it will be able to keep up in the future.
“A prolonged drought with limited or no state water deliveries combined with a weakened financial position could diminish both Morro Bay’s ability and willingness to make the contract payments,” Moody’s wrote in a March 7 rating update.
State water supplies are currently at 5 percent of normal, with expectations that they’ll dip back to zero percent, and Morro Bay will have no water delivered in 2015. For now, the city is relying on its reserve water. City finances have also taken a hit, with total general fund revenues falling from about $11.3 million in the 2009-10 fiscal year to about $10.7 million in 2013-14.
The end result is a coverage ratio of .78 percent, the lowest of any municipality that contracts with the CCWA. Buellton has the next lowest coverage ratio, according to Moody’s, but that ratio is 1.22 percent.
In an April 8 letter to Morro Bay, Stokes wrote that the CCWA has pressured the city to adjust its rates since they first dipped below the minimum obligation in the 2008-09 fiscal year. As a result of its repeated failure to keep up revenues, the authority “has the right to initiate and maintain an enforcement action against the city for failing to comply with the rate covenant.” As to what those consequences might be, Stokes couldn’t say, but noted that he had been discussing options with the CCWA attorney.
“In light of the Moody’s Investors Service report, CCWA is currently reviewing its options under the various contracts to determine the appropriate steps to enforce compliance,” Stokes wrote to city officials. “… CCWA strongly encourages the City to take immediate action to meet the coverage obligation.”
Morro Bay receives the largest allocation of state water in San Luis Obispo County, and while expenses have increased over time, revenues brought back from ratepayers have failed to keep up. According to the most recent CCWA Comprehensive Annual Financial Report, Morro Bay’s annual operating expenses increased from $1.05 million in 2005 to $2.02 million in 2012, but net revenues dropped from $2.5 million to $1.6 million over the same time.
And regardless of whether the city is receiving water from the state, it continues to owe its debt service. Without that water, city officials are planning to rely on the city’s desalination plant, which is in the midst of being repermitted. If and when the city switches to desalination for water, it will essentially double its expenses to receive the same amount of water it gets now.
In the past, city officials regularly took actions to update water and sewer rates. However, the 1996 state ballot measure, Proposition 218, which requires a vote from property owners, stymied Morro Bay’s efforts to keep rates up with expenses. According to a city staff report, when Morro Bay last broached the possibility of a rate increase in mid 2008, city officials took no action. It wasn’t until early 2013 that the city pushed forward with rate updates.
On Oct. 22, 2013, the City Council unanimously approved a Request for Proposal on a rate study. City staffers asked to contract the rate study, citing low manpower. That request was finally issued on March 27, and as of press time the city had begun to receive responses from bidders.
Public Services Director/City Engineer Rob Livick said in a written response that any proposed rate structure is still subject to a citizen protest under Proposition 218.
If no majority protest materializes, the city could have a new water rate in place by the end of 2014 that would comply with the requirements of the CCWA, Livick explained.
Senior Staff Writer Colin Rigley can be reached at firstname.lastname@example.org.