Mayor Rahm Emanuel’s 2011 decision to double water and sewer rates over a four-year period–followed by annual rate hikes to keep pace with inflation — was a bitter pill to swallow for 5.3 million city and suburban customers. But it paid dividends on Wall Street Tuesday.
Standard & Poor’s raised the rating — from A-plus to AA-minus — on a new round of borrowing that Emanuel intends to use to upgrade pumping stations and water purification plants, install water meters and replace aging water mains.
The AA-minus rating applies to Chicago’s “second lien wastewater secured debt.” The rating attached to Chicago’s “outstanding senior lien wastewater debt” was also upgraded — from AA- to AA.
Moody’s Investors has dropped Chicago’s general obligation bond rating by four notches in eight months — to just three levels above junk status — because of the city’s $20 billion pension crisis.
But water and sewer debt is in a different and healthier category. It’s backed by Emanuel’s decision to raise water rates by 25 percent in 2012 and by 15 percent a year in 2013, 2014 and 2015.
The revised rating stems from those rate hikes and from the “large and diverse” customer base that increased by 28 percent—to 5.3 million residents “almost evenly” divided between the city and 125 surrounding suburbs — between 1980 and 2000.
“The upgraded rating . . . is evidence that Chicago’s efforts are paying off with respect to increased service coverage and better financial oversight of our utilities,” Emanuel was quoted as saying in a news release.
Last week, Moody’s affirmed its A3 rating on Chicago’s $400 million second lien water revenue bonds and affirmed the A2 and A3 ratings on outstanding senior lien and second lien water revenue debt.
Moody’s noted that a Chicago pension reform bill tailor-made to save the Municipal Employees and Laborers pension funds will force the city’s “water enterprise” to nearly double its pension contribution in 2016 — to $25 million.
While that represents just 3 percent of operating revenue, it’s not without risk, Moody’s said.
“Should annual investment returns fall short of the 7.5 percent assumed by the plans, city and enterprise contributions could increase relative to projections. To address higher contribution requirements, the city could face difficult decisions related to further increases in taxes and utility rates or reductions in operating expenditures and capital investments,” Moody’s wrote.
Moody’s further noted that Chicago’s retail water distribution system remains “52 percent unmetered in terms of customer accounts, which hinders the ability to fully assess leakage.” That’s down from 66 percent unmetered a decade ago.
Last spring, the City Council gave Emanuel the go-ahead to borrow more than $1 billion to bankroll water and sewer projects, despite aldermanic concerns about Chicago’s plummeting bond rating and mountain of debt.
At the time, Chief Financial Officer Lois Scott argued that there was a dramatic difference between general obligation bonds backed by property taxes and the $575 million in “Water Revenue” bonds and the $475 million in “Wastewater Transmission Revenue” bonds authorized by the City Council’s Finance Committee.
Scott noted that Fitch, yet another Wall Street rating agency, had applauded the city for the “wisdom” of a 2011 rate hike that allows the city to improve its aging infrastructure while still keeping water and sewer rates “competitive relative to other large utilities.”
“When Fitch looked at our water and sewer bonds they see it as an improving credit…They’re impressed that 60 percent is being financed through debt and 40 percent through pay-as-you-go financing…They made a particular note that the way we are going about the financing is a marked departure from past practice, which is to use too much debt,” Scott said then.