Readers comments 8-22-14
The answer is simple
Jack Sultze asked a good question about “Old pipes, big problems” in his letter published August 15. Actually, the answer is simple, and obvious to anyone who purchased a home. Golden State Water is required to submit a report on the true condition of the water system before the city of Claremont signs a purchase agreement.
If GSW has been a good steward of the water system, time should prove its report on the water system’s condition was true. If not, GSW would be liable for any problems that occur due to conditions they failed to disclose.
David J. Lull
Do you feel lucky?
Let’s imagine that Golden State Water made the following offer to Claremont: The city has to flip a coin three times. If it comes up heads three times in a row, we can buy the water system; if any one of the flips comes up tails, we immediately lose $5 million and have to call it quits. Should the city take that bet?
The odds of flipping three consecutive heads are one in eight, so there is a 12.5 percent chance of winning the bet—and an 87.5 percent chance of losing. Those are long odds for any wager, but particularly so when the stakes are a huge chunk of the city’s budget.
Perhaps you will be surprised to learn that the city council has already agreed to that bet. Of course, they haven’t literally bet on flipping coins. Rather, the bet is that the city can overcome three major obstacles that stand in the way of a water system takeover.
Just like our metaphorical coin flips, the outcomes of each of these challenges are unpredictable, beyond our power to control, independent of each other and (at best) 50-50 propositions. Most importantly, if the city cannot get past every single one of the obstacles, the takeover attempt will fail.
First, in order to establish our legal right to pursue an eminent domain seizure, the city has to convince a judge that the takeover of our water system is necessary and in the public interest. It does not appear that any city has successfully done this before—or even tried to—and it is not obvious how Claremont can prove that it is necessary to force the sale of a regulated utility that has competently served the community for almost 90 years.
Second, if the judge decides in Claremont’s favor, the case will proceed to a valuation trial in front of a jury. A valuation up to $120 million could be financed by $135 million of revenue bonds, but the city would be forced to abandon the project at a higher price.
It is impossible to know what a jury will do, but an historical analysis of large eminent domain verdicts by the Institute for Legislative Practice shows that, on average, juries split the difference between the two proposed valuations, and add an extra 16 percent. As Claremont’s offer is $55 million, and Golden State’s request will be higher than $200 million, the verdict may easily be $140 million or more.
Third, the city will have to sell revenue bonds to finance the purchase, on terms favorable enough to fit our cost projections. That may prove difficult, as investors typically insist that utilities have experienced management and a track record of approving rate hikes—neither of which will be present in our case. Prospective bondholders will presumably demand higher interest rates to compensate for the increased risk.
If Claremont does lose this bet—which is a very real possibility—we will have nothing to show for it except the obligation to pay millions of dollars for the city’s own legal and consulting expenses, and Golden State’s as well. It is hard to see how this can be done without blowing a big hole in the city’s budget.
None of these obstacles was mentioned in the city’s feasibility study and, as far as I can tell, no member of the council is even aware of their significance. They certainly haven’t made any plans for paying the millions of dollars that the city will owe if the deal falls apart.
“Hoping we get lucky” is not a responsible decision-making strategy. We cannot afford to gamble with Claremont’s future. The city should not pursue this venture one step further unless and until we can eliminate the risk of harm to our finances.
COURIER fails standards test
While it is the prerogative of news organizations to take positions on issues or make endorsements for political office, the Claremont COURIER fails to meet basic journalistic standards in its reporting of the proposed acquisition of the city’s water system, currently operated by Golden State Water Company.
The problem with the newspaper’s broad support of the water system purchase is that it leaves most readers with the impression that buying the water system will be fast, cheap and advantageous to ratepayers. This is not accurate.
The city will have to go to court to win the right to buy the system, a process called condemnation or eminent domain. Legal costs alone will amount to millions of dollars and, as with countless other complicated water rights cases in California, the proceedings may last some years.
Readers should also understand that the case for eminent domain is no slam dunk. The city of Montclair, for example, tried to acquire its water system in the 1980s and failed. Private sector water companies have served communities in California since the 1870s; courts do not always agree that there is an overriding public interest in seizing long-held property assets.
If, however, the city manages to convince the courts that eminent domain is warranted, Golden State has the right to a jury trial to establish the value of its property. One study of several thousand eminent domain awards showed that in most such cases, plaintiffs (here, that would be Golden State) get, on average, about 99 percent of what they estimate their property is worth, and defendants (that would be the city of Claremont) pay at least 50 percent more than their highest estimation of the property value.
If the city currently allows that the system may cost $79 million, then it is likely that a jury would award Golden State something like $118.5 million for the water system. The city of Claremont would need to borrow that amount plus an additional $25 million or so to obtain minimal capital and operating reserves. (This is to assure bondholders of the city’s ability to service its debt and also to provide some padding to keep the water system running if revenues fall or system costs rise suddenly.)
Combine the new total, $143.5 million, with an estimated 4.5 percent annual interest rate on a 30-year bond, and the bill comes to approximately $796 per year in debt service for each of the 11,000 households using water in Claremont. That’s $23,880 for each household over the period of borrowing.
Rates for water—including the costs of pumping and conveyance, pipe and well maintenance, water quality monitoring and treatment, and water purchases from Three Valleys Municipal Water District—would be largely additional.
Buying the water system is likely to take a long time and cost a great deal more than is currently being reported by advocates of the purchase. Claremonters should give a lot of thought as to whether this is the best use of public money.
Most importantly, they should keep in mind that the debt we incur for the water system purchase will constrain our ability to borrow for other things like schools and roads and parks. Finally, they should consider their own household budgets.
Everyone in Claremont uses water, so even if the debt service is folded into water rates, it would function like a huge new tax. Most unfairly, if all water users are assessed equally for that debt, the rates of the smallest and most careful water users would rise by 200 percent or more.
I, along with many other people who live in apartments or condominiums, pay about $26 a month for water. For us, a big new assessment would be a tough expense to add to the high cost of living in southern California.
As the election approaches and voters consider the ballot initiative, I ask the Claremont COURIER to investigate this story carefully and present all the facts. It’s important for people to understand that establishing a public water system is likely to impose higher costs for most people with no additional benefit in domestic water service.
Associate Professor of Politics,
[Editor’s note: As I explained to Heather Williams in an email, she is misguided in her claim that the Claremont COURIER has taken a position or provided an endorsement for or against the city purchasing the water system. We have not. —KD]
Jack Sultze made a thoughtful point in July 25 and August 18 Readers’ Comments: If Claremont takes over the local water system, “The citizens of Claremont would be taking on the liability for future maintenance and replacement of the infrastructure—much of it 100 years old.”
He is right. And taking on that liability would be a reasonable thing to do. The system in La Verne is the same age, and they manage very well with a municipal water utility. When Golden State fixes something, we pay for it—and it costs more because they make a hefty profit.
The water company says they maintain the system well, and why wouldn’t they? We pay for it, they own it, it increases the value, and they profit through depreciation at tax-time. In a recent mailer Golden State told us: “We invested more than $21 million since 2000 in expansion and upgrades to the Claremont water system.” (And since 2000 Claremont residents have paid an estimated $60 million more than we would have under La Verne rates.)
Provision for maintenance and repair is included in the water rates in La Verne, as it will be in Claremont. If we owned the system, a fraction of the millions saved each year would cover emergency repair costs.
Mr. Sultze also asks “If the takeover is such a great idea, why do they (the city) think it is necessary to spend $176,000 to hire a PR firm to sell it to us?”
By law, the city cannot spend money to advocate a “yes” vote on the bond measure, but they can fund a program to help inform the community on the facts. Since Golden State is said to be spending over a million dollars to promote their version of the situation, would it be wise for the city to expect volunteers, such as Claremont FLOW, to take on the entire educational effort?
There is much to consider in this vote. Join in the discussion. Come to a Claremont FLOW coffee, listed at ClaremontFLOW.org, where the focus is on facts. A councilmember is expected to participate at each one.