The City of St. Petersburg continues to make improvements to its public utility system, and the cost of those improvements will show up in increased water bill rates at least for the next few years, according to two credit rating agencies.
Moody’s Investors Service and Fitch Ratings speculated on future rate hikes in separate reports issued this month, as the city prepares to issue nearly $94 million in bonds for the public utility system.
The bond sale, scheduled for the week of Oct. 16, includes two series of debt offerings, one for upgrades to the public utility system and the other to pay off older bonds.
The first series of bonds will raise $53.7 million for upgrades to water reclamation facilities, the wastewater collection system and lift stations, the water treatment plant and distribution system, the reclaimed water distribution system, computer resource and support facilities and the stormwater system.
Parts of the public utility system have been in service since 1950 and are reaching the end of their useful life, the bond document said. Heavy rains in 2015 and 2016 led to unauthorized wastewater discharges, and the city now is operating under two consent orders with the Florida Department of Environment Protection.
The deadline for completing projects outlined in the consent orders is 2022. A significant portion of the projects already has been finished, and the city is on track to complete all projects by the 2022 deadline, the Fitch report said.
The bond proceeds will fund about 60 to 65 percent of the capital improvements planned in the current fiscal year for the water resources department, said Tom Greene, assistant city administrator. Those improvement include projects mandated under the consent orders as well as other projects, Greene said.
Starting in 2020, the city will have about $9 million from the Penny for Pinellas tax that will be allocated to address water resources, specifically underground infrastructure. The water resource department also uses cash to fund projects.
“The bonds are a component of our capital improvement program but not the entirety of that,” Greene said.
The other series of bonds will raise $39.9 million to pay off debt issued in 2010. Those older bonds were issued under President Barak Obama’s Build America program that was designed to create jobs and stimulate the economy by ensuring that local governments could raise much-needed capital during the recession.
“The 2010 bonds were issued on a taxable basis, but we got a subsidy from the federal government that effectively reduced our interest cost to what it would be if we borrowed on a tax-exempt basis,” Greene said. “In this current market environment we can refinance that on a tax-exempt basis at a much better yield, or interest rate, so we will be able to save about $7 million in gross debt service payments.”
Both Moody’s and Fitch assigned investment grade ratings with a stable outlook to the bonds.
“We’re a highly rated entity. That’s important for a couple of reasons,” Greene said. “The higher rating you have, the lower your cost of capital, so when we go to the capital markets at Aa2 from Moody’s and AA from Fitch, the investors sharpen their pencils and typically give us a nice attractive rate. That helps us keep down the rates to ratepayers.”
The St. Petersburg combined monthly public utility bills are high compared to Fitch’s affordability threshold of 2 percent of median household income, the Fitch report said.
“However, the largest rate adjustments have been implemented and future rate increases are more moderate in scope. Rates for the water and sewer system are anticipated to decline to about 3% annually by fiscal 2023 and will continue to be adjusted annually by about 3% to 3.5% through at least 2029,” Fitch wrote.
The Moody’s report was less specific about rates. Moody’s said the stable outlook assigned to the bonds “reflects the system’s healthy financial position along with management’s commitment to annual rate increases that can meet escalating debt service payments,” as well as adequate supply and capacity and the sizable population served by the system.
The public utility system provides services to the city of St. Petersburg and contracts with surrounding jurisdictions. As of July, the system had an estimated 94,324 water and 83,099 sewer accounts, Moody’s said.