Since March, there have been rumblings inside the City of Houston’s PW&E department that a large shortfall was pending in the Combined Utility System’s funding. The public first learned about the city’s overall budget problems in Bill King’s oped, which we discussed here. The CUS, which is supposed to be independent of the city’s general fund is a separate issue altogether, though certain funding tricks used during the White era make their appearance once again. Specifically: back-loaded borrowing in which the city pays only a little up front, but then faces a balloon note down the road. According to Lee McGuire’s article for KHOU:

…nearly $1 billion in credit must be renegotiated early next year, and debt payments have spiked $50 million above earlier projections. All told, the system currently faces a $100 million cash shortfall – a significant problem for a department that took in $332 million in water bills last year.

“Re-negotiate” is CPA-speak for “re-finance” or “obtain debt relief, rather than default.” Simply put, the city’s rate-payers are about to face the music for years of living off borrowed money. How bad is it? The city has been making ordinary expenditures, such as yearly water meter purchases, from the capital funds instead of operating expenses. In household terms, they’ve borrowed money to pay for the groceries. And while this specific example represents only a tiny portion of the total, it’s one of the ways that total has been accumulated.

Today’s article was based on item #13 on today’s agenda, a proposal to hire consultants McKinsey & Co. to look for inefficiencies in the Public Works Department. This item was tagged and will return on next week’s agenda. Once again, the mayor is proposing to spend a large amount of funds for a questionable purpose. Unfortunately, KHOU’s article contains a few key errors, and some misleading statements. This may simply be the result of deadline pressure, or it may be that not all of the information provided to the press was…. shall we say, totally accurate.

First: the $100 million figure is for the combined (water and sewer) utility system, but the $322 million in revenue is water only. CUS revenue is in the range of $600-700 million per year. It’s not technically wrong, but it’s an apples and oranges comparison that misleads the reader.

Second: “White recommended hiring Dallas-based McKinsey, a private consulting firm…” Wrong. McKinsey is based in London, with its US headquarters in Washington D.C., not Dallas. In short, they’re Beltway Bandits, being hired at the cost of $1 million to tell the department how to work more efficiently. The merits of their claims and ability to do so will have to wait on a future article, but color me highly skeptical.

Third: KHOU says:

When the city restructured the water/sewer system in 2004, city leaders set up a system that would raise rates gradually each year through 2010, when $1 billion worth of debt would come due. Instead, successive city councils held the water rates steady until 2009, when they increased the average monthly bill for Houston residents by about $2.

This is not even close to being correct. Rates were boosted in 2004, but the the yearly increase was not implemented until 2005. Since then, there have been increases in May of 2005, 2006, 2007, 2008, and 2009. The first four equaled the rate of inflation; the last equaled inflation plus the population growth. This was based on Propositions One and Two a few years ago, limiting revenue growth. How Bill White is going to finagle such a huge increase past those limits is a mystery, but he’s only rarely been stopped before.

Fourth: Note that the article glosses over a proposed rate hike. (Again, not exactly an error, unless of omission). Another consultant is currently working with PW&E to determine its costs and work out a new revenue model that will fix problems with the current system. The entire rate structure will probably be revised, but sources in the department indicate that the average increases will be on the order of 100% over the next ten years, catapulting Houston into the top ranks for high utility rates. The majority of this is due to the debt structure, but some of it is because prior in-house cost calculations omitted key costs.

Fifth and final: This one has to be laid specifically at Bill White’s feet. It’s misleading, grandstanding, and worse, it’s utterly unwarranted:

White said the McKinsey study will also help the city trace another mystery: hundreds of millions of gallons of treated drinking water vanish from the city’s aging underground pipes every year, never reaching paying customers. “Why do we produce more water than is consumed?” White asked. “There is a lot of lost inventory within this system. We’d better find out where it goes.”

How mysterious can LEAKS due to lack of maintenance be? This is normal for any water system, anywhere — the key is managing and minimizing the losses. We need to replace at least 3% of our infrastructure per year to remain close to norm; in reality all the infrastructure built during the hurly-burly growth years of the 1960s and 1970s is wearing out. The city has sewer lines that haven’t been replaced in a century. Nothing’s left but the hole the line used to run through. Water lines are in excess of 70 years old in some neighborhoods. Despite that, PW&E is running barely 1% over its targeted loss level, and the losses are down by a third from 15 years ago.

Here’s a question that someone should ask: If Bill White has been mayor for six years, why is everything suddenly going to pieces now? Why are multiple consultants needed only now? Where was the urgency six years ago when we were piling up this debt?