Economics in favor of Claremont’s buying water system: Guest commentary

Rodney Smith, a former professor of economics at CMC, has been using his credentials as an economist to give credibility to his comments opposing the Claremont’s purchase of its water system.

I am a professor of economics and statistics at Cal State L.A. I have served on the research staff of the President’s Council of Economic Advisors in Washington, D.C., and on the research staff of the Federal Reserve Bank of San Francisco. I disagree completely with Dr. Smith and the statements of the No on W campaign which are mostly not facts, but assertions based on misleading assumptions, misstatements and the decision to ignore inconvenient evidence.

Here are the facts:

Current water bills are too high. Golden State Water Company (GSW) charges Claremont residents far more than the publicly owned agencies in La Verne and Pomona charge their residents.

Why? GSW’s rates are set to:

• Guarantee an 8.8 percent profit above the cost of maintenance, salaries, corporate taxes, and other expenses.

• Pay for providing water to distant cities, increasing rates about 10 percent.

• Compensate for their decreased profits when Claremont residents reduce water usage.

These excessive charges generate more than $8 million per year to GSW.

What would the city have to pay to buy the water system? A court will determine fair market value. GSW sold a somewhat larger system in Arizona for just $34 million in 2011. The city of Claremont hired an independent appraiser who determined the fair market value based on earnings potential was $55 million. GSW paid for an engineering study assuming the maximum possible cost of creating a whole new system. That value was $223 million, four times higher than the objective city study.

But the California Court of Appeal has stated: “where construction cost substantially exceeds a figure which earning will support, it should be given little weight in determining market value.” Once GSW has paid for a legitimate appraisal, the court will decide where the fair market value falls.

How will the city get the funds to buy the water system? It will issue revenue bonds repaid through the water bills. There will be no tax — despite Dr. Smith’s and the GSW supporters’ misrepresentation. The more than $8 million per year currently given to GSW above their costs will allow the city to service $80 million in revenue bonds without raising current rates at all. Measure W allows the city to issue up to $135 million in bonds in the unlikely event that the court sets a value above $80 million. This maximum is a “line of credit,” not an expected cost.

Is there any basis for the assertion that water bills would go up $100 per month? No. Even at $135 million, less than $30 per month would be added to the average water bill. Any surcharge would disappear when the bonds are repaid. No matter who operates the water system, the price of water is sure to go up. The key point is that the rates will go up much faster and to much higher levels under GSW than the city.

What happens in the extremely unlikely event that the court sets a price above $135 million? Measure W sets a credit limit; but if the price set by the court were above $135 million, the city could ask Claremont residents to decide if they were willing to pay that higher price. .

The economics are in our favor. I urge you to vote Yes on Measure W.

Andrew Winnick, Ph.D., of Claremont is a professor of economics and statistics at Cal State Los Angeles. His full analysis is available at www.ClaremontFLOW.org.