Viewpoint: An analysis of using revenue bonds described by Measure W

Most of you have seen letters and read press releases written by or citing work done by Dr. Rodney Smith, a former professor of economics at CMC, who has been using his credentials to give credibility to his comments opposing the city’s purchase of the water system.

In response, I feel it necessary to establish my own credentials as an economist to lend credibility to my response to Dr. Smith, since I must disagree completely with him and the statements of the No on W campaign.

I am a professor of economics and statistics, still actively teaching both subjects at Cal State Los Angeles. I have served on the research staff of the President’s Council of Economic Advisors in Washington, DC and on the research staff of the Federal Reserve Bank of San Francisco.

I have held tenured positions in economics at three universities, given invited lectures at many universities across the United States and Europe, and have published a book and many articles on a broad range of topics. I was also involved in a successful effort by another city to take over a utility service and then run it effectively and efficiently for many years now as a public utility.

Unlike the work by Dr. Smith that was commissioned and paid for by Golden State, the analysis below is at my own initiative and has not been paid for by anyone. Most of the “facts” opponents cite are not facts, but assertions based on flawed and incorrect analysis using misleading assumptions, misstatements of facts and the decision to ignore concrete evidence that is inconvenient.

Here are the facts:

Your current water bill is too high.

Golden State Water Company (GSW) charges Claremont residents far more than the publicly-owned water agencies in La Verne and Pomona charge their residents. Why? GSW’s rates are set to:

• generate an 8.8 percent profit so this privately-owned firm can pay dividends to its stockholders,

• cover the expenses of providing water to cities far from Claremont, increasing our rates by about 10 percent,

• pay million-dollar salaries to its executives,

• provide a margin to allow for paying corporate taxes,

• provide extra revenue to compensate for decreased profits when Claremont residents reduce water usage.

These excessive charges generate more than $8 million per year to GSW. Additionally, GSW is allowed to set rates to guarantee profits above any level of costs. On the other hand, the city would try to keep costs down, for example, by using more of our own well water and buying less from outside sources.

What would the city have to pay to buy the water system?

A court will determine the fair market value based on estimates submitted by both the city and by GSW.

• The city hired an independent firm to determine the fair market value of GSW’s operations in Claremont and on the basis of earnings potential determined that the value was $55 million.

• GSW hired a firm with the clear goal of setting a value high enough to deter the city from buying its Claremont assets. This firm, using a questionable method (replacement value, including re-doing the design and engineering studies and permitting), reported a value of $223 million, four times higher than the objective study the city obtained.

• But the California Court of Appeal has previously concluded: “where construction cost substantially exceeds a figure which earning will support, it should be given little weight in determining market value” (South Bay Irrigation Dis- trict v. California American Water Com- pany 61C.A 3d 994 [Cal. Rpt. 166].

Moreover, it should be noted that GSW sold a somewhat larger system in Arizona for just $34 million.

A court which is familiar with the various accounting devices used by the parties in these situations will determine the final price. Based on competent legal advice, the city believes that the final price will be at most midway between the city’s $55 million appraisal and the more legitimate appraisal GSW will almost surely be required to submit.

How will the city get the funds to buy the Water System from GSW?

It will issue revenue bonds repaid by the revenue from providing water to Claremont residents. There will be no tax—despite Dr. Smith’s and the GSW supporters’ misrepresentation.

• The more than $8 million in excess revenue currently earned by GSW will allow the city to service more than $80 million in revenue bonds without raising current rates at all.

• Measure W allows the city to issue up to $135 million in bonds; that is, up to $55 million above the $80 million. This limit was set to provide a sort of line of credit to provide for the unlikely event that the court set a value above $80 million.

But Dr. Smith and the campaign against Measure W have falsely claimed that “Government [presumably they mean city] officials have consistently raised their estimated cost to purchase the water system. First it was $54 mil- lion, then $55 million, then $80 million, and now $135 million.” This is yet an- other total misrepresentation.

Is there any basis for the assertion that water bills would go up $100 per month?

If the cost exceeds $80 million, a surcharge would be added to your water bill. But even if the city had to pay the full $135 million, this would be less than $30 per month to the average water bill—not the more than $100 per month that Dr. Smith has indicated, which has no basis in fact. Any surcharge, if one were needed, would last for the duration of the bonds, and then be removed.

Regardless of whether the city or GSW operates the water system in future years, the price of water is sure to go up. The key point is that rates will go up much faster and to much higher levels under GSW than the city. Any exceptional repair costs will have to be passed on by either the city or GSW, but the city would not be adding an 8.8 percent profit margin to such costs.

What happens in the extremely unlikely event that the court sets a price above $135 million?

The $135 million in Measure W is a credit limit the city feels will be far more than required. But if the price set by the court were to be more than $135 million, the city could come back to the residents of Claremont to decide if they were willing to pay that higher price. The residents would be informed about the potential impact on their water rates before having to make the decision about whether to go forward.

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