City water system fix down the drain?

Atlanta officials fear the city’s $4 billion water and sewer system overhaul could collapse because the city’s crushing debt and already low credit rating threaten the city’s ability to borrow money in ever-tightening credit markets.

The city hopes Monday to issue $500 million to $700 million in new bonds for the program, with much of the money to refund old debt that must be repaid before interest rates or other factors send payments skyrocketing.

“We’ve got some considerable issues facing us,” city CFO Jim Glass said Friday.

The planned issuance comes as the City Council is mulling Thursday’s release of an audit of the city’s Watershed Management Department that questions the way the city has set rates and notes the department’s huge debt.

Council members said during a budget retreat Friday that they were concerned the audit —- and even council debate about it —- could further undermine the city’s tenuous financial position.

Members have scheduled a work session on the audit for Wednesday but said Friday that they should be mindful not to say anything that credit rating agencies might use against the city. Glass said he’s due to present the city’s finances to the credit rating agencies in two weeks.

“We just have to be really careful,” said Councilman Howard Shook, chairman of the city’s finance committee. “If the manner in which we discuss it alarms them, we are already one foot in the junk-bond grave.”

Leslie Ward, the city’s internal auditor, said the audit wasn’t planned to undermine the proposed bond issue.

The city carries a bond rating for the sewer utility one step above junk-bond status. One step down, city officials fear, could raise interest rates so high the city would be unable to borrow.

The $4 billion program was initially envisioned with the state and federal governments paying at least half the cost. About $3 billion of the work is required by two federal consent decrees that force Atlanta to repair its aging pipes to protect waterways.

Instead, virtually the entire program —- including $2.65 billion already borrowed —- is now expected to be paid for by borrowing and repaid by a sales tax and rate increases on the system’s 140,000 customer accounts.

Glass said he feels reasonably confident, as long as the city maintains its bond rating, that the city will be able to refund $480 million in short-term debt to be considered by the council on Monday.

Some of that money is crucial because it is needed to pay for projects the city has already let but has no money to fund due to cancellation of a $600 million line of credit.

However, Atlanta also wants up to $223 million in money for new projects that Glass said Friday he’s not sure anyone will allow Atlanta to borrow.

Beyond that, Atlanta’s water/sewer program has an additional $900 million in variable rate debt that Glass said must be transferred in about 90 days into fixed-rate financing or it, too, will become prohibitively expensive.

For years, Atlanta officials have complained the program is too costly and the 2014 deadline to finish it too short. They have unsuccessfully sought a deadline of 20 to 30 years to do the work.

When Mayor Shirley Franklin took office, the question was whether the council would muster the nerve to pass the fee increases needed to pay for the program or whether the federal judge would be forced to appoint a special master to oversee it.

Atlanta council members have proved a willingness to pass rate increases with two four-year programs. Now, though, the city may be unable to borrow enough money.

If Atlanta can’t borrow for the program, it could be salvaged by raising water rates substantially to create enough cash for a pay-as-you go program.

The audit, though, raises the question whether the city’s rates —- which Franklin contends are the highest for any major city —- have already surpassed the ability of residents to pay them.