Funds for Cobb water system diverted

Cobb County officials have spent tens of millions of their water system’s money for other uses despite restrictions on how it could be spent, an Atlanta Journal-Constitution investigation has found.

As Cobb has increasingly relied on the water system to fund other expenses, the county has repeatedly raised water rates for customers while lowering property taxes. Water rates have jumped by about 60 percent since the mid-1990s.

One expert said the practice has been called “a hidden tax.”

As a result of the financial maneuvering, the water system’s pristine AAA bond rating could be in jeopardy, potentially driving up the cost the system pays in interest when it borrows money.

In response to the AJC’s questions, Cobb County Commission Chairman Tim Lee has called for an audit of the county’s use of water system money.

The shifting of water money affects everyone who pays a water and sewer bill. Cobb has 178,000 customer accounts, representing about 650,000 people.

The issue dates back to the 1990s, when Cobb faced a series of costly expenses: a troubled compost facility, the closure of several landfills and an aging system of underground stormwater pipes.

The county needed money to pay those bills, and the water system was bringing in a $30 million to $40 million yearly surplus.

The trouble is, the county had issued bonds in previous years that prohibited the county from using water system money for anything but water and sewer services.

Despite those restrictions, the county moved both the solid waste and stormwater management divisions into the water system. That theoretically gave officials access to the water system’s money to help pay the bills.

Since those moves, at least $158 million in water system money has gone toward those expenses — $130.7 million for stormwater management and $27.3 million for solid waste, according to data obtained by the AJC.

The solid waste division was merged on paper but was never truly consolidated with the water system, according to the water system’s former director, Robert Brice. And though the departments were purportedly merged, county documents consistently refer to the $27.3 million for solid waste as “loans” from the water system.

Cobb paid back part of that “debt” with the water system’s own money, then sidestepped bond restrictions by absolving itself of paying back nearly $18 million of the $27 million loan.

Bond experts say most of the county’s actions ran afoul of bond restrictions that were agreed to by the county.

“I find it disturbing what seems to have transpired,” said Emory University finance professor J.B. Kurish, a municipal bonds expert. “It kind of astounds me, quite honestly.”

Most of the questionable activity occurred from the mid-1990s to the early 2000s, while Bill Byrne headed the county commission and during current County Manager David Hankerson’s tenure.

Reached for comment by phone, Byrne denied any wrongdoing. Hankerson declined an interview request.

Brice, who headed Cobb’s water system from 1994 to 2007, said the funding moves were inappropriate. Water and sewer customers were expecting to pay only for their water and the treatment of used water — “not for purposes other than the customers that we served,” Brice said.

Bond terms look violated

What Cobb could do with the water system’s money was constrained by the fact that it had issued bonds earlier. When Cobb did that, it had to make promises to investors in the bonds.

Municipal bonds are issued by governments to borrow large amounts for a specific reason. When revenue bonds are issued, the municipality agrees to a legal contract called the bond resolution. That’s a written set of stipulations on how the government will handle its finances and repay those who invest in the bonds.

The bond resolution is the investors’ “collateral,” said Georgia State University professor Bart Hildreth, a municipal bond expert.

Three municipal bond experts who reviewed Cobb’s bond resolutions at the AJC’s request, including Kurish and Hildreth, said consolidating the solid waste and stormwater management divisions deviated from the water system’s bond restrictions.

Their reasoning: The bond documents narrowly define Cobb’s water system as including only water and sewer services — not solid waste and stormwater. And the water system’s money couldn’t be spent on expenses not related to the system.

There is another issue: Solid waste was never actually consolidated into the water system, Brice said.

“On paper, it appeared that solid waste was a part of the water system,” Brice said. But, the two departments did not commingle their finances or staff and continued to operate out of different buildings.

The only connection between the two departments, Brice said, was the water system “loans” to solid waste that occurred between 1998 and 2003.

Two of the bond experts said the loans ran counter to what was allowed in the bond restrictions.

The bond documents state that the water system’s money is “supposed to be dedicated toward the [water] system,” Kurish said.

Hildreth said he did not think that a loan would violate the bond restrictions as long as it was paid back. What did deviate from the restrictions, he said, was the county commission’s decision in April 2009 to absolve itself of paying back the majority of the loan debt.

It’s difficult to say whether Cobb’s financial decisions will come back to haunt the county.

Most of the bonds that were outstanding at the time have since been paid off, so the county is in no real danger of defaulting on them, experts say.

But the three main bond rating agencies — whose ratings determine how much interest Cobb pays when it borrows money — could look into the issues and lower the water system’s AAA rating, experts say. That could increase the county’s interest rate and thereby the cost of borrowing to the water system, though the experts said it would be difficult to say how much.

The three agencies that rate municipal bonds— Moody’s, Standard & Poor’s and Fitch — either declined to comment or did not respond to inquiries for this story.

“One of the things that rating agencies consider in their ratings is not simply the financial flows, but they also engage in an evaluation of the quality of management,” Kurish said. “And it would seem to me that there has been in the past — in the very least — some questions about proper disclosure and proper management of finances in Cobb County.”

‘Borrowing from yourself’

When the loans began, the solid waste division was sinking. It needed money to pay for the closing of several landfills and operating the compost facility, which had cost the county tens of millions of dollars, county documents show.

Chairman Byrne told Brice the county needed to “solve the problem” of solid waste’s finances, according to Brice. Hankerson and Virgil Moon, finance director at the time, later approached Brice to work out the details, Brice said. Moon, now the director of Cobb’s Support Services Agency, declined an interview request.

Brice said Byrne assured him that the loans would be paid back with 5 percent interest. But by the time Byrne left office in 2002, none of the money had been returned.

The loans continued until 2003 when Byrne’s successor as chairman, Sam Olens, says he stopped the practice. “I was aghast at what had occurred,” Olens said.

Cobb did not put the terms of the loan in writing, nor did it have a repayment plan, Brice said. The AJC requested both from Cobb, which produced nothing.

Olens said that until he took over as chairman there was never any intent to pay back the debt.

Byrne, asked whether the loan was going to be paid back, did not answer directly.

“You’re borrowing money from yourself,” Byrne said. “Where would the money come from to pay back the water system?”

In 2005, the loan money started getting paid back. But Cobb made the repayments with the water system’s own money.

County policy allowed it to transfer a certain percentage of water system money to the county’s general fund each year. So, beginning in 2005, after that money was moved to the general fund, the county began returning some of it to the water system.

Cobb paid back $9.4 million of the debt, without interest, before writing off the remaining $17.9 million last year.

Olens says that two of the three bond rating agencies told Cobb to write off the loans.

“The credit rating agencies went up to me and said, ‘Why are you doing that? Wipe it off. Just don’t do it again,’ ” Olens said.

Asked why he supported writing off the loan debt, now-Chairman Lee said: “Because that was what was recommended to me by staff.”

The use of water system money for other purposes has taken a toll on the water system — and its customers.

“Any time you have anticipated income that you don’t get, you have to make it up somewhere else,” Brice said. “We made it up through rate [increases].”