Money Down the Sewer

Doubling water rates to fix crumbling underground infrastructure isn't popular with Chicagoans. But it's a lot more responsible than the approach that got Jefferson County into trouble.
by | January 4, 2012

It's certainly understandable that Chicagoans aren't crazy about Mayor Rahm Emanuel's plan to double the city's water rates over the next five years. But ratepayers don't have to look very far to find an example of a far worse outcome that might result from not raising the rates.

In Chicago, a 25 percent water-rate increase went into effect on Jan. 1, to be followed by 15 percent increases in each of the next three years. The plan comes in the aftermath of 15, 15 and 14 percent hikes in each of the previous three years. The new increases are part of Emanuel's 10-year infrastructure plan, which is designed to correct years of neglect.

Chicago is crisscrossed by 4,300 miles of water mains, which are currently replaced at the rate of 29 miles per year. That averages out to each main being replaced every 148 years.

Chicago's cold winters and hot summers mean a lot of expanding and contracting, which leads to cracked pipes. Mineral deposits also build up inside the pipes, which often results in a 6-inch main having just 3 inches of capacity.

Emanuel's plan would boost the rate of replacement to almost 90 miles per year. At a cost of $2.2 million per mile, it's easy to see why the rate hike is needed.

It's tough medicine in a down economy, but the plan could create 1,800 jobs. And after opening a number of city services to competition, Emanuel surely doesn't mind putting forth a proposal that meets with the approval of the city's public-employee unions.

Regardless of the politics, investing now can yield benefits for literally centuries to come. The use of 8-inch rather than 6-inch pipes will accommodate future development, and the manufacturer says technological advances mean the pipes will last 300 years.

Chicago is hardly alone in its struggle with aging water infrastructure. At a hearing last month, a U.S. Senate committee was told that one-quarter of all the nation's drinking water leaks from pipes before reaching faucets, and that it would take $335 billion to fix water systems and $300 billion to repair sewers.

Organizations like the American Society of Civil Engineers admittedly have a dog in this hunt. Nonetheless, when they release a study finding that failure to make the needed investment would result in disruptions in water service and contamination from sewage bacteria, it's hard not to take notice.

If Chicago ratepayers wonder if the investment they're making is worth it from a purely fiscal perspective, they need only look 660 miles to the south, where the saga of Jefferson County, Ala.'s sewer funding-induced bankruptcy is a reminder that there's no such thing as a free lunch.

In 1996, Jefferson County was required to expand and renovate its sewer system to meet federal clean-water standards. Instead of raising rates or coming up with another responsible way to pay for the project, county commissioners fell back on what is too often government's default position—they borrowed the money and made paying it back their successors' problem. And following what has become an all-too-predictable script, they topped it off by layering on a maze of derivatives designed to protect the county from interest-rate increases.

Like so many others, this house of cards collapsed during the September 2008 credit crisis. The county was forced to pay back the $3.14 billion it owes for the sewer project faster than anticipated, and revenues pledged to back the debt were insufficient.

Despite a court-appointed receiver's recommendation that sewer rates increase by at least 25 percent for the next three years, state lawmakers refused last September to back a deal that included rate hikes, even though they would have been much smaller—up to 8.2 percent for three years.

In November, the county filed the largest municipal bankruptcy in American history, with over $4.2 billion in debts ($3.14 billion in sewer debt plus more than $1 billion in school construction and other debts). According to an Alabama state senator, the legal bills alone will cost county taxpayers $1 million per month. In terms of layoffs, higher costs and service cuts, the pain associated with bankruptcy will be far worse than the rate hike that might have averted it.

Sometimes government efficiency means sucking it up and paying the bills. In Jefferson County's case, the rule of thumb that interest doubles the price of anything you pay for with borrowed money proved all too true. Elected officials are too often willing to pay the higher price—as long as the bill comes due on somebody else's watch.

Government efficiency is always served by decision making that is in taxpayers' long-term interest. Kudos to Rahm Emanuel for making a tough call whose political benefits will likely accrue to his successors.

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