MSD raises rates as cost estimates soar; ‘surety bond’ helps fill budget hole

A giant boring machine is carving out a tunnel under downtown Louisville in a $200 million project to keep sewage-tainted water out of the Ohio River and Beargrass Creek. | Courtesy of MSD

Louisville’s MSD is raising sewer rates again and will use a so-called surety bond to plug a $60 million budget hole as forecast costs for federally mandated projects have surged.

Officials said the $205 million capital budget for fiscal 2020 would allow it to continue work on schedule to meet the terms of a federal consent decree to resolve alleged Clean Water Act violations. This work is aimed at nearly eliminating the combined flow of wastewater and storm runoff into local waterways by 2024.

The estimated cost for these projects has soared over the past decade by more than a third, to $1.15 billion from an original $850 million, and is well up from a revised estimate of around $940 million. An Insider Louisville report in November on MSD saying the cost forecast had risen to $980 million prompted a deeper review and the new, higher estimate, officials said.

Higher bills starting Aug. 1

On Tuesday, the MSD board approved a 6.9% rate increase for the coming fiscal year — the most permitted without Metro Council’s permission. For now, the utility said it wouldn’t ask for an even larger hike.

On Aug. 1, the MSD portion of a typical homeowner’s bimonthly water bill, including wastewater and stormwater drainage, will go up by $8.30, to $128.34. For areas such as Jeffersontown and St. Matthews that handle their own drainage, the typical charge every two months will rise to $107.18.

After failing for three years to persuade Metro Council to allow rate increases as high as 20%, MSD officials said it would pause this effort for the time being. Metro Louisville officials are working out cuts to the city’s own budget to address a $25 million shortfall.

“With the discussions that are ongoing now in terms of budgets and cuts, we just feel like the timing is not right to have that conversation,” said Wes Sydnor, MSD’s director of intergovernmental relations. “When the time is right, we will start having those (rate-hike) discussions again.”

Ballooning cost estimates

MSD officials said several factors led to the jump in its estimates for consent-decree costs: The improving economy over the past decade and competition from other big projects like the Ohio River bridges jacked up the costs of labor and raw materials such as steel and concrete.

Also, the cost of several projects — such as the Logan Street Basin  — rose for work to meet requests for design changes and additional amenities, to expand the projects or to deal with unexpected technical challenges, MSD Chief of Operations Brian Bingham said.

“When we were first in some of these early projects, we were in an economic downturn and we got very good prices,” he said. “As the economy started to recover, the prices have escalated.”

MSD said building a $200 million tunnel under downtown Louisville instead of some basins shouldn’t cost any more, in the end, than the original plan. Not only did the cost estimate for those basins rise, but the underground tunnel work will eliminate the need for expensive and disruptive above-ground work, such as closing off sections of Main Street, officials said.

Big fixes remain

Officials from MSD and Metro Louisville government cut the ribbon on the new Clifton Heights storage basin on May 22. | Photo by Mark R. Long

Outside of the consent-decree work, MSD said it would be able to replace some aging pumps and other assets, and complete some drainage improvements and other work that had been deferred.

Officials warned, however, that the approved budget still falls short of what’s required to make long-term fixes to prevent neighborhood flooding and pipe cave-ins, and to fully beef up the 29-mile-long Ohio River flood-control system. MSD’s Critical Repair & Reinvestment Plan envisages spending $4.3 billion over 20 years on sewer, drainage and flood-control projects.

“We’re not doing the majority of this work yet,” Bingham said. “We’re going in and fixing the little stuff that makes a difference to people, but we’re not going in and fixing the big stuff.”

Some of this big stuff would include an overhaul of the sewer under Broadway, said Sydnor, noting there had been an isolated cave-in on that 150-year-old brick line in each of the past three years. A more complete overhaul of the line under Main Street that ruptured last year, disrupting traffic for months, is also on the long-term wish list.

“We’re seeing more and more collapses. We have a very aging system and it’s something we need to address in the community,” said Metro Councilman Bill Hollander (D-9), who has supported MSD’s efforts to raise additional revenue, during last week’s ribbon cutting at the new Clifton Heights Basin.

New to MSD: a surety bond

A “surety bond” is a kind of insurance policy guaranteeing that debt service will be paid even if revenue falls short. It allows MSD to move $75 million — $60 million for fiscal 2020, the rest for the following year — out of a restricted $151 million “rainy day fund” for use in servicing debt in case of a revenue shortfall.

This move, unlike adding to the agency’s $2.2 billion in debt, shouldn’t affect MSD’s credit-rating outlook, Sydnor said.

Edward McGlade, an S&P Global analyst in New York, last month affirmed a AA rating with a stable outlook on MSD’s debt. He said surety bonds were commonly used by municipalities and raised no concerns.

“It doesn’t affect the credit at all,” McGlade said. “Freeing up that cash … is probably in the long run better than just having it sit in an account.”