Water and Sewer Upgrade Costs -- $274,000,000?

[Stan Austin]

I presume the Finance Director and Director of Public Works have a plan to deal with this??????

[Mark Kindt]

Mr. Austin is old enough to remember this fellow:

bankrupted-clipart-monopoly-1.jpg (18.12 KiB) Viewed 4522 times

But, on a more serious note:

As we continue to collect documents, like the current U.S. EPA Administrative Orders against the City of Lakewood, we will also examine the public fund accounting standards that will govern how these liabilities are commonly reported. This may take some time. Like I said before, this can get really "nerdy".

Citizens that have experience with the implementation of sewer improvements should feel free to email me their thoughts or comments at mkindt@kindt.com. All comments will be kept confidential.

I am very interested in the issue of homeowner costs both in financial terms and nuisance headaches.

[Mark Kindt]

May 2006 Long Term Control Plan -- Average Cost of $273,000,000

The City of Lakewood has been facing hundreds of millions of dollars in sewer infrastructure costs for the past 12 years.

The average of the high and low numbers from the May 2006 Long Term Control Plan is about $273,000,000.

2007_SewerProject_LTCP_Executive_Summary 10.jpg (136.97 KiB) Viewed 4472 times

[Stan Austin]

In a reverse regurgitation model one could call this a Flint

[Mark Kindt]

CORRECTION

In this Deck post, I have previously asserted that the 2018 Budget document was inadequate in its financial disclosures related to future sewer upgrade costs.

I have given that document a more careful examination and from that review it is clear to me that meaningful financial disclosures have been made with respect to future upgrade costs.

I appreciate your attention to this correction.

[Mark Kindt]

Current Estimated Improvement Costs Are $34,325,000

The 2018 Budget for the City of Lakewood identifies future costs in the total amount of $34,325,000 between the years 2019 and 2022 for Water, Sewer, Wastewater Treatment Plant Improvements.

There are several unknowns:

1. What, if any, additional capital improvements will be required by the Ohio EPA / U.S. EPA for the City's 2019 NPDES Permit.

2. If additional capital improvements are required, by what year will such improvements have to be completed.

3. What are the terms of the proposed federal consent order related to these issues.

4. What numbers will the sewer rate study commission by the City of Lakewood reveal.

I will leave it there for the time being.

[Stan Austin]

Mr. Kindt-- while being cognizant of the monetary figures and various estimates thereof; it still can't be disputed that a frivolous forfeiture of a significant asset limits the options available.

[Mark Kindt]

Mr. Kindt-- while being cognizant of the monetary figures and various estimates thereof; it still can't be disputed that a frivolous forfeiture of a significant asset limits the options available.

Mr. Austin is correct.

Two examples:

1. A hospital building sitting on 5.7 acres listed with a value of over $20,000,000 on the county tax rolls will be given to a selected developer for $1.00.

2. Distributions of approximately $32,000,000 from liquidated hospital proceeds will be distributed to a new non-profit foundation under the Master Agreement.

Right off the cuff, we can see approximately $52,000,000 in value directed to private parties; public funds that could have been used to pay for government mandated sewer infrastructure improvements, rather than the rate increase that will be requested from city council.

[Mark Kindt]

Why Should City Financial Reporting Be "Off" By More Than $50,000,000?

As you can see, the 5-year plan (2018-2022) for Water, Sewer, Wastewater Treatment Plan Improvements has an estimated total budget of $51,043,500.

This budget was prepared November 15, 2017.

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[Mark Kindt]

The 2017 CAFR is Silent on $51 Million in Impending Costs

Six months after the 2017 City Budget was released, the City issued its 2017 Comprehensive Annual Financial Report (2017 CAFR).

The 2017 CAFR is dead silent on these known impending sewer and wastewater upgrade costs of $51 million dollars. There is simply no mention of the City's obligation to bear these costs under its 2014 NPDES Permit.

--Not even a footnote.

As you can see below, the 2017 CAFR is paragraph-after-paragraph effusive about the future plans to develop the former hospital site.

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[Mark Kindt]

And Now We Understand

And, now we can understand that the number of $274,000,000 in future costs contained in the Mayor's October 1, 2018 letter to city council is largely unrelated to the current planning of the city administration in compliance with its 2014 NPDES Permit requirements.

However, the budgeted obligation is still substantial -- $51,043,500.

Future monthly rate increases could be steep.

[Mark Kindt]

Here's the Closest Footnote

The 2017 CAFR is dead silent on these known impending sewer and wastewater upgrade costs of $51 million dollars. There is simply no mention of the City's obligation to bear these costs under its 2014 NPDES Permit.

--Not even a footnote. Here is the closest relevant footnote:

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[Mark Kindt]

To be fair to the City, I do want to emphasize the point that there is a great deal of detailed reporting on the income and the expenditures associated with the water, sewer, and wastewater functions; as well as reporting on the repayment of bonds and loans.

However, I want to continue to make my point about "off-book" assets and liabilities in terms of clarity and transparency in light of rulings by the U.S. Securities and Exchange Commission.

1. The 2017 CAFR describes how the former hospital site will be used for commercial redevelopment, but it is unclear to an educated reader whether the asset value of the hospital building or its real estate was carried on the books of the City of Lakewood or the Lakewood Hospital Association in 2017. Its asset value is described (see above), but where it appears in the 2017 CAFR is obscure. It could be there or it could still have been on the LHA or CCF books in 2017. (I can't tell and I've been out of law school for about 40 years.)

2. The 2017 CAFR is simply not transparent with respect to the long-term planning costs associated with the City's mandatory obligations under its 2014 NPDES Permit to complete major infrastructure improvements.

These observations are relevant to those who hold or will in the future purchase the municipal bond indebtedness of the City of Lakewood.

While the 2017 CAFR may be functionally accurate and fully comply with government accounting standards (GASB), as a document in the municipal bond market it has a variability of about $56M to $71M across a range of seemingly undisclosed assets and liabilities.

$56M equals $5M (hospital) and $51M (wastewater treatment, etc.) (City value on hospital)

$71M equals $20M (hospital) and $51M (wastewater treatment, etc.) (County value on hospital)

Because of the way the Observation Deck allows the posting of document images, this is a very unique way to review government documents comparatively and interleave commentary.

[Mark Kindt]

The Mysteries of Public Fund Accounting, Part I

So...how can a city, like Lakewood, have current mandates from other government agencies amounting to tens of millions if not hundreds of millions of dollars for sewer improvements and not have to report them as current liabilities?

Guess What? -- They don't have to!

But for GASB Statement No. 49, most municipalities in America would be technically bankrupt due to unfunded U.S. EPA wastewater requirements.

Here is a key page from the official summary of GASB Statement No. 49. (I have also attached the full summary as a PDF below)

Summary of GASB Statement No. 49 1.jpg (255.01 KiB) Viewed 4204 times

[Mark Kindt]

GASB -- The Phantom Bail-Out

Each city administration since 2006 has known that the costs of achieving compliance with U.S. EPA wastewater management goals under the City's sequence of 5-year NPDES permits came with infrastructure improvement costs that could take compliance costs "north" of $300,000,000. (!!!)

Public fund accounting under GASB permits a city to, in some meaningful sense, disregard these permit compliance costs (pollution control costs) by only having to recognize the capital expenditures as they occur at a future date, not necessarily when they accrue at permit renewal or some other regulatory event.

Public fund accounting under GASB for environmental remediation does just the opposite. An estimated liability has be booked when it is triggered (accrued), not be left for the future.

For pollution control costs, it seems that a city can have a significant known, but unfunded liability, more or less, sitting off the books.

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