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Official: Utility rate hike would prevent bond default

By Staff | Mar 26, 2009

Cape Coral could default on its bonds if a utility rate increase is not approved by city council members, Financial Services Director Mark Mason said Wednesday.
During a press conference to discuss the release of a new utility rate study, Mason said that without the proposed increase in the study, the city’s bond rating could be reduced to “junk” status, which could lead to the city defaulting on its bonds.
“Our advice to the city council is if we don’t do this (raise the rates), the potential is that our bonds are downgraded to junk status and we default on our bonds,” he said.
Under the study, conducted by Burton & Associates, combined water, sewer and irrigation bills will rise from the current average of $81.97 to $103.70 per month in fiscal year 2010. The bills would rise to $157.79 by 2014, a 92.5 percent increase from the current average.
The projected increases in utility rates are the result of the global credit crunch and the city council’s decision in February to stop the utility expansion for potable water in the area north of Pine Island Road.
The council reversed its decision to approve the UEP’s expansion in the north Cape, which would have brought 57,000 more units into the utility system.
Combined with council’s decision to halt the UEP in the Southwest 6/7 section, preventing 6,200 homeowners from hooking into the system, the lack of additional utility customers added to the amount of the rate increase.
A rate plan adopted in 2006 counted on 5,250 units being added each year to the system.
Even accounting for the halting of the UEP, however, the study projects an even greater increase in monthly bills due to a tightening of the credit markets.
A study released in May showed a projected average bill for fiscal year 2009 of $93.82 if the UEP was stopped. The projected bill for 2013 was $122.21.
Mason said earlier rate projections were based on interest rates on bonds for the project being held at about 5 percent over the next three years. Now that rate is expected to be 7 percent.
“The plan we originally proposed used more commercial paper to smooth out the rate increases,” he said.
The tight credit markets are a result of the collapse of the housing bubble, which led to rampant foreclosures across the nation, with the Cape Coral-Fort Myers metro area leading the nation in foreclosure rates in 2008.
Ironically, the foreclosures and harsh financial times were cited by council members who voted against the UEP as a major reason for halting the project.