Restoring Jackson’s water bond rating will be among top priorities for city officials when it comes to spending proceeds from the Siemens settlement.
Earlier this year, Mayor Chokwe Antar Lumumba announced the city had settled its suit with Siemens Industry for nearly $90 million.
City officials discussed plans for the money at two recent public forums where they said a portion of the funds ($33.2 million) would be used to bring the city into compliance with its water/sewer bond covenants, while another $12.6 million would be used to repay the city’s general fund.
In recent years, revenues from the general fund have been used to prop up the water/sewer enterprise fund, which has been struggling to remain solvent as a result of the Siemens work.
Another portion of the settlement proceeds, $3.5 million, would be used to make emergency repairs to the sewer system. Meanwhile, attorneys representing the city in the Siemens case are slated to receive around $29.9 million.
Top priority, though, will be bringing Jackson into compliance with its water/sewer bond covenants – a move that the mayor said will help restore Jackson’s credit rating and enable the city to take out additional water bonds in the future.
“The reason meeting our bond covenants is so important is so we can use our credit to do the work that has been neglected,” Lumumba said.
Bond covenants are the rules that the city must follow as part of an agreement to borrow funds.
Jackson has approximately $239 million in water bond debt.
Under the agreements for those bonds, the city must set aside a certain amount of money each month to ensure that annual bond payments can be made.
The city has been unable to do that, though, due to decreased collections in the water and sewer billing office.
To come into compliance, Jackson will set aside $33.2 million, which would cover this year’s annual debt service and establish a contingency account to cover water and sewer bond payments in the future, said Chief Executive Officer Robert Blaine.
Failure to comply would likely have a negative impact on Jackson’s credit rating, which could prohibit the city from issuing future bonds or refinancing existing debt for lower interest rates.
Coming into compliance this year is especially important, as the city faces re-evaluation from Moody’s Investors Services.
The credit rating agency reviews the city’s water bond debt every two years. In 2018, the agency downgraded Jackson’s water bond debt from Baa2 to Baa3..
Moody’s cited instability with the water/sewer enterprise fund as a reason for the downgrade, as well as the fact that Jackson was out of compliance with its bond covenants.
According to the agency’s web site, ratings with a Ba are “judged to have speculative elements and are subject to substantial credit risk.”
Moody’s added that the city’s bond rating could be downgraded further if Jackson failed to return to compliance.
Bond compliance aside, remaining settlement funds (about $11 million) will essentially be used to clean up problems related to the Siemens contract.
The city brought on Siemens Industry in 2012 to completely overhaul its water billing system.
Work included replacing the city’s existing analog water meters with new electronic ones, creating and installing new billing software at the water/sewer business office, and installing a network of repeaters and transmitters to carry meter data to the business office.
The contract was approved under then-Mayor Harvey Johnson. Johnson sold the contract as being revenue neutral, meaning savings associated with the work would help pay for the contract over time.
Those promises were never fulfilled. Instead, the city has been struggling to keep its water/sewer system afloat, due to complications from the work.
Jackson filed suit against the firm and its subcontractors last year, seeking $450 million in damages. Siemens settled the suit earlier this year, a victory for the Lumumba administration.
The city rejected Siemens’ initial offers, both of which were extremely small in light of the billing complications. “The first settlement was they will fix the system and not seek the $1 million they felt the city owed them,” he said. “The second offer was $5 million.”
The final offer of approximately $90 million was accepted earlier this year. Lumumba said had the city not taken the deal, it could have been tied up in litigation for years.
“It could be decades before the city sees a penny, and we could not afford that as a city,” he said. “It’s very rare to settle for the demanded amount.”
Even with the funds, Jackson is facing what the mayor said was a “perfect storm of problems” related to the Siemens work.
At any given time, a fifth of the city’s 52,000 water customers are still not receiving statements.
For many customers who do receive bills, they receive “flat-rate” statements, because the city does not have accurate meter readings for those addresses.
The system is supposed to work like this: meters will read water usage and transmit it to the billing office through a system of repeaters and transmitters throughout the city.
What that data is not available, the billing software generates an estimated bill based on previous months’ usage. After three estimated bills, the system quits sending out statements, causing accounts to get “stranded.”
When customers don’t receive bills, they are less likely to make payments. And when customers don’t pay, water revenues drop. Currently, water collections are down by about $20 million annually, Lumumba said.
To help offset those losses, the city implemented flat-rate billing late last year. Under that program, “stranded” customers will receive bills for approximately $63 a month, what they would pay if they used 100 gallons of water a day.
“If they use less than that, we’re going to give them a credit. If they use more, we’re going to call it even,” Public Works Director Robert Miller said previously.
And earlier this year, the city announced that it would be bringing back meter readers, an expense the Siemens contract was supposed to eliminate.
Lumumba said Jackson would be contracting out the service on a temporary basis and would be paying for the work with portions of a $7 million emergency loan issued previously.
Meanwhile, the city is also speaking with companies interested in repairing or replacing the Siemens system. Talks were ongoing last week. However, Lumumba said it was too early to offer any details.