The Atlanta Journal-Constitution: 12/12/03 ]

Sewer bonds take new hit

Atlanta Journal-Constitution

A third bond rating agency downgraded Atlanta's water and sewer bonds Thursday.

Standard & Poor's Ratings Service dropped Atlanta one notch, from A to A-. That's on par with what Fitch Ratings did two weeks ago but not as bad as the assessment given by Moody's Investors Services, which downgraded the bonds two notches last week.

A statement from Standard & Poor's attributed the downgrading of the Atlanta Water & Wastewater Revenue Bonds in part to the failure of the City Council and Mayor Shirley Franklin to reach an accord on water and sewer rate increases. The rates must go up to pay for work mandated by two federal court agreements.

"The negative outlook reflects the need to resolve the political stalemate," the statement said. It went on to say that the bonds could be downgraded again if the city fails to approve adequate rate increases "in an expedient manner."

Atlanta agreed in federal court in 1998 and 1999 to fix its sewers so they'll stop dumping raw sewage into the Chattahoochee and other rivers.

Franklin backed a $3.2 billion overhaul. On Tuesday, she vetoed water and sewer rate increases adopted by City Council, saying they would generate less revenue than was needed.

The downgrading comes at a sensitive time. The water and sewer system plans to borrow $1.4 billion during the next two years for construction. The downgradings mean the city will have to pay more interest when it borrows.

And the city's Finance Department has calculated that ratepayers will pay an additional $2.5 million a year for the next 40 years to pay for insurance that would make those lower-rated bonds more attractive to investors.

Most of that damage was done before Standard & Poor's downgraded the city Thursday. And a vice president of a company that manages investments in the city's water and sewer bonds said that latest assessment probably won't have much effect.

"I don't think there's necessarily a cumulative impact," said Jonathan Chirunga, a vice president at T. Rowe Price in Baltimore. "If people have been paying attention, the expectation is already set."

T. Rowe Price manages the Georgia Tax-Free Bond Fund, and Chirunga said the fund owns some Atlanta water and sewer bonds. He said he has confidence in Franklin, her management team and her proposal to fix the sewers.

"It seems like the city's administration has the right approach to solving its future needs. And to the extent that they and the City Council can come up with something that really works, that in the end is going to determine how the market reacts," Chirunga said.

However, he said, "If it continues to drag out, the market may lose some of its confidence."

Standard & Poor's gave several other reasons for downgrading the bonds -- the weakened regional economy, the cost of resuming control of water service after eliminating the contract with private provider United Water, the cost of the looming overhaul and the mounting cost of existing debt. Annual debt service on bonds sold previously will rise from $69.6 million this year to $93.2 million next year, a 34 percent increase.

The company said it will maintain a "negative outlook" on Atlanta's water and sewer system bonds because of the impasse over sewer rate increases.