County Taxpayers Could Be Forced to Bail Out Sudden Valley Sewer Line

Fred Miller has been a Whatcom County neighbor for 24 years. He drinks lots of water, pays lots of taxes, and earns his skepticism from years of active concern for Lake Whatcom.

Editor’s Note: The following was sent to the members of Whatcom County and Bellingham City Councils on March 21, 2002.

I am writing about a serious potential financial risk escalating from the $5 million in loans that Whatcom County Water District 10 is taking out on your behalf and that ultimately might force local taxpayers to bail out a poorly designed project.

If the project fails to meet its loan obligations, not only could the county (or possibly the city) have to absorb the $5+ million debt burden of the project, but the possible bankruptcy of Water District 10 would also become the county’s (or city’s) responsibility, as stated by district officials.

Effectively, Whatcom County has to “co-sign” by default the risky loans taken out by the district. These loans have been secured for the construction of the second Sudden Valley sewer line, running from Sudden Valley to Geneva along Lake Louise Road.

It is analogous to unwittingly allowing a family member to go on a spending spree without a clear path for re-paying the loan, and potentially inheriting a wider range of problems when the bankruptcy judge rules.

There are several reasons why it will be worthwhile to perform a substantial analysis of the financial risks we face with Water District 10’s sewer interceptor project. The project has recently unfolded to reveal funding mechanisms and assumptions that place the city and county directly in harm’s way financially if the project fails to meet its anticipated goals.

At the recent joint councils’ meeting, Water District 10 announced their funding scheme for the project. Only by forcing a significant volume of watershed growth—at least 2,000 and potentially over 3,000 new sewer hookups—will the district be able to collect enough revenue to meet its loan obligations for the project.

It had not been well communicated until that evening that the district plans to feed 95 percent of its cash flow for the loans with revenues from new hookups. Only five percent of the cost of the project will be borne by the ratepayers whose sewer system causes the sewage overflows that this project was purported to fix.

There are several alarming trends that command attention:

For over a decade, Water District 10 has been responding to the persistent vocal pressure of a few developers and lot owners who have been affected by the current moratorium on hookups. With their detention tank built, the district may have already drawn off the decade’s pent-up demand for hookups.

So how many hookups are truly needed? For both Sudden Valley and Geneva, the district’s own projections (see their 2001 Water System Comprehensive Plan Update) forecast only an additional 281 homes by 2006, and 1131 homes by 2020. (See sidebar)

Where are the 2,000-3,000 property owners needed to sign up by this December for the Local Improvement District (LID)? What if Water District 10’s comprehensive plan numbers are more accurate? Those projections are less than 100 per year.

The point is that the district may have grossly overestimated the demand for sewer hookups with this LID. If that is the case, where is the cash flow for paying the loans on the project?

The district announced last week that the project has started. They also said that property owners would have until December to opt in or out of the yet-to-be-formed LID at the core of the $5 million project.

That’s nine months of cost-incurring, debt-obligating, don’t-look-back, rapid backhoe, and fill work that will deliver twice the infrastructure problems currently faced by Sudden Valley (please see The Bellingham Herald’s coverage of roads, traffic, water quality risks, etc. on March 18, 2002).

Regardless of the other costs and despite the fact that those costs will easily mount to 20 times the cost of this pipeline, the central problem remains: Water District 10 has jumped into this LID project with both feet before it knows how many participants are willing to pay for it.

While we’re at it, let’s take out a loan to send an internationally manned mission to Mars, launch the rocket, and then later try to count in the countries who will help us pay for it. The district’s $5 million dollar rocket may or may not get enough ratepayers to achieve its goal, the pipeline, which by the way is NOT going to resolve sewage overflows in the lake. Like its other projects ostensibly intended to “fix” the sewage overflows, once again the district has pulled the trigger without seeing the target.

In this LID, it is not a matter of “how low will they go?” If the project doesn’t attract thousands of eager builders, the game becomes “how high will they go.” Think of it this way. In a stunning display of planning accuracy, the district’s engineer said that there are potentially between 3,000 and 6,000 lots that could be served by this project.

Later, there were an optimal 2,800 to 3,000 lots that would be likely to opt in to the fudgy LID. Later still, it was stated that at least 2,000 hookups were needed. Don’t we deserve a little better forecasting or accuracy? Your fourth grade math teacher wants to know what the denominator is for this LID numerator, and a range from 2,000 to 3,000 is a bit too vague to solve the problem.

Do the math. Five million dollars divided by 2,000 lots is a hookup fee of $2,500. But even 2,000 lot owners are not likely to rush in at once (see above, “what if they threw a party and nobody came?”) So divide by 1,000 and each lot owner would have to pay $5,000. Divide by the district’s previous five-year projection, 281 homes, and each owner has to pay almost $18,000. And so on.

Asking a lot owner to opt in without knowing how many comrades will be joining in is more elusive than trading stock options in a bear market. Many of these lots are barely worth $10,000. Adding a highly variable hookup cost to the overall cost of developing those lots will create a self-defeating snowballing effect.

A few anxious lot owners may opt in right away, but the “wise and prudent” owners will want to know what the true hookup costs will be. The fewer that sign up, the higher the perceived costs will be, which in turn will scare more people away, driving the costs even higher.

How high will the hookup costs be allowed to go before the first few anxious developers decide to cancel their commitment? To avoid the total collapse they have already publicly warned about, how forthcoming will the district be about the real details that will affect LID decisions?

Water District 10 could probably qualify for a Guinness World Record for lawsuits and squabbles over sewer hookups. The well-publicized dispute blocking the pipeline is only one of the many lawsuits and legal scraps in which the district has found itself embroiled.

For decades, lot owners have fought over who comes first, who gets to build, how many permits a developer can get versus an individual lot owner, whose needs are more important than others, which area gets hookups that might take away capacity from others, and so on, ad nauseum.

What makes us think that the squabbling will suddenly cease? An issue as complex as this LID with its variable costs for opting in, rules for opting out, and the mounting pressure of a bankruptcy-forcing debt is sure to fuel a free-for-all. And the wrangling will keep people out of the party, blur the target, and raise the price of poker for all.

These trends are cause for concern. By the district’s own admissions that…

1. It is funding 95 percent of this project on new growth in the watershed,

2. It doesn’t know how many will participate in the LID,

3. It doesn’t know the cost per hookup,

4. It has already launched the project, and

5. It will go bankrupt if the loans can’t be repaid...

…we have effectively co-signed costly loans for a drunken spending spree of development in our watershed.

Where is the certainty, the assurance that this very risky project will not land square in the laps of Whatcom County and the City of Bellingham as a cost-overrun project that requires a huge bailout? When the pipe is already built and the hookups have been promised, the liabilities to frustrated property owners alone will mount up exponentially faster than the unpaid interest on the loans to get the project started.

Next add the cost of the roads those property owners will demand, the schools, the improvements to Lakeway Drive, and so on. And we haven’t even begun talking about the cost of protecting drinking water quality. And we haven’t added the cost of, once and for all, fixing the district’s collector system that will still leak raw sewage after this pipeline is built.

This pipeline is easily a $100 million problem. All to benefit somewhere less than 2,800 lots - or was that 2,000, or 6,000, or 3,000, or 281, or 1131?

I’d be less concerned if Water District 10 were able to effectively resolve all the questions and risks identified in this letter. I am sure they will try, just as I am sure you, as our elected officials, must ask them to provide solid answers. And since the district has been deep in this problem for many years, there should certainly be ready answers to many of these questions.

But shouldn’t we put a hold on the project until both the county and the city are sure and fully satisfied that they understand the financial risks involved? Can’t we pause long enough to fully explore all the financial scenarios and responsibilities of all parties?

Please ask your staff to do whatever they can to temporarily halt this project and clearly spell out for you and the public what the financial risks for this project will be for the city, county, and the taxpaying public. Those of us who may end up footing the bill for this risky endeavor would appreciate answers to the concerns raised in this letter. Thank you.