Water scarcity could damage municipal bond ratings

By Michael Clark - 16 Jun 2011 14:49:0 GMT
Water scarcity could damage municipal bond ratings

Water scarcity may not only impact public health and the environment, but the local economy as well. Recently, Fitch Ratings, a credit rating firm, issued a report stating it may downgrade Atlanta's and surrounding cities' credit rating should Georgia lose its court battle to continue using Lake Lanier as its primary water source. This could have wide ranging impacts, including delayed capital upgrades and increased taxes and utility rates to account for the higher cost of borrowing money, which could hurt an already struggling local economy.

This isn't the first time Atlanta water bonds have been downgraded. In 2003, Moody's downgraded the city's water and sewer bonds largely due to what the firm viewed as insufficient rate increases to cover costs. The uniqueness of the current situation is that the credit downgrade may be the result of potentially insufficient long term water supply.

Ceres, a sustainability and environmental research group, has been writing about the need to incorporate water risk in the municipal bonds market. The group designed a model to assess municipal water risk and determined that Los Angeles and Atlanta had the highest water risk ratings of major US cities.

Los Angeles is heavily reliant on imported Colorado River water, a risky proposition at best, and Atlanta's water supply has been significantly reduced by a court ordered withdrawal reduction from Lake Lanier, the source of a tri-state (Georgia, Alabama, and Tennessee) water war.

Ceres recommends water utilities improve water risk report, improve demand management and leak prevention programs, and invest in diversification of local water supply. Should utilities fail to heed these recommendations, water scarcity will only become more widespread and, along with it, damaged municipal credit ratings. Many western cities that are highly dependent on Colorado River water are at particular risk. 

Western suppliers that are developing alternative local water supplies are actually seeing a rise in their credit ratings. The Orange County Water District, due in large part to its recently completed groundwater replenishment system, has maintained top credit scores. Other cities would be smart to follow suit.

The issue of water scarcity will likely only become more widespread. Ceres published a report listing the top 10 largest US cities facing the prospect of an insufficient long term water supply; it included Los Angeles, Houston, Orlando, Atlanta, Phoenix, and San Francisco, major economic and cultural centers. New York City may be a future addition to this list, should hydrofracking be permitted within its watershed, potentially putting the city's primary water supply at risk.

The implications of credit downgrades related to water risk in these cities are widespread; infrastructure upgrades may be delayed, and the local economy may suffer. Future water supply planning will require that water utilities consider these implications in cost-benefit analyses. This, in turn, may make currently prohibitively expensive water supply augmentation alternatives, such as desalination, look more attractive. Water utilities should be waiting with baited breath for the outcome of the court battle over Lake Lanier and its impacts on Atlanta's credit.

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