Brown water: The cost of doing nothing will only get higher

Did we jinx NALGW?

A little after midnight, early Tuesday morning October 10th, we posted a “Rant,” which lauded the work of New Albany Lights, Gas and Water (NALGW). We heaped special praise on the improvements in electrical service since Bill Mattox became the local utility’s manager seven years ago.

About eight hours after we posted that item, a squirrel got fried at NALGW’s main electrical substation. Power was knocked out to half the town. We deny all responsibility for that power failure, and hasten to add that NALGW’s quick repairs to major damage Tuesday proves our point: they now recognize problems and fix them quickly.

That Tuesday “Rant” (see link below) also discussed the ugly problem we still have with the dirty-looking, stinking water often supplied to our kitchens, washing machines and bathrooms by NALGW.

Mattox has studied our brown water problem. He talked about it candidly as recently at last week’s meeting of the Board of Aldermen. He said the brown water problem can be solved and we can enjoy clean, clear water every time we open the tap. Fixing it will cost money, a great deal of money.

Finding the money to fix the problem is the responsibility of the mayor and board.

Fixing the brown water problem is unavoidable. As with a leaking roof on your house: you cannot afford not to fix it.  The longer you wait, the more the damage it will do, and the more money it’s going to cost.

We cannot afford for our city leadership to be timid and overly cautious about putting together the money to do the work.

In a conversation with Bill Robertson several months ago, he pointed out that the cost of borrowing large sums of money — as with municipal revenue bonds — is at historical lows. Not only will labor and materials cost more every month we delay, the cost of paying back the borrowed money will inevitably increase. Robertson, for those who may not know him, is by no means a “tax and spend liberal.”  He is a fiscally and politically conservative guy who understands money and how to manage it.

Here’s a quick look at what little I understand about municipal bonds and what it costs to raise money by issuing them. Municipal bonds are sold to investors, who get back their money with interest at agreed rates. The interest rate on bonds is a good deal lower than the rate on bank loans for one simple reason. Under the current federal tax code, investors who buy municipal bonds do not have to pay federal income taxes on the money earned on the bonds. The rates on bonds generally follow the same trends as bank loans.

The rising cost of doing nothing

Nine years ago, in 2008, the lowest interest rate on municipal bonds was a little over six percent. When I first talked about it with Bill Robertson about it a year ago, the municipal bond rate had fallen to 2.8 percent, a historical low. As of this week the lowest rate on bonds is about 3.6 percent — an increase of 29 percent over what the same money would have cost a year ago. With the changes in the tax code that Trump and the congress are discussing, and with the likely increase in the prime rate by the Federal Reserve, it is inevitable that borrowing money will cost more and more with each passing month.

I do not claim to know exactly how much it would cost to fix New Albany’s brown water problem. For purpose of illustrating the point, I arbitrarily picked a number of ten million dollars. A smart person at one of our local banks did the following calculations for us:

Let’s posit that we go to the bond market today for $10-million. We promise the bond holders that we’ll pay them back, with interest, over 20  years.

If we had borrowed the $10-million a year ago at 2.8 percent, our annual payment to amortize the loan would be $653,568. Over the 20 year period, we would pay the bond holders $13,071,360. But we didn’t do it then.

If we were to borrow $10-million today, at the current 3.63 percent rate, it would cost us $703,992 per year to pay it back. Over the 20 years, at today’s best rate, we would pay $14,079,840, principle and interest, to pay off the debt.

If the city fathers procrastinate another year or two and the best bond rate goes to 4.7 percent, we will pay $772,200 per year and a total of $15,444,000 over the 20 years.

You get the point.

Thus, the money would cost us a million dollars more today than it would have a year ago. If the rate goes up as much in the next year as it has in the past year, our  total cost — just for borrowing the money — would be $1.3-million more than it would be today and $2.37-million more than it would have been if we had done the right thing a year ago.

And this illustration doesn’t even address the additional construction costs — labor, materials, professional fees, etc. — that will also be rising with passing time.

It’s both more and less complicated than in this homely illustration. But it is a fact that we cannot afford to continue wringing our hands. Our city leadership must get up the courage to fix the water problem now.

Brown Water, Part I: A long-ignored problem and why it must be fixed