Water rates in San Diego County won’t go up next year as sharply as some feared — but the county water authority’s efforts to keep rates low are becoming a significant threat to its credit rating.
A sharply divided water authority board voted Thursday to reduce next year’s rate increase from 18 percent to 14 percent, which eases pressure on local water agencies to raise rates on their customers.
But the possibility of shrinking the increase, which the board first discussed last month, prompted Moody’s Ratings to take the unusual step of asking the authority for an in-depth review of its finances.
The June 28 request from Moody’s came just two weeks after concerns about the water authority’s finances prompted S&P Global to shift its outlook for the authority from stable to negative.
Water authority officials said they will make a comprehensive financial presentation, including a five-year forecast, to Moody’s in August.
Because it seems inevitable they will get similar requests from S&P Global and Fitch Ratings, officials said they have scheduled additional presentations with those credit rating agencies in September.
If one or more of the big three agencies lowers the authority’s credit rating, officials said, it could cost ratepayers somewhere between $30 million and $95 million in higher interest rates and debt financing costs over the next five to 10 years.
The authority’s finances are in bad shape for several reasons.
Water authority officials say the fundamental problem is that they borrowed money to build and maintain a significantly larger water storage and delivery system than they now need.
Other problems include high costs for desalination at a Carlsbad plant the authority operates and the recent departure of water agencies serving Fallbrook and Rainbow, which opted to get water from nearby Riverside County instead.
And two wet winters in a row have sharply reduced water sales, costing the authority millions in projected revenue.
Board members recognize the problems. Each of the three rate-increase packages they considered Thursday call for cumulative hikes over the next three years totaling about 40 percent.
Thursday’s dispute was about whether the board should raise rates during the first year — calendar year 2025 — by 14 percent, 15.4 percent or 16.9 percent.
A coalition led by the city of San Diego lobbied hard for 14 percent, which was eventually approved with yes votes from 17 board members at the meeting and no votes from 11.
Critics of the move stressed that the 14 percent option violated several of the authority’s financial policies related to reserves and cash flow, while the other two options did not. They said that could affect the credit rating.
The financial structure of the 14 percent option was then altered to avoid violating any authority financial policies.
Instead of using $9 million in reserves to shrink the hikes, the authority will make $2 million in operational cuts and save $7 million by delaying one year a seismic retrofit of an inland North County aqueduct.
Dan Denham, the water authority’s general manager, said it will be difficult to find cuts in a budget that has already been cut this year by 5 percent.
“It will lean out the agency in a way that is harmful,” he said.
Board member Gary Arant, who represents Valley Center, said he was more concerned about delaying the work needed to make the aqueduct less vulnerable to earthquakes.
“We’re failing to do our mission — to protect our infrastructure and guarantee safe and reliable delivery of the water supply,” Arant said.
Nick Serrano, who represents San Diego on the board, said authority officials must explore alternative revenue sources, find efficiencies and ensure that every dollar they have helps boost long-term stability.
He said critics may scoff at the city’s insistence on 14 percent instead of 15.4 percent, but he argued that every penny counts for some ratepayers — especially with the cost of living so high.
“Our priority must be water affordability for all of our ratepayers,” he said. “We cannot continue to impose such significant rate hikes.”
Other board members said they’d rather pay more now.
“I would rather bite the bullet this year,” said Marty Miller, who represents Vista. “I can’t support 14 (percent). I certainly understand the city’s position, but I think the fiscal integrity of this organization is more important.”
The rate increases approved Thursday include 14 percent in 2025, 16.4 percent in 2026 and 5.6 percent in 2027. That’s a cumulative increase of 40.1 percent when compounded.
The increase in wholesale rates will force nearly every local water agency to pass on the extra costs to its customers, but just how much gets passed on could vary widely.
Some agencies buy less wholesale water than others, especially those with groundwater basin storage or other local water supplies.
In a news release, San Diego Mayor Todd Gloria praised the board’s decision to shrink next year’s increase, crediting the “effective leadership” of San Diego’s representatives.
“This means less money coming out of the pockets of ratepayers,” Gloria said.
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