Loveland's Independent News Source
Loveland - January 1, 2013

Municipal bonds, issued by cities to raise money for large infrastructure projects, are facing a triple threat in 2013 as
the federal government wrestles to reduce deficit spending.  Tax reform, deficit reduction (by eliminating federal
income tax-exemptions) and progressive tax schemes all combine to threaten the viability of municipal bonds in

Municipal bonds traditionally have provided local governments access to capital at extremely low costs due to the
numerous incentives provided to municipal bond investors.  Since the early 1800's municipal bonds have served as an
important funding source for local governments largely controlled by states with little or no interference from the
federal government.

According to municipal bond traders, however, a perfect storm is gathering for 2013. As efforts to balance the federal
budget target the tax-exempt status of many municipal bonds (even those already issued), tax rates on investment
income will likely increase while interest rates are at historic lows all creating uncertainty for the municipal bond
market in 2013.   The Obama Administration estimates the federal government could raise an additional $48 billion
in revenue for 2013 by removing the tax-exempt status (named a loophole) of municipal bonds and therefore is
proposing a retroactive 28% interest tax (even on bonds already issued).

While federal income tax rates and so called "loopholes" for 2013 are still being negotiated on Capitol Hill, one thing is
clear, income earned on municipal bonds is in the cross hairs which will have an impact on local government
borrowing costs.  Not since 1986 when the AMT (Alternative Minimum Tax) was allowed to include interest from
tax-exempt municipal bonds (1986 Tax Act) has the federal government targeted the tax-exempt status of so many
municipal bonds.   On the brighter side, an increase in the capital gains tax could drive more money towards
tax-exempt municipal bonds but only if the Obama Administration fails in making interest on most municipal bonds

Impact on Loveland

Earlier this year some members of Loveland's City Council advocated issuing municipal bonds (in this case revenue
bonds for the water utility) to cover the costs of deferred maintenance to the city's water utility's aging infrastructure
and expansion of the treatment plant together estimated to cost $50 million.   Loveland suffered a number of crisis in
2012 as the result of its aging sewer and water infrastructure combined with failures to adequately meet all of the
city's water treatment requirements.  Expansion of treatment facilities apparently didn't keep pace with the city's
growth over the past decade nor did the city replace aging water lines.  

Loveland experienced lower water pressure in 2012 and ruptured water lines that interrupted water service to
hundreds of Loveland residents.  Loveland water utility managers brought their complaints to the city council arguing
that failure to began replacing aging water lines will result in even more service interruptions in 2013.   Emergency
interruptions force the city's water utility to spend thousands of dollars repairing water lines already long past their
expected service life.  This band-aid approach, utility managers argue, wastes city resources since repairing already
obsolete water lines doesn't really fix the underlying problem.   Resources would be better spent replacing the entire
line under a street once opened but limited resources in the city's water fund preclude such infrastructure

Last August Loveland's Utilities Commission recommended the city take out $16 million in 30-year municipal bonds
immediately to repair failing water lines and upgrade the city's water treatment facility.    Councilman John Fogle
later recommended the city consider funding some portion of the improvements using internal funds (savings) while
using the bonds for longer-term improvements to the city's treatment facility and other upgrades.   By December six
councilors agreed with Fogle's hybrid approach of approving higher utility rates now (to double by 2030) cushioned
by bonds for future improvements so not all the improvements are funded directly by current rate payers.

Loveland's Water and Sewage Utility Neglect

In other words, pass the cost of replacing infrastructure along to current rate payers via higher rates versus paying for
the infrastructure with bond proceeds that would be repaid by slightly higher rates over a longer period of time.  Now
the city has started down the "hybrid" approach the availability of low-cost bond debt may not be available in 2013.

The problem with Loveland's utility hasn't just been the lack of water rate increases, as the city's official narrative
claims, but instead the city diverting increasing water fund revenue into pet projects, annexation subsidies and other
non-water uses.  Especially misleading has bee the constant claim that Loveland residents simply don't pay enough
for water when compared with other cities.

According to the Loveland Reporter-Herald (1-1-13) which perpetuates the city's narrative, Loveland's water rates
need to increase because water rates "
have been mostly flat for the past ten years."   While Loveland's water rates
are low when compared with other cities,  they have indeed been increasing over the past decade with the most
recent increase in 2012 (
see LovelandPolitics story of most recent increase).

Loveland has dipped into its water utility fund like a sort of slush fund for non-water needs during the past 10 years.  
Among those non-water uses Loveland residents have been paying for are;

1. PILT increases (arbitrary charge by city to water utility fund) the most recent increase to close a $3.5 million
systemic budget shortfall of the general fund having nothing to do with the cost of delivering water
2. Overpaying for water shares using water utility money to acquire property through annexations near Johnstown
3.  Affordable housing tap fee waivers and business inventive fees where favored commercial customers are allowed
to waive fees for 100 hundred years so other rate payers pay the true costs. (
see Water Sham)
4.  Annual debt service to the Windy Gap Project that hasn't yielded the expected water shares promised but costs
Loveland utility customers nearly $1 million annually.

Given the current federal budget deficit negotiations and the potential impact to municipal bond market, the city's
bond option could be more costly than first contemplated as investors will expect higher returns to offset higher
capital gains taxes or loss of tax-exempt status for municipal bonds.

As Loveland residents are asked to pay ever increasing water utility rates it is likely the city's ability to play a shell
game with how that money will more difficult.  If indeed the municipal bond market encounters a perfect storm in
2013 than Loveland residents will find themselves paying the highest water rates in the area (when adjusted for
distance from water sources).   See chart below.
Fiscal Cliff Solution May Force
Steep Loveland Water Rate Increases
Politics of City Finance &

Colorado's Taxpayer Bill of
Rights (TABOR) limits the City
Council's ability to raise
general taxes without a
consent of the taxed (ballot
measure).   Therefore,
increasing tax rates for
the city's general fund is
difficult if not impossible for
city politicians because
taxpayers must approve any
tax increases.  However, fines
and fees for services are not
considered taxes and
therefore can be raised simply
by a vote of the city council.

Those proposing the increased
water rates claim the city
doesn't have any debt
associated with the water
utility therefore operates,
"debt free."  This is not
accurate.  Loveland pays over
$800,000 annually into a
collective debt it entered into
with other municipalities for
the Chimney Hollow Project.

Because utility rates are
easier to raise than general
taxes, most cities in Colorado
have politicised their
municipal financing decisions
by finding innovative ways to
transfer monies away from
utilities and into the general
 Loveland has also
played this game by
increasing PILT (a type of
lease payment) to its water
utility as a mechanism to
transfer money collected from
rate payers for water into the
general fund.  The problem
with this accounting is the city
is also now asking rate payers
to invest in replacing the
infrastructure the city charges
them to use.

LovelandPolitics covered this
issue in a story entitled, "
Whole Story Behind
Loveland's Increasing Water
Rates" and reported,

"The Council voted to
increase the PILT (payment in
lieu of tax) nearly one year
ago in full knowledge the
change would drive higher
utility rates in 2012.  
Approximately $650,000 of
artificial “cost” was added to
the city’s various utility
enterprise funds now lost
inside the “Administrative”
line item in the water utility’s
budget.  The total annual
transfer into Loveland’s
General Fund from the utility
rate payers now tops $4.5
million annually; second only
to Longmont as the highest
PILT collecting in Northern
Water rates reflect many different factors including the raw cost of water (shares), long-term financing costs of
capital improvements, transportation, storage and treatment.

When comparing rates between cities it is important the distance of the city to its various water sources also be
considered.  Loveland's ideal location at its primary water source means the city doesn't have the same
transportation costs as other municipalities so directly comparing rates with the above cities can be misleading.

The chart above illustrates a correlation between city distances from Big Thompson River (considered a prime
fresh water source for Northern Colorado) and residential water rates.   Greeley is slightly lower than Windsor
given its age and early investment in water shares and built infrastructure.  Otherwise, each city's water rates
correlate closely to its distance from Big Thompson which is only one source.