After the City of Oxnard lost their lawsuit against Measure M (which repealed an 87% rate increase schedule), the wastewater bonds got an improved rating from S&P.
The ruling means that the city owes millions of dollars in refunds to ratepayers. Yet, on July 23, 2018, in the first S&P report following the court’s ruling, the ratings agency left the wastewater bonds at BBB for the underlying rating, but they changed the “outlook” from negative to positive. The “outlook” is essentially S&P’s future trend predictor on the rating, and the city’s press release touted the shift as “great news for the residents of Oxnard”.
The ratings improvement may seem counter-intuitive for the circumstances, until you remember that the city struggles with basic math – and that they gave both the public and S&P bad data. We demonstrated that during the Measure M trial. Now S&P has more accurate data, and they see it’s not what the city had previously portrayed.
Recall that the city council defied voters by adopting a new set of higher rates to replace those repealed by Measure M in November 2016. Because Measure M was on hold during the trial, the city kept collecting the first 35% step of the repealed rate increase schedule. When the city council’s replacement rates went into effect on July 1, 2017, the amount of potential refunds (should the city lose the Measure M case) became a knowable number. It’s the 35% rate increase for wastewater billings collected from December 16, 2016 through June 30, 2017.
Arriving at that figure requires grade-school math skills; unfortunately, the city’s CFO (Jim Throop at the time) evidently did not possess those skills, and as you’ll read below the city gave wildly varying – and wrong – numbers for their potential liability for overcharging ratepayers.
Oxnard’s 2016-2017 Comprehensive Annual Financial Report (CAFR) reports on city finances through June 30, 2017, the very date that the exact amount of the liability became knowable. Even after an audit was performed, when that CAFR was published, it claimed that losing the Measure M case, “could potentially compel the City to rebate approximately $ 8.5 million to the City's wastewater customers from the City's Wastewater Fund. (See PDF-page 146, printed page 127.)
During the January 23, 2018 city council meeting, we were told that this particular portion of the CAFR was written before the Measure M trial. It is likely that S&P was also given this number, and S&P puts a lot of trust in audited CAFRs.
The city’s Measure M trial exhibits argued to a judge in late December 2017 that the potential liability for the overcharges was $6.8 million. When we got a chance to question Mr. Throop on the witness stand, we spent the afternoon helping Mr. Throop correct the math on the city’s trial exhibits. At the end, the city agreed the liability for the overcharges was really only $5,074,330.
The July 2018 S&P ratings report stated, “We revised the outlook based on greater clarity regarding the potential outcome and impact of the Measure M litigation, and the city completing a rate-setting process in 2017 and implementing the first two of five approved rate increases that we anticipate will drive stronger near-term performance.”
Let’s decipher that.
S&P had known about the replacement rate increases for well over a year, so the only part of that statement that is new information was the “greater clarity regarding the potential outcome and impact of the Measure M litigation.” The “outcome” was the worst possible for the city because they lost the litigation, so that would not have improved the rating. The only positive development was that the “impact” was established to be $5 million, not the $8.5 million that had been previously alleged.
This S&P report appears to be the ratings agency politely saying, “The situation isn’t quite what we were told.”
Well, S&P, we’ve been saying for a long time that you can't blindly trust the city's numbers. In the past we’ve called out the city for making misrepresentations to the public when they wanted to impact public opinion and council decisions:
Many of Oxnard’s troubles are just the result of poor management and city leaders being bamboozled by bad information. Even when the public points it out, the city council members don’t seem to be upset at having received bad data to inform their decisions.
Until we have council members who can detect these problems on their own, we’ll continue to say it from the sidelines.
UPDATE: A subsequent article in The Voice La Voz asked S&P to comment on this blog post. That article quotes an S&P representative, Malcolm N D’Silva, as essentially confirming our point by stating, “We believe that things have moved in the right direction for Oxnard and the lawsuit was not as impactful as previously thought.”