HAWTHORNE : City May Tap Into Utility to Ease Budget Crisis

City officials are considering leasing or borrowing against the city’s water utility to generate cash to ease the city’s financial crisis.

The municipal water system is one of city’s most valuable assets, worth $6.7 million to $8 million. Selling, leasing or borrowing against the utility is one component of City Manager Todd W. Argow’s 24-point plan to make the city solvent. The city faces a $10.5-million deficit from the 1993-94 fiscal year and an additional $7-million shortfall on this year’s $27-million budget.

“It’s an essential part (of the plan) because it is one of the few assets that we have that has enough value to it that would make a major dent in our past deficit,” Argow said. “We have to deal with the debt in some fashion.”

The loan or lease option could generate as much as $8 million that would go toward paying off the $10.5-million deficit, Argow said.

Southern California Water Co., California Water Service and the brokerage firm of Sutro & Co. have made proposals.

The water companies offer cash payments to lease the utility. But the council is concerned about losing control of rate adjustments and customer service.

Sutro & Co. propose lending the city money using the water system as collateral, which would allow the city to retain control of the utility. In addition, the city staff would have help getting its finances in order from a large firm with many resources and financial experts.

Southern California Water serves 5,800 water customers in Hawthorne, about half the city. It initially offered to buy the city’s water utility, but has since submitted a proposal to lease the system for 30 years with an upfront payment of $7.5 million. The company would pay additional fees for use of the city’s water-storage facility and connections.

California Water Service offered a payment of $5 million to lease the city’s water system and $3 million to lease the sewer system for 30 years. California Water offered another $3 million to buy the city’s water rights.

Both water companies pledged to retain all current city water employees at the same or greater pay.

In presenting its financing option, Sutro cautioned city officials from taking any action until a complete financial restructuring is in place.

Hawthorne’s current financial condition means the city would pay excessive interest rates on a loan. Sutro officials said a complete financial overhaul could make a lower interest rate possible. The money the city would receive by mortgaging the water system depends on the length of the loan and whether the city agrees to increase water rates.

If officials opt to service the loan in 10 years with no increase in water rates, the city would receive $2.6 million. However, if the city agreed to a 30-year loan with a rate increase of 10% over each of the next 5 years, it would receive $7.3 million up front.