Honolulu City Council members and city finance officials on Tuesday began a contentious debate over a plan to shift revenue from the transient accommodations tax (TAT) into the city's sewer fund to reduce projected sewer-rate increases for residents.

The proposal that prompted the discussion would allocate TAT revenue to the Department of Environmental Services’ sewer fund as one piece of a larger financing package tied to planned capital projects and outstanding debt on the wastewater system.

Why it matters: The sewer fund carries billions of dollars of capital obligations and debt. City officials and bond counsel warned that using general or other non-sewer revenues to supplement the fund could harm bondholders’ protections and the city’s credit ratings, potentially raising long-term borrowing costs.

Director Roger Babcock, Department of Environmental Services, told the council that the sewer rate study identifies substantially larger revenue needs than the TAT proposal would fill. “The difference between those two numbers is $1,015,000,000,” Babcock said, summarizing staff estimates of the gap between the department’s projected revenue requirement and the amounts shown in a news article summarizing a proposed TAT supplement. He also walked the council through an example rate schedule that staff has discussed publicly: “It was presented in the civil beat article which said that it would be 8.75% in year 1 and 7.5% in year 3, and then 5.5% each year in the years 4 through 10. That adds up to an 87.75% total increase over the 10 years.”

Babcock warned about legal and financial risk from drawing non-sewer revenue into the sewer fund. He said bond counsel had testified that diverting general revenues into the sewer fund “is akin to a breach of contract with the bondholders” and could, in a worst case, allow bondholders to demand accelerated repayment.

Andy Kawano, Director of Budget and Fiscal Services, said he shared concerns about the size of the transfer contemplated by the bill. “The 41% and change that the bill proposes to transfer from the general fund to the sewer fund would move significant cash amounts,” Kawano said, urging caution and noting the city’s existing credit and budget constraints.

Council members pressed staff about alternatives and demand-management steps. Council member Tupelo said the council should exhaust outside funding and regulatory options before asking residents to shoulder large rate hikes: “I think before we talk about raising the rates, [we should] find[] every little million down until we actually have a realistic amount of what we’re trying to — what we actually need,” she said.

Staff described the portfolio of capital projects, debt service, and limited availability of federal grants. Babcock said the department had pursued state revolving funds and other federal sources but found them insufficient to close the funding gap. He also described operational constraints: much of the department’s capital program responds to court settlements and regulatory requirements, including upgrades such as the Sand Island Wastewater Treatment Plant secondary-treatment project tied to prior legal obligations.

What the council did: The measure remains at first reading and will proceed to committee for further review. Council members expressed differing views but asked staff to pursue further outreach and to refine the rate and assistance proposals; members also signaled interest in designing customer-assistance provisions to mitigate impacts on lower-income households.

Context and next steps: The council and department said the rate study and budget bill drafts will be the basis for committee hearings. City directors pledged to continue looking for federal and state funding, to refine affordability proposals and to provide a line-by-line account of capital projects underlying the rate needs. The council’s budget committee will consider related rate and budget measures later this month.