Honolulu bond counsel warns rate cuts could breach covenants as council debates phased sewer‑fee increases

Honolulu — Bond counsel and city finance officials told the Budget Committee that the city’s wastewater bonds include a legally binding “rate covenant” that requires sewer rates be set at levels sufficient to pay operation, maintenance and debt service plus a cushion. Committee members considered a proposed CD2 that paces increases and shifts more of the monthly charge from a fixed fee to a volumetric (per‑gallon) charge to reward lower water use.

John Wong, partner and the city’s bond counsel, said the council’s authority to set rates is central to investors’ confidence. “Investors view the city’s commitment to set rates to meet the rate covenant as a critical and almost sacred component of their evaluation,” Wong told the committee, warning that a material failure to meet the covenant “could lead to a default under the resolutions and entitle bondholders to pursue legal remedies.” He noted the city has roughly $2.5 billion in wastewater bonds outstanding and that ratings and borrowing costs could be harmed by a failure to demonstrate ongoing compliance.

Director Roger Babcock of the Department of Environmental Services and Director of Budget and Fiscal Services Andrew Quano joined Wong for the briefing. Babcock presented a revised rate schedule labeled “CD2” that phases some increases to reduce immediate bill shock: the CD2 package would start with a smaller first‑year increase (6% in the presented option, versus 9% in an earlier proposal), then apply larger increases later in the 10‑year plan so the program remains revenue‑neutral for the modeled capital and operating needs.

The CD2 proposal also shifts the share of the monthly charge so a larger portion is volumetric (consumption‑based): proposals examined a 40/60 fixed/volumetric split (versus the current roughly 70/30 split). Under the 6% phased option with a 40/60 split, the consultants’ tables showed low water users would pay less in early years compared with the original 9% plan, while high water users would pay more. Babcock said the change was intended to promote equity and conservation while still meeting debt and operating needs.

Committee members pressed for details on the rate‑model assumptions and equity measures. Council Member Cordeiro asked whether technology or revenue sources other than rates (for example, using general‑fund transfers or other revenue streams) could be used to reduce rate pressure; bond counsel said the critical legal requirement is that pledged wastewater revenues satisfy the rate covenant, but that council could consider other revenue sources so long as the required pledged revenues are preserved. Quano said administration staff were exploring options including one proposal discussed by council to use a share of the transient accommodations tax to cover system costs.

Officials also proposed a customer assistance program (CARES) to mitigate hardship. Babcock said a $10 million annual program with a monthly credit (EY’s modeling examples included $20 or $10 per household) would subsidize thousands of households. Using a $20 monthly credit as an example, $10 million could reach roughly 41,666 households (because $20/month equals $240/year). The department suggested income‑eligible thresholds (for example, 80% of area median income, ALICE thresholds, or 300% of the federal poverty level) as eligibility options.

Public commenters voiced concern about the size and timing of increases. One resident said the proposed bills would be onerous for families who already face high costs of living in Honolulu. The committee did not adopt rates at the meeting; Chair Waters and other members signaled they wanted to keep discussing changes and possible offsets and affirmed the need to protect the city’s bond covenants.

Ending — Committee members asked departments to refine the modeling, provide additional options for mitigating impacts on low‑income households, and deliver the bond‑covenant language used in the city’s wastewater bond resolutions for review. No vote to set rates occurred at the meeting, but staff and bond counsel warned the council that any adopted rate plan must meet the bond rate covenant to avoid legal and credit consequences.