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Recent articles and an editorial on Water Authority bond transactions contain more misinformation than information and smack of character assassination.

The facts are that the authority three times took advantage of low interest rates and favorable conditions in the bond market to refinance its debt, saving a total of over $14 million. These refinancings were undertaken to hold down rate increases. In the decade from 1986 to 1996, water rates around the country typically rose about 70 percent. In Erie County, they rose only 32 percent from 1983 to June of 1996.

Your stories and editorial mixed up two accounting concepts, "total indebtedness" (the amount of principal borrowed which has not yet been repaid) and "total debt principal service" (the amount of combined principal and interest needed to pay off the debt). For instance, at the end of the 1992, the authority had a total debt of $70 million, certainly not the $234 million quoted. The $234 million figure incorrectly included both what the authority owed after refinancing because of two refinancings.

Another part of the articles dealt with the county comptroller's concern that the authority might have earned arbitrage. Arbitrage is money made by investing tax-exempt, borrowed money at a higher rate of return than the cost of borrowing such money, resulting in a profit after the debt is paid. In tax-exempt borrowings, arbitrage is regulated by tax laws and regulations.

The current authority chairman called these successful actions "arrogance." But these refinancings and borrowings were all reviewed carefully by a host of bond and tax experts. They all agreed that these transactions were prudent and advantageous to the authority. None of these people were queried by "investigators" on the transactions before these allegations were leaked to the press.

The transactions were legal and made money for Water Authority customers, helping to hold rates down.

In addition to refinancing, there were also two Erie County Water Authority bond issues that raised money for the authority's capital program in 1989 and '93. These naturally did result in new costs and were a part of the rate increases that have occurred and will occur. Capital bonding is a part of the ongoing reconstruction of the system and reflects the growing age of the system and increasingly stricter, but beneficial-treatment rules issued by the federal government.

Philip J. Cook Former Executive Director
Erie County Water Authority

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