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Cracked pipes harboring rodents and reptiles, and wastewater seeping through crumbling walls comprise the antiquated—and often failing—sewer system in East Baton Rouge Parish.

But the dirty reality of the sewer’s infrastructure might not be the biggest problems city-parish officials face. The financial foundation of the federally mandated plan to repair the infrastructure, with grossly estimated bonds and funding based on sales tax, could be just as messy.

This puts East Baton Rouge in a difficult position. The EPA, after repeated extensions, has given the parish a hard deadline to fix the crumbling system by the close of 2014 or face financial penalties. Yet, changing plans over how to rehabilitate the aging system, coupled with declining sales tax revenue and a turbulent bond market, have put finishing the $1.2 billion project on time in jeopardy. Officials insist they’ll meet the deadline, but acknowledge the timetable is tight and there’s little margin for error.

Critical is Baton Rouge’s ability to sell $944 million in bonds to fund much of the work. Typically, such a sale would pose little problem, but with the current financial crisis these are hardly normal times. The good news is there are some buyers for government issue bonds, and the parish’s AAA bond rating certainly will help.

So, for now, those responsible for completing the work remain cautiously optimistic.

The plan to improve the sewer system includes three facets. The first is to rehabilitate as much as 5 million feet of pipe, according to a presentation by Mike Futrell, the project manager from Mayor Kip Holden’s office, and Michael Ellis of CH2M Hill, the firm contracted to oversee the project.

The second includes capacity improvements, primarily in Zachary, to serve a potential 50,000 new residents. “This sets Baton Rouge on a great stage for growth,” Futrell says. “When developers come in to build subdivisions, the sewer system is there for them to develop.”

The third involves leveling the Central Waste Treatment Facility and shifting the raw sewage to the South Treatment Plant, which Futrell says “has tremendous capacity to process raw sewage. Even if you add what comes from the central and south areas, the South Treatment Plant still has more capacity.”

Ellis, the self-proclaimed “sewer system fan,” says combining the sewage from the two treatment plans is better for the process. “The bugs that eat the waste need a constant flow of sewage in order to stay happy,” he says. “Adding more to the South Treatment Plant keeps the system regulated.”

Demolishing the Central facility has an upside, too. “It will free up a 22-acre plot of land along the river,” Futrell says. That’s prime real estate for the city to utilize or sell during the current riverfront development craze.

East Baton Rouge Parish has battled the failure of its sewer system for more than two decades. There have been three plans since 1988; the current plan was approved in 2007. And changing engineering plans and contractors over the years has caused controversy.

But it wasn’t until early this year that the financial side of the project made Metro Council meeting agenda and news headlines. An e-mail request from District 1 councilman Wayne Carter to Department of Public Works Financial Manager Mark LeBlanc hinted at an interest into the project’s financial status.

LeBlanc responded with an official letter, dated Jan. 22, to the Metro Council detailing financials and then-current flaws in the plan. LeBlanc’s letter detailed all of the basics: The project would be financed with “approximately $600 million in bonds, generate $261 million in pay-as-you-go cash, generate $65 million in interest and utilize $6 million in impact fee, though this amount is expected to increase.”

The real kicker came on the second page of LeBlanc’s letter. “The sewer system’s financial model currently shows that a funding gap exists for the $1.2 billion revised RMAP2 construction program as presented by DPW and the sewer system’s program manager, CH2M Hill. The funding gap currently totals approximately $260 million in 2014.”

The letter also states that while the project will have the funds to move forward through 2010, there is a “$60 million funding gap in 2010.” That’s a substantial crack in the system.

Tempers flared and tensions ran high during Metro Council meetings in which the sewer project was discussed. Carter canceled interviews for this story, but provided e-mails between his office and LeBlanc from January 2008. Those e-mails claim the city was broke and the project still had a $260 million deficit.

The plan originally included $600 million in bonds. But nine months later, that amount has increased to $944 million. While that increase might amount for additional expenses created in the project’s expansion, it likely has to do with immediate shortfalls in the plan’s financial structure.

Interestingly enough, presentation slides shown by Futrell and Ellis at the Metro Council meeting on Sept. 24 don’t even mention bonds. Instead, the slides proclaim the project is “funded by existing revenue sources.” That is only partially true, considering some of the funding is pay-as-you-go cash from sewer usage fees, the 0.5% sales tax and earned interest. But it leaves out the largest portion of the project’s cash source.

In interviews with Futrell and Ellis, there was not a consensus regarding the source of funding. In response to a question about the $944 million in bonds, Futrell says the city was not planning to take on such a high level of debt. During a later phone conversation, he mentioned the dollar value of municipal bonds that would soon be for sale.

LeBlanc defended the city’s financial plan for the project, saying city officials and the city’s financial advisers have reviewed it to ward off any financial pitfalls that might arise, including “model scenarios utilizing bonds with longer maturity dates, lowering our long-term interest rate assumptions for bonds, re-examining the sewer system’s long-term operation and maintenance growth assumptions, and utilizing subordinate or junior lien bonds.”

He says the detail of the sale would not be known until the actual time of the sale. Officials could only produce one document detailing the amount of the bond sales, financing terms, maturity dates or ratios of standard to subordinate loans.

“We don’t know anything for sure until the bond sales are made,” Le-Blanc says, adding that it’s standard for most large-scale investments.

Whether or not the city even sells municipal bonds over the next few years remains to be seen. With the nation in the throes of a financial crisis, city and state bond sales have been postponed in many cases.

“I am confident that we will be able to sell the bonds,” LeBlanc says, noting the city has a very high bond credit rating, which helps it stand out as a financially sound option for bond sales.

Adams and Reese attorney Tracy Morganti agrees bond sales are still possible. “Currently, governmental issues seem to be faring better than private issues. It’s just a matter of obtaining AAA-rated bond insurance or going out with an uninsured deal and what the interest rate will be based on the credit of the issuer. However, by the time the bonds are actually issued, the market conditions may have changed substantially [for better or worse] or not at all. No one can predict what is going to happen in light of the government bailout and regular market fluctuations.”

A downside to the city’s plan to sell bonds is the lack of bond insurance. LeBlanc says because of the financial crisis, bond insurance is more difficult to come by. Plus, the city’s credit rating doesn’t make it a necessity.

Gregg H. Jones, a member of the National Association of Bond Lawyers Task Force on Current Market Conditions, is not optimistic. “The current conditions in the credit markets are more unsettled than anyone has seen since the Great Depression,” says Jones, who works for Andrews Kurth in Houston. “There are no guarantees in the current credit market, especially if an issuer is trying to sell $944 million in bonds. However, an issuer with a high investment grade credit rating has the best chance of selling its debt today.”

Even tax revenue funding from the 0.5% sales tax for the sewer system’s traditional operating funds and a portion of the rehab might be questionable in the near future. The Nelson A. Rockefeller Institute of Government at the State University of New York released a study in October detailing the decline in sales tax revenues across the country during the last four quarters.

“Ten out of 12 states in the Southeast region had sales tax declines,” the report stated.

Louisiana was exempt from the group, but the revenue increases were miniscule and might follow the national trend by dropping off over the next fiscal year.

“The last fiscal crisis,” the Rocke-feller study concluded, “which occurred in the midst of a mild recession, was dubbed a perfect storm. This one could be a more perfect storm.”

DIRTY DETAILS

The East Baton Rouge Parish sewer system rehabilitation plan has three primary facets:

1. What? Rehabilitation and upsizing of as much as 5 million feet of sewer pipe.

Why? Much of the city’s sewer system is comprised of 100-year-old sewer pipes. Cracked, leaking pipes lead to soil contamination and aid in rodent and reptilian infestations. Pipes with insufficient capacity lead to overflows and home contamination in wet weather.

2. What? Expansion of wastewater services in developing areas such as Zachary by constructing new sewer pipes.

Why? City officials believe that residential growth is most likely in the Highway 61/Red Mud Lakes area. When developers build new subdivisions, the city-parish will be prepared to service a potential 50,000 new customers in the area.

3. What? Closing the Central Treatment Plant and redirecting the wastewater to the South Treatment Plant.

Why? The bugs that eat or process wastewater are more effective with a constant flow of sewage. The South Treatment Plant is currently operating under capacity, meaning combining the two produces better results. It also saves the city money.