The water that poured into Lloyd Seiavitch's Squirrel Hill garage one morning last month, drenching four cars and ruining appliances, was a ripple in an invisible river that bleeds from the Pittsburgh Water and Sewer Authority daily.

That was no consolation to Mr. Seiavitch, as he stood on the heaved-up concrete of his driveway, a few feet from the scene of the main break that sent a cascade toward his 1985 Oldsmobile Cutlass Supreme, 1996 Buick Roadmaster, 2006 Chrysler Sebring convertible and 2007 Buick Lucerne.

"Every car is totaled," he said. "It's heartbreaking."

The break was also a reflection of a leaky water system with creaky finances and big challenges ahead as its board mulls a possible rate increase.

For every gallon of water that the authority pumps to a home, business, institution or other paying client, nearly a gallon and a half is given away, used for maintenance work, or lost to leaks and breaks.

On an average day last year, the authority gave away or lost 42 million gallons of water, according to reports it sent to the state Department of Environmental Protection. That's high, compared to other systems.

"It's an ongoing problem," said water authority Executive Director Michael Kenney. He's using borrowed money to launch a $120 million improvement push.

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Gifts and Leaks

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That borrowing, though, has boosted payments on the authority's $779 million in debt toward $44 million -- 25 percent higher than it paid five years ago. Moody's credit rating agency has placed a negative outlook on the authority's debt, finding "pronounced risks" in its obligations.

Mr. Kenney said there's no connection between the system's leaky pipes and the finances.

But city Councilman Patrick Dowd, a water authority board member, sees a link.

"The water leakage is a symptom of the fact that the water authority is bleeding resources -- whether it's cash or water," he said. "Wouldn't it be wiser to plug the leaks before we put any more resources, like a rate increase, into the system?"

Along with ill-maintained roads, aging bridges, careworn parks and more, the water system is part of an infrastructure deficit that doesn't show up on the city's balance sheet.

State Rep. Don Walko chairs the authority's board. "The infrastructure needs of our city and region are so enormous," he said, "that it's sobering."

On Friday, Mr. Kenney confirmed that the authority has been considering a 5 percent rate increase since September. A draft budget includes a $9 million gap, half of which would be filled from the rate hike, the other half from the authority's $38 million savings account. A board vote could come Dec. 11.

The authority didn't raise rates this year or last, but before that had raised rates every year from 2003 through 2007, compounding to a 50 percent hike.

"Residential rates are going to have to go up," warned Robert P. Strauss, professor of economics and public policy at Carnegie Mellon University's Heinz College, who guided students this spring in a study of the authority's physical and fiscal problems. The authority is "servicing a $700 million-plus debt and you're just plugging leaks" rather than fixing underlying problems.

Hired as authority director in March 2008, Mr. Kenney said he needs money in part to get ahead of the old system's maintenance issues. He got $98 million from a 2008 debt deal, and borrowed around $22 million more from the state, but also wants to start spending some ratepayer dollars on fixes.

The system is burdened with deals that require it to provide free water to the city, plus privatized city assets including the Pittsburgh Zoo and PPG Aquarium, Phipps Conservatory and the National Aviary. Those obligations, plus leaks, mean the authority gives away or loses 58 percent of the water it makes -- more than comparable systems in the state.

"How can you do business?" asked Mr. Strauss. "Think if the auto industry was giving away 60 percent of its cars. That's crazy."

He said the system is too deep in debt to be privatized, but could benefit from a partnership with a private operator.

Mr. Kenney said all water systems leak. But some leak more than others.

The privately owned Pennsylvania American Water Co.'s Pittsburgh district reports that 44 percent of its water goes to either noncustomer uses or is lost. The figure is 35 percent for the much larger Philadelphia system.

The Pittsburgh Post-Gazette reviewed state filings by 10 water systems serving between 97,000 and 400,000 people, and found that, on average, they give away, use internally, or lose 30 percent of what they produce -- around half of Pittsburgh's figure.

Mr. Kenney said that even if he could magically plug every leak, it would only marginally affect his costs by trimming power and chemical bills. He'd still need the same staff to service the authority's 900 miles of pipes.

That said, he has four employees dedicated to ferreting out leaks, and plans to increase the amount of repair work he does. He's hired an engineering firm, HDR Inc., based in Omaha, Neb., to study the water loss.

The board on Friday approved spending $1.4 million to replace perhaps one mile of old mains before they break. The authority didn't have a contract this year to proactively replace old pipes, but did replace or reline those that failed.

The industry ideal is replacing 1 percent of pipe each year, Mr. Kenney and others said.

"I don't know anybody in the industry that's doing that," said Mr. Kenney. He replaces or relines several miles of pipe per year, but said it would cost a budget-busting $10 million to replace 1 percent of his pipes.

Anthony Russo, executive director of the Wilkinsburg-Penn Joint Water Authority, said he tries to approach the 1 percent threshold for his 430-mile pipe system.

The private York Water Co. loses just 11 percent of the water it makes, and replaces around 6 miles of its 800 miles of pipe each year -- 0.75 percent.

"It definitely costs money, and rates will go up," said York Water CEO Jeff Hines. "If we're putting $6 million a year into replacing pipe, the customers have to pay for that."

But the alternative, he said, is "literally kicking the can down the road. It's going to be $12 million down the road."

The Pittsburgh Water and Sewer Authority was created 25 years ago precisely to stop the kicking of the can.

By the early 1980s, some in government "were getting increasingly concerned over the condition of the water system and the water purification plant," said Jim Turner, who was the city's budget director then, and now works for the University of Pittsburgh School of Education.

City Council wouldn't approve rate hikes needed to cover repairs. But an authority could borrow and spend without direct political constraints.

It did. Last year the authority's debt surpassed that of the city government, which has a budget three times the size of the water system's. That was driven by the authority's decision to enter into a complex $414 million debt package that included instruments called swaps, in which the authority and finance firms make payments to each other. The amounts of the payments shift as variable rate debt interest rates change.

Most of the money raised went to refinance old debt, and $18.5 million covered insurance, consultants and termination fees on old debt. The authority netted $98 million to use for improvements, prompting Mr. Kenney to say then, "I don't anticipate a borrowing through 2012 that will impact the [water] rate."

The swap deals went awry last year when global credit markets capsized. As a result of unexpected gyrations in swap interest rates, the authority's debt payments last year were $2.3 million higher than predicted.

This year a firm decided not to renew guarantees to back the debt, temporarily pushing up interest rates on parts of the package, and forcing a scramble for new guarantees. So far the cost of replacing the guarantees, including the higher-than-expected interest payments and fees for professional services, is around $2.8 million, Mr. Kenney said.

"The swap deal was billed as a way to bring in proceeds without raising rates though 2012," said city Controller Michael Lamb, who is auditing the authority. "Now we're raising rates due to the swap deal."

The cost of the debt package could jump again if Wall Street loses faith in the authority's finances, especially since some of the guarantees that hold down its rates expire in the middle of next year, Mr. Dowd said.

"I'm being told" by authority staff, he said, "that Wall Street demands this [5 percent] rate increase."

Mr. Kenney said it's not that simple. It's more a matter of matching up declining water use with costs that include the debt, and the need to plan for big obligations to come.

Mike Vincent's home in the Greenfield area known as The Run was flooded in 2004 when a water main broke, again a few years later when sewers backed up, and then a third time in June when historic rainfall overtaxed sewers in several neighborhoods and pushed wastewater up through scores of basement drains.

"There's just not enough room for the water to come through," he said.

The result? "It's just a lot of time cleaning up, and the house is suffering for it" by way of furnace damage, warped wood, dirty ducts and basement mold.

The region's sewers are the subject of consent orders involving the federal Environmental Protection Agency, state DEP, Allegheny County Sanitary Authority and scores of municipalities. They have to have a plan in place by 2012 to stop frequent overflows that push sewage into the rivers -- not to mention basements -- when it rains, and to have the plan implemented by 2026.

Mr. Lamb and Allegheny County Controller Mark Patrick Flaherty in April estimated the countywide cost of a sewer fix to be $21 billion. The Pittsburgh Water and Sewer Authority often cites a years-old estimate that its share of the costs will be $300 million. That's a low estimate, Mr. Kenney said, noting that the authority has already spent $15 million just collecting data on its sewers.

Mr. Lamb said there may be ways to share the costs, like creating a large stormwater district and directly assessing owners of properties that create a lot of runoff in that district. But there's no guarantee that a solution can be found that won't involve massive borrowing, and higher rates.

The region, and authority, will likely turn to the federal government for help, but can't count on getting much, said Mr. Strauss.

"That's like planning on the tooth fairy," he said.

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