Oceanside has been put on a "credit watch with negative implications" by a bond rating agency because the City Council failed to raise water and sewer rates earlier this month.

The credit watch, issued in a Tuesday notice to investors by Standard & Poor's, could have "severe consequences" if it remains in place and results in a lower bond rating, the city's financial services director, Teri Ferro, warned in a memo Thursday to council members.

"This will really hurt the city if we don't fix this," Councilman Jerry Kern said.

A lower bond rating would mean the city would have to pay higher interest rates on money it borrows.

Of more immediate concern, investors could demand immediate payment of $18.6 million in outstanding sewer bonds, Ferro said in her memo.

Investors could seek a court order to raise water and sewer rates high enough to make regular payments on the outstanding bonds, Ferro said.

"If they call for full payment, $18.6 million, we don't have that," Councilman Rocky Chavez said. "We just went ahead and shot ourselves in the foot if we don't pass this (rate increase)."

As it is, city officials are struggling to cover a two-year $10 million budget deficit. The council last week approved nearly $7 million in spending cuts.

City utility officials will return to the council Nov. 4 with a revised proposal to raise water and sewer rates.

The revised proposal will include increases higher than those recommended to the council at an Oct. 14 hearing, because the city must recoup higher rates it has been paying for water to the San Diego Water Authority since Sept. 1, City Manager Peter Weiss said Thursday.

"We're paying money out already," Weiss said.

Oceanside buys 80 percent of its water from the Metropolitan Water District through the San Diego Water Authority.

The water authority in September raised its rates 18.1 percent, passing most of an increase adopted earlier by the water district.

If the council rejects rate increases Nov. 4, Weiss said, he will ask it to approve severe cuts in utility department spending, which would result in 27 water and sewer workers losing their jobs and deferral of needed maintenance on the city's water and sewer system.

Standard & Poor's warned in its notice that spending cuts may not be sufficient to remove the credit watch.

The agency said it was unclear whether the cuts would save enough money to cover the city's next payment on the outstanding bonds, which is due May 1.

The council voted 3-2 Oct. 14 to raise water and sewer rates, but officials at the time thought a 4-1 vote was needed to adopt the higher rates.

Mayor Jim Wood and Councilwoman Esther Sanchez voted against any increase. Councilmen Jack Feller, Chavez and Kern voted to raise rates.

City Attorney John Mullen subsequently said a 3-2 vote was sufficient.

He said a supermajority of 4-1 was needed only if the city wanted the ability to place liens on the property of people who didn't pay their water and sewer bills.

Nevertheless, Mullen said a new vote was needed because the rate ordinance before the council Oct. 14 was for the highest of the suggested increases.

The council chose the lowest rate increase that would defer some projects but raise enough money to cover bond payments.

Call staff writer Ray Huard at 760-901-4062.