The city council was scheduled to meet in a special session Tuesday at 5 p.m. to consider a resolution to increase local water rates by 18 percent. The move was prompted to allow the city to continue to meet bond debt service requirements on its water treatment plant.
The issuance of the bond dates back several years, when the city was forced to approve construction of the plant to reduce the amount of arsenic in the local water supply. That move came after the state and federal governments radically reduced the acceptable level of arsenic allowed in municipal drinking water.
In order to build the plant, the city issued $18 million in bonds. The council in place in 2005, when the subject was first broached, approved a resolution to increase water rates by 24 percent per year over a four-year period (96 percent in total), ending in 2009, in order to have the money to pay off the bond. The 2005 resolution also allowed the city to impose additional cost of living rate increases as needed.
There have been no increases to the water rates since 2009.
However, City Manager Kindon Meik said it became apparent to the city in recent months that state-mandated water conservation efforts were cutting into water fund revenues. Flat-rate customers are paying the same for water service despite double-digit cuts in water use. Those on metered water service from the city are actually seeing reductions in their water bills thanks to their conservation efforts.
Thereby lies the rub. When the city signed covenants for the water bond, it agreed to maintain debt service coverage at 120 percent; in other words, the city obligated itself to ensure its net revenues were 20 percent higher than its total debt service on the bond issuance.
At some point since the city became aware it would not meet the bond requirement, city staff contacted NHA Advisors to provide solutions. Tuesday’s resolution is a direct result. In addition to the 18 percent increase—which is retroactive to Jan. 1—the resolution will allow a three percent or higher rate increase (tied to cost of living increases, with three percent used as the minimum base percentage), beginning with the new fiscal year on July 1, and annually thereafter, as necessary.
NHA Advisors made other recommendations, which the city staff submitted for council approval. They included:
–Reduction of expenses in the water fund. The city proposed cutting the water fund by $120,000 during the remaining five months of the current fiscal year.
–Utilizing cash reserves as a rate stabilization fund (RSF); city staff proposed transfer of $150,000 in water fund reserves into a RSF. That money could be returned over the next year as the rate increase kicks in.
–Authorization of a rate study for future solidity of the water fund. No cost was given for the study, which is aimed at developing a water rate structure that maintains the financial stability of the water fund.