Maintenance costs may force rate-hike or bond sales
Morgan Hill City Council members this week took their first look
at how much it’s going to cost to operate the city’s water and
sewer systems over the next five years.
Maintenance costs may force rate-hike or bond sales
Morgan Hill City Council members this week took their first look at how much it’s going to cost to operate the city’s water and sewer systems over the next five years.
They’ll decide early next year how to pay for maintenance and routine capital costs — whether to increase the amount that homeowners and business people pay each month or sell 20-year bonds and spread the costs to future residents as well.
The last rate adjustment occurred in 1997, when water rates were reduced slightly and sewer rates considerably. The city was collecting more than it needed to provide service, and there had been an infusion of redevelopment money, city finance director Jack Dilles said.
Meanwhile, council members Wednesday scheduled a study session Nov. 13 to go over in more detail the revenue requirements for water and sewer operations as calculated by the consulting firm of Hilton Farnkopf & Hobson.
It should be noted that impact fees paid by homebuilders can’t be used for on-going expenses such as system maintenance or facility replacement. Impact fees are reserved to fund the cost of providing services to new development.
Council members focused more attention Wednesday on the water system, which requires immediate attention. Sewer needs are pretty much taken care of through 2006-07.
“The water system is aging, we’re collecting less than what we need for maintenance, the cost of electricity is increasing and Santa Clara Valley Water District rates have increased 20 percent over the past few years,” finance director Jack Dilles told council members.
Water purchases from the district – what’s known as the pump tax — is the city’s single largest ongoing annual expense in the water budget. This year, the pump tax accounts for $1.1 million out of a budget of $4.1 million. But the number is deceptive because the current budget contains $2.5 million for capital expenses – up from $1.4 million last fiscal year and $557,000 the year before.
A consultant’s study indicates that water operations in 2006-07 will require $6.7 million. The projections include a 3 percent annual increase for inflation. Without a rate increase, the city will collect almost $400,000 less than the projected cost.
“The consultant projects that we don’t have to raise our rates as much as the rate of inflation. One reason is that we are assuming a 2 percent annual increase in customers, so there will be some economy of scale in serving a larger population,” Dilles said.
However, Dilles said, “a short-term spike in capital costs need not continue over the rest of the five-year period. That is another reason our rate increases don’t have to match the rate of inflation.”
Water fund reserves are dropping, too, because of capital projects such as the four million gallon water tank being constructed at Edmundson and DeWitt avenues. Reserve balances are falling below the desired level, Dilles said.
Practice dictates a minimum reserve of 25 percent of operations and maintenance costs. Additionally, officials like to keep 20 percent of rate revenue in a “stabilization fund” for emergencies such as droughts or disaster recovery.
With no increase in revenue, the water reserve balance will drop from $8.2 million in 2001-02 to $2.6 million in 2006-07.
While the consultant points only to projected revenue needs, city council members must decide how to pay for operation and maintenance of the water system in the near future.
Dilles outlined three possibilities. Rates could be increased 2 percent annually through 2006-07, a one-time 8 percent increase could be imposed or the city could sell $2 million worth of bonds, which would be paid off over 20 years. Rates would remain unchanged in this scenario.
The first two methods put the load on current residents, while a bond sale would spread the cost over a good number of new arrivals.
The consultant didn’t address rate structures for sewer and water services. Rate structure refers to how residents and businesses are charged – for example, a base fee, plus an escalating charge depending on consumption. Also, users are charged according to whether they live within or outside the city limits.
Following the November study session – intended to clarify revenue requirements – council members plan a public hearing in early January to discuss how to pay for operations and maintenance. A final decision would follow.
