Additional Water Bill Questions Addressed

This article is a follow up to one posted May 8th to address questions from a citizen about water bills. After responding to the initial six questions City staff received another five questions, which are addressed below. Readers may need to refer back to that May 8th post for the context of some of this information.

Before going through each specific question, I think it would be helpful to take a step back from analyzing the components listed on the bill and specific words used for each. Regardless of how the charges are broken out on the bill, residents and businesses connected to the City’s water system need to pay the costs to operate it. If the City ceases to maintain the plant (and periodically upgrade it) it will not continue to operate and serve our citizens.

A rate study is required before raising rates, and the City’s engineering firm conducted these studies both for the water system and wastewater system prior to Council putting the current rate structure in place.

We have attempted to break out the system expenditures in a meaningful way to help customers understand the different components as well as to allocate the total costs in as equitable a manner as possible. For 2012, the budget to operate the water system is $1,581,400. One option for paying these expenditures would be to simply divide the total by the 3,100 customers connected to the system and bill each one $128 each quarter ($43 per month).

Another option would have been to charge customers entirely based upon the amount of water used. However, this does not take into consideration that the City is “ready to serve” all customers connected to the system and that the plant and infrastructure must be maintained whether or not a customer is actively using the service. In fact, the largest problem with frozen water meters is due to customers who are not using water.

Instead, the City worked with its engineering firm to devise a system by which a portion of the fixed costs are paid by a fixed fee charged to each customer. The remaining costs are paid by a variable charge based on how much water each customer uses. This method results in a base quarterly fee ranging from $67.66 for a residential customer to $441.45 for a commercial customer using large quantities of water ($22.56 to $147.15 per month). Residential customers receive 6,000 gallons in the base fee and then pay for additional gallons used. Commercial customers pay for all water used.

It should also be noted that substantially all the operating costs are fixed; it does not cost the City much to treat more water. At least one member of the Council would like to encourage customers to use more water and green up their lawns!

Answers to all the questions we recently received are available in public documents on our website. These financial matters have been discussed during various public meetings; however, City staff can certainly appreciate that people are busy and do not take the time to attend or watch meetings or read information available on our website. Therefore, I hope the letter sent to the citizen who posed these questions and this public post will provide a relatively concise, but thorough enough, response so that all readers will better understand the finances of the water system. The first two questions below specifically follow up on the first set of questions and answers and readers may wish to refer to the May 8th article for a more complete answer to each question.

Now, to address the specific questions:

Question #1:  Water maintenance fee includes personal and water service fee includes salaries. Aren’t these the same? Who is personnel? Who has control of salaries – Council, Administrators?

Answer:

  • Personnel are needed to maintain the water distribution system (“water maintenance fee”) and to operate the water treatment plant and oversee administrative needs and capital projects (“water service fee”). So, yes, both the maintenance fee and the service fee include cost-recovery of salaries and other costs for personnel.
  • Personnel includes 100% of the costs for the water plant manager and two other certified operators. Also included are a portion of the costs for certain public works and administrative staff who work on the water system in addition to their other duties at the City. For example, I am spending time right now working on a matter related to the water system. A portion of my salary is allocated to the water fund. Also, the staff members who process payables and receivables allocate a portion of their time to the water fund.
  • The City Council adopted a “Pay Plan” with the salary ranges for employees based on their job level and they set the salary paid to the City Administrator. Individual salaries for other staff members are approved by the City Administrator.

Question #2: Water maintenance fee includes fixing leaks and frozen meters, and water service fee includes supplies. Aren’t these the same? 

Answer:

Supplies are needed for activities related to maintaining the water distribution system, operating the plant and for administrative requirements. They are not the same supplies.

Question #3:  Specifically, what debt service obligations does the City have?

Answer:

Given the context of your questions, I will provide a listing of the water system debt. For a complete listing of all the City’s debt, please see footnote 4 to the audited financial statements (available on the City’s website).

  • 2001 Department of Local Affairs Note Payable
    • Original Amount Borrowed:  $175,000
    • Amount Outstanding:  $116,643
  • 2007 Water & Sewer Refunding and Improvement Bonds
    • Original Amount Borrowed/Refunded:  $3,940,000
    • Amount Outstanding:  $3,255,000
  • 2011 Water & Sewer Enterprise Tax Exempt Loan (Drinking Water Revolving Fund)
    • Original Amount Borrowed:  $545,000
    • Amount Outstanding:  $545,000

Question #4:  When you bought the Vandaveer water rights did that purchase impact our current water rates?

Answer:

The direct answer is no.

However, one could argue that the purchase does have some indirect effect on current water rates. At the time of the purchase, City Council anticipated that the tap fees for development of the land would completely pay the costs for the water rights. As we all know, development activity slowed down significantly since that time. So, the reserves used to pay for the water rights have not been replenished. The current water rates do include an amount intended to re-build reserves.

Question #5:  If the water and sewage utilities are run as a business shouldn’t the Council be looking at decreasing expenditures?

Answer:

Yes. Each year, department heads identify costs that can be deferred or cut and then the City Council usually cuts more items from the proposed budget.

Fiscal responsibility is a City-wide goal of all department heads. They are continually asked to look for ways to do more with the same or fewer resources. However, sometimes saving money in the short-term ends up costing taxpayers more in the long-term. We strive for the balance of being frugal but investing what is necessary to protect the investment in the facilities and infrastructure that serves our community. We have to maintain the facilities and infrastructure to keep them from failing and requiring a complete replacement. From time to time, a major upgrade is necessary. For example, in the case of the City’s wastewater treatment plant, the upgrade is needed because of new regulatory requirements. The plant, which was built in 1956 and renovated in 1983, was not designed to treat ammonia in the effluent discharged into the Arkansas River. In addition the aging facility’s concrete and mechanical equipment was deteriorating and, after serving the community for many years, it was approaching the end of its useful life.

State and Federal regulations and reporting requirements have increased and, just like you see when you go shopping or pay other utility bills, cost inflation affects the City’s budget. Unfortunately, the costs of operating our facilities probably will not decrease in the future.

The City’s enterprise funds differ from a business in that they operate only to serve its customers. The City does not have shareholders who expect dividends or growth in its stock price. The City manages its water business for the long-run, not to meet quarterly earnings expectations for short-term profits. Customers pay only for the cost of the service and not for a return to investors.

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