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HomeMy WebLinkAbout2007-08-09 - MinutesCity Council Water & Sewer Meeting Minutes August 9, 2007 Page I of 9 Member Aldermen Mayor Dan Coady Ward 1 Position 1 — Adella Gray V10 Ward 2 Position l - Kyle rt Cook CityAttorney Kit Williams � 1 Ward 3 Position 2—Robert Ferrell Ward 4 Position 2 - Lioneld Jordan City Clerk Sondra Smith ARKANSAS City of Fayetteville Arkansas City Council Water & Sewer Committee Meeting Minutes August 9, 2007 A meeting of the Fayetteville City Council Water & Sewer Committee was held on August 9, 2007 at 4:30 p.m. in Room 326 of the City Administration Building located at 113 West Mountain Street, Fayetteville, Arkansas. MEMBERS PRESENT: Alderman Kyle Cook, Chair; Alderwoman Adella Gray; Alderman Lioneld Jordan; Alderman Robert Ferrell STAFF PRESENT: Paul Becker; Gary Dumas Chairman Kyle Cook called the meeting to order. He said he had asked Paul Becker to be present at this meeting to answer questions. David Jurgens is out of town on military leave. 1. Water and Sewer Rate Study Discussion Paul Becker said staff has handled this rate study with a team approach. He said he and other people in Finance have been involved, as well as David Jurgens and HDR's rate study specialists. He said he has framed this meeting as a kind of question and answer period. He watched the tape of the last meeting and Susan Thomas helped to point out the questions the Committee expressed at that meeting. He said he will try to answer as many of those questions as he can and will be open for any other questions the Committee might have. He said the first question that has been asked is what a flat rate across customer classes would look like. What would it look like if we charged everyone per gallon used? That calculated out at $3.08 per thousand gallons for water and $4.66 per thousand gallons for sewer. That figure is straight across the board and we wouldn't charge meter charges which are intended to recoup fixed costs. Volume charges are designed to calculate the variable charges. He said that is one method that could be used, depending on how we define fixed costs. The next method would be to keep the fixed costs, keep the same projected increase and attached a water volume charge. In other words, there is one flat volume charge but we do have fixed costs. Those costs would be calculated at $2.70 per thousand gallons for water volume charges and $3.19 per thousand gallons for sewer. These rates are less because we have fixed costs figured in. Mr. Becker said he would like to make clear that he does not feel flat rates are a fair and prudent way of recouping costs because the customer classes have costs associated with them that are factored into rates and these vary widely. He doesn't think this is a fair method but he did want to give the Committee some numbers to show what would be the affect of this method would be. He distributed a spread sheet to the Committee. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 2 of 9 Alderman Ferrell asked if the fixed charge was incremental. Paul Becker said the fixed charges are based on the difference in the size of the meters. It would change with the meter charge. Alderman Cook explained that it would be the size of the meter rather than the volume that determined this. Paul Becker reviewed the information on the spreadsheet he had distributed. He said he wanted to show the affect on customer classes if we did in fact put into effect a flat rate for water and sewer. To do that he picked three customer classes: the average residential customer, the University of Arkansas and Pinnacle Foods (representing the industrial class. Pinnacle is our largest user for sewer and water services). If we compare current rates in effect to 2008 rates (with flat rates), we could see that residential rates would actually go down. That would have to be absorbed across the system by increasing rates for governmental and industrial customers. His spreadsheet compared that to Option 1 in our rate study (cost of service, charging that customer class exactly what it costs to run that customer class). He pointed out the variances: the increase would be $1.21 for residential customers; the bill for the University of Arkansas would go up $9,279.00 per month and the Pinnacle Foods group would be up around $12,310 a month. If we went to Option 2 (outside customers rates based on cost of service; inside Fayetteville users increasing 11.1% in 2008 for water) the increase would cost the average customer $2.58 a month; the University of Arkansas $4,707.00 and Pinnacle Food Group $5,042.00. All this tells us that if we go to a flat rate, we would actually be subsidizing the residential customer. If we go to full costs it would drive up the rates (in comparison to what they are paying now) for the industrial and governmental classes. Option 2 would help subsidize those industrial classes. In response to a question from Alderman Jordan, Paul Becker said that the 11.1% across the board was Option 2. He continued with information on the spreadsheet, going to 2009 where there are increases to water and sewer. He pointed out the dramatic effect of flat rates. He said it will certainly affect the residential customer but it will do so at the expense of the governmental class and the industrial class. He said he hoped this synopsis would give the Committee a little idea of the sensitivity of this issue of flat rates. Alderman Jordan said this is good information. He asked if we go with what staff is recommending (Option 2 which shows the sewer rate by 2009 for residential class being $8.96) if that is total cost or if we would then add the $2.58 (from page 1) to that. Paul Becker said the $8.96 includes everything on page 1 and 2. He said the next question from the last meeting is what subsidies to customer classes for Option 2 occur over Option 1 in total allocations. He said with the estimates done for water, residential would have an additional allocation of about $170,000 across classes (we have about 16,000 residential customers). There would be an additional allocation for commercial water so they would be helping subsidize the industrial and governmental classes which would be under allocated by $200,000 and $67,000. He said these are the differences between Option 2 and Option 1. Alderman Jordan said in other words, in Option 2, the residential customers subsidize the industrial and the government customers. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 3 of 9 Paul Becker said that is correct. He added that commercial also subsidizes them to a small degree Alderman Jordan said that in Option 1 that is not the case. Paul Becker said in Option 1 everybody pays. There is no subsidy. Everybody pays their cost. Alderman Cook said the cost of service takes into account the cost of servicing each of the different classes. He said we have always had that conversation about it being cheaper to service an industrial customer because of the larger volume. Cost of service takes into account all those factors. Paul Becker said that is a decision the Committee will be making: do we want to do that or do we want to subsidize a class. On the sewer side he said with Option 2 both commercial and industrial would be subsidized by residential and a little bit by government. The third question from the last meeting was why subsidize any sector. He said one concept of rate reduction centers on end user. In other words, with the residential customer, that's where it all stops (they are the end user). However with a business, that water may somehow be incorporated into the production of a product and in that case you might give a price break to these users. Another concept is that there are positive externalities associated with a user group. He said it does help the community to have a business that pays property taxes. Another thing to consider is that these businesses are employers and that is another positive externality we get out of the commercial and industrial users. He said the University of Arkansas employs 7,400 people plus all the students. The Northwest Arkansas Mall employs roughly 2,000 people; Washington Regional Medical Center employs 2,000, etc. Employment offered is the reason that many governments consider a subsidy for commercial and industrial users. Alderman Jordan asked if Mr. Becker has any examples of cities that don't do this. He wondered if the consultant looked at other cities that don't do this when they were doing the study. Paul Becker said he really doesn't have any examples of such cities but he said HDR is a big player in doing rate studies and Tom Gould will certainly have that information when he comes to the next Committee meeting. Mr. Becker said the cities he is familiar with use a subsidy. Alderman Ferrell asked if it is fair to say that most cities do go that route, realizing the importance of the business sector. Paul Becker agreed with that. Another question raised is what the impact of the suggested rate increase would be on our top twenty users. He distributed a schedule with this information to the Committee and reviewed this information for the Committee. As one example, the differences between Option 1 and 2 for the University of Arkansas would be about $4,500 per month. He said the difference between Option 1 and 2 for what we are calling the average residential customer (assuming 5300 gallons of water a month) is $1.37 (more) per month to go with Option 2. He said because the residential customer is a smaller user, they will pay more than the cost of service, but it will help mitigate those increased costs which would be very large for the larger customers. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 4 of 9 Alderman Ferrell said he was going to have to leave but wanted to ask a couple of questions that are a little out of the order of the presentation. He said there were a couple of CIP projects, the cost of which was added into the 1 cent sales tax. Some other projects were deferred. He asked what impact loading on those capital improvement projects so they could be completed at a quicker time have on the typical residential rate payer in Fayetteville. Paul Becker said in the WSIP we had additional costs other than what had been anticipated. That is being paid by special sales tax. We had other issues where we had some other things that were being paid out of the one cent sales tax we have for our capital programs. He said he doesn't think this directly impacted the rate payers. He said we have to remember that basically the WSIP was paid out of bonds issued by sales tax. He asked if this addresses Alderman Ferrell's question. Alderman Ferrell said this afternoon when he was going through this information, he was remembering that there were some pretty good sized capital projects that were thrown into the WSIP that in his opinion, would not have been completed as quickly and would not have had as much impact on the rate payer. In other words, we said these projects would have to be done sooner or later and we've got to come up with a new wastewater treatment plant, let's go ahead and include these projects into that bigger project. He said he doesn't see how that can not have an impact on the rate payer. He asked Mr. Becker to take a look at that. He said there were some things put into the program that had we not put them in, we would not have had to come up with as much money as fast as we did. Paul Becker said he will research that and get the information. Alderman Ferrell asked if Mr. Becker could describe the financial impact of serving customers out the City of Fayetteville city limits (water & sewer) bearing in mind CIP costs, maintenance & operation costs, etc. on the average residential water & sewer rate payer in Fayetteville. Paul Becker said it shouldn't have an impact. He said by contract we were allowed to set those rates based on not only cost but a rate of return. So if we compare those rates, we will see that the rates to the outside customer are higher than those for Fayetteville. Alderman Ferrell said that it is not only a wash, then but we are also getting a little rate of return. Paul Becker said we should. Alderman Cook said in the negotiations with Elkins and Farmington, the "Ferrell Amendment" as it was called (service to outside customers shall not have a negative impact on Fayetteville rate payers) was taken into consideration. Alderman Jordan said we are saying that outside customers are never supposed to have cheaper rates than the citizens of Fayetteville. Alderman Cook said no, we are entitled to a rate of return also and that is what takes the rate above ours. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 5 of 9 Alderman Ferrell asked a question regarding a memo issued before the sales tax election. He read, "use of increased revenues from 2004 to 2006 ... the revenues generated from the 29.5% rate increase have been used for operations & maintenance and capital replacement on the current sewer system". He asked if this is still an accurate statement. He said he was trying to remember if we used some of that 29.5% on our WSIP. Paul Becker said we used some rate money on the WSIP. He thought it was $5.3 million. Alderman Jordan said we used impact fee money on it also. Alderman Cook said those incremental increases were originally to build up for the O & M needed to bring the new plant on line. But with the overrun, we pulled together money wherever we could to lower the burden on the tax payers. Alderman Jordan said basically what we are saying is that part of this 20% increase on sewer rates is the result of having to use part of the 29%. He asked if that is a fair statement. Paul Becker said theoretically. He said he would have to look into it more closely but it was a build up of working cash. Alderman Jordan said when there is a decrease in one place, it has to be re -collected somewhere else. Alderman Cook said he wanted to add on to one thing Alderman Ferrell said earlier. He was asking about how deferring costs and rolling in costs would affect the rate payers. He said he would also say that the amount of projects that we rolled in to this rate study also affect these rates that we are looking at currently. He said these are all CIP projects that typically we would be trying to figure out how to pay for and we rolled them into this study to have a plan for how to pay for them. Alderman Ferrell said that is basically what he was saying. If you look at it historically, you didn't see increases of this magnitude even when we had a new sewer plant come on line (the Noland Plant). He said it is a pay -me -now or pay -me -later deal. When this thing is done we should probably be in the best shape we've been in for 50 years. But it is having an impact on the increase in the rates. Paul Becker addressed the next question on his list: what were the capital improvements that we anticipate and included in the study. He distributed information regarding this. He said this is generally the CIP for water & sewer. He said the final column shows what staff feels has to be deferred to a later date. He said questions regarding this will have to wait until Mr. Jurgens returns. Moving on, Mr. Becker said the fifth question - regarding the provision to utility customers outside the City has already been addressed. The next question regards costs allocated to the City enterprise funds, specifically water & sewer. Mr. Becker said we do have a cost allocation system and costs are in fact charged to the water & sewer system. He said cost allocation is a pretty normal undertaking in governmental accounting and is intended to spread to the enterprise funds those costs that are absorbed in general government so that the enterprise funds pay back the general fund or other funds for services. He said the one thing we don't see here is that some money comes back into the water and sewer fund from the billing division. He gave to the Committee a list of divisional allocations. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 6 of 9 In response to a question from Alderman Cook, Paul Becker said the information given is for budgeted amounts. He said this reimburses the general fund for costs absorbed by the general fund (for that division). He said these are basically allocations. He gave an example of the costs for auditing and accounting where the division is charged a certain amount per bill. Depending on how many bills are processed, that cost is billed back to the division. The budget numbers may not turn out to be the actual cost. The next question that came up at the last meeting was regarding inflation rates. It was asked what inflation rates were used in the study going forward. Mr. Becker said when you prepare the detail analysis in the rate study you go by category in use of inflation rates. He said we forecasted a range between 3 and 4% for most of the expense elements, except for medical costs for employees which was at a higher percent. He said revenue was estimated at a 3% increase. He said that is how inflation was incorporated. The next question asked if the policy currently in effect is rewarding people for increased water usage by having a tiered approach to the rate structure. In other words, the more water you use, the rate goes down. He said the block or tiered approach to rates is a common method. He said this is to aid bulk users because they provide certain benefits to the community. Also, the incremental costs or marginal cost per gallon does go down with the more gallons pumped. This is because the maintenance costs decrease per number of lines, etc. If the Committee wants to pursue this more, David Jurgens will be able to provide the specific reasons for this. To address the question of whether or not this is fair, Mr. Becker said he thinks it is. As to whether it rewards people for increased water usage, yes it does in some ways. He said if conservation is the goal, this does not address that issue. Alderman Jordan said that is his goal. He said he would also be curious to know if there are other cities that are looking at sustainable programs but which still reward people for using more water. Alderman Cook said he is sure Tom Gould could answer that question. Paul Becker said that is a perfect question for Tom. He said it is called an inverted block approach. Alderwoman Gray asked if it would be wise for us to give these questions to Tom in advance of his coming. Paul Becker said this is something he needs to discuss with Tom and he will have him prepared for the meeting. He said any information the Committee needs to make their decisions the staff will be willing to provide. Alderwoman Gray said she wants us to do everything we can to encourage conservation. If there is a program that is working in some other places, the Committee would like to know about it. Paul Becker said there are many approaches that could be taken in this. Alderman Cook said he remembers that Tom alluded to conservation at the end of his last presentation. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 7 of 9 Paul Becker said it is something that the Council might want to set as a specific management goal. He said a lot of this is to reduce the cost to the bulk user. We might want to consider some way of accomplishing that plus water conservation. He said some industries are going to use a lot of water. We don't want to penalize them but we do want to have people conserve as much as possible. He said there are mix -and -match approaches to this and Tom can certainly help us with that. Continuing with his presentation, Mr. Becker said the next question is how it is possible that the rates have remained stable in recent years in view of the City's population growth during those years. He said a lot of our capital improvement programs are financed through sales tax and not necessarily rates. He said also it is important to remember that as the number of customers increases, the revenue increases. In response to a question from Alderwoman Gray, Paul Becker said we haven't had a rate increase in water since 2003 and that was strictly to cover the cost increase from the supplier. We had a 2003 increase in sewer rates also. He said the increase in water was 10% and the sewer was incremental over three periods. Alderman Jordan said it (sewer rate increase) was about 29% when all was said and done. He said at the time there was discussion about enacting the rate increase all at once but he suggested that it would be best to do it in 9% increments. In response to a further question from Alderwoman Gray, Paul Becker said the increase was across all classes. He said the increases were applied using the same method as our Option 2 in this study. Alderman Cook said before the 2003 increases, it had been several years since there had been any increases. Paul Becker said the last water increase before the 2003 increases was in 1997. The last question he had on his list to address was how new development (in the future) relates to sewer/water use equation. He said the cost related to new development should be addressed in impact fees. He brought it to the Committee's attention that impact fees here are incorporated into the rate study. He said they did anticipate using impact fees to finance some of the capital improvements. As far as the indexing of the fees and its impact, that goes into the impact fee study. They go through it by developing these equivalent units estimated on the City's twenty- five year plan. So as related to sewer and water rates, we are expecting impact fee revenues to be factored into this to help with some of these projects. Alderman Jordan said that was one of the new questions he was going to ask. How do the water/sewer impact fees figure into all this? It has to figure in somewhere. Paul Becker said we do make a projection and we factor it in and we say we are going to use it. He couldn't remember off the top of his head what the figure was. He said if we collect more in impact fees than anticipated, we can do some of the deferred projects quicker or we could use the money for capacity related issue. Alderman Jordan asked if we could roll back some of the money to help pay down on some of the bond issue. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 8 of 9 Paul Becker said we have to be very careful with that. We can use the funds on revenue bonds but we cannot use them on the special sales tax bonds Alderman Jordan said he has more questions but he hasn't worked them all up yet. He said he would send the questions to Mr. Becker. Paul Becker said that is very helpful and he appreciates having the questions in advance. It gives him something to go on to prepare. He said staff can give presentations but if that presentation isn't helping the Committee in going the direction they want to go, it isn't helping. Alderman Cook opened the floor for public comment. Tom Overby said he read about the 58% increase on irrigation rates and it caught his attention. He said Mr. Becker gave him a copy of the summary of the study. He said his sole issue is irrigation rates and it is a policy decision. He said he recognizes the Committee has an impossible job in making their decisions. In looking at the summary he said he can see where the 58% comes from because as the cost allocation is presented, it shows that the irrigation class of customers is far undercharged relative to allocated costs. However, this summary does not indicate what allocated costs these are. He understands the study is not complete and is not readily available. He said from his perspective he would ask that the Committee consider averaging all users, not identifying and separating out the irrigation users. He said a user who has an irrigation meter has gone through a lot of trouble and expense to get to that point. He has already paid the cost of the sewer fees and the taps, etc. That irrigation meter user would end up paying a much larger increase than other customers, regardless of which method the Committee adopts. He said the irrigation user is also using a more efficient system to deliver the water to their yard. He said he understands it is more efficient to deliver smaller amounts of water through a properly installed irrigation system than some of the manual methods. He said the City promotes landscaping, American in Bloom, etc. He said what bothers him philosophically is that we require landscaping in new construction and now we're going to penalize the folks who do this, especially the ones who put in something nicer than required because they're going to have to pay 58% compared to 11.1 % for the irrigation to keep that nice landscaping going. He said his irrigation bill was $14 in June so this is not going to break him but it is, as a philosophical point, disturbing to him to single out the irrigation customer. Alderman Cook said he wanted to say that the Committee has not yet made any policy decisions. They are still asking questions. In response to a question from Tom Overby, Paul Becker said once a recommendation is made by the Committee, there will be a public hearing before it goes to the City Council for approval. Jeremy Cobb said he is an irrigation distributor in Springdale and he said for years his company has advertised themselves as conservation leaders in the industry. He said he agreed with what Mr. Overby said about the efficiency of irrigation systems. He said Fayetteville has some landscaping codes but there are no irrigation requirements. He says he sees both ends of the spectrum — people using super efficient systems where over 85% of the water coming out of the end of the head is going into the ground. He also sees people using materials that are only sending about 50% of the water into the ground. He said he is not here to say an increase in irrigation rates is bad. He will say that if it were to be a level rate across the board for everybody, the guys who are wasting a lot of irrigation water are going to have no incentive to reevaluate 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes August 9, 2007 Page 9 of 9 their usage. He said he does not promote the use of irrigation everywhere. He said he is a proponent of using more drought tolerant plants. We should be using turf that doesn't require irrigation over two inches a week. We don't have to be spraying water all over our sidewalks and streets. He said it costs $1600 in the City to set the smallest secondary meters for an irrigation system. So you do incorporate a large cost into a landscape when you look at the backflow regulations, the irrigation set, etc. So you should be looking into the lines of conservation as opposed to cost of system installation. He said there are smart ways to irrigate and use our water. He said it is nice to hear that conservation is really on the forefront of what needs to be done. Alderman Cook said at the last meeting David Jurgens addressed irrigation and said it is not just about the conservation of water. Mr. Jurgens said because more and more people are irrigating, the City has to upsize lines to take into account the volume needed. It is not necessarily the volume of water they are using but the fact that we have to take into account that extra usage and make sure the lines are large enough to deliver it. Tom Overby said when he put his system in he ran it off the house path. When doing this he said he calculated the cost of putting in a separate meter and the savings on the sewer rates. He said it was cheaper for him to use City water at the volumes he was using it. He ended up putting in an irrigation meter and tap because of the pressure needs that changed when he increased the system. He said if the City increases residential rates by 11.1 % and irrigation rates by 58.2%, we will make it cheaper for people to use the water and pay the sewer on top of it than to go and have a separate tap. He doesn't think that will be good long range. There being no further public comment, Alderman Cook brought the discussion back to the Committee. 2. The Next Water/Sewer Committee Meetine The next Water & Sewer Committee had already been scheduled for Tuesday, August 28, 2007 at 6:00 p.m. in Room 326 of the City Administration Building. There being no further business, the meeting was adjourned. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org