FINANCE
COMMITTEE MEETING
NOVEMBER 27,
2006
The
meeting was called to order by Chairman Burke at 7:32 p.m.
MEMBERS
PRESENT: David Burke, John Gore, Dan
Fogt
OTHERS
PRESENT: Mayor Kruse, Kathy House, John
Morehart, Tracie Davies, Phil Roush, Ed Mullady,
AGENDA:
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Water Rate Increase
Mr.
Gore began by stating for the record the figure of $3M that he quoted at the
last City Council meeting that the Mayor disputed in his Letter to the Editor
was given to him by Mr. John
Morehart, City Finance Director.
Mr. Morehart confirmed that he gave Mr. Gore that figure. Mayor Kruse stated he was not disputing that
amount, he was making the statement that he believed it should not be
considered surplus, but prudent reserves.
Mr. Gore recalled that the Mayor did challenge his statement at the
meeting when he called it surplus by saying he’d rather refer to it as
reserves. Mr. Gore wanted to clarify
where he got the figure that he used in his comments. Mayor Kruse stated he was not challenging the
newspaper aside from them drawing the conclusion that he was not keeping a
campaign promise by raising the rates as opposed to (did not end
sentence).
Mr.
Burke noted that Administration presented the Committee with a presentation that was given to City Council in December
2005.
The
Mayor commented that everything that was discussed at the last Council meeting
with respect to water rate increases was discussed at this December 7, 2005
meeting. Administration and Council
collectively commissioned this study so that we would have a Wastewater Master
Plan that would support #1. Things that needed to be done and
2#. What needed to be done to finance those things. The Study gave three alternatives and
Alternative 2 was the one that Council had elected to go with at that time. Administration had asked that Council pass
increases for multiple years. At the
time, Council did not want to do that, but only wanted to do it for one year,
using Alternative 2. Subsequently,
Alternative 2 being 5% at that time, indicated that we
would need 8% on future years. At a subsequent
Council meeting, Council addressed the issue of rates, and passed 5%
unanimously knowing full well that the result of that was going to be 8%
proposals for the following years. He continued
by saying he felt it was an improper co-mingling of funds to try to mitigate
rates increases through transferring General Fund money to the Water. In an analysis since then, if the City would
make all the capital improvements and do all the things necessary that Council
is well aware of between now and the end of 2008, the General Fund would be
totally broke, and we would not have completed all the projects needed to be
done. He vigorously opposed any transfer
of that nature. On the flip side, in the
study presentation given last year, it demonstrated that we need to build the
reservoir that’s been discussed for many years.
The rate increases are needed for the debt services to finance
that. The presentation also showed that
the City was doing everything to mitigate the impact on the public as far rate
increases by doing things such as in the first three years of the debt for
construction of the reservoir, City would only make interest payments as
opposed to interest and principal and wouldn’t start the principal until year
2010, which would allow us to look at a little less in terms of future rate increases
because of growth we might anticipate in that period of time. If we don’t have a rate structure that will
support borrowing for the reservoir, the Mayor will not borrow the money on
behalf of the City without knowing we have revenue stream to pay it back. It’s also important to note that when the
land was purchased for the reservoir in 1998, it was estimated the cost of
building that reservoir was $12/13M.
Today the cost of building that same reservoir is in excess of
$22M. The longer we put it off, the more
impact it’s going to be on the public in terms of rate increase to handle the
debt service. He urged Council to look
at this with a very close eye. Secondly,
in terms of the operation of the WWTP, operation and maintenance expenditures,
one of the things City has been doing is not spending money just because it’s
budgeted. In Water over the last three
years, the actual spent at the end of the year compared to budget has been
anywhere from $350,000 to $550,000 under what was actually budgeted. It is the Mayor’s intent if money were
transferred from the General Fund to a line item, to veto that out of the
budget. As far as passage of any rate
increases, that’s not within his bailiwick, it’s clearly within Council’s
prerogative and he will live with that.
He wants to be sure everyone understands what the ramifications of not
passing the appropriate rate increases, whatever they may be.
Referring
to a handout, Mr. Gore asked about the carryover of $415,000 in 2003 in the
Water Fund and if it became a part of the budgeted $4.3M in 2004. Response was no. Mr. Gore asked what happened to it? The following
year the projected needs were $4.3M and $3,758,000 was spent, which is
approximately $550,000, then the following year approximately $621,000, so
that’s basically $1.5M. That became
reserves in the Water Fund. Mr. Morehart
agreed. Mr. Gore was unsure of the
number projected for the reserve for 2006.
He asked if that’s the case and you’re looking at $22M, an 8% increase
would generate approximately $400,000 in additional revenue, which is basically
one year’s good management. He commented
that 5% will cause a $150,000 shortfall on the projected $400,000 additional
revenue, so it would be a $250,000 increase in revenue. What impact would that have, other than
building up reserves?
Mr.
Morehart said John Mastraccio of Malcolm Pirnie ran
some scenarios on rates so he explained three scenarios.
Mayor
Kruse stated this year’s budget shows $7M.
Part of that being $2.7M of debt service which is about $2M more than
what we’ve had in previous years. The
reserves that we’ve got at the very least are going to be utilized in
maintaining that debt service that we have to make payment on this year.
Mr.
Morehart explained the reason the debt service is higher is because of the
County debt. If you discount that, you
are still looking at a budget of $5M, which includes the normal debt service
that was budgeted for 2007. The budget
is increased because of the increased debt service that we must pay when we
roll the County bill and begin paying it down with revenue from the tap fees
from the County. City absorbed $4M in
debt, $2M for the wastewater and $2M for water.
Mr. Gore asked for the increased revenue from that debt service, the
additional services we picked up from the County. On the Water side was a slight increase
because prior to 2006, City was receiving revenue from the County because of
the bulk water purchases. A slight
increase was seen this year from previous years. There was an opposite effect on the
wastewater side. That’s already built into
the financial number prior to 2006.
Scenario #1. 5% rate increase for 2007 and
2008 with rate revenue increase required would result in suggested increase in
2009 and 2010 of 11-1/2% and 11.4%.
These are with the same numbers Malcolm Pirnie utilized in the Water
Master Plan.
Scenario #2. 6% rate increase for 2007 and
2008 would result in rate increases of 10.3% for years 2009 and 2010.
Scenario #3. 7% increase for 2007 and 2008 would result in a rate increase in 2009
and 2010 of 9.1% each year.
Mr.
Gore asked if there was any way to know what percentage of the residents in
Marysville are not required to pay personal income tax. Mr. Morehart responded no, not without
additional research. He has no database
with that information.
Mayor
Kruse said he gets nervous about looking at these rates and asking what the
impact is on senior citizens. He is a
senior citizen and is fully capable of paying his water bills. He feels a substantial number of elderly in
this community have the ability to pay their bill. He’s not sure that’s where the hardship
actually ends up. Younger people with
young families may be the issue when you are looking at impact. You impact a greater number of people and
maybe harder, when it comes to that group.
This is observation only; he has no data to substantiate that. Mr. Gore expressed concern for the elderly
due to increased medication costs, plus additional costs on utility bills,
etc. These people live on a fixed
income.
Mayor
Kruse noted that
Mr.
Gore said it’s always said with a rate increase, that growth needs to pay for
itself, but every time there is an increase, a need to expand, we go back to
the people who have been here for 20/25 years and increase their rates along
with the new people in the new development.
He noted the Mayor does not want to touch the General Fund but the
General Fund probably crosses more of a segment of everyone, even the
non-residents of this community, the ones that work in the community but don’t
benefit from our services. At least that
helps pay for some of the expansion and some of the needs, which relieves some
of the burden from those residents who have lived here all of their lives. Mr. Gore is supportive of the reservoir and
the wastewater treatment plant. He’s
just trying to find a way to stop the bleeding for the folks who have lived
here and continue to pay for the new houses being built in
Mayor
Kruse stated the ramifications from using the General Fund. City has been able to manage the General Fund
well enough with the increased growth we’re experiencing to cover the cost to
operate things like Police and Fire, Street Department, etc. The cost of those is going up every
year. Without the growth that we’ve had,
particularly the industrial and commercial growth, City would be looking at
some other source of revenue at this point to try and fund that. City is making the new development pay in the
water and sewer system by increasing the capacity charges. These capacity charges have to have a direct
relationship with the cost of replacing the capacity they’re using. At the point it doesn’t do that and you can’t
substantiate that it does, these are no longer fees; these become taxes. They’re capable of being challenged in court
and to pass the tax increases, you have to go to the vote of the people. The study is done and we have the
documentation to back up the increases.
We cannot go any larger at this point.
Mr. Burke’s proposal for indexing future charges, particularly in the
rate area, makes a lot of sense because it will be tied to some type of regular
increase in something to keep the City on track. What we’re doing now is making up for the
sins of past Councils.
Mr.
Fogt is taking a different approach by reducing spending. He noted the City wants to buy a new semi. The cost is budgeted for a new semi, but the
City is going to try to find a good, used one at less money. That could possibly mean $80,000 vs.
$138,000. Ms. Davies said she budgets
for a worse-case scenario. $1.4M was approved
for 2006 Capital Budget; to date have only spent
$228,000. Mr. Fogt noted a 5% increase
would mean finding $150,000. He noted
the possibility of saving $50,000 for buying a used semi. There may be other places where we could come
up with the other $100,000.
Mayor
doubted Mr. Fogt’s proposal would solve the problem of having the debt service
to build the reservoir. If you save
enough money that way, where we can take a 5% rate increase and come up with
savings that would generate the difference between a 5% and 8% increase and you
do that every year, he will have to demonstrate to bond underwriters that the
City will be able to come up with that money every year to come up with the
debt service on those notes. Assume that
you can’t come up with that the 2nd year, you only had a 5% actual
rate increase, to make it the second year, you’ll have to come up with the 8% plus 3% that wasn’t passed this year plus
probably another ½ to 1% that we loose on the compounding of the money from
year to year. The City could potentially
have a 12% rate increase in the second year.
Mr.
Morehart distributed a sheet showing the dollar impact on different rate
increases and also what the implications are if you have a 5% increase in year
one and what is needed in year two to equate to an 8% increase. If you have an 8% rate increase in 2007 on
700 c.f., the annual cost is $656.76 compared to a 5% increase,
the annual increase is $638.52 which equates to a monthly reduction of $1.52
per month. A 5% increase in 2007 vs. an
8% in 2008 losing the compounding affect in the second year has an impact on
the total rate as far as the revenue realized in year 2. To get back to where we are with an 8% per
year 2007/2008 and the other 5% increase in 2007, what is the expected rate we
would need to get pretty close to where we would be if we had an 8% increase in
2007 and 2008. We’re looking at in
excess of 11% in year two just to get us back to where we would have been if
we’d had an 8% increase in 2007/2008.
Mr.
Morehart distributed another handout which states
where the General Fund is now and where it will be in the future. Showed the forecast 2007
budget. Included in the out years
beginning 2008 to 2013, are regular O&M expenditure increases in the range
of 3-4%, some employee benefits, medical, etc. that are a little higher than
that. Also included in the out years are expected capital needs. This is generated from the Department/
Division heads. As early as 2008, the
reserves are less than the $1.5M threshold number that the City tries to
maintain in the General Fund. As early
as 2009, the General Fund is out of money.
To interact another obligation as far as
funding Enterprise Funds, that would be on top of the numbers here. The capital numbers are basically all the
capital
needs that are projected in the General Fund.
Mayor
Kruse stated there is big unknown in the budget this coming year on the General
Fund. Collective Bargaining will take
place with Police and Fire. If we get a
wage settlement that exceeds the 3% that was put in for all the other City
employees through a binding arbitration, there will be major difficulties in
the General Fund if we don’t have some reserves to work with. The rest of the City is going to want the
same increases that Police and Fire get.
He suggested being very careful with the prudent reserves.
Mr.
Fogt asked if the track hoe is owned exclusively by Water. Ms. Davies said yes, and Water uses it the
most, but it is used by Streets and Stormwater at
times. Mr. Fogt asked if Water
Department gets credit for any money when other departments use it? Response was
no.
Mayor
Kruse said oil has a major impact on the cost of operating water
treatment.
Mr.
Fogt asked if it was possible with the housing market slowing down, that the
Assistant City Engineer could oversee construction of the reservoir instead of
hiring a part-time person for that job.
Mr. Roush stated no. The Asst.
City Engineer will be busy with the Water Reclamation Facility. Ms. Davies said an outside firm will be hired
for the reservoir, but we need someone internally to help coordinate the
project. That person would work about 30
hours a week on an as-needed basis.
Mr.
Burke stated the current facility right now is rated at 3.17 MGD. Ms. Davies said City just got approval from
Ohio EPA to start a study to re-rate the plant at 4.33 MGD. Mr. Burke stated the reservoir will satisfy
over 1.32 billion gallons of water and with the current expansion with the rate
increases will be 7.5 million gallons., which will
handle the City until the projected future demand YR2013. Ms. Davies said dependent on this particular
company that may or may not (inaudible). Study was not based on this project or the
figures from
Mr.
Fogt referred to an article from the Columbus Dispatch.
Mayor
Kruse stated
Mr.
Gore questioned Administration having to come back to Council for an additional
$818,000 in unencumbered funds. Ms.
Davies stated the reason why they have to do that is because that specific
project was not listed in the budget.
You can’t spend it if it’s not listed in the budget. Ms. House stated some of the appropriations
that came before Council were for items cut out of the budget that were
originally proposed by the Departments.
The amount of reserves was not known at that time. Once Administration saw the solvency of the
reserves, the appropriations were brought forward.
Mr.
Gore had no comments on the budget.
He’ll get his amendments ready.
Mr.
Burke agreed with Mr. Gore. He feels
$1.5M is low for unencumbered. It should
be $2M. If he was going to use those
funds, would rather see them used for non-borrowings. If we’re going to pave, let’s use it. If we’re going to use the same logic we do on
rates of compounding, then we should do the same thing for the taxpayers on
those kinds of improvements so we don’t pay interest and can turn around and
fund other capital projects with what would have been interest payments. He
pointed out for $1M in paving, you end up paying $1.2M
over the five-year period. That .2 could
buy the truck the City is looking for.
Mayor
Kruse stated $1.5M in reserves would allow the City to operate at the same
level for about a year if Scotts would happen to up and close their doors.
Meeting
adjourned at 8:42 p.m.