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Richard Adams, public works director.
Palm Coast Saturday, Feb. 16, 2013 4 years ago

Q&A: Why the rate hike?

by: Megan Hoye Staff Writer

Palm Coast’s proposed water and sewer rate increases have elicited many questions from residents.
The Palm Coast City Council will discuss and likely choose between two alternative rate increase schedules at its Tuesday meeting.

The first is the originally proposed increase, which will account for maintenance- and growth-related expenses for the utility for the next five years. It includes infrastructure projects for the existing utility, funds for renewal and replacement of existing parts, money to maintain an operating reserve and growth-related capital projects.

The second is similar to the first, but it pushes growth-related capital projects outside of the scope of the city’s current five-year plan, reducing the need for capital projects by $24 million. Doing this would require that the city reevaluate its plan in 2015. If the city’s population grows enough to require planning for an additional wastewater treatment (sewer) plant, rates could rise again then. 

Aside from consumer price index increases, the last utility rate increase was a 12.5% hike in 2008, which came with the five-year plan the city developed at the time. The plan accounted for maintenance and growth needs for the utility. Those five years passed, and 2012 brought the need for another capital improvement program.

“We’re accused of not planning, when really, this has been carefully planned,” said Jim Landon, city manager for Palm Coast. “Most of the money budgeted is for improvements needed because of changes in regulation.” (See the next question for more on this.)

The city departs from planned maintenance and infrastructure when it delves into the realm of growth-related projects. While there are estimates, nobody knows how quickly Palm Coast will grow. That’s why City

Council is able to consider its second option, which pushes growth-related projects back, leaving just the minimum maintenance and improvement projects in the plan.

The alternative leaves the city to do three things: First, it will refinance its loans. Taking advantage of lower interest rates will save the city between $400,000 and $500,000 annually, Landon said.

Second, the city will issue $15 million of additional debt for its five-year capital improvement plan, which only covers the first two years of its projects. The situation will be reassessed in 2015.

Third, the city will keep enough money in its operating reserve to prevent its bond rating from dropping again. Doing this is important, Landon said, because a higher rating will let the city release $6 million of its debt from its reserve fund, reducing the amount of money the city needs to borrow for projects. It will also let the city borrow at a lower interest rate, saving money in the long term.

Why spend $10 million on water treatment plant 2? Why pay for so many new wells?

The biggest expense the city faces now is an Environmental Protection Agency-mandated improvement to the utility’s second water treatment plant, which currently releases a concentrate of minerals from well water into the Royal Palm Waterway.

Palm Coast currently has an EPA-issued permit to do this, but it expires in March, and because of changes in pollution regulations, the EPA will not renew it until the treatment plant switches to a system that puts fewer minerals into the waterway.

“That’s why we’re telling City Council they don’t have a choice right now,” Landon said. “Or, they do: They can either raise rates or fight the (Department of Environmental Protection) and the EPA. We’re at the point where we can’t sit and do nothing.”

The news of the impending expiration of this permit, which is issued under the EPA’s National Pollutant Discharge Elimination System, came four years ago. Since then, the city commissioned a study and considered 10 options for bringing the plant up to the EPA’s new standards.

The winner: a zero liquid discharge system similar to the process used in the utility’s first water treatment plant. Through post-treatment, the mineral concentrate will be mixed with lime to create a solid waste, which can be taken to a landfill. This kind of waste is not currently regulated.

The city was on track to change to a zero liquid discharge system by 2013, but when the city’s bond insurer (not the city itself) was downgraded, the city was required to put more funds in its debt reserve, which ensures bondholders that the city can repay its debt. This, Landon said, is another reason that it’s important for the utility to keep enough funds in its operating reserve: to maintain a high rating on its bonds.

Palm Coast has requested an extension on its deadline to upgrade its treatment plant, and Public Works Director Richard Adams said he is confident that because plans are in works to do so, the extension will be granted.

Other regulations require that the city expand its number of wells because environmental agencies say relying too heavily on a few wells is detrimental to the aquifer. That’s why, staff said, money is budgeted to increase the number of wells the utility gets its water from.

Why not sell the utility?

Some residents have suggested Palm Coast sell the utility to a private company to solve its problems.

“I think the misconception is that there’s somebody out there with a pocket full of cash that will come in and buy the utility,” said Chris Quinn, the city’s finance director. “Whoever’s going to buy the utility is going to borrow the money to do so, and the cost is going to be greatly in excess of what we’re paying now. That’s going to be turned around on the rate payers.”

And, Quinn said, any private person or company who purchases the utility will want to make a return on the investment, so rates would rise to create a profit. Plus, the new owner would still need to maintain the utility, which costs money, Quinn said.

But doesn’t the city make a profit on the utility?

The city’s utility is an enterprise that stands alone from the rest of the city’s projects. It’s set up to be a self-sustaining, profitless entity.

“All the revenues we collect in the utility are reinvested into the utility,” Adams said.

Why not use red light camera funds to repair the utility rather than raise rates?

Palm Coast purchased its utility as a stand-alone enterprise. Its budget and the city of Palm Coast’s budget are separate sources of funding, and they cannot be intertwined.

“We don’t use the funds collected from utility bills for general government projects,” Landon said, “and we don’t use tax dollars to support the utility.”

The question of changing this practice has arisen in City Council discussions about the rate increase. But overall, the council and city staff say that comingling the two funds is a bad practice. Right now, residents are charged for water and sewer based on use. If taxes were used to fund utility projects, that wouldn’t be the case.

A high-value home with one resident pays higher property taxes than a lower-value home with six residents in it.

“Is it fair for that person to be paying more into the utility even if other properties use more water?” Landon said.

There are fund transfers from the utility to the general fund every year, however, because the utility contracts with the city for services such as human resources, processing purchase orders and use of the city attorney.
It’s more efficient for the utility to operate in conjunction with the city for those services, Landon said.


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