Beginning in 2011, the City of Wauwatosa undertook increased capital spending to address basement backups, surface flooding and deferred maintenance of the sewer system. To accommodate that increased spending which is budgeted to continue at approximately the same rate in the 2016-2020 Adopted Capital Plan, it is necessary to raise sanitary and storm sewer rates.
The City operates separate Sanitary and Stormwater utilities which are accounted for as Enterprise Funds such that their operating expenditures must be supported by user-revenue collected through a rate-structure. Unlike the Water Utility, the sewer utilities are not regulated by the Public Service Commission so that changes to this rate structure can be made by action of the Common Council. In order to capture a full-year's benefit of a rate increase, it is necessary that new rates be adopted before the end of January 2017. Sewer rates were last raised in 2016.
Due to repeated flood events beginning in 2008 and recognizing the miles of pipe that were past-due for replacement, the City began planning for an enhanced sewer infrastructure program. From 2011-2015 $42.7 million has been spent. It is estimated that $4.8 million was spent in 2016. The 2016-2020 Capital Improvement Plan was based on a "State-of-Good-Repair" analysis which established as a base-line of spending the amount of funding necessary to replace sewer infrastructure based on its useful-life and authorizes $36.1 million over that 5 year period.
These improvements are largely debt-financed so as to ease the impact on rate-payers and spread the cost over time through the debt amortization (10-20 years). Beginning in 2013, the principal and interest payments necessary to pay this debt significantly increase annually necessitating the rate adjustments described in more detail below. At this time, the Finance Department with the assistance of the City’s Financial Advisor is re-examining the debt service schedules and rate projections after 2021 so no estimate is available beyond 2021.
The current rate forecast shown below attempts to smooth rate increases while maintaining a 1.10-1.20 debt coverage ratio (Net Operating Income/Debt Service) while achieving a cash balance equal to 25% of operating expenditures including debt service. Given that the sewer utilities bill quarterly, the age of the infrastructure and increasing debt service amounts, I believe this an appropriate cash balance. For the time being, that cash balance is purposely growing each year with the intent that the surplus above 25% will be used towards the East Tosa Sewer Project which is likely not fully funded in the capital budget.
Sanitary Sewer Rates
The Sanitary Sewer includes pass-through charges from the Metropolitan Milwaukee Sewerage District (MMSD) which provides waste-water treatment services to the City. The rate increases described below only relate to the City’s “Local Charge” which makes up approximately 50% of the bill. For forecasting purposes, it is assumed that the MMSD charge will increase 3%. As a result, the financial impact on the customer is typically less than the total rate increase percentage.
In order to cover increasing debt service costs and achieve the ratios described above, I recommend that sanitary sewer rates increase 8% effective with the first bill issued in 2017 as approved in the 2017 operating budget. This will have a projected 6.3% increase on customer’s sanitary sewer portion of the bill due to MMSD's residential rate increasing 4.0%. For an average homeowner, the sanitary sewer portion of their bill will increase from $105.86 to $112.55 quarterly.
As shown in the table below, assuming debt service totals necessary to finance the adopted 2016-2020 Capital Improvement plan, that quarterly bill is projected to increase to $142.23 by 2021. As the sanitary charge is based on water consumption, larger water users will face larger dollar increases although the percentage increase should remain consistent. The estimated impact on a hypothetical restaurant, laundromat and office building are shown below.
Figure 1 in the attachment shows forecasted rate and bill increases through 2021. Based on previous direction from the Common Council, relatively level rate increases which decrease in magnitude over time are maintained through this period. As mentioned previously, further analysis and modeling is being undertaken to determine the future rates necessary to fund the amount suggested by Engineering’s “State of Good Repair” analysis.
Figure 2 shows the projected increase in debt service along with the forecasted coverage ratio. The coverage ratio is the amount of operating revenue available after operating expenditures are paid for to cover debt service. In general, rates are intended to maintain a 110-120% coverage ratio. The coverage ratio is forecasted to drop to approximately 80% in 2016 due to carryovers from 2015. However, with the current rate plan, it increases back to 120% by 2017 and is relatively stable through 2021. The impact of this coverage ratio can be seen in Figure 3 which depicts the cash balance available in reserves. There is a draw down in 2016 for the 2015 carryover but with the planned coverage ratio, reserves will continue to increase to the desired 25% by 2017. Staff recommend that the surplus exceeding 25% be set-aside for the East Tosa Sewer Improvement project.
The only charge for Storm Sewer service is the local charge so the rate increase percentage will increase the bill by same percentage. In order to achieve desired coverage ratios and fund balance and to accommodate increasing debt service costs, I recommend the storm sewer charge be increased by 10% in 2017 as presented in the approved 2017 budget. This will result in the average homeowner’s quarterly bill increasing from $25.38 to 27.92. Based on the 2016-2020 Capital Improvement Plan, that bill is anticipated to increase to $35.58 by 2021. As the storm water charge is based on the amount of impervious surface, this increase will have a proportionally larger impact on those properties with greater amounts of pavement. The figure below shows the rate increase and its estimated impact on different types of properties.
Similar to Sanitary, Figures 4 shows forecasted rate increases through 2021. Figure 5 shows a relatively stable coverage ratio hovering around 110% and the increasing debt service which necessitates the annual rate increases. Figure 6 shows the impact of the forecasted rate increases on the cash balance available in reserves. The Stormwater cash balance is forecasted to be a very healthy 60% in 2017 and steadily increase. As with Sanitary, it is recommended the surplus over 25% of operating expenditures be used for the future East Tosa Sewer project.
It is important to consider the impact of the two rate increases discussed above as well as current water rates. Including the conventional water rate increase that just went into effect and the proposed sewer rates discussed above, the total quarterly bill would increase from $233.30 in 2016 to $262.29 in 2017, an approximately twenty-nine dollar increase or 12.4%.
It is also helpful to place the sewer and water bill in context of other household utility bills. The chart below shows the combined Wauwatosa utility bill compared to average other bills on a monthly basis. Even with the recommended rate increases, at $87.43 the 2017 average residential Wauwatosa utility bill remains a comparable amount to other bills.
· www.wisconsingasprices.com as of 12/31/16
· 12/1/16 WE Energy residential rate. 2014 WI average monthly consumption based on federal statistics at http://www.eia.gov/electricity/sales_revenue_price/xls/table5_a.xls
· 12/1/16 WE Energy residential rate. 2014 WI Utilization/2014 number of households http://www.eia.gov/opendata/qb.cfm?category=480302&sdid=NG.N3010WI2.A
In addition, MMSD provided the results of a nation-wide survey of water and sewer rates that shows the average cost of water and sewer for a family of four in major metropolitan areas around the country. When removing storm water from the average monthly City bill and converting it to the consumption assumed in the table as measured in gallons, the equivalent monthly bill would be $126.23. While greater than the City of Milwaukee, it is comparable with most metropolitan areas around the country.
C. Fiscal Impact
The 2017 Budget was based on these rates so that adoption of this recommendation has no impact on the budget. The impact on the cash balance is described above.
In order to achieve recommended debt coverage ratios and fund balances as well as cover increasing debt service associated with capital infrastructure improvements, I recommend that the sanitary sewer rates be increased 8.0% and the storm sewer rates be increased 10.0%.
I further recommend that an additional report be provided to the Committee later this year after the Capital budget is adopted with an updated 10-year rate forecast and different financing options including debt financing, cash financing or special assessments.