If water rates rise, what happens to the money?

  • Posted: Monday, March 24, 2014 12:01 a.m.
FILE PHOTO ¬ During a work session, Aiken City Council discussed concerns that even with a 10 percent increase to water and sewer rates, consumption could go down again. Regardless, Council voted unanimously during its first reading to raise water and sewer rates by 10 percent during a public hearing.
FILE PHOTO ¬ During a work session, Aiken City Council discussed concerns that even with a 10 percent increase to water and sewer rates, consumption could go down again. Regardless, Council voted unanimously during its first reading to raise water and sewer rates by 10 percent during a public hearing.

Aiken City Council is expected to vote for the last time tonight on an ordinance raising water and sewer rates by 10 percent.

Many residents have wondered, if the ordinance passes, whether they will receive money back from the City if surplus revenue is generated by the rate hike.

The answer is yes and also no.

“Folks ask, ‘Why can't I keep that money?'” City Manager Richard Pearce said. “The point is, that's why we're not in debt. At the end of the calendar year, December 2014, we will pay off a utility bond. Then, the City of Aiken will be operating debt free.”

As those excess funds go toward the water and sewer system depreciation account, the Aiken Standard explains what that means for the City.

Water and sewer revenues projected 10 percent shortfall

Depreciation funds are an issue after City Director of Finance Kim Abney reported that due to last summer's higher-than-normal rainfall, water and sewer revenues are projected to be 10 percent less than anticipated.

That shortfall contributes to the “self-funding” process of the Water and Sewer Enterprise Fund, meaning the City's depreciation account will only be partially funded and impact funds available for future improvements.

The City has borrowed money from its general fund in the past to keep projects going, but has taken steps to avoid that practice. Water and sewer proceeds help fund the system, such as the Silver Bluff water treatment plant and the replacement of aging water meters.

The water and sewer revenue has a shortfall of about $700,000 this budget year (ended June 2013), and if Council approves the new rates, Abney said there is the potential for $100,000 to come in April, May and June – totaling $300,000. Staff anticipate the rates would go into effect April 1.

“We're still going to be short on funds in the utility account,” Abney said. “And the debt service is there to keep the system modern to make future improvements. ... Debt service means paying back debt. So if you have a car loan, you pay debt service on that car loan every month. The City has to pay back debt.”

Depreciation funds negate borrowing

Depreciation means the reduction in the value of an asset over a period of time due to use. The City sets up depreciation funds like many residents set up savings accounts – they come in handy if a part of the system breaks down or needs replacement.

If no funding is directed toward depreciation, there could be delays in infrastructure replacement and repairs.

The most basic answer of why cities have depreciation funds is so those cities don't have to borrow money, according to Pearce.

“When you borrow money, you get $100,000 for the life of the loan, and then you're going to have to pay interest,” Pearce said. “When we do a bond issue, that could be six figures just in one cost.”

These funds help cities like Aiken, so when it comes time to pay bills at the end of the year, the City can still pay them. Come December, staff said they anticipate bills to be roughly $2 million to $3 million.

“For taxpayers, we don't want to get into a situation like cities that were unable to pay their bills,” Pearce said. “That would be bad – unacceptable, frankly.”

Each fund carries its own account

The Water and Sewer Enterprise Fund has two depreciation accounts – one for the system and one for equipment.

Currently, the water and sewer system depreciation account holds about $1.5 million. That account includes money to cover pipes, pumps, valves and water treatment equipment. The depreciation account for equipment is about $2 million, which covers trucks, tools and air compressors.

Historically, as a target, the City has tried to make an effort to keep funds going at about $1.2 million.

“They have a life expectancy in the system, and that's the infrastructure folks,” Pearce said. “Water meters, pipe in the ground, all of that. It doesn't just last forever.”

Pearce said the City tries to come up with a reasonable approach to keep the system modern.

Responding to TalkBacks

Responding to residents' TalkBacks in the Aiken Standard can be tricky, according to Pearce.

Many ask why, if rates are likely to go up every single year, doesn't the City just cut spending in the water and sewer fund so there would be no need for a rate hike?

Pearce said he and Engineering and Utilities Director George Grinton have looked at doing projects internally instead of bidding them out.

“We've looked at alternative approaches for fixing problems as opposed to total replacement,” Pearce said. “Some work we can do, or input new technology out there to modernize the system.”

Pearce used the example of the new Silver Bluff water treatment plant, which costs roughly $4 million. The City is treating the water with a safer form of gas, as opposed to chlorine gas, which has shown to have negative side effects.

The City also has looked at grant money and forgivable loans through the state, such as the $1 million loan for the Shiloh filtration system.

Abney said one of the hard parts to digest today is that because of the Water and Sewer Enterprise Fund shortfall, there's no money to put into the depreciation account today.

“I try and bring it down to something very personal,” Abney said. “On a small scale, our depreciation account had about $1.5 million. It cannot go negative. Just like your savings account, you put in $50 in the savings account for a rainy day ... There were two years when we added nothing to it, and spent that money on salaries or chemicals, or like someone spending $50 because your car broke down ... So three years down the road, we don't have has much money as we would have had.”

Malayan Schechter is the local government reporter with Aiken Standard. Follow her on Twitter @MaayanSchechter.

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