The City of Smithville will have to raise water rates by 45% over the next five years once it loses its largest customer, the DeKalb Utility District. The DUD has built its own treatment plant and plans to start producing water soon.
In addition, Smithville residents will be hit with a sewer rate hike of 40% over the next four years in order to fund depreciation due to renovations underway at the waste water treatment plant.
A 45% hike would increase customers water rates from $5.00 per thousand gallons to $7.69 per thousand over five years. A 40% increase in sewer rates over four years would result in an increase from the current rate of $5.00 per thousand gallons to $7.33 per thousand.
Greg Davenport of the J.R. Wauford Engineering Company and Buddy Petty of Rate Studies Incorporated of Nashville shared with the mayor and aldermen Monday night the results of the latest water and sewer rate study.
“Everybody knows a big water rate increase is coming. You cannot lose your largest water customer by far without a massive increase. I think you are selling more water to them (DUD) than you use inside the city. We also looked at your sewer system,” said Davenport.
Aldermen Josh Miller and Gayla Hendrix asked why the loss of revenue from DUD would not be offset by less expense to the city. “They only thing you’re getting an advantage on here is less power and less chemicals. You still have the plant infrastructure that you are paying depreciation on. We did not assume anybody being laid off (in this water rate study). It’s basically just as you are now except you’re just losing a big customer,” said Petty.
“You have a lot of fixed costs. You can’t take a three million gallon a day water plant and operate it at two million gallons a day and cut the labor staff by 50%. You still need a certain number of people there just to keep it going and run tests everyday whether you produce one gallon or three million gallons a day. All those fixed costs are divided into fewer sales gallons. Your variable costs like chemicals and power will go down but they will not go down in corresponding fashion with your income,” added Davenport.
Petty said his company did a cash flow analysis over five years and concluded a rate hike is inevitable.
“By fiscal year 2021 we’re anticipating total income (water fund) of $933,000 but expenses will be over $1 million so you will be losing cash by that point. We’re showing some possible cash expenses that year so you will have a cash loss of about $200,000 just pure cash. When we look at it on net position the biggest thing is you have depreciation. You have a negative change in net position of $406,000 (water fund). That is what is driving it (loss). It looks like over the next five years you are going to need an overall 45% increase in the water (rates). In sewer you’ve got a negative change in net position of $341,000 and a 40% increase (rates) will be needed over the next four years,” said Petty.
Petty recommended that the city raise water rates by 10% each year over the next four years and 5% in the fifth year. Petty further suggested increasing sewer rates by 10% each year over the next four years. “What that does for you is to bring your cash back up where your revenue will be well above your expenses. It’s going to put you back in really good shape financially,” said Petty.
The proposed water and sewer rate increases under this plan would not put the city back in the black for four to five years so Petty and Davenport suggested that city officials review this option with the state comptroller before any action is taken since the state requires that utilities not operate in the red for more than two consecutive years.
“A water system fund is not just managed off of cash. It’s not like your home budget where as long as your bills are less than your income you’re still okay. With a water system you have what they refer to as a net position. In Tennessee there’s a law that says you can’t have more than two years of net position negative in the red. What that means is your cash could be floating along fine. Your books could show a negative number because depreciation is pulling you down. Depreciation is a non cash expense. Really if you have any depreciation your cash balance should be going up all the time and you have to raise those rates not just to finance your bills but also to fund your depreciation and everything else and that’s a state law. If you have two years or more of net position in the red then the state water and waste water financing board is going to come down and say you raise your rates or we’re going to raise them for you and they are not going to care about your citizens like you do because they are not here,” said Davenport.
“The state law in Tennessee says you must have a depreciation charge on your water and sewer fund. The purpose of that law is that if you buy something new they want you to depreciate that over whatever useful years that is. For example, a vehicle may be seven years. A wastewater plant may be 40 years. It’s a non cash expense. In other words you are not actually spending that money. It just shows up on the books. The purpose of the law is that the state wants you to save up that money over time so that when you have your next plant (the money to build it) is sitting there in bank,” Davenport continued.
Janice Plemmons-Jackson, the city’s financial consultant recommended that the city consider making the water increase 20% the first year, 15% the second year, and then 5% the following two years.
“You look at the numbers and you’re in the red about four years before you’re starting to get better. I think for the water rates we need to put in 20% for the first year, 15% the second year, and then 5% and 5% (following two years). That gets to 45% but it gets money in here quicker to get the problem fixed (quicker) rather than going four years before you get out of the red. If the comptroller doesn’t like that option (smaller rate increases over five years) then we’re in trouble,” said Jackson.
No action is expected until the new budget is up for passage this summer.