Friday, January 28, 2022

Utility Rate Discussion Continues at City Hall



By Noelle H. Lowery

Last week, Marco Island’s Finance Director Guillermo Polanco sent a report out to City Council members.

The topic: balancing the budget for Marco Island Utilities.

According to City Manager Roger Hernstadt, the report says the Council voted to approve the budget on September 8th and 22nd, 2013 that included a 2.1% increase in utility rates. The Council deferred the implementation to determine if the implementation of a new rate structure would mitigate the need for the additional revenue. Unfortunately, that effort has not reached a consensus to date. Therefore, the Council will have to either proceed with the 2.1 percent increase or take out the equivalent dollar amount from the reserves to put into the coffers or cut the operating budget or a combination thereof. This is necessary to balance the budget.”

This information comes on the heels of the November City Council meeting in which councilors voted down — 4-3 — to implement the 2.1 percent increase to the utility rates. They also took no action on a request from Robert Ori, the president of the city’s utility rate consultant Public Resources Management Group Inc., to increase his firm’s fees by $12,000 for additional work on the utility rate design study. PRMG’s initial contract with the city was for $33,800.

The 2.1 percent rate increase was part of a series of increases sanctioned by a city resolution last year in conjunction with the refinancing of the series 2003 and series 2008 utility system revenue bonds. The refinancing of these bonds was accomplished with the issuance of Series 2013, $60.75 million Utility System Draft Refunding Revenue Bonds, which have a lower interest than the current bonds and amount to an interest savings of about $200,000 annually over the 20-year life of the 2013 bond series.

The first increase was effective Nov. 1, 2013, for seven percent. The second increase — the 2.1 percent in question — was supposed to be in place by Oct. 1, and subsequent annual increases ranging between 2.1 and 2.3 percent are on the docket through 2018.

“Council needs to do something,” stressed Hernstadt in an interview. “Every month you delay implementing the 2.1 percent, the budget falls behind. We have already lost 25 percent.”

Rewind to Council’s November meeting, during which councilors continued their years-long debate about the utility’s water and sewage rate structure. “I think this council needs to get some sort of consensus if we are going to do anything moving forward,” Councilor Ken Honecker said from the dais during the meeting. “Paying a consultant over and over again for the same thing is crazy…There is no perfect magic switch…This is a black science.”

Honecker went on to explain why the utility rate structure and the current process to change it is broken: “Sticking with the Florida Water methodology is not going to work. We now have a totally different sewer plant than we had in 2003.” He added that it would not be enough to just slap the additional 2.1 percent onto the current rates and call it good because the current rates are based on an infrastructure and capital structure that no longer exists.

“We have to adjust the base charges based on the current structure we have today,” Honecker insisted. He favored the implementation of the 2.1 percent increase, as did councilors Larry Honig and Bob Brown, while councilors Amadeo Petricca and Victor Rios, felt the utility’s current reserve fund — $5.8 million — would be more than adequate to fill the void of no rate increases. Thanks to the seven percent rate increase in 2013, Marco Island Utilities had a good year in 2013, allowing it to beef up its reserves. However, on the other side of the coin, the Utility staff has calculated that a recurring $7 million needs to be allocated for capital improvements (in addition to a building replacement which was last estimated to cost $6 million in 2009). So unless there is a willingness to add to the existing $150 million debt, the utility will need to continue to accumulate funding.

At the meeting, Hernstadt reinforced the importance of getting the 2.1 percent rate increase in place, as the FY2015 utility budget includes its implementation. “We have a budget that is out of balance right now,” he told City Council. “I would be more comfortable with a rate increase in place…The utility is more than a one year thing…It needs rate stability”. He added, particularly if a new rate structure is not in the cards. If you are not concerned with the risk of not having adequate revenues to operate the utility, then don’t implement the scheduled 2.1% increase but the bond rating agencies may not agree with us.”

When the vote on the 2.1 percent increase failed, the discussion turned toward disappointment in Ori and his work for the city, as well as toward alternative rate structures and the use of secondary deduct water meters on single-family homes.

“Ori did a disservice to his profession and our city,” said Councilor Honig. “He didn’t do what we asked him to do, and even after that, he still didn’t do what we asked him to do. We asked him to come up with a plan that included deduct meters, and he didn’t do that…My trust in Ori is zero, and it would be lower if possible. He has now presented two plans that have an increases for single-family homeowners, which I object to.”

Brown agreed, “We are running around in circles and scratching our nails on the chalkboard irritating the residents. We are starting to look pretty foolish over this thing.”

In the end, councilors voted 5-2 to have Hernstadt and city staff bring a plan back to them for instituting the use of the secondary deduct meters. Councilors Honecker and Petricca voted against the measure. The deduct meters will begin the process of formally recognizing that single-family homes do not get the rate benefits of reuse water.

Here is how the meters work: A second water meter will be installed at single-family homes to monitor the amount of water homeowners use to irrigate their yards, wash their cars and boats, and fill their pools. Meter readings will be taken each month from both water meters, and homeowners will pay sewage and wastewater fees only on the difference between the two meter readings, mitigating the cost of these fees.

Once the meters are installed — at the cost of the homeowners — city staff will collect the data and analyze it to help City Council and staff decipher just how much of an impact reuse water or the lack of it has on demand for water and ultimately utility rates.

Even so, Hernstadt pointed out during the interview that the deduct meters are just the beginning: “It is an important step, but it isn’t enough.” The reasons: First, city staff will have to devise a plan that requires homeowners to participate, which between the meter and its installation by a certified plumber, could cost approximately $500.

Second, because of the 6,000 gallon cap on single-family homes, the use of the deduct meters will only help a subset of homeowners who use less than 6,000 gallons of water per month. Those who use more than 6,000 gallons are protected by the cap.

The lack of a rate increase could prove more problematic for the city, though, Hernstadt believed. Depending on which of the three alternatives put forth in Polanco’s report, it may or may not have an impact on the utility’s current bond rating and any potential future financing. Further, a lack of a the healthy reserve fund may only magnify this effect.

“The utility had a good year (in 2013),” said Hernstadt. “That being said, the funding needs of the utility have not fully been met. We are not assessing and accumulating enough money to meet the ongoing needs. Yes, there is cash in the bank, but if (City Council) doesn’t find a way to fully fund the utility, at some point, it will catch up with us, and at some point, we will have to borrow money again.”

For instance, Hernstadt contended that the utility’s current capital improvements budget is currently under funded by $2 million. He is concerned that if the under-funding continues and a big ticket project comes due money will have to be borrowed from an unforgiving, suspicious market that will not look favorably at a depleted

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