06-28-10 Common Council Meeting Minutes

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REGULAR MEETING JUNE 28, 2010 across the board rate adjustments needed for 2010 through 2013 to continue the mandated CSO LTCP efforts as well as the full Rate Study by Crowe Horwath. Mr. John Skomp, Crowe Horwath, 10 West Market Street, Suite 2000, Indianapolis, Indiana, advised that they performed a study and analysis of the operating and financial reports, budgets and other data pertaining to the City of South Bend Municipal Sewage Works (“Utility”.) He stated that the report provides three possible scenarios for proposed rate changes over the next few years; the Report truly should be viewed as a continuation of an effort the Utility started to undertake back in 2005. At that point in time, the Utility had identified that it had a significant combined sewer overflow (CSO) problems and had begun to develop plans for how to address this problem over the course of many years. These initial plans indicated that the Utility would need almost $450 million over the course of twenty years to address and resolve the CSO problem. Due to the significant amount of improvements that would be necessary, the Utility determined that the best approach would be to address the situation in phases. In order address the first phase of the CSO project, the Common Council adopted a rate ordinance which allowed for incremental rate increase from 2006 through 2009. These rate increases were designed to allow the Utility to issue debt each year to provide funding for the necessary improvements while minimizing the impact to ratepayers each year. Since the adoption of the 2005 rate ordinance, the Utility has issued four pieces of debt, totaling over $44 million to provide funding for CSO improvements as well as other ongoing extensions and replacements for the Utility. This funding has allowed the Utility to keep on track with its originally proposed twenty-year long-term control plan. He stated that this report is to explore the second phase of the long-term control plan and provide possible approaches for continuing to successfully implement the needed CSO improvements. He stated that much of the focus of the report is to consider the proposed capital improvement plan for the next four years and identify potential levels of funding for this plan. However, the proposed rate increases in each scenario also considers the changes to operation and maintenance expenses that have occurred over time. Since 2007, operation and maintenance expenses have increased by almost fifty percent (50%) He stated that this seems like a significant increase in expenses, the two main categories of increases have occurred within collection system expenses and treatment plant expenses. Other operation and maintenance expenses such as administration and customer accounts have declined over time. In addition to these increases in operation and maintenance expenses, the Utility has also experienced increases in the contribution it makes to the City each year. The Payment in Lieu of Taxes (PILOT) is provided to the City to account for the assets of the Utility being exempt from property taxes, which impacts the amount of property taxes collected by the City. To account for this, the City requires the Utility to pay a PILOT each year out of is revenues. The PILOT is calculated based on the amount of utility plant assets of the Utility and the City’s corporate tax rate. The PILOT paid by the Utility over the last few years has increased by approximately $300,000. Again, this can be directly attributable to the increase in Utility assets as it has been placing new improvements into service to address its CSO plan and other needed extensions and replacements. Going forward, the PILOT is expected to continue to increase as the Utility continues to improve its system. In order to consider the funding of these capital improvements the City asked for three scenarios. The first scenario assumes that the proposed capital improvements are fully funded through the Utility’s rates. The second scenario assumes that the proposed rate increases are held to a specific level, allowing funding for a portion of the capital improvements with the remainder of the improvements being funded through other revenue sources. The final scenario assumes the proposed rate increases are established only to meet operating expenses and have sufficient coverage on the Utility’s existing debt. Any capital improvements not funded under these rate increases would need to be funded through other revenue sources. Scenario 1 – Fully Funded Capital Improvement Plan would raise its rates to a level where it could accomplish all of the capital improvements currently anticipated. Over the next four years, the currently anticipated funding level required is as follows: 2010 - $24,068,367; 2011 - $25,340,336; 2012 - $32,361,323; 2013 - $25,395,155; the total amount of proposed capital improvements over this time period is just over $107 million. To do this the City would issue bonds for the purposes of funding $90,444,828 in capital improvements. It is estimated that the City would issue over $100 million in bonds from 2010 through the end of 2012. The bond issue at the end of 2012 would fund the capital 9