6/26/2014 4:29:00 PM Water & Light taking financials seriously
Customers of North Branch Water & Light will see a five percent increase in their city water bill next quarter. The base customer charge last week was approved to go from $15.91 to $16.70. The usage fee based on each 1,000 gallons consumed is going to $7.36 from $7.01. At 3,000 gallons it goes to $22.08 (it was $21.03) and 5,000 gallons bumps it up to $36.80 from $35.05. Including the above; North Branch water rates have doubled in just two years. Billing information provided at the meeting had the base at $8.75 two years ago.
The three members of the North Branch Water & Light utility’s board of directors approved the increase on a 2-1 vote, with City Council Liaison Theresa Furman opposed. Water & Light had implemented a three percent increase that became effective as of January 1, 2014. The discussion during the afternoon meeting, held at the Water & Light headquarters, was extensive. Liaison Furman, and directors Rick Hals and Darrell Fisk waded through about 90 minutes worth of financial information provided by North Branch financial director Richard Hill, reviewed a recent audit and heard from Water & Light General Manager Mark Petsche.
Hill addressed revenue bond contract covenants placed on any public entity borrowing money-- Water & Light in this case-- to have 110 percent of revenues necessary to service the debt payments, in a designated fund. Water & Light isn’t quite there. Hill stressed that the utility has made “substantial progress in the last three years” to enhance the situation, but, in general, stabilization of city Enterprise Funds (utilities) “has a ways to go yet,” he stated. Furman questioned if all options had been considered before hiking customer rates. She and City Council member Joyce Borchardt (in the audience with about five other citizens) asked about recent Water & Light wage hikes. Borchardt said the benefits for staff (life insurance, healthcare, severance) are in excess of any that the council has given city staff.
Borchardt noted the utility’s severance package calls for 12 months of pay and the city allows six months, for example. Directors Fisk and Hals have helped to oversee the utility for years, and both said Water & Light requires highly trained specialized workers. The utility benefits by retaining experienced staff, Fisk added. In the overall budget, wage adjustments are a “drop in the bucket” compared to the $7 million budget. Hals added that staff are working “dangerous jobs” and the utility is “...not over-manned in any department.” Council member Borchardt also questioned the way in which revenue is applied under the utility’s budgeting discretion. The utility basically lumps delinquent payments together and deposits them where needed for cash flow-- which has generally been the electric side.
Borchardt was concerned the City of North Branch is losing out on thousands of dollars annually in what should be its share from the water fees, apportioned into the city wastewater (sewer) fund. The utility most recently had the city council certify $116,491 in delinquent utility bills to property tax statements. North Branch is very unique in that the city only provides the wastewater treatment (sewer) facility. The quasi-public agency North Branch Municipal Water & Light provides the rest of the utility services. The electric service territory is surrounded by ECE and Xcel. North Branch is in the SMMPA cooperative, but is capable of generating and distributing electric power independently. Financial Director Hill cautioned that this relationship between the city and the electric and water systems is anything but simple. A shift in how cash is accounted could have serious ripple effects.
The utility’s debt-ratio coverage is paramount right now, he explained. Liaison Furman, who is newly-appointed to Water & Light, commented that “poor planning” seems to have helped create problems, and she felt there should have been more worst case scenario discussions on what would happen if revenues crashed-- before debt was encumbered for major utility upgrades and projects. Water & Light Manager Petsche pointed out that when loans were taken out (for generators, old plant equipment removal/disposal, new water well, new municipal water conditioning plant by the outlet mall, etc.) much of the infrastructure was 50 years old. The utility was also responding to state mandates on water quality standards, availability and aquifer protections; plus there was record-setting population growth happening. He declared, “In retrospect would we have built what we did if we’d known the growth was going to halt?” The question was left to answer itself.
And, even this five percent increase in the water billing may be insufficient. Petsche and Hill have also been directed by Moody’s bond rating service to put together long range projections, new policies and a clear Capital Improvement Plan. These are all part of bond rating methodology, which investors use in opting where to put their money. There was a recent reduction in Moody’s rating of water & light and the city. The utility’s revenue bonds went to Baa-3 mainly due to cash issues and the city GO bond rating went to Baa-1. Hill said he felt “disappointed,” commenting that Moody’s is “creating a linkage” between the city and the utility that hasn’t traditionally been part of the rating. Hill said the downgrade doesn’t cost money now-- but if there’s re-financing later bond holders and the city get stung.
Hill stressed that the Standard & Poors bond rating has the entities four steps higher than Moody’s. But he agreed with some of Moody’s recommendations, adding that, “...there are things we ought to work on in the near future... Operating cash is still low and the utility sinking fund (bond payment account) is not at the level it needs to be.” The board also supported a motion to contract with Springsted, public finance consultants, to oversee filing of necessary bonding reports, arbitrage disclaimers and related issues. Director Fisk, walking out with a reporter after the meeting, observed that a couple of highly-billed commercial customers in town have closed, and the city not realizing its planned commercial development growth really hit Water & Light hard. The “one good thing” he remarked, is North Branch utility systems are set for many years to come.