OPEN LETTER: City manager addresses water proposal

City Manager David Kennedy (vertical headshot)
©2017 Loveland Local News/Joe Wessels [FILE PHOTO] City Manager David Kennedy. [FILE PHOTO/Joe Wessels/Loveland Local News]

The city is proud of its financial stability.  Conservative budgeting, strict reserve policies, award-winning budgeting, and aggressive pursuit of grant funding by staff, all account for a city which is able to provide quality services to our residents, support to our business community, and lay the foundation for future growth. If there is a vulnerability in the city’s financial structure, it lies within our water funds. While the city is proud of its low water rates, largely seen as a way to offset the high fees for sewer service charged by the Metropolitan Sewer Service (MSD), it produces insufficient revenue to complete upgrades and repairs to our water distribution system.

It is important to note that water funds are classified as “enterprise funds”.  Enterprise funds are defined as: a fund in which the services provided to customers or residents are financed and operated similarly to a private business. An enterprise fund is operated so that the costs of providing services are financed through user fees and charges.  

The city accounts for its water revenue and expenditures in two separate funds; water operations and water capital improvements. Revenue to these funds come primarily from user fees, with 60 percent being accounted into the water operations fund and 40 percent into the water capital improvements fund.  The 2020 operating budget and capital improvement program (CIP) budgeted $1.7 million in water user fees for both funds. The water funds receive nominal revenue from other sources, including leases for cellular antennas located on our water towers and water impact fees for new residential units.

Expenses for both funds are divided by their purposes. Those that are operative by nature, such as salaries, insurance, billing costs, supplies and office equipment are expended by the water operation fund. Expenses associated with the capital improvement fund are related to needed equipment, upgrades, and repairs to the water system.  Unfortunately, the largest annual expense from the capital improvements fund is debt service.  In the 2020 budget, annual debt service accounted for 58 percent of all expenses from the Water Capital Improvements Fund.

The need for adding debt is a necessary evil, in that our water system, as the distribution portion, is aging, and needed repairs are costly.  Without a sufficiently funded capital fund, the only alternative is securing debt to complete the projects.  In addition to 76 waterline miles, the city must maintain a regular schedule of maintenance of its storage system- including four elevated water towers and three ground tanks.  These towers and tanks are an important component of our water system and have the ability to maintain five million gallons of water storage for water usage and fire protection.

Why doesn’t the city just raise the water rates again? Since 2014, the city has made multiple percentage-based water rates.  Inevitably, these produced corresponding increases in overall revenue to the water funds.  Unfortunately, during that same period of time, additional debt was needed to make important water system improvements, including the Loveland-Miamiville waterline (2019), Union Cemetery waterline (2016) and the repair of two water towers (2018).  These three projects increased the annual debt service to the water fund by over $111,000 – largely negating revenue observed by the rate increases.

In an effort to begin changing the cycle of 1) identified water system improvement need, 2) secure financing, 3) repeat, we are looking for a long-term solution increasing revenue and does it in a manner equitable to all users. With that in mind, rather than simply proposing another, across the board percentage-based rate increase, the city is proposing a modification to the structure of our water rates.  This proposal would include a reduction of the water minimum, from its current 4,000 gallons a month, to 2,240 gallons per month. A water-minimum modification benefit results in a lesser impact on residential structures – especially those who utilize minimal water each month. And the increased revenue is spread among all of the varying water users including, multiple-family units and those receiving our water service who live outside of our city limits.

To calculate the potential revenue the reduced water minimum could produce, and the impact it would have on our customers, extensive testing was completed by city staff.  The testing included creating formulas and recalculating past water billing cycles utilizing the reduced monthly minimum. (see sample result below). The results were what we had hoped: An average monthly revenue increase of $22,723 would not cause a single-family resident’s water bill to go up greater than $7.00 a month.  Also, during the test runs, an average of 1,097 single-family customers observed no rate increase, as they still remained under the new water minimum.

While by no means does this reduction of the water minimum solve the city water fund problems, it does set us on a path towards creating a capital fund dedicated towards a scheduled replacement of aged, undersized water mains and staying on time with scheduled maintenance needs of our water storage tanks.  These additional funds can and will be used as leverage to secure additional grant dollars to fund capital improvements.

To help explain the financial situation of our water funds, the condition of our water distribution system and the proposed modification to our water billing structure, I made a formal presentation to the public and City Council at the September 22 Council meeting.

I have placed the presentation on the city’s website for everyone to view. I also remain readily available to discuss the presentation and the proposed modification at any time.

To view the water presentation please click here: Water Presentation

My intention is to introduce legislation to City Council authorizing the amendment to the water minimum in October. If adopted, the revised water rates, calculated with the reduced minimum, would go into effect with the January billing. 

To contact me with questions or to request additional information, please call me at 707-1454, or send me an email at [email protected].

Thanks for your time, and I welcome your comments.

David Kennedy
City Manager

(Editor’s Note: This is part of the city’s Straight From The Heart community newsletter sent to email subscribers on September 30, 2020. Slight modifications were made for clarity.)

Last Updated on March 15, 2021 by Joe Wessels

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