Only Mild Opposition as Palm Coast Council Prepares to Raise Utility Rates 22% in 3 Years
FlaglerLive | January 15, 2013
Palm Coast is in trouble with its creditors—those bond-holders who like their debts paid just as much as less sharply dressed, kneecap-busting lenders. The city borrowed heavily to buy a $100 million water utility 10 years ago, supposedly to take control of local water rates and protect rate-payers, and borrowed heavily to upgrade and maintain the system. To pay its debts and maintain its credit rating, the city bet on continued growth. The city lost that bet.
The water and wastewater system has colossal needs—for repairs, upgrades and compliance with regulatory requirements that every utility system must comply with. Palm Coast is adding to that additional expansion of the system, even though the system’s existing capacity is more than adequate for current needs and then some. The bill for the next five years: $78 million.
The city’s creditors have been getting nervous about Palm Coast’s ability to pay its debts and maintain the system it needs to do so. The city’s credit rating could suffer as a consequence, costing the city, and therefore its taxpayers, that much more in future financing costs.
The only solution: raise water and sewer rates.
That’s what the city is planning to do. Rates will go up 22 percent over the next three years, beginning with an 8 percent increase that would kick in this March. The typical single-family house using some 4,000 gallons of water a month would see its rates go from $54.64 to $59.25, a $4.61 monthly increase, or $55 for the year.
For the combined three-year increase, those typical residents will see their rates go up $144 a year. That’s full one-third the tax bill of the typical Palm Coast homeowner, paying taxes on a $150,000 house with a $50,000 exemption. But the Palm Coast City Council doesn’t consider its utility rates to be a tax. That’s how it has managed, year after year, to keep its property tax artificially low, while its many other fees (stormwater, wastewater, water, garbage) have been going up.
The council held its first of two public hearings Monday evening, ahead of approving a resolution raising the rates (what council members insist on calling an “adjustment”). Residents turned up, but by no means in the sort of large numbers that have confronted the council on, say, the stormwater fee controversies of the past year and a half, or to protest proposed developments (such as the building of an assisted living complex adjacent to the Woodlands, a plan the council approved in September) .
And ironically the crowd was both smaller and far less heated than when the council considered adding a $6.30-a-month utility fee to pay for the city’s stormwater system, even though, in the aggregate, that fee’s burden would have been significantly smaller (over three years) than the currently proposed rate increases.
In all, just nine people addressed the council Tuesday evening, all but one opposing the rate increases—and alternately ridiculing, protesting and doubting the city’s assurances that the five-year plan is necessary to maintain the system and ensure future rate-payers’ security. Vince Liguori, a frequent critic of most kinds of city expansions and a critic of its acquisition of the water utility 10 years ago, proposed selling the utility “for a magnificent price.”
“You may say well, Vince, your rates will go up. They’re going up now,” he said.
Others were critical of the utility department’s lack of transparency: the presentation about the $78 million 5-year plan was rich in detail (so rich, in many cases, that eyes could easily glaze over), but it was never placed in the context of the utility department’s complete, ongoing finances: what it takes in every year, what it pays out.
The city administration and its council members at every turn justified that plan.
“We consider this five-year plan fairly bare minimum,” but it also provides for growth, Richard Adams, the city’s utilities director, said. In other words, the utility system is planning to expand. Why that growth is being provided for now, when the city is not experiencing much growth, and when the utility system’s existing capacity can ensure at least some growth, is a question Mayor Jon Netts attempted to answer.
“At some point you reach the capacity of your plants,” Netts said. “Once you get to that level you can’t add one or two houses or three houses, you have to add a whole plant.” Otherwise there’s a risk of “major shut-downs in service.”
The city is projecting spending of $78.4 million in capital improvements between 2013 to 2017: $45.7 million of that would be to the wastewater system, $28 million of it would be for the water system, and the rest would be for “miscellaneous utility services.” As the city sees it, the spending is essential in order to invest in a system that generates revenue enough to pay back the lenders who made its construction possible. The customer’s bottom line, in other words, is not as much a priority as the bond holders’ bottom line.
The $78.4 million will be generated by refinancing existing bonds, releasing an insurance fund that had previously backed a bond issue, and that is no longer necessary, and mostly, issuing new bonds in 2014-15 (that will yield $39 million of the total). The various mechanisms will provide more money, but will also increase the city’s annual debt costs by $400,000 to $500,000.
If the city was still growing at the same pace as it had in the first half of the last decade, it would not have had to go through so many financial contortions to keep its utility system on a sound foundation: the more it grew, the more it added utility customers, the more it generated revenue to the utility system to cover what, essentially, is its utility system’s mortgage payment.
But growth stopped. As with so many other aspects of the economy, including individual mortgages, the city had overleveraged itself on the assumption that growth would not stop. Now that it has, it’s left with a massive capital program, a lot of it driven by regulatory requirements and normal, necessary improvements, and a lot of it driven by what is owed the city’s lenders—the bond holders.
The city could seek out more debt to lower the cost to customers, but it then risks seeing its bond rating drop, which would result in higher borrowing costs—and heavier costs to customers anyway, including higher borrowing costs in the future. Palm Coast’s rating is high, but it’s not the highest it could be. If the city’s rating were to be downgraded by one of its rating agencies, its financing costs would increase by about $40,000 a year. But if two rating agencies dropped the city’s rating by any measure, the city would have to rebuild a $6 million reserve to back up its bonds again—the same $6 million reserve it will soon release into its revenue stream for coming improvements.
Simply put: the city cannot keep borrowing the money it needs, so rate-payers must make up the difference.
Bill McGuire, the city council member, asked under what conditions the rate-payers’ increases might be halted, and instead decrease sometime in the future. “Is that a pipe dream or could it be a reality?” he asked the city’s consultant from the Orlando-based Public Resources Management Group, which crunched the city’s utilities rates and produced a study outlining the city’s financial needs.
“It could happen theoretically,” the consultant said. But the likelihood of that happening is low, and PRMG’s goal was not to provide a financial plan with that in mind, but to ensure that the city will responsibly pay its debts. “The main goal is to have financial sustainability,” the consultant said.
Two factors could yield that turn-around: Interest rates on the city’s investments could go back up, generating some additional revenue. But the city isn’t a hedge fund: its investments are limited. Or growth could resume to such a point as to generate significantly more rate-paying revenue. But that, too, is as unlikely as another housing bubble, though some more solid growth is expected.
The council did not take action Tuesday evening. It will hear more public input on the issue on Feb. 5 at 6:30 p.m., and on Feb. 19, when it will hold another public hearing, at 9 a.m.—and vote.