By Myrna Trauntvein
Water rates will increase each year in Nephi but only by 60-cents per year for 11 years.
“In 2017 and 2018, the city council adopted large changes to the city’s base and volume water rates,” said Seth Atkinson, city administrator. “A tiered system for volume charges was also adopted.”
Since then, impact fees have been adopted and a volume rate increase on industrial water rates has been implemented.
Atkinson, Lisa Brough, city finance director and Travis Worwood, city treasurer, as city staff, worked on the base rate changes that were adopted by the city council on Tuesday.
“In order to meet the requirements from USDA in their letter of conditions from December of 2016, the city needs to adopt additional rate increases,” said Atkinson.
Justin Seely, mayor pro tempore, asked if any of the council members had comments before taking action on the proposed ordinance.
“It is better to make small adjustment changes than to do what we had to do in 2017 and 2018,” said Larry Ostler, city council member.
Skip Worwood, Kent Jones, council members, and Seely said they had been approached by citizens who had not liked the idea of raising water rates. However, each had a similar experience in explaining the need.
“Once I explained,” said Jones, “they thought it was a good deal.”
The rates, on average, for a residential connection will come to $6.60 over 11 years.
After discussion, the council adopted the ordinance by a unanimous vote.
The council was faced with jumping the water rates at the beginning of the city water improvement project and, said Ostler, he thought that it was much better to do rate increases in small increments.
Atkinson said that USDA required rate increases in order to bring the rates into compliance.
“The proposed monthly base rate increase for a residential customer Per Equivalent Domestic Unit (EDU) over the course of the 11-year plan would be $6.60,” said Atkinson. “It averages 60-cents per year.”
Increases needed to be enough to fund the requirements to build a debt reserve account, create a short-lived asset reserve account (approximately $140,000 per year to fund infrastructure replacements with smaller life spans), budget enough funds to maintain the operations and maintenance budget including additional line replacement not covered in the current USDA funded project, pay the nearly $600,000 per year debt service payment and potentially have enough funding for an early payoff amount for the three loans that will be received by USDA.
“Currently they are set for a 40-year term with a full interest cost of $6.6 million,” said Atkinson.
The rate increases are projected to meet all the USDA requirements as well as have enough revenues to pay off the larger USDA loans within 25 years and the smaller USDA loan in 15 years.
“This will save approximately $2.3 million in interest costs for those loans,” Atkinson said.
Last year, he said, the city commissioned a financial analysis tool to calculate the future rates that need to be adopted in order to meet the requirements.
“Using this model, it is anticipated that the city can apply small annual increases in order to achieve the necessary fund balances to meet the USDA requirements,” said Atkinson.
Typically the city adopts these rate increases each year through a master fee resolution.
“Given that there are multiple rate increases that must occur over a number of years in order to meet the USDA requirements, staff recommends adopting a long-term strategy to accomplish these annual increases,” he said. “This long-term strategy would be to adopt planned rate adjustments by ordinance and authorize staff to implement those rates administratively.”
If there are any changes or deviations from the adopted plan, he said, the staff would need to bring back those proposed changes for council review before implementation.
In addition, the staff would review the plan with the council periodically, likely every two to three years, to ensure that the proposed rate changes are having the desired effect.
“After using the financial modeling tool, staff recommends base rate and average volume charge increases for the 2019 to 2029 period,” said Atkinson.
He presented some assumptions that were made in the financial model to meet the USDA requirements.
Monthly installments to build the debt reserve account need to be made.
“This consists of one annual debt service payment of approximately $600,000,” Atkinson said.
An inflation-adjusted annual amount of over $140,000 is needed to address short-lived asset needs.
These assets will need to be replaced prior to the payoff cycle for the current project.
“A construction inflation component was used to maintain funding levels commensurate with future project years,” said Atkinson.
Personnel levels and maintenance funds, adjusted for inflation, to meet current and future operational needs are planned.
“An additional inflation-adjusted amount of $75,000 per year was assumed for additional line replacement,” said Atkinson. “These lines are not included in the current project and their life span is expected to expire within the next five to 20 years.”
Planned is a 15-year payoff of the $781,000 USDA loan with an interest rate of 3.125 percent and a 25-year payoff of both the $9,000,000 and $5,290,000 loans with interest rates of 1.875 percent.
Also planned is a 15-year payoff on the water portion of the CIB Loan for the new Nephi City Public Works Building and the plan also assumes a new loan in year 2025 for a new water tank where the current silver tank is now.
“The volume charges are estimated to increase by just over $1 per month over the course of the 11-year time frame,” said Atkinson. “This averages to 10-cents per year.”
The rates will vary depending on individual water usage per home.
The rate changes would be implemented each fall during the shorter season for water usage.
Another assumption made in the model was the average annual percentage growth rate found in the preliminary engineering study of 2.73 percent.
“The growth rate for the last few years has been between 1.7 percent and 2.15 percent,” said Atkinson. “Although the growth rate is not what is predicted in the preliminary engineering report, higher growth rates are expected based on state population reports.”
If lower growth numbers materialize, rates may need to be adjusted upward from the proposed rates. However, certain growth-related projects could also be delayed, such as the upgrade of the silver water tank.