Saline Hears Utility Rates Will Rise More Than Expected.
A rate study discussed by Saline City Council in January figured that the average Saline resident would see their quarterly water and sewer bills rise by nearly $70 within the next two years.
By the end of Monday's city council work session, a $70/quarter increase sounded like a bargain.
Today, the typical city resident pays about $236 a quarter for their water and sewer service. About $81 is for the water and $155 is for the sewer. That total bill of $236 was expected to rise to $302 by 2023-24 as the city incurred debt for its wastewater treatment plant improvement project. Monday night, the city learned the rate increases would need even be higher - reaching $382 a quarter by 2023-24.
“That’s alarming to a lot of residents in the community,” Councillor Jim Dell’Orco said after hearing the report from Andy Campbell, a staff consultant with Baker Tilly.
“At some point, we’re going to price ourselves out of the market. It’s going to be a huge impact on our community,” Councillor Janet Dillon said.
The city's plan to rehab the 80-year-old wastewater treatment plant is driving the rate increase. Why are costs rising? In January, the main reason cited was inflation. Materials cost more. Labor costs more.
At Monday's meeting, Baker Tilly's Campbell explained there were two new issues driving rates higher.
First, the scope of the first phase of the project has increased. Secondly, the January report banked on some level of loan forgiveness. The city has since learned it’s likely not eligible for loan forgiveness.
The plan in January called for borrowing $51,7190 for the first phase of the project in 2024-25. Council, however, discussed moving parts of the second phase of the project up to the first phase to avoid costly repairs and maintenance. In order to do that, city will now borrow $56.4 million in two years. Most of phase one is related to addressing the state's administrative consent order judgment against the city after environmental violations in the plant.
In addition, for reasons not discussed at Monday's meeting, the city is moving phase two, now pegged at $31.9 million, up to 2025-26 or 2026-27. Previously, there had been a hard date for the second phase.
“The quicker you issue the debt, the faster you have to do the rate increases,” Campbell told council. “That debt is being issued a year earlier and it’s a higher dollar amount.”
The City of Saline must have its rates in place to cover the debt by the time they close on the loan.
Even with a low-interest loan from the state’s revolving loan fund, that’s $2.9 million per year for 30 years in debt financing. Currently, the revolving loan offers a 2.125 percent interest rate. For the purposes of the rate study, Baker Tilly used 2.5 percent.
The January report to the City of Saline was for a four-year plan that would have seen the quarterly sewer charge increase by $25-30 next year for the typical residential user. At that meeting, one council member asked Campbell for a worst-case scenario for costs. Campbell later drafted a scenario to council that showed the city receiving no grant money for the wastewater treatment plant project. Now, he said, that worst-case scenario might be likely.
“I do think that’s going to be the case, unfortunately, from looking more into this with EGLE (the state environmental agency) and talking to our sources at the Municipal Finance Authority and the State Revolving Fund. I do not think the city is going to be eligible for any grant,” Campbell told council.
Saline is too rich, according to the state.
“If you are over 120 percent of the state’s median income you are not eligible for principal forgiveness,” Campbell said.
Campbell said the average household income in Saline is roughly $100,000 annually, nearly double the state average.
There could be other grant opportunities. Campbell said $4.7 billion in American Rescue Plan issued to the state money might still provide a lifeline to the city.
“It hasn’t been decided yet, but the common thought is that this money will be put into the revolving fund,” Campbell said. “My guess is that it will be going mostly to disadvantaged communities, which again means the City of Saline would not qualify.”
Still, Campbell urged the city not to give up on seeking grants.
“There’s a lot of grant money floating around right now. The hardest part of consulting right now is that there are all these grant possibilities and figuring out who’s available for what is very difficult,” Campbell said.
Campbell said some counties are helping communities with infrastructure projects and said Washtenaw County could be a source of grant money.
Beyond the American Rescue Plan, there’s the $1.2 trillion Infrastructure Investment and Jobs Act.
“That’s a complete unknown at this point,” Campbell said. “There are a lot of pots of money potentially accessible to all communities.”
On the water side of the utility bills, rates are rising - but no more than they were projected to rise in the January report. The cost for the water system improvements hasn’t changed because it’s being funded by city cash instead of debt. Currently, the typical city resident pays $80.84 cents for water each quarterly bill. That would increase to $94.44 next year and then increase 3 percent every year.
The dramatic rise in rates has council members looking around for solutions. One place they looked was Ann Arbor - which uses a tiered structure for its rate schedule.
Ann Arbor has a four-tiered system based on use.
There’s a base rate for the user who uses very little water. The rates increase as consumption increases. Most communities don’t use these “block rates.” In fact, Campbell said, many communities lower rates for high consumption users to incentivize development or industry.
Campbell said he disagrees with Ann Arbor’s approach.
“The fundamental disagreement is that their argument is you should be charged more because you are using more, or you should be charged more because you’re demanding us to build bigger pipes and bigger assets,” Campbell said.
But, he said, cities have other ways to take care of this issue, including two avenues used by the City of Saline.
“That is taken care of with your ready-to-serve charge and your connection fees,” Campbell said. “They pay a higher connection fee if they have a higher demand on the system.”
The typical Saline resident pays $31 a quarter for the ready-to-serve charge. But the top industrial users, like American Soy, pay $770 per quarter. Ready-to-serve charges account for about 16 percent of the city’s utility revenue.
“I disagree with them saying, now we’re going to charge you more for a gallon of water when the cost is the same,” Campbell said.
He said if the City of Saline considers tiered rates it needs “major backup,” in terms of data to support its decision.
“The more you get into treating customers differently, the more you are susceptible to lawsuits,” he said.
He said bigger, powerful cities are in different situations than small cities.
Campbell said that rather than setting different rates for different people, the city should work with low-income residents to find agencies to help with the bills.
“The county has those programs to help with the costs,” Campbell said. “That is a good way to help people in need while not getting into the differentiation of customer classes on the local level,” he said.
Dell’Orco seemed to express some support for the tiered approach, saying a senior on a fixed income who uses a small amount of water shouldn't be billed the same way as a major consumer.
Councillor Dillon said was disappointed the city didn't qualify for grants.
“It’s very discouraging to hear that we don’t qualify. When you need the help, it’s not there for you,” Dillon said. “We’ve done everything we were supposed to do. It’s like paying your bills and not qualifying for the credit at the end.”
Dillon said the city needs to find a way to get grant money.
“It’s going to be a really tough putt to this whole thing on the backs of residents,” she said.
Dell'Orco openly questioned whether or not it was wise to continue pursuing the improvement of the plant. At point, the city considered using the Ypsilanti Community Utilities Authority for wastewater treatment. The cost was deemed to high, as it was for building a new plant.
So the city instead focused on revamping the current facility - in part to spare city residents significant rate increases they'll see anyway - if only not so dramatic.
“Hearing what the cost are today and what they are escalating to, I am beginning to wonder if regionalization isn’t the more practical approach,” Dell’Orco said. “I don’t know how some of our low-income, fixed-income residents are going to be able to pay these types of rate increases by 2027.”
The cost of the project continues to grow. In January of 2020, Tetra Tech estimated the cost of the phase 1 would be $32 million. Today, the city is considering borrowing $56 million in two years and another $32 million in the next three years for a total of $84 million.
In 2020, it was estimated the cost for joining Ypsilanti's system would be $87 million. Building a new plant was estimated to cost $90-96 million. Those estimates, obviously, would be impacted by inflation.
The city will discuss this issue again at the Aug. 18 meeting.