Water Rates, Debt, and That Cash Reserve

Debt

One of the numbers AFCitizens gets right in its campaign to take down city council incumbents is American Fork’s debt. The number is inherently a moving target, but according to the 2016 American Fork City budget (page 68), the City’s total debt as of July 1, 2015 (the beginning of the fiscal year), was about $52.3 million. That number is projected to be less than $49 million by the end of the fiscal year, June 30, 2016.

On one hand, these are big numbers. Whether that’s too much debt for us is a judgment call. AFCitizens says it is, and we should blame the incumbents. I readily agree that much of it was avoidable, but blaming the incumbents is a bit too convenient and quite historically absurd.

On the other hand, the City is legally allowed to carry almost $200 million more debt than it has. That limit is not a single, universal number, and not all of the City’s debt is counted toward the limit (most is), but officially we’re at about 16 percent of our statutory debt limit. I am not saying we should borrow as much as we’re allowed, though I did favor borrowing a small fraction of that remaining margin for roads two years ago. (Most voters felt otherwise, though some now say they would vote differently.)

More than $41 million — over 75 percent — of our current debt relates to water, which brings us to our water bills. AFCitizens says they’re too high. That is also a judgment call, but I agree that they could have been lower, and I wish they were.

Kicking the Can Down the Road, 1990s Style

Several years ago, city leaders studied our increasingly poor water situation at great length and decided that the wisest and least expensive course of action was to borrow to install a pressurized irrigation system. They proposed a bond issue, which the voters overwhelming passed. Here’s the essential bit of history: had City leaders in the 1990s been willing to face the problem, the cost of the system would have been less than $10 million, instead of almost $50 million dollars. Instead, they did the “fiscally conservative” thing, kept taxes and rates low . . . and effectively borrowed $40 million from us in what was then the future. (They did much the same with roads, but that’s a separate discussion.)

The same timid City leaders allowed water rates to remain well below the cost of actually delivering water, so that our water bills were in effect subsidized by tax revenues. Meanwhile, nothing was being tucked away to help replace infrastructure (which is known to have a finite lifespan). Again, several years ago, later City leaders prudently raised water rates to a level that covers current costs and a good portion of known replacement costs.

As if this didn’t make our water rates high enough, most or all of the water bond payments could have come from impact fees from new construction, but then the economy tanked, and those fees dried up. So the debt the voters voted to incur has had to be paid through higher water rates.

Had City leaders and voters acted prudently in the 1990s, our water bills would be a lot lower. Fiscal conservatism is fine, and I don’t like high taxes and fees either. But sometimes saving a penny today costs us a dime down the road.

For what it’s worth, City leaders recently were able to find enough economies elsewhere to avoid passing on to the residents a sewer rate increase imposed by the sewer district.

The Rainy Day Fund

AFCitizens wants to blame the incumbents, so they keep saying — and candidate Allen Simpson has said — that the City has lots of money lying around that could be used to lower our rates. The none-too-subtle implications are these: current City leaders want the rates to be higher than they need to be, and water rates themselves, rather than being sensibly tied to real costs, can be whatever the city council wants them to be.

Which brings us to the City’s cash reserves. According to official sources, the statutory limit is 25 percent of the City’s annual budgeted revenue. Right now the City chooses to keep that between about 14 and 18 percent. (It fluctuates during the fiscal year.) It was 9 percent when the Great Recession hit, and more would have been a very good thing then.

AFCitizens says the City is at its statutory limit, when it doesn’t need to be. Their number is off by one-third or so, based on the FY2016 budget.

How large our cash reserves should be is a judgment call. Economic downturns, fighting a refinery fire which destroys much of the City’s firefighting equipment, or a natural disaster could suck up even the maximum allowable reserve very quickly — and two of those things have happened in recent years. To my mind, the prudent thing to do is to keep a generous reserve against the unpredictable, so we don’t have to go begging, borrowing, or taxing when a major, unbudgeted need arises.

Councilman Rob Shelton, the council’s resident financial guru, wrote this to me:

“I believe a true conservative plans a budget with revenue conservatively (thinking less income will come in) and expenses conservatively (thinking there would be an increase). At the end of the year, we use the excess to fund capital improvement projects like roads, waterlines, sewer, etc.

“This approach allows us to use the ‘plan for the worst and hope for the best’ type of budgeting. This last year we came close to the 25% reserve amount, due mainly to an increase in sales tax revenues. Good budgeting allows us to be pleasantly surprised at the end of the year with excess, rather than a shortfall. You take the excess and then apply it to one-time projects in the capital improvement plans.

“So this last year we took the excess and put it to work in the budget, and that dropped [the rainy day fund] down to just under 18%.”

That’s conservative enough for me, thank you.

With Fiscal Conservatives Like These, Who Needs Liberals?

We are in the bizarre position of hearing self-proclaimed fiscal conservatives argue that we’re preparing too well for a rainy day, and that the price of a thing (here, water) should be below the cost of actually delivering that thing in the short term and (when we consider infrastructure) in the long term as well. Are they making sense to you?

Even if they are, they’re getting some of the numbers badly wrong, as usual, and misplacing the blame for the numbers they’re getting right.

Learn before you vote — and please share the facts with your neighbors and friends.

Note: this blog post and the infographic were edited after publication to correct an error.

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