The cost of things: More water rate increases on tap for Iowans
From decrees to surprises, municipal costs go up
Facing nearly $6 million in wastewater treatment upgrades to meet federal water quality rules and other infrastructure updates, Tipton had no choice but to raise monthly rates by $10 for every customer.
As a community of 3,200 people, the increase — which took effect in January — was spread across a small customer base and marked a roughly 30 percent increase to the average customer’s bill.
Tipton City Manager Brian Wagner said the increase wasn’t taken lightly by city officials and has most certainly been felt by residents. But he said the key is communication, patience and understanding coming from both sides.
“We had people who think it’s just the city adding costs,” he said. “You have to deal with the confusion that this is a mandated project.”
While Tipton’s rate increase is tied to a specific project, elected city councils and appointed boards of trustees across Iowa’s more than 400 local water and sewer suppliers must manage their service rates to take on regular infrastructure or water quality upgrades, adjust to a changing customer base or be prepared for their own unexpected projects.
One of the biggest challenges many municipal providers face is that most operate with a limited customer base to absorb financial needs.
“We don’t get the economics of scale that the big players get,” said Tim Whipple, general counsel with the Iowa Association of Municipal Utilities. “For a small community it can be a significant bite and have a big impact on your rates."
Projects needed later influence costs now
As with natural gas and electric services, which are provided in Iowa by a range of utilities including privately-owned companies, as well as municipal providers and rural electric cooperatives, water and wastewater services can be complicated.
While some customers of investor-owned providers like MidAmerican Energy and Alliant Energy bemoan what they argue is a lack of much say in matters like rate increases, most water and wastewater suppliers in Iowa are managed by local representatives.
“The accountability, the advantage of it is it’s local. It’s not just that you can go to the city council meeting and complain about your bill,” Whipple said. “You can run for city council.”
A typical utilities bill covers state taxes and charges related to water treatment at both drinking water and wastewater facilities, including infrastructure, maintenance and staffing.
Depending on the community, a water and sewer bill could include other city services.
In Cedar Rapids, for example, a utility bill covers not only water and wastewater, but also costs associated with storm sewer, trash pickup, recycling and yard waste services.
“Our rates directly reflect the total cost of providing these essential services to our residents,” Steve Hershner, Cedar Rapids utilities director, said in an email.
As with most services, the cost of doing business is always on the rise. Construction and maintenance, capital improvement projects, debt payments, regulatory requirements and a changing customer base all impact rates.
Whipple said infrastructure is a significant cost for water and wastewater utilities, especially in small towns, where federal regulations can drive major expenses in technology or upgrades.
As a service, a municipal water utility must be capable of supplying enough water to meet customer needs.
“Your system has to be able to handle peak days, even if on 364 days, you’re not quite near that peak, we still have to be able to serve peak demand,” Whipple said.
To prepare for unexpected projects, maintenance costs or other expenses, annual increases are common.
In Cedar Rapids, Hershner said the city targets an annual 5 percent to 7 percent increase to a customer’s total enterprise fund bill — which means balancing needs in multiple areas, including water, wastewater and solid waste and recycling.
“By balancing these rate changes, we work to stay on target for expected rate changes over time, minimizing major sticker shock and allowing us to maintain the expected level of operating our systems,” he said.
Whipple said an annual rate increase is encouraged for all municipal suppliers in order to build a buffer for unforeseen expenses.
“What communities need to be doing is setting their rates so they go up regularly 3 to 4 percent a year. If you don’t, you can’t put money into your reserve funds and when that day comes and you’re totally maxed out on capacity ... then you’re going to face catastrophic increases all at once,” he said.
Preparing for a surprise expense
However, as much as city’s can prepare, there always is the possibility of an unexpected cost.
Rate adjustments due to investments in infrastructure or even changes in population are common across the state.
What’s more, many Iowa communities struggle to stay ahead of federal water quality rules, which force the investment in major upgrades.
In Tipton’s’ case, the $10 monthly rate increase could be adjusted when the project is bid this winter — if the final cost comes in lower than the estimated $6 million price tag.
City Finance Director Melissa Armstrong said about $89,000 already has been generated from the increased rate. Those funds will go toward bonds for the project.
“We’re hoping by implementing the $10 now, we’ll borrow less later. When the project is bid, if the bids come in better than the estimate, our financial consultant would reconfigure the $10 rate,” Wagner said.
Work is expected to begin next year and be completed by the March 31, 2021 deadline set by the Environmental Protection Agency.
Wagner said he expects the flat increase to remain on bills for the duration of the anticipated 20-year loan that accompanies the project.
In Cedar Rapids, disinfection improvements at both water plants, filter repairs and flood recovery work necessitated a 12 percent increase to rates in fiscal 2010.
Another factor in that increase was that the 2008 flood, which inundated scores of homes and reduced the overall customer base.
“A higher rate was required to capture a similar amount of revenue — this issue is a typical challenge post-major disaster,” Hershner said. “Even with the loss of some customer accounts, you still need to meet service.”
To the south in Iowa City, changes at one commercial water user has shown to have an impact on all customer rates.
In 2018, Procter & Gamble announced the company plans to move production of hair care and body washes out of Iowa City by late 2020.
Dennis Bockenstedt, city finance director, said the company represents the city’s single largest water customer — or about 8 percent of the water utility’s revenue stream and six times the size of the city’s second largest customer.
“That’s going to be a large revenue loss for the system, so that’s why we’re proposing rate increases for next year and the year after. It’s really to try to mitigate the loss of revenue from Procter & Gamble,” Bockenstedt said. “We have debt to repay, a plant to run and staff out repairing infrastructure. As we’re losing that large revenue source, we have to offset it.”
During this year’s budget process, the city approved a 5 percent increase in water rates and a 50-cent increase to storm sewer rates. All told, a typical customer’s water bill will increase about $26 a year, or about $2 a month.
In North Liberty, the city about a decade ago had to implement a roughly 25 percent increase to sewer rates to address immediate water quality needs in wastewater treatment.
While North Liberty now boasts a state-of-the-art wastewater facility, Nick Bergus, communications director, said the City Council makes an effort to discuss water revenue quarterly.
“I think that was a wake-up call,” Bergus said. “A lot of it is about making sure these things are more predictable. We’re prepared for eventualities and things that can happen and make sure we don’t have big surprises that can lead to fewer options and more expenses.”
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