The Cost of Standing Still: Part Two
It can be boiled down to this statement in a nutshell: utility customers will carry most of the cost, but taxpayers remain a backstop. Of course, those two groups are largely one and the same.
When Galion City Council authorized up to $3.743 million in financing for water and sewer improvements this spring, it answered one question: How did the city choose to obtain the money needed to complete the work? It did not fully answer two others, however. First, what alternatives were considered? Second, and this is the question before us today — who will ultimately pay it back?
The short answer is Galion’s water and sewer customers. The longer answer is that the legislation also gives the city access to income tax revenue and its general taxing authority if utility revenue is not sufficient. Part One of this series examined how years of water and sewer problems led to the financing approved by Council. Part Two now looks at where the money for repayment will come from and why the number of customers sharing that burden matters.
The money must come from somewhere
Of the $3.743 million authorized through three ordinances, approximately $3.15 million is connected with the water system and $593,000 with the sewer system. The legislation identifies net revenues from the applicable utility systems as the primary source of repayment. In practical terms, those revenues come from the monthly payments made by households, businesses and other water and sewer customers.
That does not necessarily mean Galion residents will eventually see a separate line on their bills labeled “bond payment.” Council has not established a surcharge through these ordinances, nor has it approved a specific rate increase to cover the debt. The cost could eventually be addressed through a separate surcharge, incorporated into the city’s existing rate structure or covered through some combination of utility revenues and other available funds. Regardless of how it appears on a bill, however, utility customers are the first source of the money.
No exact increase can be calculated yet
It is too soon to determine the amount that financing will add to the average Galion utility bill. Council authorized bond anticipation notes, commonly known as BANs, rather than immediately issuing all of the contemplated long-term bonds. The actual amount ultimately borrowed, the interest rate obtained and the final repayment terms have not yet been established. The ordinances anticipate long-term bonds dated around July 1, 2027. Most of the principal would be repaid through 20 annual installments, while one sewer component would use a 15-year schedule. The legislation uses an estimated interest rate of 6 percent for planning purposes.
The first principal payments on the long-term bonds are anticipated around December 1, 2027.
Those details provide the general shape of the obligation, but not enough information to calculate a reliable household impact. That would also require knowing the number and types of water and sewer accounts, the amount of revenue the systems currently generate, other operating and capital needs, and how Council ultimately chooses to structure repayment. What is already clear is that the final cost will be more than the amount borrowed. Interest and financing expenses will be added to the principal over the life of the debt.
A surcharge and a rate increase are not the same thing
A separate surcharge would make the cost easy to see. Customers could see that a particular portion of each bill was connected with the improvement debt. A general rate increase could produce the same revenue without identifying the debt as a separate charge. It could also account for other pressures on the utility systems, including labor, chemicals, maintenance, equipment replacement and future capital work.
The distinction matters for transparency, but it does not change the basic economics. Whether the cost appears separately or is built into water and sewer rates, the money still comes from customers. Council will eventually have to determine not only how much additional revenue is needed, but also how that cost should be distributed among residential, commercial and industrial users.
The city has pledged more than utility revenue
Although water and sewer revenues are the first source of repayment, the ordinances do not leave bondholders dependent upon those revenues alone. The legislation allows municipal income tax receipts to be appropriated toward the debt. It also pledges the city’s full faith and credit and its general property-taxing authority. That does not mean Council has approved an income tax allocation or property tax increase to pay for these projects. Those provisions serve as a possible financial backstop, giving lenders assurance that the city is legally committed to repayment. They also mean the obligation cannot be viewed as entirely separate from the city’s broader finances. If utility revenues were ever inadequate, Council would still have to find the money somewhere.
The household comparison
The situation is similar to a family learning that its roof, furnace or main car will have to be replaced. The expense may be necessary and postponing it may make the eventual problem much worse. The family may start out with short-term financing before arranging a longer-term loan. But once it takes on the obligation, the monthly or annual payments must become part of the family budget. Waiting until the first payment comes due does not make the expense smaller, rather it simply leaves less time to prepare for it. We’ve all been there, seeing that first payment roll in after some delay.
Galion is now in that preparation period. The anticipated first principal payment may be more than a year away, but the city already knows that a substantial new financial obligation is approaching.
The importance of the customer base
Once long-term bonds are issued, the required debt payments will be relatively fixed. The number of customers sharing those payments will not be. If the same obligation must be supported by fewer households and businesses, the average burden on those remaining customers increases. If additional homes, businesses and industries connect to the systems, the cost can be spread across a broader base.
That is why the discussion cannot end with whether Galion raises rates or creates a surcharge. The city must also consider whether its utility customer base is growing, remaining flat or continuing to shrink.
Before the long-term bonds are issued, the public should be given a clear projection of the annual debt service, the ability of existing utility revenues to absorb it and the likely effect on residential and business customers. An exact number cannot responsibly be offered today. A public plan, however, should be developed well before the first principal payment comes due. Or, more exactly, it should have been developed months ago and that plan should have long ago been implemented.
Part Three of “The Cost of Standing Still” will examine the important question this raises: whether economic development and population growth can expand the customer base that will carry this obligation, whether those efforts are now underway, and why that work should have begun long before the present.
Editor’s Note: Since this series began, 1831Galion has obtained a separate Ohio EPA audit concerning the City’s industrial wastewater pretreatment program. The audit addresses regulatory and oversight issues outside the financial questions examined in this series. We are reviewing it for separate coverage. 1831Galion has asked the City of Galion what corrective actions it has taken or plans to take in response to the audit and requested related public records. This story will be updated as the City’s responses and records are received. Look for this story early next week.
Image by Arek Socha from Pixabay