opinion
january10
2012
Vernonia Needs to Change its Water Rates
3
By Jim Tierney and Dale Webb
and distribution system. By raising the conversations should be establishing
monies needed for these projects over a cost reduction goals for the city
The Vernonia Public Works long period of time, we can best stabilize administration.
Committee has been considering how to our future rates.
It is important to be aware that
keep our water and sewer rates as low as
we have two types of reserves. The fact
possible over the long haul. Like most
things in life, saving money in the long
Below Is a Simplified Version of Our Current (2011-2012) Budget
run involves giving something up in the
Personnel, Treatment Expense, Material &
$ 382,370
short run. So it is likely to be with our
Operating Costs
water and sewer rates in the near future.
Contingency (Annual Reserve for Unpredicted
This is the first in a series of articles that
31,720
Repair Costs)
your Public Works Committee proposes
Loan Reserves* (One time pmt. to replace
to publish to help the citizens understand
95,960
required Loan Reserves)
the complexities that we and the City
Capital Reserve Payment
60,000
Council see as affecting your future
Annual Debt Service
119,949
water and sewer rates.
This article is intended to give
Total Budget $ 689,999
you some understanding of the city’s
complicated public works budget, and *Since this loan reserve payment is a that they use the same name can make
explain the need to set aside reserves one-time transfer of last year’s cash to our communication very confusing. To
to replace our aging water and sewer the required loan reserve budget, the understand them, it is best to focus on
systems. In our next article, we’ll real annual, steady state Water System their purposes. The first type, a Loan
explain the several ways different cities Budget is $594,999, or there about. Reserve is typically required by lenders
approach setting rates, together with an That is assuming that we continue, as we when the city borrows money. These
objective discussion of the underlying should, to sequester $60,000 each year reserves are our way to assure our lender
philosophies behind those rate setting into our Capital Reserve budget, from that they will not lose money on our loan.
strategies.
the system’s operating budget.
As a result, our lenders give us lower
Responsible leaders in charge
Personnel and material costs interest rates and loan over a longer
of any expensive facility typically set include: electricity, chemicals, hardware, period of time, lowering our payment.
aside a reserve from the rates to replace public works personnel, office billing Our water and sewer rates are seen by the
the facility and its parts as they age and and accounting staff and some charges lender as a dependable source of income,
wear out. For most homeowners this for city administration. This budget also and this too encourages the lender to
might include setting aside $500 a year includes a line item for Contingency. In give the city more attractive loan terms.
to replace the roof, or a similar amount this case, the Contingency amount is Nevertheless, lenders always require us
to help pay for painting the house every our best guess of the actual unexpected to maintain significant cash reserves to
7 to 10 years. When your facilities are water system costs we will have to do in protect them. These loan reserves are
worth millions of dollars, this kind of any given year. Contingency funds left typically funded only once when the loan
prudence becomes even more important. unspent, get rolled into the next year’s is originated and they cannot be touched
Historically, Vernonia’s leaders Public Works Budget.
without violating our loan agreements.
have tried to keep water and sewer rates
Capital Reserves is what most The water rate surcharge the city added
as low as possible. By focusing on only budget analysts would call a Reserve several years ago is an example of what
the “hard” operating costs to craft rates for Replacement. It is this category happens when cities do inappropriately
for users, our leaders erred, neglecting the that we believe must be strengthened spend those funds. In our case, according
City’s responsibility to set aside reserves and protected, just as you might protect to some rumors (no one here seems to
for replacement. Because we have in the your retirement account. Annual Debt really know), the city spent some of
past been able to raise significant capital Service is non-negotiable to the city just the reserve funds related to one of our
through state and federal grants, we have as your mortgage or rent payments are loans, and we got caught. Our lenders
been able to keep our system functioning nonnegotiable to you.
then required us to replenish that loan
despite having effectively set aside no
At this point during a typical fund very quickly, so we had a large,
meaningful reserves for replacement Vernonia conversation about water unexpected increase in our water rates.
from within our rate structure.
rates the conversation changes into a Other than this “catch up” period, which
Unfortunately we cannot grumble that we should save money in is final with this year’s budget, we do
continue to depend on this approach. the operational budget before setting not make annual or monthly payments to
For the last 20 years state and federal aside reserves. Saving money and loan reserves. They just sit in the bank
grants for water and sewer projects holding our public servants accountable protecting our lenders.
have been diminishing and are now are both excellent ideas. However
The other kind of reserves,
virtually nonexistent. The best we can implementing these good ideas is an Capital Reserves, represents financial
hope for is reduced interest rates rather ongoing management task, completely discipline we apply to ourselves. It’s not
than large outright grants. Recognizing independent of the need for reserves. very different than setting aside money
this changing funding environment We should be looking for operational every month to pay for your child’s
the Public Works Committee and City savings whether or not we have adequate college or your annual tax bill. The
Council have concluded that it is in the reserves in the budget. One way to “reasonable” way to accomplish this is
best interest of our rate payers to begin accomplish both goals is to have a to “disassemble” our entire water system
setting aside sufficient reserves for public rate conversation periodically, into its discrete component parts and then
future replacements of our water plant probably every two years. Part of those make guesstimates as to the remaining
Publisher and Managing Editor
Scott Laird
503-367-0098
scott@vernoniasvoice.com
Contributors
Lynn Berry
Dr. Carol McIntyre
Gayle Rich-Boxman
Wolfgang Rotbart
Michal Smith
Jim Tierney
Dale Webb
William Wells
Photography
Yaraslava Denysenko
Scott Laird
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life of each of the components. To this
we add an estimate of the cost to replace
each component. Using this data, we
have the basis for the large, long-term,
savings accounts we must create if we
hope to be able to replace our very
expensive water system components
when they wear out.
Our intent in writing this article
is to help you, the rate payer, understand
what all the reserves, and contingencies
do. And, we are hoping that many of you
will absolutely insist that we maintain
these prudent budgeting systems into
the future. This thoughtful prudence is
always the first thing to get lost as the
public reacts to rate increases. Because
we believe that some future rate increases
are inevitable, we will continue our effort
to build knowledge and understanding
through these periodic communications
with you, the public.
The next article, which we will
publish in the near future will discuss
the various proposals to reform how we
structure the charges for water service so
that we can be sure we have the money
to operate the budget above.
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