KC debating mayor's proposal to freeze water, sewer rates

how can she freeze rates, meet standards and provide quality service?

By LYNN HORSLEY - The Kansas City Star
Date: 09/03/01 22:15

Mayor Kay Barnes has begun quietly pushing for a water and sewer rate freeze, hoping to capitalize on promised savings from Kansas City's ongoing efficiency efforts.

Some city officials are balking. They argue that before the Water Services Department can improve service and save money, it needs to spend tens of millions of dollars to fix an antiquated water and sewer system.

Barnes' proposal is shaping up as a classic battle: a politicians' desire to score points with constituents through tax relief vs. City Hall bureaucrats' desire to pour dollars back into government.

At Barnes' direction, city staffers have prepared a draft resolution that calls for a five-year moratorium on water rate increases and a two-year moratorium on sewer rate increases for residents and businesses.

The freeze would pre-empt earlier plans for annual 6 percent sewer rate increases and 1 percent water rate increases in the next six years, saving customers citywide about $3.3 million in the first year. The average residential customer would save about $2.30 on water and about $10 on the sewer charge in the first year.

The rate freeze would be possible, the draft resolution states, because of efficiencies from the department's competitive business plan for 2002-2007.

While that plan projects $217 million in operations and maintenance savings in a decade through better business practices, it also calls for even more up-front infrastructure spending -- $34 million per year -- to fix leaky water and sewer pipes that in some cases date to the 1870s.

"The mayor has asked that we do something to benefit the ratepayers," said Darby Trotter, an executive at Faultless Starch/Bon Ami who leads a citizen subcommittee overseeing the Water Services Department's competitive business plan.

Trotter, however, noted that the subcommittee also wanted to help the department address its infrastructure needs and that a moratorium on rate increases might make that more difficult.

"Our concern as a committee has been that we may not see the kinds of savings everyone has thought they're going to see right away. It may be some years," Trotter said at a subcommittee meeting.

"We want to save ratepayers money but not cause the city long-term negative consequences. That's what we're concerned about."

Barnes said last week that she did not want to comment on the water and sewer rate proposal until Trotter's subcommittee shared its views with her. She said she simply was exploring options that would allow both investment in the aging infrastructure and rate relief for residents.

With a $132 million budget, the Water Services Department is a cash cow, selling water to surrounding communities. It is one of the city's two enterprise funds, along with the airport, in which costs are paid by users and revenue generated must remain with the department.

But City Manager Bob Collins likened its infrastructure troubles to the city's bridge problems. For years Kansas City let its bridges deteriorate, until it finally had to spend hundreds of millions of dollars on a repair and replacement program.

"We can continue to patch, but the fix gets more expensive," Collins said, noting that giving ratepayers a break and investing less money in water and sewer upgrades would prolong the amount of time and raise the cost of eliminating the backlog.

"How quickly do you want to catch up?" he asked. "That's where the council will come into the decision."

Pressure's on

Barnes and Collins are under pressure to show the council and taxpayers results soon -- such as a budget cut or rate relief -- from the efficiency study that began more than a year ago.

Since December 1999, the city has shelled out more than $2 million for consultants to help improve operations and cut costs. Collins, with Barnes' backing, promised that spending the money on consultants would help save the city millions of dollars in the long run.

In February 2001, Councilman Paul Danaher demanded to know when the council would start to see savings reflected in the city's budget. Collins promised they would begin to show up in the 2002-03 budget.

But as the consultants have studied the city's Water Services Department and processes such as human resources, purchasing and information technology, they have discovered that before the city can save money, it may have to invest in better technology, equipment and infrastructure.

That has been the case in the Water Services Department. Rich Noll, assistant city manager, notes that while one of Kansas City's consultants was able to quickly save San Diego millions of dollars in its wastewater treatment operation, that was because that city's system was more modern than Kansas City's.

"They came in and said, `Your (Kansas City's) infrastructure is a lot worse than we thought,' " Noll said.

A study by Brown and Caldwell, an Atlanta-based industry specialist, bears that out. The study examined Kansas City and six similar cities: Nashville, Tenn.; Charlotte, N.C.; El Paso, Texas; Columbus, Ohio; Wichita; and Atlanta.

The study gave high rankings to Kansas City's laboratory, fleet operation, industrial waste control, and water treatment.

It found, however, that Kansas City's water pipes had 54 main breaks per 100 miles of pipeline. The next-worst city, Nashville, had only 22, and the others far fewer. Kansas City had 1,620 service breaks and leaks per year, compared with 1,100 in El Paso and Wichita.

"City crews spend all their time fixing breaks and not doing other things," Noll said.

Other peer cities also spend up to two times the amount that Kansas City spends on upgrading and replacing its system, per gallon of water and waste-water treated.

Tough choices

Kansas City's rates have gone up steadily since 1996-97, but water costs currently are competitive and sewer rates are the second-lowest in the metropolitan area.

Some water officials privately say that they fear a rate freeze could compromise the competitive business plan's ability to improve service. They argue that long-term efficiency, and operation and maintenance savings of up to $217 million in 10 years, will result only with the $34 million annual capital investment in the next seven years.

A preliminary analysis by Brown and Caldwell, according to Noll, showed that a two-year moratorium on the sewer rate increases could reduce the city's capital investment by $50 million and reduce net operating and maintenance savings by $40 million.

Another concern about any rate freeze would be the effect on the city's ability to borrow money for future capital improvements. Bond-rating agencies currently give Kansas City AA or Aa3 ratings, noting the city's healthy system finances with historically strong debt service coverage and competitive rates.

"If you increase your rate of borrowing while keeping a moratorium on rate increases, are you not tying both hands behind your back?" Trotter asked at a recent competitive review committee meeting.

The draft resolution, however, contains language to reassure the capital markets, stating: "This adopted plan will contain provisions ensuring that the city's debt service coverage requirements contained in existing and future bond covenants will be maintained."

Recognizing political reality, Gurnie Gunter, water services director, said he was prepared to accept a temporary rate freeze.

"There are two strategies: a reinvestment strategy or a return to the stakeholders strategy," Gunter said. "What this does is try to come up with a compromise."

Gunter said holding the line on rates meant the department would be unable to upgrade its system as quickly as it would like. But he said the department also was looking at other ways of generating revenue, such as selling more water to other communities and seeking more federal financing and grants.

Gunter said he fully understood the mayor's desire to appease residents on rates.

"It's a policy decision that it's very difficult to criticize," he said, "in view of the desire of people to give something back when there's a savings."

To reach Lynn Horsley, City Hall reporter, send e-mail to lhorsley@kcstar.com.