Service to town could benefit utility financially
By Michael S. Hoey
Correspondent
The City of Delavan is again discussing entering an agreement with the Town of Delavan to provide city water to the proposed Sho-Deen housing development at Mound Road and County Road F in the Town of Delavan.
The Common Council voted May 12 not to pursue such an agreement, but the Delavan Town Board requesting negotiating toward an inter-municipal agreement with the city June 16. The agreement would deal with the city’s extraterritorial zoning rights in the township and possibly selling water to customers outside city limits, which would benefit the proposed 640-unit Sho-Deen development.
After the Town Board approved negotiating with the city, Mayor Mel Nieuwenhuis said he hoped the council would reconsider continuing negotiations despite its vote not to May 12. The council discussed the issue in closed session July 14 but took no action.
City Administrator Denise Pieroni sent the council and the Water and Sewer Commission a memo summarizing a water sales analysis to the Sho-Deen development. The Water and Sewer Commission requested the analysis at its May 21 meeting.
According to the analysis, Larry Thomas of Stanley Consultants confirmed that the city’s water system capacity has sufficient supply to meet the anticipated demands of the city’s present population and the anticipated 640-unit development through 2035. Thomas also concluded that city water usage has declined since 2010 and even with the addition of the Sho-Deen development the city’s normal growth as projected would still fall short of the historically high usage level of water consumption in 2010.
City staff also prepared a summary of projected operating revenue based on the addition of the 640 units consuming an average amount of water that found that the water utility would gain about $224,000 in operating income over a 10- or 20-year build out.
A water utility debt summary showed that the utility has debt of more than $4 million in principal and more than $1 million in interest. According to the summary, the city’s development trend is for no expected growth, which places a hardship on the utility’s water impact fee’s ability to fund its portion of the debt.
The water utility’s temporary investment fund has been advancing the necessary funds to cover debt payments and could advance as much as $1.8 million if the development situation does not improve. That figure could be reduced to $255,582 if an agreement is reached with the township to provide water for the Sho-Deen development. The development would yield about $1.5 million in connection fees based on the proposed density.
The summary also said Tax Incremental District No. 4 is also experiencing difficulty paying its $3.4 million of existing debt to the water utility and, if it defaults, that would put even more pressure on the utility. The utility’s cash reserve balance of $3.5 million could drop to $1.7 million if that happens.
The summary said the Public Service Commission usually requires water utilities to yield a rate of return of 5 percent, but it has allowed the city’s to yield a rate of 1.3 percent because a substantial amount of capital is funded by the TIF district. Even so, the utility has fallen short of the 1.3 percent three years in a row. The utility has been able to avoid raising rates because of an unrestricted cash reserve balance and strong debt coverage ratio.
The summary projected the utility’s rate of return could exceed the 1.3 percent if the new development is included and water rates could remain stable. If, however, the TID defaults on its debt payments the rate of return could go back to 5 percent and a rate increase would be likely even if the new development is added unless the operating income rises to a level that supports the 5 percent rate of return.
The last part of the report listed three scenarios for the projected 10-year impact of the current capital program on the utility’s cash reserves assuming no rate increases and no new debt. All three scenarios assume a new water loop will be constructed either along County Highway F or along an easement on Lake Lawn Resort property.
Two of the scenarios suggest a need to pull money from the utility’s cash reserve in the amounts of $365,537 or $731,537. The third scenario includes contributions from Sho-Deen toward the water loop that could be included in the inter-municipal agreement and the potential sale of water outside the city limits. Thie scenario suggests the net operational income could generate a surplus for the utility and the ability to replenish the cash reserves in the amount of $1.5 million.
During discussion on May 12, aldermen Gary Stebnitz and Jeff Johnson supported negotiating an agreement based on the potential savings to taxpayers it could yield. Aldermen Ron Henriott, Ryan Schroeder, Chris Phillips and Bruce DeWitt voted not to continue the negotiations at that time. Henriott and Schroeder said they are philosophically opposed to providing water outside city limits. Phillips and DeWitt did not comment at that time. No discussion or action took place in open session last week.
