Low sewer rate hikes focus of effort to modify Fort Smith consent decree

City Administrator Carl Geffken presented a number of proposals to take to the Department of Justice for consent decree modification to the Board of Directors Tuesday night (Sept. 10) requesting that the city be allowed to do what is necessary to “get things done.”

After years of failing to maintain water and sewer infrastructure to federal standards, the city entered into a federal consent decree with the U.S. Environmental Protection Agency (EPA) and U.S. Department of Justice (DOJ) in late 2014. The consent decree, which began in January 2015, required the city to make an estimated $480 million worth of sewer upgrades in 12 years.

In May 2022, Fort Smith voters passed a 0.75% sales tax from Jan. 1, 2023, to Dec. 31, 2030, with 83.3% of the revenue going to federal consent decree work on the city’s water and sewer system, and 16.7% directed to the police department. Funding for consent decree work to date also has come in part from water and sewer bill increases, which are up 167% since 2015.

The DOJ and EPA provided a draft modification to the city for review and mark-up, Geffken said. One of the items required by federal agencies is a financial plan and assurance by the city to fund consent decree projects. The agencies provided several financial models performed by their consultant which included various sewer rate increases to fund the consent decree projects.

MODIFIED PLANS
Three of the agencies’ plans were given to the board of directors at the study session Tuesday along with modified plans prepared by the city. All plans give the city until 2036 to complete the consent decree work.

“The Department of Justice has not formally offered that. They have shown us that, they have asked us to consider that, but this is not offered yet,” Geffken said of the first of the three plans offered by the agencies, which allows for only 3.5% in sewer rates from 2025 to 2030.

The second and third plans presented by the agencies show more money being spent by the city up front, Geffken said, noting they are not valid alternatives because they require large rate increases immediately, including 15.5% rate increases next year.

The city’s first modified plan follows the same rate increase as the No. 1 plan presented by the agencies, but the first rate increase begins June 1, 2025, the earliest possible date the sales and use tax allows, Geffken said. This permits an additional $39 million of work to be performed earlier, between 2026 and 2030. That plan also increases water rates by 18% in 2031 and 2032 and by 16% in 2033, 15% in 2034 and 12% in 2035.

“Whatever gets done, we need to be able to pass our debt service covenants. That’s the most important,” Geffken said.

HOLDING AT 3.5%
City Director Lavon Morton has asked Geffken that if the city maintained only a 3.5% increase in rates annually from June 2025 through 2036, how much would be lacking to complete the consent decree work. If the city were not to only pay as you go, the sales tax continued as is and there is only an annual 3.5% rate increase on sewer rates, the city would face a $132.5 million shortfall for paying for consent decree work that needs to be completed by 2036. However, if the city were able to reconfigure the current sales and use taxes, money could be found to help fund the full scope of work.

The city has a 1% sales tax for streets, bridges and associated drainage, and it generates $30 million a year, Geffken said. The tax generated a record $29.9 million in 2023. If that tax, which is up for renewal next year, were kept but with 25% of it going to consent decree work and could be used to pay off bonds, the city could borrow $300 million to go toward consent decree spending, Geffken said.

If the option to use the sales tax funds for bonds were extended to the consent decree sales and use tax approved by voters in May 2022, it would give the city the ability to borrow more money, he said. If voters consented to raising the sales tax specifically allocated to consent decree work to 1%, it would raise even more funds and allow the city to borrow more.

“Now cumulative the amount (of bonds available) would be over $703 million. The total cost in today’s dollars to fund the consent decree is $608 million. Inflated at 2.5% to 3%, the consent decree will cost approximately $810 million. Overall our modified plan would raise $717.8 million not $800 million, but at the same point we could be trying for more grants,” Geffken said.

The long-term funding mechanism would not fully burden Fort Smith residents, as the sales tax would also be paid for by people outside of the city. The plan would keep the sales tax rate in the city under 10% – at roughly 9.87% – and keep sewer rate increases to Fort Smith residents at 3.5% annually, an amount that is needed for the city to make its debt service covenants, Geffken said.

RATE RISE OPTION
If the city was to only pay as you go and have no debt, sewer rates would have to increase around 60% in 2031, 2032, 2033 and 2034, 50% in 2035, and 40% in 2036, Geffken said. That would mean a 5 ccf usage sewer rate, not including water, would be about $704 a month in 2036, he said, noting that it’s a rate no one can afford.

“Five ccf is $42.25 for sewer alone today. In 12 years, that same will cost $63.84 (if the only 3.5% annual rate increase is allowed along with sales tax increase and the use of bonds). … It will go up $21 per year or $1.75 per year per month,” Geffken noted.

There is no date set yet for a discussion with the DOJ and EPA on the modification plans, Geffken said.

“First the Board needs to approve (a) resolution authorizing me to present a plan and negotiate. Once that is approved, our attorney will send the red line version of the modification and arrange a date to meet, probably virtually at first,” Geffken said.