Debt coverage, rate issues focus of Fort Smith budget talks

The balance between quality service and financially meeting debt covenants and ongoing maintenance and operations with Fort Smith’s water and sewer system dominated the second in a series of three city hearings on the 2011 budget. (Link here for the story on the first hearing.)

Tuesday’s (Nov. 9) meeting saw the board of directors focus on a water and sewer system operating budget that may include personnel cuts — up to nine full-time jobs from an overall staff of about 190 — and operational cuts of $1.642 million from an overall budget of $32.682 million. Participants of the Tuesday budget hearing included City Directors-elect George Catsavis, Philip Merry Jr., and Pam Weber; and Mayor-elect Sandy Sanders.

A financial problem that could make the convention center funding shortfall pale in comparison is the failure of the city to meet its 110% debt covenant threshold on about $15 million in debt service requirements.

In July, City Finance Director Kara Bushkuhl issued the first warning about the debt covenant breach. She said then that bondholders sent a “material event notice.” The notice is a formality that could lead to bondholders seeking a court order requiring the city to raise revenue — likely through a rate increase — until the 110% mandate is met. Bushkuhl said that is unlikely if the board pursues a plan to raise rates or take other action to meet the covenant percentage.

Water and sewer revenue declines are primarily the result of recent moderate summers causing water usage to fall. Also, more individuals and businesses found more resourceful ways to limit water use, Bushkuhl said.

Not aggressively addressing the bond covenant issue could also result in the city losing its high credit ratings from Standard & Poor’s rating service. A reduced rating would lead to higher interest rates on the city’s debt service and other higher costs related to the issuance of bonds for water, sewer and other infrastructure work.

“If the board does not take some type of action, we could see the rating decline and that would be a problem,” Bushkuhl said in the July interview. “And I think that (downward rating adjustment) is likely to happen before the end of this year if the revenue model is not changed.”

In introducing the issue Tuesday, Acting City Administrator Ray Gosack said the city is at a “major crossroads” with the water and sewer system. He said cuts proposed by Utilities Director Steve Parke will help address the debt covenant issue, but will “inevitably effect service levels.”

Two of Parke’s proposed “last resort” cuts hold the potential to lead to water boil orders and delay by many hours — to avoid overtime pay — customer requests for service or help. Several directors opposed the personnel cuts, saying instead that budget cuts combined with rate adjustments are preferable.

“What I see (of the proposed cuts) says, ‘Less quality, less quality, less quality,” said City Director Gary Campbell.

City Director Bill Maddox agreed, saying the board should never take an action that increases the chances of a water boil order.

On the rates side, Parke explained that the city has three choices: to raise fees on connections, the flat monthly service fee and other fixed charges; to raise rates on the volume of water and sewer used per customer; a combination of both.

Parke said many of the fixed costs have not been raised for years. An industrial user permit has not changed since 1989. The charge to connect a typical residential user has not changed in many years, with the $300 fee not covering the average $700 expense to physically create the connection.

Several board members supported the idea of exploring fixed cost adjustments.

“I’m in hopes we can do something like that,” said City Director Steve Tyler.

If rates are adjusted based on only the amount of water and sewer used, the water increase would have to be 7.5% to meet the debt covenant requirement, based on a preliminary assessment. Sewer rates would have to increase 35.25% to meet covenant requirements on sewer system debt.

Gosack said a water/sewer rate study is underway and should be completed sometime in the first quarter of 2011.

In the meantime, the board will have to decide between personnel and operational cuts and/or rate changes.

It wasn’t all bad news Tuesday night. The city’s sanitation fund is doing well.

Fort Smith Sanitation Director Baridi Nkokheli said 2010 was a “very ambitious and dynamic” year that saw the department expand automated trash service, add about 4,900 residential customers in south Fort Smith and begin and complete (within the next few weeks) the Phase 5 landfill expansion.

The estimated 4,900 new residential accounts should generate about $380,000 in revenue in 2010 and almost $817,000 in 2011, according to a mid-year report on sanitation department revenue.

The department is doing well financially, and does not foresee a need for rate increases possibly as far out as 2012. Also, the projected ending 2011 fund balance for the sanitation department is 22.9% — well above the goal of 15%.