Fort Smith board agrees to push 5% water, sewer increase

Although Monday’s (Nov. 15) budget hearing was not a voting meeting, the Fort Smith board of directors unanimously agreed to move forward with a combined 5% water and sewer rate increase and about $1 million in personnel and operating cost reductions.

During the board’s Nov. 9 budget hearing, Utilities Director Steve Parke presented a water and sewer system operating budget that 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.

Deep cuts are needed in the budget because revenues have fallen to the point the city is not meeting revenue requirement covenants on bonds related to water and sewer system improvements.

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, more individuals and businesses finding more resourceful ways to limit water use, and city water and sewer charges that have not been adjusted in decades.

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.

Deputy City Administrator Ray Gosack said the board must address the issue in the 2011 budget or bondholders may force the city to act.

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.

The overwhelming consensus of the board was that the proposed personnel and operational cuts were too deep and would likely hurt service and water quality. Gosack proposed the compromise position that would retain about $1 million in cuts and provide extra revenue from the combined 5% increase. The cuts and revenue should allow the city to meet the bond covenant requirements.

A comprehensive analysis of water and sewer rates is expected to be complete and before the board no later than March 2011. At that point, the board will again be required to consider rate adjustments.

Based on the consensus Monday night, the board will presumably adopt the compromise rate increase action during a regular board meeting prior to the beginning of 2011.