50% increase in water rates part of study presented to Fort Smith Board

A water rate study presented to the Fort Smith Board of Directors at a study session Tuesday (Dec. 12) suggests a 50% increase in residential water users within the city in 2024 and a 0.5% sales and use tax that would be in effect for 20 years.

In April, the Board of Directors approved a drinking water rate study. The city hired 1898 & Co. (a part of Burns & McDonnell Engineering) to perform the study. David Naumann, senior project manager with 1898 & Co., presented a study that showed the national average water bill has increased around 5% a year over the past 20 years.

Water rates have increased throughout the country because of four factors – general trend in lower use per account, which can pressure the variable revenue stream; inflation on operating and capital/construction cost; more stringent water quality regulations; and aging infrastructure requires renewal and replacement, Naumann said.

Fort Smith’s water rate has increased about 2% a year over the past 20 years. Fort Smith water utility rates have not changed since 2011, though because of a need to finance consent decree obligations, there was a large sewer rate increase implemented in 2015, 2016 and 2017.

A regional comparison showed that a Fort Smith residential water customer using 500 cubic feet a month pays approximately $17 per month for water. The average rate in Arkansas is $22 per month, Naumann said.

REVENUE OPTIONS
The water rate study looked at two scenarios to be able to pay for the water department needs of Fort Smith over the next five years. It looked at the cost to the department in that time to be approximately $367 million with a breakdown including $161 million for a 48-inch transmission main line from Lake Fort Smith; $76 million for water treatment plant expansion; $66 million for other main line-related project; $23 million for meters and $41 million for “other” work.

If the city were to have a 0.5% sales and use tax for water funding, the city would have revenue of $20 million a year from 2025-2027 in state revenue funding for a total of $80 million; $135 million from revenue bonds; $34 million from sales and use tax (SUT) cash proceeds; $89 million from SUT bond process; $21 million from water billing revenue; and $13 million from “other,” the water rate study said.

Naumann said a 50% rate increase in 2024 would allow the city to fund projects for 2024. In 2025, there would be a 20% rate increase, and there would be a 8% rate increase a year to round out the plan.

In the SUT plan, the retail rate structure is the same, but prices are adjusted. Low income residential customers would still be able to have a 50% discount through the city’s Project Care program. Water users outside the city would have a 1.5 times volume retail rates, Naumann said.

“Rates are designed to achieve equity between inside and outside city classes consistently over time. Base charge for wholesale is proposed to be the same as retail. Wholesale volumetric is adjusted to recover costs equitably,” he said.

In plan 2, the one without a sales and use tax, rates would increase by 50% in 2024, the same as in the other plan. Proposed rates for 2025-2028 would reflect higher increases.

With the SUT, residential rates for 500 cubic feet, which is now $16.37, would increase to $22.56 in 2024, $26.90 in 2025; $28.77 in 2026, $30.74 in 2027 and $33.27 in 2028. Without the SUT, residential rates would increase to $22.56 in 2024 and then to $31.14, $34.21, $37.60 and $41.77 in each sequential year.

“There will be about a $6 increase in residential bills in 2024,” Naumann said. “Commercial bills … they are rising at a much higher rate.”

‘BOLOGNA OR CHICKEN’
City Administrator Carl Geffken said the sales tax would alleviate putting all of the needed revenue on fees, especially to the city’s residents. Director Kevin Settler said if the city did not provide water to other cities in the area, the city would not need to spend $161 million for the 48-inch water line.

“It’s our water for our citizens, who approved the Lake Fort Smith expansion and the Lee Creek project. We should be able to charge what we want to customers outside the city,” Settle said.

As he has done in every discussion on water rates, Settle said he wanted to see a larger increase in the rates for those outside the city.

“Other cities are taking advantage of lower water rate (and) no sewer consent decree because we don’t want to charge what they should be charged,” he said.

He also said if the city is going to ask the citizens to approve a 0.5% sales tax, they are going to have to make an offer to freeze rates, much like what was done when the city sought a sales tax to help fund consent decree work.

“I come from a divorced family. I remember my dad trying to raise my brother and myself, my mom trying to raise us too, and money was tight back then. I remember having to choose if we are going to have bologna or chicken. I don’t want people today to have to do what I had to back then, and raising the basic fundamental residential rate is where I struggle,” Settle said.

Director Christina Catsavis also expressed concern about raising residential rates, noting that everyone on the board is worried about people who are having trouble making ends meet even without a water rate increase.

GROWTH IMPACT
Though Director Lavon Morton expressed concern about raising rates and asking for a sales tax, he said considering the expected growth to the city over the next few years, both were something the board had to examine.

“This is a moment for the board to think about the times when we didn’t do anything – when other directors didn’t do anything – on sewer. Perhaps they didn’t know what they were facing. We know what we are facing. We have a choice. We either try to make sure that everyone in Fort Smith always has water come out of their tap or we take the risk that they won’t,” Morton said.

The 50% water rate in 2024 would be the same as what Arkansas cities bound by Act 545 will have to do. A water rate study had been discussed for almost a year prior to being approved in April, but the board had routinely opted to postpone the study because Act 605, passed by the Arkansas Legislature in 2021, would require water rate increases noted in the study to be implemented immediately.

On April 11, Act 545, an amended version of the law, was signed into law by Gov. Sarah Sanders. Act 545 exempts any city utility provider during the time it is subject to a federal consent decree or judgment for remediation efforts related to the provider’s water system, wastewater system, or water and wastewater systems for the purpose of compliance with federal law.

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 in late 2014. The consent decree required the city to make an estimated $480 million worth of sewer upgrades over the course of 12 years.

Because of exemption in the new act, Fort Smith is not under the requirements of the Act 545. Therefore, Fort Smith is not required by law to enact any rate changes suggested in the rate study.