At the January 8 City Council meeting, consultants from HDR Engineering presented the initial findings from their analysis of the City’s water & sewer revenues, expenses, capital plans, and rates. This Rate Study was requested by the City Council to ensure the City was collecting sufficient revenue to operate & maintain the City’s water and sewer infrastructure, develop rates that reflect customer and system characteristics, incorporate prudent financial planning criteria, and develop policies and methods for setting future rates.
While additional work remains, HDR was able to share critical information related to current and future rate structures in Lennox. Some key highlights include:
- Operating and Maintenance (O&M) Reserves for both the Water Fund and the Sewer Fund are above the minimum recommendation. The industry minimum standard for O&M reserves is 90 days of operating cash. The City’s prudent planning has allowed both the water and sewer fund to perform in a way that has not jeopardized this minimum reserve, and the minimum reserve remains above the recommended 90 days.
- Current water utility rates are sufficient to fund current operations, maintenance, and debt service, but insufficient to fund future debt service and capital projects. In terms of the water system, current revenues are supporting operations, maintenance, and existing debt service. However, as new projects come to fruition rates will need to increase to fund those projects, whether through debt service or through a capital reserve fund (specifically for projects).
- Current sewer utility rates are sufficient to fund current operations, maintenance, debt service, and even future debt service, but insufficient to fund future capital projects. The sewer system is in better condition overall, with current revenues able to cover the costs of operations, maintenance, and current and future debt service. However, new projects will need a funding source necessitating a small increase in rates.
- The City of Lennox needs to ensure the right rate payers are paying their fair share of the cost of the system. The current rate system only makes a distinction between residential and commercial customers, and makes no distinction between heavy, moderate, and low users of the utility system. One alternative preferred by the City Council is to separate users into tiers in an effort to ensure that the highest users are paying the highest rates, as those users represent more demand on the utility system. This would also protect the average customer from a larger rate increase.
- Flat debt surcharges (instead of a surcharge based on use) unfairly burdens low-use customers with the cost of debt service. Several years ago, water and sewer surcharges were changed from a flat rate to a use-based rate (consumption rate) to reduce the rate for average and low users. The analysis from HDR shows that a flat rate would unfairly place the burden of project debt on low and moderate users of the system, while heavy users would have no additional burden. The City Council would prefer to continue this method.
Initial results of the rate study were presented to the public at an online event on January 10. A recording of that presentation can be found on the City’s YouTube Channel at https://www.youtube.com/watch?v=GqItd9aEe_U.
This is the first time the City of Lennox has taken a comprehensive look at our utility’s financial needs, rates, and rate setting policies. In the coming weeks and months, the City Council will review the final report. In the meantime, residents & businesses are encouraged to review the report on the City’s Boarddocs website at https://go.boarddocs.com/sd/col/Board.nsf/Public, or contact Nathan Vander Plaats, City Administrator, at nvp@cityoflennoxsd.com or 605.647.2286.