Port St. Joe city commissioners wish they could slash the coming increase utility customers will experience come fall.

Port St. Joe city commissioners wish they could slash the coming increase utility customers will experience come fall.

Whether to assume the risk that decision would bring is the choice staff offered during a budget workshop last week.

Commissioners have been examining a potential decrease in the proposed rate increases that will kick Oct. 1 for water and sewer customers since a June workshop on the rate structure with consultant Burton & Associates.

As they zero on the budget, that option, along with the risks, were put in front of commissioners by staff.

Lower rate increases, city manager Jim Anderson said, would carry risk linked to the city’s long-term debt, which commissioners and their finance committee are wrestling with simultaneously.

The two are fundamentally linked.

The utility rate structure is designed to provide sufficient revenue to adequately pay the city’s long-term debt, $17 million and rising.

The city is also currently in the marketplace to refinance that debt as a 2015 balloon payment looms.

To lower utility rates, the proposal on the table is to cap the coming increase at 3.5 percent instead of 5 percent, commissioners would have to dip into impact fee reserves, taking roughly 70 percent of the reserves, which are assessed for growth in the water and sewer systems.

That, in turn, would likely impact the terms the city could receive on its long-term debt, which are currently not favorable.

“We are heading in the right direction if we stay the course,” Anderson told commissioners. “The risk is low if you stay the course. If you cut to 3.5 percent you have risk.

“If we can get through (the refinancing) hurdle, then we have a plan for the next 10-15 years.”

Regions Bank, which holds the city’s note, has offered a 15-year loan with 3.09 percent interest rate to refinance the city’s long-term debt.

“The interest rate isn’t too bad,” said Mayor Mel Magidson. “It is the 15-year amortization that is the killer.”

Under the 15-year term, the city will pay $1.278 million annually on the note, up from the current annual payment of roughly $850,000.

A 20-year loan, which the city is seeking, would reduce that annual payment by almost $200,000; in the neighborhood of the amount the city would take from impact fee reserves to cap the coming rate increase at 3.5 percent.

The Regions Bank loan, necessitated by the debt the city has taken on while undertaking extensive infrastructure projects from a $21 million water plant to extending water and sewer connections throughout the south end of the county to replacing 20 miles of aging water lines, was taken out in 2010.

Commissioners made it clear they wanted better terms from Regions or any other bank wishing the city’s business.

“We’ve been a good customer,” Magidson said. “I don’t know if they’d want to lose a $20 million customer.

“We need that 20-year amortization or we are going to need to go out and shop.”

Commissioners will also budget for finance charges, estimated by staff at $150,000, to refinance the loan.

The city has raised utility rates, per an ordinance put in place after a rate study by Burton & Associates, twice since.

The first was a whopping 39 percent increase; the second, two years ago, came in at 8 percent. The 5 percent increase proposed for this year drops to 4 percent in 2014 and again in 2015.

For a 3,000 gallon a month user, a 5 percent increase will translate into $3.60 per month. Bringing the increase down to 3.5 percent would represent an increase of $2.70, a difference of 90 cents.

For a 4,000 gallon per month user – 60 percent of the city’s customers use 4,000 gallons or less per month – the proposed 5 percent will increase rates $4.11 per month; 3.5 percent would increase rates $3.05 per month.

To cap the increase at 3.5 percent this year would create a $500,000 shortfall, finance officer Mike Lacour said. An option to commissioners is to take those funds from impact fees for water and sewer.

“It is risky,” Lacour said. “You would no longer be escrowing impact fees for future plans. Do we want to pay down that debt and not have that reserve?”

The amount that would taken from impact fees would also be hinge on growth projections which commissioners found optimistic.

Lacour was basing his figures on growth of 2 percent, or 60 new customers in 2014. The city had less optimistic projections for this year and is struggling to meet those projections.

“The assumptions on growth scare me,” said Commissioner Rex Buzzett. “We didn’t meet it this year.”

Also uncertain is how using impact fee reserves to pay down long-term debt would look to any potential lender as the city tried to refinance the Regions Bank loan.

Sobering the entire discussion is ongoing issues with water quality as the city has added more customers the past three years and the impact of fee increases on households and businesses throughout the south end of the county.

“Any increase is a hard sell,” said Commissioner Phil McCroan. “These people didn’t ask for this. If we had a fantastic product (it would be different).”

Commissioner Bo Patterson was also blunt, saying he could not support an increase of any more than 3.5 percent.

“I think we are going to get hollered at with a 3.5 percent increase and if it is 5 percent it will be a lot louder,” Patterson said. “I don’t think I can vote to stay the course.”

Buzzett said that utility rates were spread out over the customer base and a fairer method of generating the revenue than socking property taxpayers in the city.

“Nobody wants to raise water rates but we are responsible for keeping this city fiscally sound,” Buzzett said.