Who Pays? - Sulphur Mountain Sewer Line, update & corrections
Editing Note:
As an official of the Town of Banff, I want to be as accurate as I can be. Since the last Blog entry, I have learned more through public responses, through corrections provided by the Town Manager Robert Earl. Please find updated conversation here.
Hello All,
We received much information in the past week since the Agenda for the upcoming Mar. 25 Council meeting was issued on Wed. Mar. 20, and a revised Agenda was sent out Mar. 21, and associated materials Mar. 21st. Included in that is new information on the costs of borrowing.
Few people want to spend the time to delve into all of this. For those who are trying to make sense of it, I have tried to wrap my head around this new information and organize my part of the conversation around seven points.
1. Use of the term “taxpayer” or “ratepayer”
2. Use of the term “subsidy”
3. Purpose of the 25% surcharge for out-of-town users
4. Full-cost recovery accounting: operating & maintenance costs
5. Full-cost recovery accounting: overhead
6. Full-cost recovery accounting: opportunity costs of municipal borrowing
7. Difference between budget estimates, construction costs, and loan amount
I elaborate on these below (see CONVERSATION POINTS).
I aimed to stimulate a community conversation by issuing a newsletter in February, buying an ad this month to invite others in the community into the conversation, and sharing this on a website blog. I have learned much through this conversation, including more of the history of the out-of-town utilities.
We received much information in the past week since the Agenda was issued Wed. Mar. 20 and a revised Agenda Mar. 21 and associated materials Mar. 21st. Included in that is new information on the costs of borrowing.
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CONVERSATION POINTS
1. Use of the term “taxpayer” or “ratepayer”
In my occasional newsletter which I wrote in early February 2019 about the Sulphur Mountain sewer line replacement, I use the term "subsidy" by "taxpayers." I do not distinguish between "utility ratepayers" and "taxpayers.” Mr. Earl clarified this. He is correct. Still, the nuances are interesting.
Still, there are two reasons for my using the terms in this way.
First, in common vernacular use, taxpayer is the general term and includes ratepayers. The terms are in some common sense interchangeable because normally the people who pay taxes also pay for the town's utilities. In fact, in England, a town like Banff would use the term "ratepayer" where we use the word "taxpayer." And in Canadian English, Canadians often use these English words.
Second, in the case of the out-of-town sewer line, the issue at hand is whether the Banff taxpayers (be they paying utility water and sewer rates, or taxes) should be paying for the costs of the sewer line replacement. Two of those businesses which do not pay taxes to Banff are asking those of us who pay taxes in the Town (and also pay utility rates), to pay half or more of the costs of the sewer line. Hence, by using the term "taxpayers" in its general meaning, I can distinguish between the ratepayers up on Sulphur Mountain and the rest of us. Of course, for any two different residences or businesses, the utility rates they pay are not always linearly correlated with the tax assessments. That's just algebra. Nonetheless, the basic concept still holds: those of us who pay taxes (who are also ratepayers), have been asked to pay for the costs of a utility to the benefit a non-tax-paying business.
To be completely accurate, if the costs were shared among all ratepayers, not only would Banff taxpayers (who are ratepayers) be paying for the capital costs of this sewer line, but also some other out-of-town ratepayers would also shoulder a portion of the costs. So, ratepayers is the more correct word. In common parlance, the term “taxpayer” is less accurate, though more understandable.
2. Use of the term “subsidy”
The Town Administration's report Nov. 13, 2018, Agenda 9.2 acknowledges that one option for Council to consider would be to "subsidize the services for the users group" (p.97 of 318). Why do I also use the word "subsidy"? From a simple public-policy viewpoint, as a Councillor facing how we spend money, one question I think about is: "who wins and who loses"? In other words, if the burden of costs is shared by many in the public for the benefit of a few private businesses, then from an economic perspective, that is equivalent to a subsidy for those businesses. When a government allocates public funds (from utility rate revenue or tax revenue) to reduce the costs for identifiable businesses, in economic terms, it's a subsidy. So, the word "subsidy" provides clarity.
3. Purpose of the 25% surcharge for out-of-town users
Doesn’t this surcharge cover the capital cost of replacing the sewer line?
This is a good question and has led to letters from the three business users to the Town (October 2018 correspondence included in Nov. 13, 2018 Council Agenda 9.2). These businesses each say they assume the "25% surcharge [would pay for the] recapitalization of the Utility Infrastructure." (p.99 of 318; & p.101 of 318).
Sadly, for them, they are mistaken. The intent of that 25% surcharge is for the upgrades to the Town's infrastructure by adding the extra load from these out-of-town users. That is clear from the 1997 reports when the Town introduced this surcharge. ("... users outside of the Town do not contribute to funding infrastructure within the Town. It is suggested a premium be charged to those users to be transferred to the off-site levy fund." p.85 of 318).
Where I was mistaken is in thinking that the 25% markup for out-of-town users covered the full costs for the operations & maintenance of those lines.
From the Town’s reporting, currently, for every dollar of revenue through utility rates, about 60 cents pays for operations, and 40 cents pays into capital reserves. Building up our capital reserves is a prudent, conservative approach. We are still playing catch-up on our sewer system capital reserve. Over the past 20 years, if we haven't been charging out the operating & maintenance costs, and haven't done the accounting to support such charges, and are still behind in collecting on our sewer system capital reserve, then for the Sulphur Mountain line, I see no evidence that we have saved funds over and above the operations & maintenance to pay for replacement.
That still leaves the question of who has been paying for the operating & maintenance (O&M) costs on out-of-town lines for the past 22 years since the 1997 surcharge began. From what I have heard so far, the Town has not charged O&M costs. Therefore, I wonder if I have underestimated the benefit obtained by these out-of-town users.
4. Full-cost recovery accounting: operating & maintenance costs
We may be getting to a broader point for the Town's utility accounting. The Town generally runs the utilities on a cost-recovery basis. The question may arise: would full-cost recovery accounting imply that the Town would charge out-of-town users for operating & maintenance costs?
For example, if there's a water or sewer leak on a leasehold and the Town has to send out a truck and operator to turn off a Town's valve, the Town charges this service to the leaseholder (taxpayer/ratepayer). In the past year, this type of case came before Council in the Delegation from Rundleview Housing Cooperative on June 25, 2018. If the beneficiary can be identified, in this case a residential leaseholder, then the Town attempts to recover costs from that ratepayer. The charges are based on conventional industry contracting charge-out schedules for rental equipment (The Alberta Roadbuilders and Heavy Construction Association). I want to ask Administration if the Town has charged the three businesses on Sulphur Mountain for operating & maintenance charges.
5. Full-cost recovery accounting: overhead
Furthermore, there is the question of charging for overhead. I wonder if the Town has charged an appropriate surcharge to out-of-town users to cover the Town's administrative overhead. The administrative overhead covers all sorts of costs which are typically covered by general taxes, including all or a portion of the costs of running our Council.
A typical private contractor would charge about three times the operating cost to cover overhead. So, for every dollar charged to out-of-town utility users, it might be reasonable to add an overhead premium of $1.20 to cover the Town's overhead.
If our rates were adjusted this way, the total rates for out-of-town ratepayers, for every $1 charged for an in-town user would be the sum of:
Start with the in-town rates of $1
+ surcharge of $0.25 to pay for upgrading the Town's infrastructure costs
+ (c) surcharge of $1.20 to cover the Town's overhead
= a total of $2.45.
Expressed in percentage, this would be 245% of the in-town rates.
I will be asking the Administration to examine this approach and report back to Council.
6. Full-cost recovery accounting: opportunity costs of municipal borrowing
Under full-cost accounting, I presume that the direct finance costs of our lending would be charged back to the beneficiaries, that is, the three business users, who benefit from the relatively low interest rates the Town obtains.
The Town reports on the cost of financing in the Borrowing Bylaw 411 (Agenda Mar. 25, 2019, item 7.2, p.60 of 252). The interest rate is 3.189%, lower than contemplated in the Jan.28 report to Council. Annual debt payment would be approximately $130,000 (rounded). As I understand, these costs can be charged as a flat-rate charge to the three businesses. Those costs could be spread equally to the three users, or proportionally to their relative demand. On p.53 of 252 in the Agenda, Administration proposed equal flat rates to each of the three users. That amount would be $3,100 per month per user.
The Town’s report actually proposes charging based on $2,000,000, not the full $2,500,000 of the proposed Borrowing Bylaw 411, and then later adjusting the rates once the final construction costs are in. My preference would be to charge more initially, and then later reduce the rate or shorten the borrowing period. That's based on business experience.
In addition to direct finance costs, borrowing this $2,500,000 would have an indirect cost (or opportunity cost) to the Town of reducing our borrowing potential. The cost of this can be estimated as the difference between what a private bank would charge for this loan and the Town’s interest rate. This differential, or the benefit to the businesses, would be about 2.4% (the low commercial lending rates from Scotiabank of 5.6% minus our rate of 3.189% = 2.4%). For a $2.5 million loan, this would be a $60,000 benefit per year to the three businesses. Charging this indirect cost (opportunity cost) would be analogous to what the Town does in the Fleet Services Charge-out Rates by relying on an industry standard (in that case, Construction & Roadbuilding Association rates).
In summary, for full-cost recovery accounting there five types of costs for this sewer utility:
direct use costs;
surcharge for the impact on the Town's infrastructure;
operating & maintenance costs;
overhead costs; &
financing costs.
I want to encourage the Town to keep working toward for full-cost recovery for these types of projects.
7. Difference between budget estimates, construction costs, and loan amount
Reported costs estimates have ranged from $5 million to $2 million. What explains this range? The tendered construction costs have come in lower than expected. This is good for the businesses.
The Town Budget for 2018 used an estimate of $5,000,000 for this project (Council Agenda Jan 8, 2018, Budget line item p.9 of 85). Then, in November 2018, Administration reported that "construction cost is anticipated to cost between $2,000,000 and $4,000,000" (Nov. 13, 2018, Agenda 9.2, p.92 of 318). At the time, one option being considered was to allocate these costs entirely to the Town ratepayers.
Council unanimously approved motion COU18-343 for Administration to return to Council with a report on how the out-of-town businesses would pay 100% of the capital cost.
Then, in January 2019, the Borrowing Bylaw 411 requested up to $2,500,000, anticipating that the actual costs may end up between $2 and $2.5 million. The Town has a conservative, prudent practice of aiming for actual construction costs less than initial estimates. Similarly, I want the costs to be lower for Town residents.
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Thank you for considering these points. I am trying to get all these details straight. Please excuse me for any remaining misunderstandings or inaccuracies.
Peter Poole
Sunday, Mar. 24, 2019
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NOW:
What about the responses from residents in the past two weeks?
I have heard from over twenty more people. The responses are consistent with the graph in the earlier blog posting: over 80% of respondents oppose a subsidy from Town ratepayers to the out-of-town businesses.
NEXT:
On March 25, 2019, Council will debate this. Meetings begin at 2:00 pm. Members of the public are welcome.