Gleason Board to Raise Water & Sewer Rates to Comply with State

By Shannon Taylor

Editor

Gleason 7th grader Neely Pratt led the Pledge of Allegiance at Gleason’s board meeting on Monday, February 19. Pratt is the daughter of Nick and Jessica Pratt. Neely won 5th place against 80 participants at the State of Tennessee Junior Beta Convention in 2023, enabling her to compete at the National Junior Beta Convention this summer in Savannah Georgia.[/caption]

Gleason’s water bill rate study was completed and Eric Spencer from MTAS spoke to the Gleason board of mayor and alderman to explain the steps the city would need to take going forward.

According to the report, the city has been considered financially distressed since their 2015 audit. Because of this, the state ordered a third party to come in and complete a study with recommendations on the water and waste system to try to remedy the situation.

“The main focus of a city’s water and sewer system isn’t to operate at a profit, but to provide safe, reliable drinking water,” Spencer said. However, that comes at a cost and in looking at the data for the past audits, the city has been operating at either break-evens or a loss for multiple years.

According to Spencer, The State of Tennessee is interested in what a city does operationally and the state requires that a public utility be financially self-supported, generating enough revenue to cover operating expenses.

The state has created the Tennessee Board of Utility Regulation as the oversight authority to review municipal water and wastewater systems with considerations to be taken into account to determine if a municipal utility is considered financially distressed under state law.

The first consideration is if your utility has a deficit or negative total net position in any one year.

“And what that means is net position would be your equity in your system. So if you had negative equity in your system to where your liabilities exceeded your assets, you would have negative equity, you would be considered financially distressed,” Spencer explained.

The second consideration is if there is a deficit unrestricted net position in any one year.

“And so that equity position that we just talked about can be broken up into various classifications. Some of your equity may be restricted for certain things, and then basically you would have some unrestricted equity there. If you have negative unrestricted equity or net position, you would be considered financially distressed,” Spencer said.

The third consideration is if your system has a negative statutory change in net position for two consecutive years.

“Whatever your profit or loss is under state law, that's statutory change in net position. If you have two statutory losses in two consecutive years, you would be considered financially distressed and also if your system is in default you would be considered financially distressed,” Spencer said.

The financial stress indicators that apply to the City of Gleason is when all the grants are taken out, the loss for 2018 was $124,000 and for 2019 there was a loss of $85,000. For 2021 there was a loss of %175,000 and for 2022 there was a loss of $81,000.

“It’s multiple consecutive years of losses that make you considered financially distressed under state law and that’s what the state’s taking issue with,” Spencer said.

Capital projects are figured into the calculation as an asset on the city’s balance sheet, as they are funded by grants, however, they have to be depreciated through the city’s operating statement, so the city’s rates pay for that depreciation. The city’s depreciation expense in 2024 is estimated at $136,000 but by year 2028 that number would go up to approximately $195,000 with projects to tack on about $60,000 annually, according to Spencer.

“The point is the state requires it so that you can generate enough cash because depreciation is a non-cash expense. We're paying for this $1.5 million worth of debt out of grant monies that we're getting. We're going to expense those things over the useful life of those assets even though the city hasn't. The city really isn't spending any of their money. The reason the state requires that is so every year you're putting money aside, your cash is building, so that if something needs to be replaced or fixed for these assets, you've got the cash to do it. They want you to be financially self-sufficient where you are accumulating those cash reserves to be able to handle your future needs,” Spencer explained.

According to Spencer if the city doesn’t raise their rates, they are looking at another $37,000 loss for 2024. In 2025 that number would rise to $181,000. In 2026, $119,000 loss, in 2027 a $142,000 loss and in 2028 a $165,000 loss.

“This is what the state is asking you to address. The state wants you to fund that depreciation so that you can accumulate cash so that you have money on hand to pay for repairs or replacements without having to borrow money,” Spencer said.

The rate increases recommended included a 25% increase for fiscal year 2025, 10% increases for 2026-27 and a 5% increase for 2028.

“Now, I know that naturally sounds large, but this city, based on the historical years, that we looked at, there were no ratings increased at all for fiscal years 20, 21, and 22, nor 24. There was a 3% increase in 2023. And so now we're kind of at the point where it would take a larger increase to try to accommodate some of that,” Spencer stated.

By implementing those increases the waste and sewer services would grow.

water and your wastewater services are going to grow and continue to operate and increase annually.

“2024 would still be negative $37,000, 2025 would be an $87,000 loss, 2026 would be a $22,000 profit, 2027 would be a $52,000 profit and by 2027 there would be a $59,000 profit. The whole point is to build cash for those future investments,” Spencer said.

According to Spencer the rates would go into effect July 1 the next fiscal year.

For a household that utilized 4,000 gallons of water minus sales tax would be going up from $60 to $74 per month.

Other requirements that the state asked recommendations for included a capitalization policy. The city does not currently have a policy in place. The policy would set the thresholds when purchasing an asset and also establishes the useful life of certain asset categories.

Another part of the study looked at training requirements for utility board members. According to state law, members are required to have 12 hours of training within the first 12 months of appointment and then over the next three years an additional 12 hours of training. Some hours would need to be completed by November 2024 to stay in compliance, according to Spencer.

Based on the case study MTAS recommended raising the city’s rates in order to maintain a positive total net position, maintain a positive statutory change in net position, fund their debt service, fund their capital investments and fun the operational increases.

Board members, frustrated at the prospect of raising rates, questioned whether to hire another 3rd party to do a rate study, but according to City Attorney Beau Pemberton and Mayor Charles Anderson, those can be costly and time consuming to do a second.

“We’re out of time,” Pemberton stated.

If the board chooses to do nothing the next step would be for the Chancery Court in Davidson County to serve each board member individually to appear and address why the issue wasn’t taken care of.

“Doing nothing is simply not an option at this point. I know nobody wants to hear that, but doing nothing is what’s been done for the last decade and frankly, the city of Gleason is out of time. The next order’s going to come to each of you individually.” Pemberton explained.

The board questioned what the timeline was for the increases. The recommendation by MTAS was for the rate increases to go into effect July 1, 2024.

“Irrespective of what increase this board is going to impose, I think as far as planning purposes, your budget has to be in place July 1 and this should be addressed no later than April 15,” Pemberton said.

The board voted to table the matter for the time being until they had time to “digest” all the information.

The next Gleason Board meeting will be held on March 18 at 7 p.m.