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7. BACKGROUND-2008 memo on ordinance update issues 1 Memo To: Mayor and City Council From: Anne Hurlburt, City Administrator Date: 1/11/2008 Re: “201” Sewer System Issues—Update of Ordinance #24 Ordinance No. 24 sets forth the cost allocation and billing procedures for the community sewage treatment system constructed with “201” grant assistance to serve areas of Scandia around Big Marine Lake. The ordinance was adopted in 1988 and based on a model from Washington County. Over time, the procedures for billing and allocating costs has become out of alignment with the ordinance. For example: the ordinance requires one annual bill. Late payments are to incur a 12% interest charge. In practice, there have been two billings and no interest has been charged for late payments except when certified against property taxes for collection. Another concern is that the administration of the ordinance has not been consistent, raising issues of fairness. For example: in the last year we had a case where a property was being charged as a year-round, 3-bedroom residence, but was actually a seasonal 1-bedroom residence. Staff has reviewed the proposed 2008 billings calculated by county staff, who operate the system, and found many discrepancies. We estimate that about 40% of the accounts would either be overcharged or undercharged, based on our review of property tax records. If the current system of cost allocation is to continue we will need to verify the classification of each property before calculating 2008 bills. Before staff can draft a new ordinance, some direction from the Council is needed on a number of issues. The following information will provide background and options for dealing with these issues. 1. Cost Allocation System The current cost allocation system uses the seasonal or year-round (permanent) status of a home, and numbers of bedrooms, as a proxy for the sewage volume generated and therefore the property’s share of system cost. The Equivalent Residential Unit (ERU) for each home is calculated base on an estimate of the average sewage flow per day, with 1 ERU being 225 2 gallons per day for a permanent, 1 or 2 bedroom home. The more bedrooms, the more ERUs. The ERU for a seasonal residence is 60% of an equivalent year-round unit. Some of the issues with this system are:  How is a seasonal residence defined? The ordinance does not include a definition. Homestead classification alone is not a good indicator, as there are year-round rental properties in the area. For property tax purposes, “seasonal” status can be claimed by someone who does not homestead the property, does not rent it out, and uses it “seasonally”—but there is no specified portion of the year the home might be occupied to be considered “seasonal.” About 1/3 of the homes connected to the “201” system were classified as seasonal for the 2007 billings. Another way to define a “seasonal” dwelling would be if the home did not have a heating system that would allow year-round occupancy. However, all of the homes served by the system probably could be occupied year-round because they all have heating systems, according to assessing records. A “seasonal” residence could be used by more people and generate more sewage than a year-round residence. If a differential rate for seasonal dwellings is retained, a workable and enforceable definition would need to be created.  How is the number of bedrooms related to sewer use? What’s a bedroom? The number of bedrooms is sometimes used to estimate the number of people that may live in a home, and by extension wastewater generation (i.e. for sizing a septic system.) However, in practice this is probably not reliable. While one family may use a room as a bedroom, another may use it as a den or office. As homes are remodeled, the number of bedrooms can change. A bedroom may be occupied by a family member, or used only for guests. Other living areas may also be used as sleeping areas. Other factors (such as the presence of laundry facilities) affect wastewater volumes. If we continue to use the number of bedrooms as a basis for allocating sewer costs, some standard will need to be adopted to determine the number of bedrooms and a process will be needed to verify and maintain accuracy of the information. One possibility might be to use assessor’s data regardless of the use of the rooms. Or, individual property inspections might be required if this is not reliable.  Should volume estimates be part of the cost allocation formula? With the exception of pumping costs, most of the costs of operating the “201” system are not related to wastewater volume. Pumping represents only about 10% of the average annual cost of operating the “201” system. The fact that each of the homes connected to the system has sewer service available is the major benefit of the system, regardless of how much sewage volume they produce. Without the service, the homes would not be habitable and property values would plummet. This might argue in favor of a system that charges each property equally, regardless of volume. 3 There are at least four options for allocating costs among the users: 1. Current System—ERU’s based on seasonal/permanent use and number of bedrooms 2. Permanent vs. Seasonal—different rate for seasonal and permanent residences, regardless of number of bedrooms. 3 Bedrooms Only—different rate based on number of bedrooms, regardless of seasonal/permanent status. 4. Flat Rate—same price for all users. The following table shows how 2008 costs would be allocated to users for each of the above options. The numbers of homes in each category and bedrooms are city staff’s estimate based on assessing records and not on the county staff’s 2007 or proposed 2008 billing information. 2008 “201” System User Charges, Four Options Type # Bedrooms Option 1 Option 2 Option 3 Option 4 Permanent Residential 21 1 $547.77 $617.22 $491.43 $548.94 25 2 $547.77 $617.22 $491.43 $548.94 15 3 $712.10 $617.22 $638.86 $548.94 5 4 $931.21 $617.22 $835.43 $548.94 2 5 $1,095.54 $617.22 $982.86 $548.94 Seasonal Residential 17 1 $328.66 $370.33 $491.43 $548.94 7 2 $328.66 $370.33 $491.43 $548.94 1 3 $438.22 $370.33 $638.86 $548.94 1 4 $547.77 $370.33 $835.43 $548.94 0 5 $1,095.54 $370.33 $982.86 $548.94 The estimates for each option assume total revenues of $51,600 (the 2008 budget). They do not include small adjustments made to some bills in recognition of power costs for lift stations connected to home electrical systems. (2007 adjustments were $7 per user, up or down, with net revenue of $0.) In 2007, 1 or 2 bedroom permanent residences were billed $344.80. Seasonal 1 or 2 bedroom residences were billed $206.88. The significant increases needed in 2008 are due to pumping costs (budgeted every three years.) If Option 1 (the current method of cost allocation) is chosen, many individual users would see greater or lesser increases when the status and number of bedrooms are updated for each residence. The most dramatic increase would be a home that was classified as a 2-bedroom seasonal residence that (according to assessing records) is actually a 5-bedroom year-round residence. In 2007, this user was billed $206.88. If the assessing data is correct, the 2007 billing should have been $689.60, and the 2008 billing would be $1,095.54. 4 2. Billing Procedures and Policies As noted above, current practices are not consistent with the ordinance. A single billing cycle may work a hardship on users, especially as costs increase, so it makes sense to divide the payment into installments. The billing schedule would need to allow sufficient time for overdue payments to be certified to property taxes for the following year. The first billing could not occur until after the budget had been set and any verifications of status that might be necessary (depending on the cost allocation method) were complete. One option would be to bill in 4 equal installments the first of the month in March, May, July and September. Installments would be due in 30 days. Unpaid balances as of October 31 could be certified for collection with property taxes in time for the county’s November 30 deadline. Depending upon what option for cost allocation is chosen, the 2008 billings may need to be in fewer installments or delayed from the suggested schedule. Extra time may be needed for communications with system users or to verify property status. Another option would be a quarterly billing spread evenly over the year, with billings due March 1, June 1, September 1 and December 1. Overdue payments after the September 1 billing could be certified for collection with property taxes by November 30, but the last installment would be due after the deadline. This would probably have a slight negative effect on expected revenues due to the delay in collections. Interest should be charged on overdue balances. One percent per month (12% per annum) on the amount overdue by 30 days or more would be a simple option. The interest rate for unpaid balances certified to collection with property taxes should also be established. The rate should be high enough to encourage payment. This year’s assessments were charged 7 percent interest. A higher rate should be considered. 3. Connection Fees The ordinance does not include the requirements for connecting new units to the system. Records indicate that the most recent connections to the system (approximately 5 years ago) were charged $3,500, but there is no information on how this was calculated. It appears that the connection fee was reduced 50% to $1,750 for properties that had room for individual septic systems, but instead hooked up to the “201” system. Connection fees should be established by ordinance. It appears that there are still some properties that could be developed if connected to the system and there is probably capacity for a small number of additional connections. Some direction from the Council on the connection fee, and whether a reduced fee should apply in any particular situations, would be helpful.