A case study in the design, implementation, and administration of a stormwater utility.

By Dirk S.G. Brown

Political and economic pressures have forced governments to closely evaluate various means of generating revenues. The current political climate has focused on lowering taxes and reducing the size of government. Through all this, local governments have been forced to do more with less. Municipalities are faced with providing cost-efficient and cost-effective quality services with less help from federal and state governments. Further, the notion of raising taxes is considered politically inexpedient. The devastating floods in southern Ohio in February 1997 are stark reminders that stormwater management is a vital public service and that funding to pay for the service is necessary. This article describes the efforts one municipality undertook to simultaneously address federal regulations and political restraints while protecting public health, safety, and property.

Describing the process the City of Columbus, OH, used to establish a funding mechanism for stormwater management services might aid other decision-makers in determining the feasibility of employing a user fee. Moreover, this description might illuminate pitfalls that would beset the unwary. The City of Columbus required a stable funding source to address the multiplicity of stormwater-related problems.

In 1990, to comply with the requirements of the permitting process, the City of Columbus Department of Public Utilities (at the time, the Department of Public Utilities and Aviation) Division of Sewerage and Drainage (DOSD) raised its stormwater fee by approximately 180%. At the time the fee was increased, DOSD made a commitment to review the method by which the service fee was calculated. Given the time limits imposed upon the city to comply with permitting requirements, the city opted to maintain the current method of calculating fees while breaking the charges out as a separate line item on the water and sewer bill and raising rates. However, developing a stable funding source to finance stormwater management activities became a top priority for DOSD in 1990.

Also in 1990, Ordinance No. 1626 established a special revenue fund–the storm sewer maintenance fund–to provide initial monies dedicated to comply with permitting requirements and develop a stormwater management program. Further development of a stormwater utility required a more extensive analysis.

Cost-of-Service Analysis

Equally as important as establishing the type of rate structure to be used was identifying the costs of providing stormwater service. DOSD identified five program elements: support services, engineering and planning, regulation and enforcement, operations and maintenance, and capital improvements. For all elements, a basic level of service was assumed at projected expenditure levels. Program elements had functional job categories outlined. Employee job classifications and full-time salary levels were identified for all functional categories. Rather than underestimating costs at the outset, salary assumptions were made at the top of the range, incorporating all union contract step increases. For each job classification, cost categories of fixed and variable fringe benefit costs were created. Fixed benefit costs included items with fixed percentages of salary, such as Medicare, employee retirement system funding, and worker's compensation. Variable costs included such items as tuition reimbursement, health insurance, and sick-leave reciprocity. Other cost categories were materials and supplies, services, and equipment.

To provide the most realistic expenditure projections possible, DOSD used prior-year expenditure levels to formulate expenditure-to-labor cost ratios. Organizationally, the Stormwater Management Program has been included under the umbrella of DOSD. Consequently, ongoing maintenance of existing storm sewer lines has been the responsibility of the Sewer Maintenance Operations Center. These costs are documented and thus were readily available for the cost-of-service analysis. Formulas were designed that used the total materials and supplies appropriation authority and divided this figure by the total labor expenses to establish a ratio; this percentage, in turn, was multiplied against the salary cost to arrive at an estimation of program-element costs.

To illustrate, Table 1 shows how costs were allocated to one functional category of one program element–regulation and enforcement. Under regulation and enforcement, seven functional job categories were identified: permit administration, plan review, field inspection, water monitoring, complaint processing, violation citation, and enforcement action. Table 1 shows the four positions identified for the plan review category, the amount of time each position would dedicate to the functions of this job category, the annual salary level for the classification, the salary cost at the percentage dedicated to the job category, the fixed and variable personnel costs, and the support costs.

Table 1. Cost-of-Service Allocation

This model of cost allocation was used for four of the program elements. The capital improvements program element and related debt servicing costs required separate analysis. One of the elements, support services, was further subdivided into two categories: direct and indirect support. Direct-support services costs were estimated using the method described above. Estimating indirect-support services costs necessitated developing alternate cost projections.

Three indirect-support services were identified: pro rata, billing reimbursement, and administrative overhead. All enterprise funds in the City of Columbus contribute 4.5% of revenue to the general fund. This distribution is used to reimburse general fund activities for a portion of their costs. General fund activities, such as purchasing, accounting, and legal advice, are supported by the pro rata payment. As a special revenue fund, the Stormwater Management Program would need to absorb this as an indirect-support service cost.

An additional cost that needed to be accounted for during the cost-of-service analysis was the billing reimbursement. The Division of Water (DOW) conducts accounting, billing, and meter-reading transactions on behalf of DOSD. The service charges for water consumption, sanitary sewer usage, and stormwater are itemized as separate line items on a water bill. DOW generates bills for these services on a monthly and quarterly basis. The billing system encompasses a number of different aspects, including lockbox collection, surepay withdrawal from customers' checking accounts, bill generation, and delinquent notices. Costs are associated with the operation and maintenance of the billing system. Simultaneously, since DOSD's sanitary services utilize the water meters installed by DOW, costs are incurred to maintain the metering system.

The DOW billing and metering systems costs are allocated to DOSD based on the following formulas (because of space considerations, this is an abbreviated version of the model). Direct costs are calculated by subtracting total water-only accounts from the total accounts being billed, dividing this figure by the total accounts, and splitting the percentage in half to establish a direct services multiplier (e.g., [(207,636 - 4,642) ¸ 207,636] x 0.5% = 48.88%). All the direct expenses associated with the specific indexes are summed and multiplied by the factor. This factor is applied to three categories of direct expense: customer service, data processing, and water distribution. Indirect costs are calculated by dividing the number of personnel assigned to the metering system and multiplying it by the direct services factor (e.g., [171 ¸ 495] x 0.4888 = 16.89%). This factor is applied to three levels of indirect expense: administrator's office, staff support, and vehicle maintenance. The sum of the formula costs represents DOSD's reimbursement obligation of DOW's billing and metering system costs. DOSD's 1996 budget for the water billing reimbursement was $6 million.

Because the Stormwater Management Program required bills to be generated and monies to be collected, but required no physical link to the metering system, the reimbursement calculation needed to be revised. The program opted to use an impervious-area rate structure to generate service fees. Because fees would not be based on the metering system, costs associated with the system should not be shared. After review of all the fund indexes (33 total), a decision was made to back out of all metering-system and vehicle maintenance expenses. Table 2 presents a summary of the analysis based on 1996 budget numbers. For budgetary purposes, a fixed percentage of 25% is used to project stormwater's portion of the water reimbursement expense. DOW charges DOSD on a quarterly basis based on actual numbers.

Table 2. Water Reimbursement Model

The third indirect-support service identified was the administrative overhead expense. Because organizationally the stormwater program is a section within DOSD, many supporting activities, such as personnel recruitment and hiring, accounts payable, and network services, are undertaken by staff on behalf of the program. To reimburse the sanitary fund for expenses incurred, another calculation was created whereby budgeted numbers were totaled for all relevant sections, less debt costs, pro rata, and water reimbursement expenses. This sum was divided by the total budget. The resulting percentage was then applied against total administrative costs. The end result was stormwater's administrative overhead expense.

The fifth program element was capital improvement projects. A capital improvements budget has been submitted each year. Traditionally the financing of stormwater capital improvement projects has been paid for out of voted bond packages. One-quarter of 1% of the city income tax has been set aside in a special income tax fund to pay off general obligation bonds. In estimating the debt servicing costs the program expected to incur, an assumption was made that the program would begin to pay for existing voted debt. Consequently, until the $25 million package, voted for in 1991, was exhausted, the program would only assume liability for the unvoted debt. In 1994, total principal outstanding was $3,413,000. Leveraging this over 18 years resulted in existing debt servicing costs (principal and interest) not exceeding $382,000 in any one year.

Once the 1991 voted package is exhausted, it is assumed that debt is issued at the end of the year. This results in a lag before principal payments start. An AAA bond rating also enhances Columbus's ability to lower its interest costs when the bonds are issued. This combination of factors has allowed Columbus to set stable rates for a fixed period and create a cash reserve that can be drawn on to minimize future rate increases. Table 3 outlines the capital improvement budget and the expected debt servicing costs to accompany it.

Table 3. Capital Improvement Costs (000s omitted)

Debt servicing costs assume that the West Columbus Local Protection project (Franklinton Floodwall) debt will be retired through the special income tax fund. Further, it is assumed that funding for the Franklinton Floodwall above the levels projected in the 1996 capital improvements plan will be financed by the stormwater program. Consequently, in 1996 the stormwater program assumed additional debt costs of $2 million.

Revenue Generation

All of the program element costs were projected out 10 years. Until August 1, 1994, stormwater fees were based on sanitary sewer usage as measured by the water meter and/or auxiliary meters. The fee was $1.82 per 1,000 ft.³ of water consumption (commodity charge) and a $1.34-per-month customer service charge. DOW has estimated that the average single-family consumer uses 1,000 ft.³ of water per month. Therefore, the stormwater fee for the average single-family home was $3.16 per month prior to August 1994.

Because the city auditor's office convincingly argued that the new rate structure should include new debt servicing costs only prospectively, the total projected costs were low enough to justify charging $2.44 per month per equivalent residential unit (ERU). The rate represented a 23% rate reduction for the average single-family home. Residential customers represent approximately 152,000 accounts or about 90% of total accounts being billed. Besides maintaining 10% coverage of operations and maintenance expense, it was proposed that a surplus be generated above this amount. The idea was to introduce the new rate structure with a fixed rate for a period of five years. It was thought that greater stability would be injected into the new system. As the 1991 voted debt package is exhausted and new debt is issued, and as debt servicing costs increase, the surplus is to be drawn down.

Revenue generation is based on the number of ERUs paid. An ERU is a billing unit representing 2,000 ft.² of impervious area. The new fee structure is based on the impervious area on a property, which directly correlates to the amount of stormwater runoff generated by the property, which in turn drains into the stormwater drainage system. The rate structure is a two-tiered system. A flat rate (1 ERU) is assigned to single-family residential properties; nonresidential properties are charged a multiple of ERUs, depending on the actual measured impervious area.

Impervious area is tracked via an automated mapping system. Impervious area is defined as all areas paved and/or covered with such materials as concrete, asphalt, rooftop, and blacktop. It was decided that it would be administratively cost-prohibitive to track single-family residential development. New structures, such as garages or building additions, would not add enough impervious area to the property to justify the expense of tracking each site. To arrive at the base ERU figure, a statistically significant sample was taken of single-family residential property in the City of Columbus. This statistical analysis resulted in the determination that an ERU equals 2,000 ft.²

To determine the number of ERUs to be billed at a nonsingle-family residential site, the actual impervious area is measured using electronic means (i.e., a digitizer). After entering site plan information into the mapping system, impervious-area polygons are created that calculate the square footage of area within the polygons (Figure 1).

The total area is then divided by 2,000 and rounded to the nearest whole number (e.g., XYZ Company's total impervious-area measurement = 144,902 ( 2,000 = 72 ERUs). The bill for stormwater services is based on the number of ERUs at the property, multiplied by the number of days in the billing period, multiplied by the daily rate (e.g., in 1994, XYZ Company's monthly bill for stormwater services would have been: 72 x $0.0802 x 31 = $179.00).

To determine the rate required to support the cost of service analysis, estimations were made of the number of ERUs in the city. Since a flat rate was decided upon for single-family residences, the first step was to identify all properties fitting the criteria. Franklin County's property tax appraisal system was used to distinguish between residential and nonresidential properties.

For instance, all properties tagged with a Franklin County appraisal code of 510 were categorized as residential. If a property was not tagged as 510, 511, 512, 513, or 520 and was not tagged with a ìvacant appraisal code,î it was assumed to be nonsingle-family residential. Simultaneously, the mapping system was color-coded to highlight the difference. Blue was assigned to residential parcel labels, and white was assigned to nonresidential. Technicians then used digitizers to measure the impervious area on all white color-coded parcels. Parcel measurements were grouped together, if necessary, and assigned to an account. Because the measurement process was time-consuming, initial ERU projections were based on samples taken of various land-use categories.

The stormwater fees were placed on regular monthly and quarterly bills that DOW produces to bill for water service. Where necessary, stormwater-only bills are generated. The charges are collected on the same basis as other charges. The stormwater program has established a payment priority process in which partial payments are allocated to stormwater after water services have been paid but before sanitary services are paid. Properties with delinquent charges are subject to water service discontinuation, if the property is connected to the metering system. If charges remain uncollected after delinquent notices have been sent and after water turnoff has been instituted, the city is able to certify the unpaid charges to the property tax duplicate, as a lien, once a year. This process minimizes the size of uncollectibles.

The revenue stream is further enhanced by the fact that once the new rate structure was introduced, the fund began generating earned interest income from the surplus. For example, the fund received $724,000 in 1995 and $954,000 in 1996 in interest income. An additional source of revenue comes from the application fees for participating in the discount program (known as the Stormwater Credit Program). The discount program is a means through which qualifying nonresidential properties can reduce their stormwater fees if they either reduce the impact of increased stormwater runoff or reduce the city's cost of providing stormwater management.

The application fee does not offset the unrealized revenue because a property participates in the discount program. It is estimated that the discount program represents approximately 3% of revenue. Original estimates suggested that participation in the discount program would be greater than it turned out to be. Higher-than-projected encumbrance cancellations along with more ERUs billed than estimated resulted in a rate-reduction proposal effective January 1, 1996. Refinements in reporting and impervious-area assignments combined to allow DOSD to propose to the Sewer and Water Advisory Board a 33% rate decrease (from $0.0802 per day per ERU to $0.0539 per day per ERU). This proposal was in turn forwarded to city council along with a concurrence that the rate be decreased. Today the rate is $1.64 per ERU per month. In effect, therefore, for the average single-family residence, stormwater rates have decreased approximately 48% since the implementation of the new fee structure.

Conclusion

The design and implementation of the stormwater utility has allowed for the establishment of a dedicated funding source. With this stability, financing the operations, maintenance, and capital improvements of stormwater management is more easily undertaken. Every community has to address managing water quality and quantity. The recent flooding in North Dakota reminds us that nature waits for no one. Prudent planning is a critical ingredient of city stewardship. Severe flooding of the 500-year variety might not be preventable, but instituting a reliable funding source gives city managers more options in minimizing the consequences.

Dirk S.G. Brown is the stormwater utility manager for the City of Columbus, OH.

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