Water Utility Plans for $6M Deficit

Sigh . . . how the hell did we get here? The Water Utility “became aware” of a cash flow deficit during their audit and their solution is to sell a bunch of property and raise rates to cover the $6 million? This seems a little strange to me. The the water utility director is “surprised“? The council will be getting a briefing tonight.

Deja vu? 10 years ago Madison showed David Denig-Chakroff, the Water Utility Manager the door and we hired Tom Heikkenen for his “extensive management experience”. Of course, we gave Denig-Chakraff $130,000 to leave. Now the guy with the “extensive managment experience” is surprised by a $6M deficit that wasn’t reported to him by his staff, but by the auditors? Yikes.

Here’s the full memo on “next steps” to the Water Utility Board from May 22nd:

To: Water Utility Board
From: Robin Piper, Chief Adminstrative Officer and Kathy Schwenn, Finance Supervisor
Date: May 22, 2018
Subject : Madison Water Utility Deficit and Next Steps

While preparing the 2017 Annual Report and work papers for the 2017 annual audit, we became aware of a cash flow deficit at the Water Utility.

As of 12/31/17, the Water Utility had a negative cash balance of ($6,036,654). We are taking the following steps to address this cash shortfall and put the Utility in a positive cash position while maintaining current levels of service:

• Working with the Public Service Commission on our current rate increase application to provide sufficient revenues to cover expenses.
• We have determined a list of properties that the Utility owns that it no longer needs and have begun talks with City Real Estate to sell these properties . We anticipate a rough estimated value of $2,000,000 for all properties.

Madison Water Utility Surplus Property

Address Parcel Number Sq. Feet Notes

14S PATERSON ST 0709-134-1014-1 10,890 Old East Well Site
320S WHITNEY WAY 0709-193-0097-4 39,998 Future Well Site
3821 SAVANNAH RD 0710-261-0102-3 9,905 Inherited from Sanitary District#8
5802 FEMRITE DR 0710-233-0108-0 66,945 Former future well site
604 BORDNER DR 0709-192-2129-5 _ 9,000 Former well site
6802 GRAASKAMP WAY 0810-162-0502-4 43,560 Future Well Site
10451 OLD SAUK RD 0708-201-0103-1 742,698 Blackhawk Tower site – 17 total acres, we will keep 2 and have 15 acres available

• We are working with City Finance to secure an advance from the City in 2018 to cover our cash deficit . This advance will have a loan repayment schedule.
• We are restricting all 2018 operating expenditures to necessary purchases only.
• We will be preparing our 2019 operating budget to maintain our current level of service but exclude any non-essential spending .
• We have cancelled certain non-obligated projects from our 2018 capital budget (i.e. Unit Well 12).
• We have significantly reduced our 2019 capital budget request . We are only funding our main replacement programs and our meter program.
• We are currently working with City Finance to convert our financial system to Munis (City Financial System). We plan to be live on Munis 1/1/2019.
• We are working with Springsted Financial to update our ten-year Financial Model and will be using this model to forecast our revenues, expenses, and rate needs from this point forward. This along with the financial system conversion will allow us to better track and report on our cash position.

We feel the step’ s that we have outlined above will provide a way forward for the Utility to ensure its financial stability in the future.

I’m not really surprised that after all the controversy in the past something like this would happen . . . again. Just frustrated that the problems continue.

Also, I knew the Water Utility had an “affordability” policy – which I thought was about the average water bill payer, because that is what they all talked about in the media – turns out, if you read it with fresh eyes, its seems to be more about economic development than about the residents of the city being able to afford their bill. Here’s their policy:

Policy Language:
Madison Water Utility customers will pay an affordable rate for water, including the financing of necessary replacement of water distribution plant and improvements to water treatment.

With a goal of maintaining affordable water rates and funding necessary improvements to the water supply system, Madison Water Utility shall:

1. Maintain its water rates between the 25th and 75th percentile for Class AB utilities (those serving 4,000 customers or more) in Wisconsin.
2. Apply for a necessary rate increase (subject to the adopted City of Madison Budget) that does not exceed an annualized rate of 9% per year. “Annualized rate increase” is defined as the increase beginning from the time when the last rate increase was fully effective to the estimated date the applied-for rate increase is anticipated to become fully effective, apportioned annually.
3. Generate its authorized return on rate base consumption (defined as per F-23 of the Utility’s Annual Report to the PSCW). This sets a reasonable return on investment as determined by an outside party, the PSCW. The allowable return on investment is comparable to that of other publicly and privately owned utilities in Wisconsin. By maximizing this return, the utility will have revenue necessary and reasonable for reinvestment in system improvements, and operations and maintenance expenses.
4. Petition for water rates that will complement economic growth in Madison.

So, complementing economic growth gets mentioned, but not the residents who have to pay the increases? The council will be looking at the big picture tonight and if they think the above plan is sufficient. I hope the council members also ask about the affordability policy and residents tonight as well as residential vs nonresidential rates.