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By Wilfred Mbah
Candidate for Somerville City Councilor at Large

We attended the May 15 hearing on the FY2024 Sewer and Water rates at which the city agencies proposed increases of 12% for water and 17.5% for sewer service. For an average household, the combined annual bill would rise from $900-$1000 to $1,030-$1,250.

This will be a significant burden for many families and it exceeds the gradual annual cost growth that the Mayor and City Council approved in 2019 and 2021 in the Capital Improvement Plan and its accompanying financial/rate strategy.

We have begun to review the numbers and we think that there are adjustments that the city can make to minimize these rate hikes. We urge the City Council to consider some policy and financing adjustments.

1. What are the main revenue and cost projections for Sewer and Water services?

Back in 2021, the Mayor and City Council received a detailed feasibility and financial study of all sewer and water projects, which were planned over ten years. We considered the capacity of the city to manage and carry out this construction work, simultaneously with operating the systems.

The study reached the conclusion that an ambitious program of improvements – including the major work of separating drainage and sanitary sewers, could be done. It would require a steady increase of rates — 10% water and 10.5% sewer — each year. To mitigate the impact on rate-payers and even out the “spikes” in revenue and costs year to year, the City Council took four actions:

• For the lowest income households, we created a subsidy fund;
• For elderly residents, veterans and disabled individuals, we added a sewer/water discount to the existing property tax discount that these persons can claim;
• We created Water and Sewer Stabilization funds to receive any surplus rate revenues, “free cash” surplus from the city budget, and developer contributions, to be appropriated, as needed, for project costs;
• Last year the Council also directed into the stabilization funds money from COVID/ARPA.

Today, the Mayor and City Council must try to understand why the moderate annual rate strategy, put into place only three years ago, seems unable to stay on course. What factors are now pushing sewer and water costs beyond the projections? Are shortfalls in revenue occurring? Can they make changes in the capital projects or financing to diminish the need for higher rates?

2. The major cost factors and possible ways to adjust them

Looking at the Sewer and Water budgets for the past three years, the numbers show the gradually growing revenue that was predicted, rising to a total in FY 2023 of $17.5 million Water and $29 million Sewer. Adding the proposed 12% and 17% rate increases would result in revenue of about $19 million Water and $33 million Sewer. This adds up to a combined increase of $5 million, of which about $2 million is the unplanned extra (the difference of 12% and 17.5% over the planned 10% and 10.5%).

Higher construction costs and interest rates are pushing up the total project costs of the city’s main infrastructure work: (a) the on-going work of separating the sanitary and storm water mains, (b) the Poplar Street Pump Station, and (c) the smaller projects of metering, lead pipe and water main replacements. Long term these projects total over $500 million.

The pump station will require a bond issue of $89 million that (at current high interest rates) will add require $5 million per year in debt service. In FY2024, it will also need $13 million in direct spending (coming through the Stabilization fund). The other smaller projects will require a combined $3.5 million.

Could some savings be realized by delaying some of smaller jobs or by stretching out the pump station bond issue over two or three years? This would probably be inefficient in the long run but could diminish the short-term revenue need. Slowing down the other smaller projects might also accumulate a few savings.

Higher assessment to the Metro Regional Water Authority will be required to pay for our water delivery from the reservoirs and our sewage outflow and treatment. The water assessment increase will be 0.25% in FY2024, and will add only about $250,000 to the annual cost of $10 million. The sewer assessment will be much larger – it will rise 5% over the total of $16 million – that is, about $808,000.

Possible alternative revenue sources should also be considered by the Mayor and City Council. In past years, they have been appropriating into the Stabilization funds some free cash surplus monies from the city operating budget, some developer contributions and COVID/ARPA grant funds. This can be seen in the following Chart which shows that last July three transfers of free cash and grant funding were made.

Table 5: Sewer and Water Capital Stabilization

In the presentation on May 15, the city agencies said that they would draw $5 million from the Sewer fund for the Poplar Pump Station, along with $10 million ARPA and $2.5 million other federal grant monies. This will allow the bond issue to be set at $89 million, rather than the total $102 million. The $5 million withdrawal will leave $6 million in the Sewer account and $4 in the Water account, and it may be possible to find more free cash when the FY2023 city operating budget books are closed in July.

Another possible revenue source might be additional contributions from the developers, whose projects are in construction or in planning process. The city expects 2 to 3 million ft2 of new research/commercial space, along with some 700 new residential units. These will all be new sewer and water rate payers – thus increasing direct revenue.

They have also benefitted from the city’s infrastructure expansion projects – which has made it possible to have larger buildings in more redevelopment zones. Thus, there could be justification for requiring each new development to make an additional contribution. This could take the form of a surcharge to the fees for a building permit, an occupancy permit or a utility hook up permit.

The city has already organized the mechanisms of tax increment financing – DIF and TIF – in three zones: Assembly Square, Union Square and Boynton Yards. Part of the general property tax revenue paid in these zones is diverted directly toward the sewer, water and other infrastructure financing. (The diversion will last for twenty years.) Similar mechanisms might be applied to other zones or to specific project categories (individual lab buildings).

Adding another schedule of water and sewer rates for large volume water users may be another revenue strategy. The city now calculates the sewer and water rates on two different tables — one for residential and another for commercial/industrial buildings. It might be possible to create a third distinct rate schedules for buildings or uses that use more water – such as bio-tech labs (compared to office buildings) or restaurants (compared to retail shops). They would pay a somewhat higher rate given their larger volume needs.

These ideas suggest that the City Council could find some more ways to mitigate the higher sewer and water rates. We encourage them to make the effort.