(Jan. 17, 2020) As the Town of Ocean City pursues a slew of pricey, but necessary capital improvement projects, it must reckon with raising its water rates. However, according to NewGen Strategies and Solutions, it can do so marginally.
“What our recommended plan is to spread the necessary rate increase for that future debt service specifically that begins in Fiscal 24 and Fiscal 25, begin to moderately adjust rates over the next five fiscal years … and that involves a 7 percent rate increase across the board to each of your water fees,” said Eric Callocchia, NewGen’s executive consultant.
Ocean City currently charges a fixed water and sewer fee of $1.60 for water, a fixed vacant lots fee of $9.60 and a water consumption rate of $4.20 per 1,000 gallons of water.
The resort charges fixed fees because of its seasonal nature, as it must maintain a certain water capacity, regardless if a customer is using it.
This totals to approximately $6.6 million in revenue, which is not enough for the additional debt service, Callocchia said.
Both the city’s water and sewer operating expenses will grow incrementally, with water increasing from $5.38 million in FY2020 to $5.85 million FY2025, and sewer growing from $8.46 million to $9.21 million.
Callocchia also broke down the city’s current existing debt.
For FY2020, the city has $679,098 in water debt service and $3,675,645 in sewer debt service.
These debts are projected to be paid off significantly by FY2025, with water debt service projected to be at $413,570 and sewer at $2,789,029.
However, Callocchia said the primary issue was the dramatic increase in the city’s water debt service beginning in FY2024, as it prepares to complete various capital improvement projects.
“You can see the total six-year investments we are planning for these systems is just over $40 million on the water side,” Callocchia said. “These improvements are necessary to maintain the operational nature of your systems. In general, any project that is $1 million or greater, we are going to finance. We are going to assume that we are going to issue debt and finance that capital project over a number of years.”
The water debt service increases from $679,098 to more than $3 million, which would increase the city’s total water expenses to almost $10 million.
With current water revenue of $6.6 million, the city would find itself woefully underfunded. Furthermore, Callocchia said the city’s net position would fall significantly as well.
Net position is essentially left over money in the budget, which is then reserved for rainy day use, he said.
This cash reserve must be maintained at a level equal to the sum of 60 days worth of operating and maintenance costs and 2 percent of net book value of its assets, which at the moment is a little more than $1 million.
Callocchia said the city’s net position minimum level would grow to more than $2 million, while the city’s actual net position funds would be dry by FY2025.
The only way to combat both the loss in revenue and the loss in cash reserves would be to implement the 7 percent rate increase.
From FY2020 to FY2025, the fixed water fee would grow from $1.60 to $2.24, the fixed vacant lot fee from $9.60 to $13.46 and finally the water rate per 1,000 gallons would change from $4.20 to $5.89.
No changes would be made to the city’s sewer rates.
This would cause residents to cash out approximately $7 more for their water bill by FY2025, which still places Ocean City below the average water and sewer bill of its nearby competitors of $231, and well below competitors such as Ocean Pines, Newark, Salisbury, Annapolis, and Berlin.
Most importantly, the city’s revenue would increase by almost $3 million, and its net position would be well above the $2 million plus maintenance line.
NewGen President Ed Donahue said the city was able to implement such a low rate increase because of it’s historically conservative spending.
“Ocean City has always been very conservative financially with its water and sewer systems,” Donahue said. “I think it explains why you are in the comfortable position you are in right now, and why in spite of taking on $60 million in additional debt, we’re suggesting that customer bill for water and sewer combined … only go up like 3 percent a year.”
Callocchia said the last town he visited in New Jersey was forced to adopt a 60 percent rate increase for their water utility because they had avoided the issue for so long, andtheir reserves had completely depleted.
Before the recommendations could be adopted, however, Donahue and Callocchia must prepare a full report detailing all of the minutia of the potential rate change, which would then be presented to city leaders at a public hearing.