Town of Levinton

The September 2010 Levinton Town Meeting was certain to be contentious. The views above reflected the wide range of opinions about the proposed $3M expansion of the town water and sewage system. The town's treasurer was proposing to finance the expansion with 20 year bond issue. The bonds would carry an interest rate of 5% meaning that the town was looking at large debt service obligation. Approval of the expansion was by no means certain.

Background

The town of Levinton was located on the Pacific coast of California, some 200 miles north of LA. It had been incorporated In 1800s, during the time of California's gold rush, when it was popular with miners who had "struck it rich" in the hills to its east. Over the years it had grown and matured, and now was home to some 2000 permanent residents. About 30 new homes had been built each year over the past several years, mainly by retirees or people who wanted to leave LA and live simpler life. Many of these people purchased a local business and tried to make a go of it, or they started their own business, usually as professionals (stock brokers, accountants, lawyers).

Levinton was a popular summer vacation spot, but the citizens, via their Board of Selectmen (3 people elected to staggered 3-year terms), had always voted to maintain the town's small village feel by not allowing expansion in the number of tourist facilities (hotels &inns, beach parking, beach concession stands). As a result, the town had sleeping accommodations for only about 500 tourists at any one time, although due to vacation schedules and lengths, some 4000 people spent more or all of their summer vacations in Levinton each year. The town Manager estimated that another 2000-3000 people were " day visitors" during the summer.

The Municipal services department

For over 20 years, the town's water and sewer system had been operated by the Municipal service department. As Exhibit 1 indicates, from 2007 to 2009, the department had incurred sizable operating deficits. A deficit meant that the general tax revenues budgeted for the department ($0.5 of the general property tax) were insufficient. And tax revenues had to be diverted from other uses to eliminate the deficit, which had angered some residents. In 2009, the Board of Select men had told the town Manager to see to it that the department ran a surplus or incurred only a small deficit. The department had incurred a small deficit in 2010 and was forecasting a surplus in its 2011 budget
Water and Sewer Units and Fees.

Initiation fees for "tapping into" the system, as well as ongoing usage fees for water and sewer consumption, were based on estimated rather than actual use. Estimated consumption was a function of the number of "units" in a building, which depended on the building's size and design. For ex, building with many bathrooms, saunas, whirlpool tubs, wet bars, ice machines, extra sinks, outdoor spigots, and so forth had more units than buildings designed more abstemiously. A swimming pool or the presence of lawn sprinklers added considerably to the unit count.

The initiation (or "tap-in") fee was one time, whereas the usage fee was assessed annually. Because fees depended on units and not actual usage, customers who tapped into the system paid no usage fees during the tap-in year. From then on, they paid usage fee only.

The number of usage units had grown steadily each year as new people tapped onto the system. Exhibit 1 shows these fees and the number of usage unit for the past 4 years, plus the forecast for 2011. As it indicates, there had been 435 initiation units in 2010, and, due to many existing customers 7270 usage units.

The annual increase in units depended on a combination of the number of new dwellings and the water consumption potential (units) of each. The town's planner indicated that she expected the number of initiation units to be about 440 in 2011 and 450 in 2012. Usage units were forecast at 7705 in 2011 and 8145 in 2012.

The Bonds

If approved, the $3M 5% bond issue would be Levinton's second bond issuance for the Municipal Services Department. The first (for $2M) had taken place in 1994 had been for 20 years and carried a 4% interest rate. It was using a sinking fund to accumulate principal payments. The treasurer's plan was to use a sinking fund with the $3M issue also. Exhibit 2 contains a schedule of payments into the sinking funds, earnings on the sinking funds and principal repayment. Since the Town invested the sinking fund conservatively, the 3% earning rate had remained almost constant for the first 15 years of the $2M bond, and was expected to remain at that level for its remaining life. It also appeared to be reasonable for the $3M bond. Sinking fund earnings were used by the town for general budget support.

Issues

As the date of the town meeting neared, the debate about the wisdom of the expansion intensified. According to an accountant who had moved to Levinton some three years ago, the financial forecast was not optimistic:

2011 budget forecast for debt service is fine, but it's also misleading in terms of expansion. In 2012, if we pass these bonds, we'll be looking at incremental debt service of $300,000, on top of the $180,000 we're already paying for the first bond issue. How are we going to pay for that. More precisely, who is going to pay for it? There are only 2000 of us. Do the math!

A longtime resident and retired attorney, agreed adding a new dimension to the analysis.

The math's easy. Here is the tricky part- who came up with those fees? Who should an initiation fee be $125 and a usage fee $42. It just doesn't seem right that they're so close together. And while we are at it, what about the earnings on the bond sinking fund. What aren't those used to help fund the deficit?

The owner of a local inn with about 50 beds and a large swimming pool, added her own perspective:

Ok then what about the units themselves? Sure, I use water for my pool, but the pool doesn't use the sewer system. The same for watering my grounds. Why should I pay the sewer rate for the water that doesn't use the sewer. I already pay and arm and a leg because of the bathrooms in the inn.

With only a few weeks left before the town meeting, almost everyone was looking for the magic bullet. Surely there could be some way to solve the problem.

ASSIGNMENT

1. As a philosophical matter, without reference to any numbers, what sort of cross -subsidization, if any, is appropriate in a water and sewer system? Be sure to address, as a minimum, whether new users should subsidize existing users or vice versa, whether tax payers should subsidize the overall cost of the system, whether people with pools and large lawns should subsidize ( via the inclusion the overall rate) people do not have these facilities.

2. Assuming the $3M bond is approved, and that the current usage and fee trends continue, prepare a budget for 2012. Make assumption where necessary.

3. Assume there is a deficit forecast for 2012 and you want to eliminate it. How would you change the fees and subsidies? As part of your answer, address whether the general tax support should remain, and whether the earnings on the sinking fund should be considered as revenue of the Municipal Service Department.

4. Given above decision, forecast what will happen to the surplus or deficit in 2012-2014 when there is debt service on the 2 bond issues. How would you eliminate a deficit during this 3-year period? What will happen in 2015 and beyond, when there is debt service only for the second bond issue?

5. Given all of the above thinking, prepare a propose solution to the issues on the table that if presented at the town meeting would be the magic bullet that everyone is seeking.

Attachment:- town_of_levinton_exhibit.xlsx