Anchored by a theme of keeping “a well-oiled machine running smoothly,” Cleveland Utilities next week will submit to the City Council a Fiscal Year 2014 budget proposal that includes water and wastewater rate increases of 5 percent each.
When Council members convene Monday for their annual budget retreat, CU will be among several departments presenting their needs for the coming year and the costs for each.
As a prelude to the city hearings, Cleveland Board of Public Utilities members met in called session Thursday to hear the same proposals from staff that will be made to the Council. The board was not asked to vote; rather, according to CU President and CEO Tom Wheeler, the work session was intended to make the governing body aware of what lies ahead for city fathers.
“We’re not asking for any approval on this today,” Wheeler told board members at the Training Center session. “We wanted to bring it [proposed budget document] to the board’s attention and to show you where we are. We’ll discuss it next week with the City Council.”
He added, “At some future date, we’ll ask for your approval.”
Budget projections, which included expected revenue and expenses, were presented by Wheeler, CU Senior Vice President and CFO Ken Webb, Electric Division Vice President Bart Borden and Water Division Vice President Craig T. Mullinax.
In the CFO’s collective summary, Webb detailed the two proposed rate increases.
One is a sewer rate hike of 5 percent which has already been discussed in previous CU board meetings, and has been approved by CU’s leaders and presented to the City Council. Early approval was sought from the Council in order for CU to keep its place in line for a $10 million loan from the Tennessee Department of Environment and Conservation Clean Water State Revolving Fund Loan Program.
The SRF loan, which will forgive $451,200 in repayment (thereby making this amount the equivalent of a grant), will be used to pay for a portion of the decade-long SCOPE 10 sewer rehabilitation project. Current costs of the comprehensive rehab program, which will greatly curtail inflow & infiltration (I/I) into existing sewer lines, is about $30 million.
SCOPE 10 is an acronym for Strategic Commitment to Protect the Environment. The “10” refers to the initiative’s life span.
CU had already planned for 4.5 percent sewer rate hikes over the next four years to help pay for the sewer rehab project. However, as part of their review of the SRF loan application by CU, state officials required a 5 percent hike they felt would better assure loan repayment. As previously announced, the 5 percent rate hike in wastewater will take effect July 1.
CU’s budget proposal also includes a 5 percent rate hike in the Water Division. Of this amount, 3.81 percent will be internal; the remaining 1.19 percent increase will be a pass-thru from the Hiwassee Utilities Commission, a multijurisdictional water provider that sells water to Cleveland Utilities.
Capitol projects — that is, system upgrades and expansions — are primarily responsible for the proposed CU rate hikes, according to Webb.
“Capital projects are what drives a lot of the numbers that we deal with at Cleveland Utilities,” Webb said. “That’s a very important part of the budget.”
Although Thursday’s presentation to the board involved FY 2014 needs, CU staff also forecast ahead over the next few years to discuss coming projects whose intent is to keep up with economic development and growth within the CU service territory.
Webb pointed out CU actually develops preliminary budget needs for 10 years in advance. This process not only keeps the utility apprised of its own revenue needs, it also helps identify future capital projects that are needed to keep up with the city’s growth.
For 2014, rate hikes are being requested for only the Water and Wastewater divisions. To this point, no internal rate hikes are anticipated for the coming year in the Electric Division; however, this does not include any pass-thru hikes from TVA.
“We’re not projecting any rate changes in electric internally for 2014, but I will tell you, just as you have heard us talk about at monthly meetings, the margin between sales and purchased power [from TVA] ... we continue to have some concerns about that,” Webb said.
The longtime CU accountant pointed to recent “deterioration” between incoming Electric Division revenue and outgoing expense for purchased power from TVA.
“We will continue to monitor that,” he noted. “... But for this budget at this time, we are not projecting any change there [in the Electric Division].”
In Webb’s breakdown of the Electric Division numbers for FY 2014, he said anticipated sales volume is 1.1 billion kilowatt-hours by CU customers. Total cost of this purchased power from TVA will be $99,757,451. Expected revenue to CU from electric patrons will be $100,344,485, leaving a net income of $587,034.
Electric Division debt at the beginning of the fiscal year will be $12,790,000 and new debt totaling $3,625,000 will be added over the course of the year. CU will pay $940,000 in FY 2014 on Electric Division debt, leaving year-end FY debt at $15,475,000.
In the Water Division, anticipated sales volume will be 2.825 billion gallons. This will bring in revenue of $13,754,527. The division’s expenses are expected to total $13,250,919, leaving a net income of $503,608. Investment in new facilities (capitol projects) should total $4,933,750. The CU Water Division will begin FY 2014 with a debt of $23,085,001 and will assume $2,750,000 in new debt. During the year, CU will pay $1,292,885 on existing debt. By year’s end, the division’s debt should land at $24,542,116.
In the Wastewater (Sewer) Division, anticipated sales volume for FY 2014 will be 1.845 billion gallons of water. This will result in total revenue of $10,861,558. Expenses are expected to be $10,483,591, leaving a net income of $377,967.
The Wastewater Division will invest $6,132,919 in new facilities.
Debt at the beginning of FY 2014 will be $23,852,322, and $3,994,219 in new debt will be added. During the year, CU will pay $2,189,385 on existing debt. At year’s end, the CU Wastewater Division debt should total about $25,657,156.
CU will enter FY 2014 with 190 employees as opposed to 201 in FY 2010.
The CU budget document includes a total 4.5 percent pay raise for employees; however, only 1 percent of this amount is cost-of-living. The remaining 3.5 percent is a merit pay raise for eligible employees who pass their evaluation.
In closing the staff’s budget presentations, Wheeler told the board Cleveland Utilities carries a significant responsibility; that being, to have services available where and when needed by current and future commercial and residential customers.
“What I would emphasize more than anything is that, for as long as I’ve been here, the Water, Electric and Wastewater [divisions] are probably in the best physical condition that they’ve ever been in,” he stressed. “There’s been a lot of improvements made. We’ve got a lot of technical expertise in this room that’s done a lot to bring us to [the point] we are now.”
Wheeler added, “But, one thing we’ve got to remember. Even in times when economic conditions may not be the best in the world, the utilities — electric, water and sewer — are like the engine of the community. In thinking about it, we kind of have an awesome responsibility.”
He pointed to CU’s importance in Cleveland’s growth.
“Nothing in this community happens if we don’t have utilities functioning at the level they need to be,” Wheeler stressed. “There’s no commerce. There’s no schools. There’s no nothing.”
He added, “It’s important that we keep utilities running like ... a well-tuned machine, a well-tuned engine. I think we’ve got it running that way now, and I think we’ve planned for a future where we’ll continue to run like that.”
The utility CEO said in some cases delaying commitments on necessary expenses like maintenance and system upgrades is too risky for any public utility.
“The temptation we face, especially when we have economic downturns, is ‘... let’s try to get a few more miles out of this engine before we do any tune-ups or repairs,’” Wheeler said. “That’s a bad position to take because if you’re going to come out of economic problems in a community you’ve got to have utilities ahead of the game.”
The utility company’s CEO told board members, and this position will be repeated before the City Council on Monday, that, “... We need to keep that engine running very smoothly. If we don’t, nothing else will occur like we would want to see. That’s what I glean from [these reports] today. That’s the kind of thing we’ll try to emphasize to the City Council ... that we’re doing fine, things are running well and we want to keep it that way.”
Wheeler’s sentiments were endorsed by CU board member Eddie Cartwright who offers a unique perspective on local government. He has served as a member of the former Cleveland City Commission, as commissioner of Public Works, and as Bradley County executive which was the forerunner to the Bradley County mayor’s post.
“Having served in both city and county governments ... if everything in local government ran as well as Cleveland Utilities does, we would really be ahead of the game,” Cartwright said. “Tom, his staff and his employees run a sure-enough, well-oiled machine. You are to be commended.”
Cartwright agreed with Wheeler’s assessment that new industry always looks to a community’s available utilities services, as well as its quality of education and other needs.
“ ... But utilities are usually right out there in front,” Cartwright said. “You folks do a wonderful job.”
Wheeler pointed out it’s not just about availability of utility services.
“They [new and existing industries] want to know if it’s [utilities] available, but they also want to know if it’s available at an affordable price,” Wheeler said. “You’re fighting two battles there and you’ve got to balance them.”
Cleveland Mayor Tom Rowland, a CU board member, concurred with Cartwright and Wheeler.
“Utility noise [restoration crews] is good to hear in storms,” Rowland said. He pointed out it means a well-equipped utility company has its emergency crews on the spot making repairs even in the height of dangerous weather conditions.