Florida village generates revenue from utility

Most city and county water and sewer utilities meet their primary public service function: providing effective, environmentally sound water treatment and disposal service. But few utilities are fulfilling their secondary public service function: generating proprietary revenues for a general governmental services fund.

A water and sewer utility, like police and fire/rescue, is as much a business enterprise as it is a service. Courts throughout the United States have approved profits as high as 30 percent of gross revenues and 16 percent on equity for government-owned utilities, but few municipalities have taken advantage of this opportunity

Historically, governments have not needed to develop supplemental sources of revenues, traditional means of funding general government services — ad valorem property tax, state income tax, sales tax, etc. — have been sufficient. Most government-owned utilities served only their own citizens ad were funded by general revenues.

Neither of these historical rationales applies today. Ever since passage of California’s Proposition 13, the traditional funding sources for general government services have been under attack. No longer can governments count on readily available tax revenue to fund services.

Additionally, new cities and communities have sprung up in the West and South in recent decades, and rapid population increases required governments to build utilities in advance of growth, rather than simply serving existing communities. As a result, many systems serviced areas outside the government’s boundaries.

In addition, many of the new utility systems were created by private businesses, which did not limit themselves to political boundaries but serviced whatever customers could be found. When municipalities later acquired these systems, they inherited service territories spread over multiple incorporated and unincorporated jurisdictions.

One small southeast Florida village provides a good example of a utility system providing more than just water. Created by developers in the early 1970s as a model golf community for retirees, the village was constructed with significant excess capacity. By the 1990s, its utility system serviced not only its own citizens, but several unincorporated communities. Almost 90 percent of all customers now live outside the village.

Concerned about whether its outside customers were paying the true value of the utility service, the village identified the traditional costs of utility operation: personnel, chemicals, electricity, renewal and replacement, capital upgrades, etc. It also identified many general fund services — such as administrative support, management services, and police and fire services, as well as intangible benefits like tax-free municipal borrowing and operation — that were provided directly and indirectly to the utility system and could not be readily calculated.

The village resolved to incorporate all these additional factors into a comprehensive new rate structure that would equitably apportion the cost of utility service to all customers. To develop the new rate, the village calculated the actual time that its general administrative personnel provided to the utility and allocated personnel costs proportionately between the general fund and the utility system.

Next, the village used a property value paradigm to allocate police and fire/rescue costs. The value of the property within the utility service area was compared with the value of the village property to apportion costs between the general fund and the utility system. A profit factor was applied to the identifiable costs of the utility.

To finish the task, the village then applied a 25-percent surcharge on all out-of-city customers. Florida law permits municipalities to charge a 25-percent surcharge automatically and allows up to 50 percent if the surcharge is based on a documented cost-of-service study.

As a result of the comprehensive utility rate analysis, the village’s general fund now receives an additional $499,000 per year. (The general services budget totals approximately $925,000 per year.) This includes a $165,000 utility payment, $206,000 for the outside customer cost differential and $128,000 profit.

To take advantage of the benefits available to government utilities, owners must re-evaluate their utility systems. In today’s climate, this revenue source may make the difference in maintaining needed services.