NEWS BLOG
LovelandPolitics
Loveland's Independent News Source
Loveland - May 31, 2012



Historically, the City of Loveland passed along to residents increases in the cost of water delivery through increases in the
rates residents pay for water.   However, a January 2012 increase in Loveland water rates and possibly future increases are
not necessarily tied to the cost of delivering water.

On June 7, 2011, Loveland’s City Council passed Resolution #R-39-2011 to mitigate a projected $3.5 million shortfall in
General Fund revenues for the city.  Absent from much of the recent media attention (See RH "
City Considers Water Rate
Changes 5-19-12) regarding the reported necessity of again raising water rates is where the most recent increase went –
directly to the city’s general fund.

The City of Loveland, as a result of TABOR (Taxpayers Bill of Rights), cannot increase taxes that go towards the city’s
General Fund without a vote by taxpayers approving the increase.  However, Enterprise Funds (fee for service) are immune
from this requirement thus rates for delivery of specific government services can be raised without any vote of the residents
who will be paying the higher utility rates.

Cities have cleverly found “legal” means to transfer funds from Enterprise Funds like the city’s water utility into the General
Fund with little notice or alarm by rate payers.  One method is called the PILT (Payment in Lieu of Taxes).  PILT is the label
the city uses for transferring 7% of the water utility fund into the city’s General Fund each year.  In some jurisdictions the
transfer is a called a “Franchise Fee” or “Occupation Tax.”

Simply explained, the city claims the water utility, run like a business, should pay a reasonable return on the city’s investment
in utility properties and capital investments made on behalf of utilities.  The legal justification for the transfer of funds is found
in Loveland’s City Charter Section 13-2(c):

“a reasonable return on the City’s investment in utility properties and capital investments”

In a report to Loveland’s City Council last June, City Manager Bill Cahill reported,

“While the recommendation is to increase the fee by 1% to generate 651,600, increasing the rate
by 2% would generate $1,303,239. The increase would need to be considered at the household
impact level.”

The Council voted to increase the PILT nearly one year ago in full knowledge the change would drive higher utility rates in
2012.  Approximately $650,000 of artificial “cost” was added to the city’s various utility enterprise funds now lost inside the
“Administrative” line item in the water utility’s budget.  The total annual transfer into Loveland’s General Fund from the utility
rate payers now tops $4.5 million annually; second only to Longmont as the highest PILT collecting in Northern Colorado.

The financial sustainability report to Loveland’s Council last year never attempted to create a nexus between the city’s
investment in the water utility and the expected “return on investment” the city’s charter allows.  Instead, the report provided
to council appears to suggest the increase was driven only by a need to increase the city’s general fund making it more like a
general tax increase than the purpose allowed under the city’s charter.  A clear explanation was provided by staff to council in
the following language of a sustainability report,

“It is imperative to understand that even a 1% increase will likely be passed through directly to utility enterprise fund
customers over future years.  It is possible that even with a rate increase; the revenue would be equitably generated by the
community in a manner that may be more acceptable than a mill levy increase. Nearly all funds are considering a 2012
rate increase for various business reasons…. it is likely that most funds will still see a 2012 rate increase. Collecting this
return on investments from the utilities in addition to the current PILT or franchise fee would make Loveland the highest
in the neighboring communities with the exception of the 8% PILT that Longmont charges its electric utility.


Is Loveland Double Dipping?

Some rate payers, especially the higher tap fee commercial rate payers, have recently raised concerns over the city’s
methodology in charging the PILT while also charging the rate payers for those capital improvements PILT is supposed to
cover.

One Loveland businessman complained to LovelandPolitics,
“Why do we pay twice,  the city makes us pay for the capital
improvements through our rates and CEF’s while later charging us a ‘return’ on the city’s investment? “  “Unless they pay
for the capital improvements through general fund monies it is Enron style circular accounting by charging rate payers
twice for the same infrastructure.”

At issue is whether Loveland is able to continue collecting approximately $4.5 million annually from the utility customers while
also raising rates to force the same utility customers to pay for new capital improvements.   Planned future water rates would
be unnecessary if the City of Loveland reduced the PILT back to perhaps 4-5% as it is in other communities.

Instead, Loveland’s Council directed staff during a May 22, study session to again increase water rates in Loveland by
bringing back a specific rate increase proposal by August.


Is Loveland Really Debt Free and Our Water Rates The Cheapest?

Two important selling points the Loveland Reporter Herald has been recently reporting for the city is that Lovelanders pay the
lowest regional rates for water while the city operates the utility free of debt thus leaving open the possibility of funding future
infrastructure improvements using public bonds.  

The City of Loveland water utility budget does show “debt service” payments of more than $800,000 annually despite the
claim of being a "debt-free" operation.  The debt service represents principle and interest payments on the city’s pro-rata
portion of the public debt incurred to build the Windy Gap water project through the Northern Colorado Water Conservancy
District
(NCWCD).

According to
a report prepared for the City of Loveland by Spronk Water Engineers Inc. of Denver, the city’s participation in
Windy Gap has not yielded the expected results.  A water diversion project from the Western slope across the Rocky
Mountains into Northern Colorado that began in 1985, Windy Gap has been a source of controversy as further investments
using public debt may be required to make the project fully successful.  According to the city’s consultant,

“Loveland owns 40 units out of the 480 units in the project.  Each unit was originally projected to yield an average of 100
af/y, although actual yields have been less since the project began delivering water in 1985………Yield from the Windy
Gap Project is quite variable as a result of the relatively junior water rights that supply the project and the reliance on the
excess storage and conveyance capacity of the CBT Project facilities.  During dry years the project yields little or no water
because of upstream diversions by senior water rights, and by calls against the project water rights from senior downstream
water users.  During wet years, there may be insufficient capacity in Granby Reservoir ….”

Despite the disappointing yields from Windy Gap, Loveland rate payers continue repaying the bond debts as agreed in an IGA
(Inter-governmental agreement) used to finance the project.  While some Loveland staff may claim the city’s utility is a “pay
as you go” debt-free operation, Loveland’s payments to the Windy Gap project debt will continue until 2027 via the “debt
service” being paid through the NCWCD.


Water Rate Comparisons

Loveland is blessed by its close proximity to the Big Thompson River as a primary water source.   Comparing the rate paid by
water users in Loveland with those in Greeley and other cities farther away from any natural water sources is comparing
apples to oranges.

Greeley spends literally millions of dollars more than Loveland maintaining and improving infrastructure which is passed along
to Greeley rate payers.  Greeley pipes water from Bellvue approximately 40 miles away from their city at considerable cost.  
When Greeley’s summer water demands reach over 90% of capacity (as they have in recent years) Greeley is forced to pay a
higher cost of additional raw water from surrounding cities or face investing  millions more in a new higher-capacity pipeline
to accommodate new growth.  

A fair comparison in rates would remove from the rates paid in neighboring communities any expenses incurred by that city to
take Big Thompson water beyond the boundaries of Loveland.   Click here to see a Greeley generated water costs comparison
chart showing water usage.  When comparing cost of water for the number of miles transported, Loveland doesn’t fare as
well given how close the rates already are between the cities.


Increasing Costs Of Delivering Water

While the City of Loveland's aging water delivery infrastructure does require updating, claims the city has been conservative in
its use of the enterprise fund resources or even short on resources may seem to be a stretch.

In 2011 the former Agilent property purchased by the City of Loveland for over $5 million was purchased mostly using a
"loan" from monies available for future raw water acquisitions collected from new development fees and rate payers.  Though
that money was largely repaid by December of 2011, other previous actions by the council also indicate the city's senior staff
were treating the water utility account almost as a slush fund to "grease" annexation agreements.

As an example, in 2008 (see box right) the city incentivised a landowner to annex into Loveland instead of Johnstown by
paying higher than market rates for water shares while also agreeing to install a sewer line that will need to pump waste uphill
to Loveland sewage treatment plant from the newly annexed property at no cost to the current property owner.  

Before raising water rates in August, the City of Loveland may need to explain to rate payers why the money collected to
repair aging pipes was instead used to incentivize annexation agreements, business incentive schemes, promise free uphill
sewers and subsidize the city's General Fund deficit for everything except water infrastructure.
The Whole Story Behind
Loveland's Increasing Water Rates
Olsen Annexation
Agreement
2008

City of Loveland "Incentive"
to annex property by
overpaying for water shares
while agreeing to build an
expensive uphill sewer using
water utility money.

Agreement Text Below;


5.        Purchase of Water
Shares.  Provided that the
Property is annexed into the
City, the City agrees
to purchase from the Owners
twenty-seven (27) shares of
Consolidated Home Supply
Ditch and
Reservoir Company stock, bearing
stock Certificate
Nos.                                  (“the
Water Shares”).
The City shall purchase the
Water Shares from the
Owners within                  
days after the effective
date of the annexation of the
Property at a per share price
of $70,000.00 for a total
purchase price of
$1,890,000.00. The Owners
shall convey the Water
Shares to the City by general
warranty deed, a
written bill of sale and
assignment with general
warranties of title, and
through the execution of any
and
all other documents required
for such transfer by the
Consolidated Home Supply
Ditch and Reservoir
Company. The City also
agrees to include in the
Annexation Agreement a
provision obligating the City
to lease back to the Owners
the Water Shares for raw
water irrigation of the
Property on terms and
conditions acceptable to the
Parties.

6.        Extension of Sewer
Main to the Property.  The
City agrees to extend, or pay
for the extension of,
a (                 ) inch Sewer
Main from to the intersection
of Highway 402 and County
Road 7 (hereinafter referred
to as “the Sewer Main”) in
order for the City to provide
future wastewater service to
the Property when the
Property develops. The City
agrees to meet this
obligation by either paying
directly for the cost to install
the Sewer Main or to
reimburse the Owners for
their costs if they install the
Sewer Main. It is estimated
that the current cost of
extending the Sewer Main is
approximately $ 7.1 million .
The Parties agree that the
City’s obligation to pay for
the costs to so  extend the
Sewer Main to the Property
shall also include all costs for
any needed lift stations for
the effective operation of the
Sewer Main pursuant to the
City’s engineering standards.