17999_Authority_December

16 The Authority | December 2024 F Iscal c heckuP By Russell F. McIntosh and Lauren B. Zumbrun, Herbert, Rowland & Grubic, Inc. The holidays are fast approaching, which means a new year is just around the corner. Hopefully, your budgets are finished and decisions on next year’s rates have been made. But in case you’re still trying to decide, here are a couple of thoughts you may want to consider as you deliberate. User Fees Budgets are road maps based on assumptions of future events. With the cost of everything going up, it is tempting to approach rates looking at the worst-case scenario, but some additional analysis proves helpful if a rate increase seems necessary or if you’re considering postponing one. Separating fixed and variable costs is a good first step. For many authorities, debt service cost is fixed, and if there is some variable rate debt, interest rates are trending down based on the Fed’s recent announcements. Reduced interest rates may not immediately impact your budget, but you may want to review your loan agreement to see how interest cost is calculated for next year. Not all variable costs are subject to the same inflationary pressure. Some of the biggest costs are salaries and wages and increases are generally known since they are often discussed with employees around this time of year. Employee benefits are not as predictable and health insurance has been a wild card along with chemicals and utilities, but we’ve seen some moderation in many of these costs. Other Revenues We can expect to see lower interest income from surplus funds because interest rates are falling but there doesn’t seem to be any reason to think that late fees and interest on past due bills should be changing. I have noticed that some authorities are stepping up their collection efforts to improve cash flow and reduce the size of any rate increase. Tapping Fees Reductions in interest rates may revive or create new development projects. If so, you may want to review and possibly recalculate your tapping fee. Construction costs have been steadily increasing. Based on the Engineering News Record’s Construction Cost Index, which is often used to estimate current values in tapping fee calculations, costs have risen over 17% since December of 2020. Principal payments on debt also increase the basis for tapping fees. However, there are several factors that determine the final tapping fee amount including changes in household size based on the 2020 Census. Still, a review may result in an increase in the tapping fee amount. This could be especially important if new development appears likely next year. Also, operating costs have increased over the past several years which could result in an increase in the reservation of capacity fee. This fee which is described in Section (24) of the Municipality Authorities Act, allows the collection of revenue for capacity that is committed prior to the payment of the tapping fee. The fee is based on debt service and fixed operating costs but cannot exceed 60% of the average residential sanitary sewer charge. This is often imposed when you approve a planning module for sewer or commit water capacity, if you have not collected the tapping fee. If you do not currently impose a reservation of capacity fee, you may want to discuss this with your solicitor and engineer. Multi-Year Projection Now would be a great time to look at the next few years, usually three to five years, and estimate future revenues and expenditures. Of course, this will be less accurate than