ALERT: INFORMATION ON HIGH WATER RATES
Dear New Water/Sewer Customer:
This pamphlet is to make you aware of the town’s high water/sewer rates,
explaining why the rates are so high and sharing what actions the town has taken to
address this situation. Hillsborough’s out-of-town rates are some of the highest in
North Carolina and likely considerably higher than what you’ve paid in other
places. By sharing information about this difficult issue, the town hopes to help
prevent new customers from being surprised when they receive their first bill and to
let you know we are working hard to improve this situation.
One of the more difficult issues surrounding the high rates is that out-of-town
customers are charged nearly double the rate of in-town customers (95 percent
more). Most municipalities follow this policy. In Hillsborough, a minimum
monthly bill for an out-of-town customer with water and sewer service (3,000
gallons or less) is $95.61. It is common for out-of-town customers with both water
and sewer service to have much higher monthly bills — even double or triple the
minimum if they are medium- to high-volume users. The issue of “double rates”
has been debated fervently since September 2000. Effective November 2003, the
Hillsborough Board of Commissioners decreased the out-of-town rate multiplier
from 200 to 195 percent by raising in-town rates.
While it is impossible to fully explain a situation of this magnitude in a
pamphlet, we hope you find the enclosed information helpful in evaluating some of
the issues and problems facing Hillsborough’s utility operations. Mayor Stevens,
the Board of Commissioners, the Water and Sewer Advisory Committee and town
staff are truly concerned about the burden these high rates place on Hillsborough’s
customers, especially those on fixed incomes. The town is committed to keeping
the rates as low as possible, yet still doing what is necessary to run an efficient and
environmentally responsible operation, stay financially solvent, and prepare for the
future. Thank you for your patience and understanding!
Why Are the Water & Sewer Rates So High?
Hillsborough has had the extreme misfortune of having to deal with a variety of
financial and operational problems at the same time. The following highlights some
of the major reasons for the current rate problem.
• Reservoir — In 1993, Hillsborough voters approved $5.8 million in General
Obligation Bonds to pay for a reservoir to address longtime water shortages and
allow for growth. Waiting five years to start the project in 1998 created inflationary
increases in construction and land costs. This delay, combined with additional
requirements from the state and lawsuits from property owners whose land was
Rev. 01/2012
condemned to build the project, resulted in the reservoir costing over $10.8 million,
more than $4.3 million over budget. Annual debt service payments on the reservoir
alone in Fiscal Year 2011 are $705,031. This debt will take another nine years to pay
off and is approximately 9 percent of the Water/Sewer Fund budget. Fortunately, the
added water supply saved the town from a potentially disastrous situation during the
drought in 2002.
• Outdated Wastewater Treatment Plant — The Wastewater Treatment Plant is
32 years old and has never received a major rehabilitation or upgrade. Partially due to
the outdated design and other limitations of this older plant, the town has been fined by
the state numerous times for violations. In 2002, the town borrowed $750,000 to make
much-needed improvements that helped delay the need for a major overhaul at the plant
until 2011. These improvements added another $130,000 per year in debt service
payments. In FY12, construction started on a $19.2 million upgrade/expansion to keep
the wastewater discharge compliant with environmental regulations, to avoid a
moratorium on new development, and to meet new, highly stringent discharge
requirements imposed by the state to protect nearby Falls Lake. As a result, $1.46
million in annual debt payments for the project will begin in FY15, more than doubling
the plant’s current budget. The town has studied alternatives to the expansion and
upgrade, including sending Hillsborough’s wastewater to the City of Durham for
treatment. However, initial costs were determined to be three times more expensive
than upgrading and expanding the existing plant. Sending Hillsborough’s wastewater to
Mebane or to the Orange Water and Sewer Authority in Chapel Hill were not options
since their systems discharge effluent into a different river basin, which the state would
not permit.
• Water Plant Upgrade — The Water Plant, built in the mid-1970s, received a $3.8
million upgrade in 2002. To help fund this project, the town received a $2 million grant
and a $1.8 million low-interest loan from the state at half the market rate. This project
added another $100,000+ in annual debt payments through the year 2026. The plant
likely will run out of capacity in 7 to 10 years, necessitating an expansion of the plant
and reservoir at that time with a projected cost of approximately $5 million.
• Aging Water Lines — Because many lines in the town’s system are over 70 years
old, serious problems exist with leaking from water lines and with inflow into sewer
lines. While the town has made good progress in recent years on the lines, their age still
poses a variety of problems and increases operations and maintenance costs. Fiscal
Year 2013 is the first year of annual debt payments of $174,044 to pay for improvement
projects totaling $1.55 million, including dredging and repairing the dam at Lake Ben
Johnston; replacing backwash pumps at the Water Plant; and replacing old water lines
in the Riverside Drive and Crawford Road areas.
• Total Debt Service Payments — Currently, 17 percent (about $1.3 million) of the
town’s Water/Sewer Fund budget is earmarked for debt service payments.
• Critical Savings Level — Because small towns deal with smaller amounts of
gross funds, they need larger savings levels to be fiscally sound and to satisfy
criteria established by bond rating agencies. A reasonable “fund balance” — or
savings — is critical to ensure the town does not have cash flow problems; can
handle unexpected revenue shortfalls, expenditure overruns and emergencies; and
can earn interest income. The town believes Hillsborough’s minimum fund balance
level for the Water/Sewer Fund should never drop below three months of the
annual budget, or 25 percent, as it is dangerous to risk dropping below this
threshold. The current fund balance level is approximately 23 percent. This means
the town does not have the luxury of using its savings to defer future rate increases.
• Loss of Large Customer Base — In September 2000, the town’s largest
water customer at the time (Flynt Fabrics) closed its operations, costing the town
about $700,000 per year in revenue. The loss forced the town to take dramatic
action to keep the Water/Sewer Fund financially solvent: raising rates 34.2 percent
in 2001 and making expenditure cuts. In three to seven years, the Efland-Cheeks
sewer system will disconnect from Hillsborough and become part of Mebane’s
system. These customers generate about $250,000 of Hillsborough’s sewer
revenue. This loss is projected to start in FY15 and was included in the calculations
to maintain a steady increase in rates.
• Little Growth/Declining Water Use — Little growth in town and declining
water use over the past 10 years are making it difficult to pay for rebuilding much
of the town’s aging water and sewer system. Lines and pump stations constantly are
being repaired, replaced or upgraded due to age or inferior installation decades ago.
The town did not raise water and sewer rates for many years until some of this
rebuilding and upgrading became necessary. While the rates are high, there are still
Triangle-area systems with higher rates than Hillsborough.
What Does This Mean?
While there are always many ways to interpret information, the following is one
brief analysis. Unlike other systems that may face a few problems at once,
Hillsborough is facing several serious challenges. The many fixed costs associated
with running utility operations limit the opportunities for large-scale expenditure
cuts. In other words, it costs almost as much money to operate Hillsborough’s
system whether it treats 1 million gallons of water per day or 3 million. After
reviewing the many expenditures that cannot reasonably be removed (like debt
payments and many operating and personnel costs), the task of finding ways to
stabilize or even reduce rates becomes more daunting. The independent Citizens
Advisory Water and Sewer Task Force made the same findings after reviewing the
town’s utility operations. While the task force identified problems and reasons for
the dilemma of high rates, the members found the operations were currently being
managed in a fiscally responsible manner. Ultimately, the loss of Flynt Fabrics, the
combination of high debt, low savings, old plants and lines, and high rates means
there are no simple, short-term or painless solutions to cure all these problems.
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What Is the Town Doing to Improve the Situation?
The town has taken several steps to stabilize and improve the rates. Because there
are no quick fixes to the problems that have led to the high rates, the town is addressing
the situation in a businesslike manner, making decisions that make the most sense over
the long haul. Below are examples of actions the town has taken:
• Fiscal Radar — The town upgraded its financial planning process in FY1999 to
include a multi-year budget format that combines the elements of a financial forecast,
capital improvements plan and budget into one document. This improved “fiscal radar”
is helping the town make better decisions by understanding the impact of today’s
decisions on tomorrow.
• Task Force — The Board of Commissioners appointed a Citizens Water and
Sewer Advisory Task Force in October 2000 to study the utility situation after the
closing of Flynt Fabrics. The task force was composed of Hillsborough water
customers, equally split between in-town and out-of-town customers. The group
reviewed and made recommendations regarding the Water and Sewer Fund’s
operations, financial condition, billing practices and other areas.
• Permanent Advisory Committee — In September 2001, the Board of
Commissioners made the advisory task force a permanent advisory committee to the
board. The task force is now called the Water and Sewer Advisory Committee, and the
members meet monthly. Their charge is to review the Water and Sewer Fund’s
operations and finances and to make recommendations to the Town Board and town
staff on policies as well as mechanisms to improve the overall efficiency. To attend a
meeting, contact Utilities Analyst Julie Laws at 732-1270 Ext. 72 for information on
meeting dates, times and location. Ms. Laws serves as the committee’s secretary.
• Sewer Capital Reserve Fund — Funds are being placed in the Sewer Capital
Reserve Fund to be applied toward the first debt payments in FY15 and FY16 for the
Wastewater Treatment Plant upgrade. This will level the rate increases over a longer
period to avoid large spikes at one time. The $18+ million project has annual debt
payments of $1,462,607. The new debt more than doubles the plant’s annual operating
cost, increasing it by 2.38 times.
• More Customers — New developments have been approved for construction.
Having more water and sewer customers to share in paying for many of the fixed
system costs (like the reservoir and improvements to the plants) should help ease the
burden on all customers. While this is positive news, it likely will take years before the
full effect of these still unbuilt developments is felt.
• Careful Budgeting — Most importantly, the Town Board and staff do their best to
make sure that all expenditures are reasonable, justified and needed before the budget is
adopted and before actual dollars are spent. The town has been successful in regularly
bringing its operational expenditures in under budget. The mayor, board and staff are
committed to continuing this recent trend.