Gainesville City Commission cuts transfer from GRU to City, requiring budget cuts of about $19 million

BY JENNIFER CABRERA

GAINESVILLE, Fla. – Yesterday the Gainesville City Commission, sitting as the General Policy Committee, voted unanimously to adopt a formula for transferring funds from Gainesville Regional Utilities (GRU) to General Government that promises to cut the debt-to-capitalization rate for GRU from 87% to 70% over 10 years and will require cuts of about $19 million to the FY24 General Government budget.

The presentation from GRU stated that the debt-to-capitalization rate is projected to be 82.1% in 2033 if no changes are made, so the 70% rate was described as a “stretch goal.” The original projection was based on previous votes from the City Commission that reduced the General Fund Transfer by $2 million per year through 2027 and raised electric rates by 3% per year and wastewater rates by 5% per year through 2027. Those measures were projected to reduce the debt by $91 million, but an additional reduction of $224 million, for a total of $315 million, will be required to get to the 70% rate. 

Formula uses proxies for property tax and electric franchise fee

GRU proposed a formula for calculating the transfer, now referred to as the Government Services Contribution (GSC), that would use an estimate for the assessed values of GRU properties included in the most recent Property Insurance Policy to calculate a proxy for property tax and use the electric system revenues to calculate a proxy for an electric franchise fee. 

Under the formula, the GSC would be $15.3 million for Fiscal Year 2024 and would go up to $16.78 million in FY 2025 before starting to drop. It would be at $10.78 million per year from 2027 to 2033. These reductions are projected to provide about $120 million to pay down the debt, while “modest base rate increases” will produce $76 million and GRU expense reductions are projected to produce $28 million. 

The plan has “significant assumptions,” including an assumption that GRU will not borrow more than the capital budget submitted as part of the FY24 budget, that future capital improvement plans will be funded on a 50% debt/50% equity basis, that no funds will be borrowed in response to the Integrated Resource Plan, that there will be no plant decommissioning costs, and that base rates “will continue as approved by ordinance.” The presentation did not address the expiration of the rate increases in 2027 or the amounts of the “modest base rate increases.”

Transfer cuts would leave “a big hole in the general government budget”

During commission discussion, Commissioner Casey Willits said he’d always thought of the GSC as a “dividend – what would be coming back if it was a private company,” although companies often invest their profits back into capital expenses or debt reduction instead of distributing them to shareholders. He said some people argue that the City could get more in property taxes and franchise fees from an investor-owned utility, so he is worried that “frankly, a GRU Authority board that is not appointed by City people up here, that may be the only argument they see” if the City Commission makes the transfer so low that the Authority could think that selling the electric utility could produce more revenue for the City.

GRU General Manager Tony Cunningham said the transfer “has always been represented as a proxy for property tax, franchise fees, and return to shareholders. In this instance, we looked at that, but there are instances where [a company], rather than giving a dividend, will buy back their own stock. The cost reductions here are going back into buying GRU debt; we looked at that as essentially the replacement piece for a ‘shareholder dividend’ – we’re buying back our own stock, we’re reducing our debt… We felt like that was an appropriate substitution.”

“It may not be all that everyone wants, but this is, I think, a very serious commitment that we’re taking.” – Commissioner Cynthia Chestnut

Commissioner Cynthia Chestnut said, “The JLAC asked for bold moves; I think we’re taking a bold move by paying down our debt by hundreds of millions of dollars over 10 years, I think, shows our commitment and our sincerity in trying to address the debt stabilization. It may not be all that everyone wants, but this is, I think, a very serious commitment that we’re taking.”

“We have to do something far more drastic [than the previous $2 million per year reduction in the transfer], and this is that. It cuts what had been intended as a general fund transfer by more than half for the coming year. That’s a big hole in the general government budget. That is actual services that we won’t be able to provide, probably. That is actual millage rate that people who live inside the city limits will be asked, probably, to shoulder.” – Mayor Harvey Ward

Mayor Harvey Ward said, “We have to do something far more drastic [than the previous $2 million per year reduction in the transfer], and this is that. It cuts what had been intended as a general fund transfer by more than half for the coming year. That’s a big hole in the general government budget. That is actual services that we won’t be able to provide, probably. That is actual millage rate that people who live inside the city limits will be asked, probably, to shoulder. So this is a very real thing; it is something that is going to have consequences for many years, but the positive consequence is that we will have a utility that will be better off financially, and that means to you… that at some point in the future, that could increase our bond rating, and that would mean we pay less in interest, which means you would pay less in rates and fees. That’s the idea behind this, to eventually create a utility that at some point down the road can charge you less, as a user, for the services they offer.”

Ward suggested adding a “trigger” when GRU reaches the 70% debt rate, whenever that happens, “to reappraise the formula.”

Commissioner Bryan Eastman said, “At least in recent history, this is by far the largest austerity measure that we’ve ever taken, as a City… This shouldn’t be downplayed at all.” He also suggested adding a “minimal” franchise fee on water and adjusting the electric side to the state average: “I think we are leaving a lot on the table in terms of not taxing any of those 4,000 acres of land that we’re talking about… and a number of other things we’re seemingly leaving out of this… Give us something that is a little fairer, while still being incredibly bold.”

Chestnut said she didn’t want to delay passing this resolution, but she also wanted to ask GRU to bring back some “figures for water for us… and we would still be able to adjust the resolution.”

Eastman’s initial motion did not attract enough support

Eastman made a motion to approve the recommended GSC formula with an added option brought back in an upcoming meeting with industry averages for franchise fees for electric, water, wastewater, natural gas, and telecommunications, to approve a 10-year period to reach the 70% capitalization rate, and to re-review the formula upon reaching the 70% capitalization rate, based on the methodology of any of the three bond ratings agencies. Chestnut seconded the motion.

Willits said he didn’t support the motion because both GRU and the City need the “finality” of establishing the transfer to develop their budgets: “I do fear that this motion is not going to provide enough finality for our entire operation to hit the goals” from “a whole new stakeholder, the legislature, which we don’t normally have.” He said he would probably support the motion if the legislature were not part of the discussion “because it makes a lot of sense, but we have to give them something this year,” and the City doesn’t currently know whether 70% is below what the legislature expects or goes beyond it.”

Commissioner Reina Saco also did not support the motion; she said that staff had worked hard to agree on a formula “that they can both work with,” and she thought the commission should be voting on the staff recommendation.

Chestnut asked Eastman if he would withdraw his motion and substitute the staff recommendation, which was to adopt the recommended GSC formula for a ten-year period to reach the 70% target capitalization rate. Eastman agreed but said he wanted to add the re-review when the debt rate reaches 70%.

However, Eastman said he wanted to make the point that “we are not taxing land at all, we have a zero percent franchise fee on telecommunications, a zero percent franchise fee on water, a zero percent franchise fee on wastewater, and we’re taking zero percent dividend out of GRU. The formula can’t have zeros within them, but I do want to add it on the record, what exactly we are leaving on the table, which is a lot of what would be given to us under any other formulation.” In the end, he agreed to substitute the staff recommendation for his motion. Chestnut accepted the substitute motion. The motion was further clarified to state that it was a request for staff to bring back a resolution that implemented the staff recommendation.

“I thought everyone out there should recognize that we cannot make up $19 million in millage increases alone, which we shouldn’t do because that’s going to really hurt–this is going to mean very severe cuts to things that we care deeply about within our community, and this is a hard day. It should weigh heavily on everyone.” – Commissioner Bryan Eastman

Eastman still had more to say, though: “I just want to keep reiterating–I thought when we made our charter officers permanent, I said that was the biggest decision we will have made as a commission, and here I am, having been here three months now–this is by far the biggest decision we will make. I mean, this is a $19 million cut to our government that will live beyond anything that we do, and I don’t like that we are leaving such a significant amount of what our residents should be receiving, as owners of this utility, on the table, but I understand sort of where we are and that we need to be moving quickly, so I guess I will support my own motion that I made, but I thought everyone out there should recognize that we cannot make up $19 million in millage increases alone, which we shouldn’t do because that’s going to really hurt–this is going to mean very severe cuts to things that we care deeply about within our community, and this is a hard day. It should weigh heavily on everyone.”

In response to a question from Commissioner Desmon Duncan-Walker, Cunningham said that he had given JLAC members a high-level overview of the plan, saying they would reduce GRU’s debt by “hundreds of millions of dollars” over the next 10 years, “and got neutral to favorable responses from JLAC members when we did that.” He pointed out that there was no formal vote because these were one-on-one meetings. 

The plan can only consider “the known knowns”

In closing, Ward said that $315 million is what it will take to get to the 70% capitalization rate “with the known knowns–with what we know today… Any changes we make in between… then it has to be made up from one side of the ledger or the other… We would not be having [this conversation]… if we had not been directly tasked by the Joint Legislative Audit Committee with finding a formula. Period. That is a reality… The chairs directed that this be done.”

“This is going to be hard to figure out; this is not the last meeting that is going to be painful. We are going to have a series of workshops and votes for both the utility budget and the general government budget, and they’re going to be uncomfortable, and they’re going to be complicated and complex” – Mayor Harvey Ward

Ward also pointed out that this is separate from Clemons’ proposed local bill that would set up a governor-appointed governing authority for GRU: “This is bold. This is a big deal. This is going to be hard to figure out; this is not the last meeting that is going to be painful. We are going to have a series of workshops and votes for both the utility budget and the general government budget, and they’re going to be uncomfortable, and they’re going to be complicated and complex, and I encourage the community to reach out to us and continue to ask questions. It’s also OK for you to ask questions of the Joint Legislative Audit Committee. This is the result of direction–and I want that to be exceptionally clear, we are responding to them as requested… You are our bosses; you are their bosses.”

The motion passed unanimously. 

Eastman made another motion to re-review the formula when the 70% capitalization rate is reached, based on the methodologies of any of the three bond rating agencies. Willits seconded the motion. That motion also passed unanimously.

Chestnut asked the mayor to communicate the decision to JLAC, and Ward said he would do that by the next morning.

Ward previously promised a transfer under $10 million

At a legislative delegation hearing on March 17, Ward told the delegation that he expected the transfer to be no more than one-third “of what it has been in past years. I might not even vote for that much.” The transfer was about $35 million this year, so one-third would be under $12 million. Ward also told the delegation that his intent was for the transfer for FY24 to be “probably south of $10 million… Those are the kind of bold moves that I am interested in. I can’t speak for the other six members of the City Commission… I’m willing to entertain zero.”