HomeLocal governmentUtility Advisory Board decides against making a recommendation on electricity rates
Utility Advisory Board decides against making a recommendation on electricity rates
June 4, 2019
BY JENNIFER CABRERA / JUNE 4, 2019
At the Utility Advisory Board (UAB) meeting on May 28, the board viewed presentations from GRU on their current budget situation and voted on recommendations for the Gainesville City Commission. Their task was to decide on their recommended utility rates for the next fiscal year and whether to recommend a cut in the General Fund Transfer (GFT) from GRU to the city.
GRU’s goal is to improve cash flow
The first GRU presentation referred back to their February white paper, “GRU at a Crossroads,” which we covered here. The main goal of their February 2019 financial plan was to improve their cash flow by replenishing their cash reserves, reducing their leverage, and increasing their investment in technology. Specifically, they proposed to reduce debt service by restructuring their debt with the bonds that were issued this spring, reduce their operations and maintenance expenses, reduce the GFT by $6 million/year for the next 6 years, and implement rate increases. The necessary rate increases are thus tied directly to the GFT, as shown here.
According to GRU, every 1% rate increase is worth about $1.75 million a year in cash flow. GRU said their original recommendation to the city was to decrease the GFT by $6 million/year with a 4% rate increase in FY20, but since the city commission didn’t support that, their new recommendation is a $3 million reduction in the GFT with a rate increase of 5%. They noted that the impact on salaries from the new Total Rewards report (comparing the compensation of city employees to the national market) would also add about 0.5% to the rates for electricity, water, wastewater, and gas.
“Significant financial impact” of failing to reduce the GFT
Claudia Rasnick, the Acting CFO of GRU, cautioned the UAB that failing to reduce the GFT could have a significant financial impact: “During the conversation with the rating agencies, there was one in particular that made the statement that if the GFT were to be increased, that would definitely increase our leverage, and they would come back and look at our rating again, and that one particular rating agency said we barely skirted by without a double downgrade.” She said that a double downgrade would probably cost the city an additional $2 million/year on current debt and also increase the cost of future debt.
Rasnick later said, “Even with a $6 million reduction, we’re still not making enough to cover the GFT” over the next 5-6 years.
The board then looked at GRU’s current and proposed rates in comparison with other state utilities:
The board had difficulty deciding on its recommendation. Several members said it was clear that the city had no intention of cutting the GFT, and they generally supported the new expenses the city has been adding, particularly new full-time employees. One member said they shouldn’t raise rates without a plan to fix the “infrastructure” (private homes that are in disrepair and thus have high utility bills), while others said their job was to protect the financial health of the utility, and it is the city’s job to help citizens repair their homes. They finally decided to make 2 separate but related recommendations:
Adopt the rate that matches the commission’s chosen GFT, as shown in the table above.
In deciding on the GFT, the city should recognize that a decision to not reduce the GFT may have a negative bond rating impact and also that the city needs to address the infrastructure needs of customers hardest hit by these increases.
The agenda for tomorrow’s City Commission Special Meeting (1:30 pm in the City Hall Auditorium) lists a staff recommendation of a $3 million GFT reduction with a rate increase of 5% in FY20, along with the UAB recommendations listed above.
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