Understanding Rochester Finances – Part 2, Utilities

Overview:

This post is all about utilities, what they are, how they are funded, and how they impact other budget items. My personal preference is to have lower property taxes, one of few tools that cities have to make this happen is through the use of utilities. There are utilities that you know about and probably utilities that you don’t know about.

Wow, I have to confess I was a little overwhelmed with the interest and response to the first post. Apperarently there are a whole bunch of people with a sincere interested in learning how City Finances work. I also had some feedback telling me to keep it simple. This is where you need to keep me honest. If I have not explained something well enough, you need to tell me to fix it. The first few posts are going to be about really basic topics, but are needed to understand some of the more complex topics.

In 2019 the budget for the city of Rochester is about $284 million. Yet the most visible way that we pay for government services, property taxes is only about $75 million or about $54 per month per resident. So clearly there are some other things going on that fund government. One of these are utilities.

What is a Utility?

The above figures leave out 2 key parts of the City of Rochester. The Rochester Public Utilities 2019 Electric Utility budget is about $172 million while the Water Utility budget is about $12 million.

Most folks know that we have a public Electric Utility in Rochester, and most probably also know we have a public Water Utility. What people might not know is that we also have a Sewer Utility, a Parking Utility, and a Stormwater Utility. We also have the ability to create Sidewalk and Street Lighting Utilities. We are asking for state authorization to create Street Utilities as well.

So what actually is a Utility (or in our case a Public Utility)? A utility can best be thought of as a part of the government that is broken apart and has its own revenues and expenses. Typically we would not put property tax or other tax dollars into a utility. Utilities are almost always paid for with customer charges or fees. In general, things that a utility does is only funded with utility revenues and the utility does not fund things that are not relevant to utilities. There are some exceptions, but this is a pretty good rule.

In the case of the Water and Electric Utilities people and businesses pay an RPU bill which is the primary source of income for those utilities. Also on that same bill there are some additional charges for Storm Water, and Sewer. While these fees are not actually charged by RPU, they come on the same bill

What Utilities does Rochester have?

  • Electric Utility (RPU) – Provides electric generation, transmission, and management.
  • Water Utility (RPU) – Provides water extractions, treatment, and distribution.
  • Stormwater Utility – Constructs and maintains stormwater pipes, ponds, and treatment.
  • Sewer Utility – Maintains sanitary sewer collection system and the wastewater treatment plant.
  • Parking – Constructs and maintains public structured, flat lot, and metered parking for the community

Do Utilities pay taxes?

Most public utilities do pay taxes to the City. The reason for this is that many utility providers are private or investor owned. Here in Rochester, Minnesota Energy is private for example. To keep things consistent public utilities pay the City of Rochester a “Payment In Lieu of Taxes (sometimes called a PILOT).” This ensures that public utilities don’t have an unfair advantage over investor owned utilities. These payments can then reduce the amount of property taxes needed by the city. While it might not seem like a big deal this really helps because, as I will cover in a later post, utility fees are MUCH fairer that property taxes. Many properties do not pay property taxes but they do pay fees.

Problems with Utilities

There are a couple things that we can do better with utilities. Like anything they can be abused. Probably the biggest problem in Rochester is that the previous Administrator, Mayor, and some council members have used utilities as a method to subsidize certain industries at the cost of everyone else. The most egregious case that I can point to is the sewer subsidies going to luxury housing. This has been well documented and understood, but there hasn’t been the political will to address this. In general the cost of sewer capacity and treatment for every new single family detached home in Rochester (this style of housing is pretty much 100% non-affordable) is $10-$15k. We charge teh developer / homeowner less than $4k. The difference is made up by higher customer charges on everyone, including the very poorest residents of Rochester. The current Council President has said that this is a cost that should be shared. I vehemently disagree. We can have a discussion about what things we should subsidize, but luxury housing should stand on its own.

An additional problem has been consistent sustainable management. Parking is the perfect example. For a long time we did not charge enough for parking to cover the operations, maintenance, and expansion of public parking. Our new administration has addressed this and it sure is unpopular. We are moving towards charging people the actual cost of parking and it is much higher that people had been accustomed to. If you don’t charge fair fees you will go through periods of massive adjustment. A similar issue happened in the water utility where rates were held flat for 17 years and as a result the utility was not raising enough cash to eventually replace assets.

Lastly there is the problem that really is no more. While property taxes are largely tax deductible, utility fees are not. In reality this benefit was largely overstated in the past. Now however, with the percentage of households itemizing on their taxes greatly reduced this advantage has largely been eliminated.

Why create more utilities?

In general I am a huge fan of utilities because laws allow us the flexibility to make them fair. Property taxes are fundamentally unfair and we have little control over how they are applied. We can charge people who consume more water or electric more. Property taxes don’t let us do anything like that. This will be covered in detail in a future post. As we create more utilities we by default decrease our reliance on property taxes which I believe is a good thing. If you believe in equity, utilities are far better than property taxes. That said as noted above, just because you can be fair doesn’t mean you will be.

State law allows us to create a sidewalk utility. I think this would be far better than the current practice. While there is some disagreement about what we could put into a sidewalk utility, it would eliminate the massive bills some properties face when they have sidewalk panes replaces. At a minimum I would like every property to pay a couple bucks a month and have all sidewalk replacements, downtown / St. Marys sidewalk clearing, and ADA transition plan funded by a utility. The utility could also be used to fill in missing sections (in conjunction with property charges for the first time install), plow and maintain trails, and other features which make it safer to walk in Rochester.

State law also allows us to create a lighting utility. This one is pretty simple. Rather than paying for street lighting with property taxes we could again assess all properties a flat fee. While the cost does not change, they are shared more evenly. Further the many, many Rochester properties who do not pay property taxes still would pay their fair share through a fee.

Lastly we are asking the state to allow us to have a street utility fee. This is huge in stemming property tax increases. We have build so many more roads than we can afford. 90% of these are probably money losers for the community when you look at how little property tax is generated along them. Road maintenance will be the number 1 thing raising local property taxes for the next 30 years. If we could fund the major maintenance of local roads with assessments on adjacent property owners, property tax increases could likely be greatly reduced in the future. To put things into perspective, if we built no new roads we would still have to increase property taxes 30-40% just to catch up with today’s costs.

Previous Understanding Rochester Finances Articles:

Next time in Part 3, I will cover the different roles of different local governments.

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