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8. City Extension of Services Planr DAVID L. ASTLE WILLIAM E. ASTLE ASTLE AND ASTLE ATTORNEYS AND COUNSELORS AT LAW 705 MAIN STREET KALISPELL, MONTANA 59901 March 14, 1995 Honorable Mayor Doug Rauthe Members of the Kalispell City Council Kalispell City Hall Kalispell, MT 59901 Re: Kalispell/Evergreen Interlocal Agreement Dear Mayor Rauthe and Council Members: PHONE (406) 752.7393 FAX (406) 257.3268 This letter is written to you on behalf of my client, Flathead County Water & Sewer District No. 1 - Evergreen, for your review and action. As you may know CPA Ron Foltz on behalf of Evergreen has been reviewing the rate the City of Kalispell has indicated will be charged Evergreen for treatment of sewage under the terms of the Kalispell/Evergreen Interlocal Agreement. As expressly provided in the Interlocal Agreement it is unequivocally the City's unilateral prerogative and responsibility to annually establish the charge for sewage treatment. This "rate setting" authority is expressly limited, however by the Interlocal Agreement p.7 that the "The charges shall be set by using formulas established within Appendix B (of the Interlocal Agreenent). ;emphasis supplied) CPA Foltz is concerned that the City of Kalispell has, in confirming the charge for the 6 months of 1994 and in setting the proposed rate for 1995, included items outside the scope and purview of the Interlocal Agreement Appendix B formulas. The concern relates to items that under the Appendix B formula are not appropriate direct costs, indirect costs or replacement costs as defined in the Interlocal Agreement. By way of illustration CPA Foltz' analysis indicates that by using the City of Kalispell's implementation of the Appendix B formula the rate per thousand gallons is $1.75 whereas using Evergreen's interpretation of Appendix B v Honorable Mayor Doug Rauthe Members of the Kalispell City Council March 14, 1995 Page 2 formula the rate is $1.49 per thousand gallons. The effect of the $.26 per thousand gallons rate differential on the rate users of Evergreen is as follows: 1994 overcharge $6,000.00 1995 overcharge $29,640.00 1995 - 2015 (balance of the life of the Interlocal Agreement) $1,000,000.00 Ironically to you as the elected officials of the City, under the scenario outlined hereinabove is the proposition that your City of Kalispell resident sewer customers may also be paying a rate that includes these same inappropriate items of cost. In a nutshell certain direct or indirect costs are general fund expenditures owing by all the taxpayers of the City of Kalispell and not the sewer customers in Evergreen or Kalispell. The sewer customers are paying for general fund expenditures in their city sewer user rates. Under the legal constraints of 1-105 such a practice may be tempting to local governments such as the City of Kalispell but blatantly unfair and unlawful to your constituents who in effect are paying the general fund tax obligation under the guise that it is a legitimate cost of the enterprising sewer fund. In addition to the inclusion of direct/indirect costs that are more appropriately general fund obligations of the City is the inclusion of inappropriate replacement cost items. Using what CPA Foltz considered speculative data supporting the City's replacement costs could nonetheless result in an annual overcharge to Kalispell City customers of approximately $77,000.00 per year for the life of the EPA grant 0 3.5 cents per thousand gallons x 531 million gallons annually). If indeed CPA Foltz is correct, this $77,000.00 of annual erroneous replacement cost for 20 years to the Kalispell rate users amounts to approximately $1,500,000.00 and cannot be justified or rationalized from any source whether it be funded from retained earnings, hookup fees, or Kalispell City sewer user fees. Let there be no misunderstanding, Evergreen recognizes clearly that the City of Kalispell has an obligation under its EPA grant to establish a replacement Honorable Mayor Doug Rauthe Members of the Kalispell City Council March 14, 1995 Page 3 reserve account, and that Evergreen has an Interlocal contractual obligation to contribute to the replacement fund, provided however that both the elected City Council and the elected Board of Directors of Evergreen recognize they each have a fiduciary responsibility to its rate users that the replacement costs be appropriate, reasonable and not excessive. It is CPA Foltz' opinion that both Evergreen and Kalispell customers are paying excessive replacement cost, excessive being 50% more than necessary or required, based on the data furnished by management of the City of Kalispell. I would hope and trust that you, the City Council, would in behalf of your constituent sewer customers share the concern of the Evergreen Water and Sewer Board of Directors that these rates may include inappropriate if not illegal cost items. In that CPA Foltz's findings could affect Kalispell sewer customers, Evergreen would propose a process of review less stringent and costly than invoking the arbitration provisions of the Interlocal Agreement. Evergreen would propose that it and the City of Kalispell select a neutral third party, possibly a CPA/Utility Rate Specialist. The CPA/Utility Rate Specialist would have the authority to bind the parties to the appropriate direct, indirect and replacement costs under the formulas set forth in Appendix B of the Kalispell/Evergreen Interlocal Agreement. The decision of the neutral party would be binding on the parties. If the concerns of CPA Foltz are accurate the inappropriate/illegal items in the charges will be eliminated and your constituents, the Kalispell City sewer customers, along with the Evergreen sewer customers will be the benefactors. If, however, the neutral analysis supports the continued inclusion of these suspect cost items in the charges proposed by City Management, then the City and Evergreen Sewer customers can be proud of the reassurance that at minimum their elected officials exercised a reasonable degree of caution in exercising this additional scrutiny of the sewer rate components in behalf of their respective constituents as proposed herein. Honorable Mayor Doug Rauthe Members of the Kalispell City Council March 14, 1995 Page 4 Thanking you in advance for your anticipated cooperation, I remain Very truly yours, WEA/slp cc: glen Neier, City Attorney ruce Williams, City Manager March 6, 1995 To: Ron Foltz From: Amy Robertson RE: Analysis of Evergreen Rate 1). Personnel costs- The personnel paid by the Sewer Fund for the WWTP are direct costs to the City and may be indirect costs to Evergreen. We would not be able to fund the operation of the Plant without the collection of revenue generated by the billing clerks and the meter reader. The Contract with evergreen does not indicate that they pay only for costs related to them. These are indirect costs to them and necessary costs to us. The administrative transfer includes indirect costs of the department to the plant and is not based on the full salaries of these individuals. If I were to pull the portion of salaries for the three individuals in the general fund administrative transfer it would only change the amount of the transfer by $2,110. 2). Billing costs are a necessary expense of running the plant and therefore an indirect cost to Evergreen. 3). I do agree with in the insurance costs- that is an annual payment. 4). Data processing includes a share of the cost of the city's computer system which is used to do payroll, accounts payable and billing for the plant. All computer purchases, including requests by the plant are run through this fund. The computer paper, copiers and copy paper, fax and other office equipment all are budgeted in this fund. The general funds share of data processing costs relates specifically to general government use as well as police and fire. 5). Replacement costs: no where in the ordinance does it say to set aside 1/20 of 1/2 the costs. The ordinance says $31,000 plus 1/20 of the cost of the equipment and appurtenances of the plant. This plant was added on to the old plans, The costs related to the old plant equipment will carry out until 2002. It is the City Council's obligation to set aside a replacement amount and that is what they have done in the budget process. The setting of the budget is a management and administrative process which the Evergreen district has no claim to participate in- See appendix B of Interlocal agreement. CITY OF KALISPELL revised 6 month recap 7/1/94- 12/31/94 Evergreen flows City flows Part 1. WWTP M&.O REPLACEMENT Costs-6 mo. Part II. DEBT SERVICE- 6 mo. Rate per Thousand: Kalispell's M &.O -6 months Replacement costs total * adjusted for 1/2 year insurance 03/06/95 25,844,961 8.8677% 291,452,000 $344,382.00 8.8677% $167,500.00 8.8677% subtotal TOTAL FOR PERIOD TOTAL PAID TO DATE BALANCE DUE 1 $344,382.00 $167 500.00 $511,882.00 $30,538.61 $14,853.32 $45,391.94 $55,530.00 $100,921.94 $85,551.44 $15,370.50 Rate $1.18 0.57 $1.75 per thousand rout Pond l d; c i- z. C=F~ �:+-OHE No. : 40"1 39130 Mar.03 19'95 11:.:,c..,FM P05 b - i SUMMARY OF THE ANALYSIS OF THE CALCULATION OF SEWER CHARGES BY THE CITY OF KALISPELL IN ACCORDANCE WITH THE INTERLOGAL AGREEMENT FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 City of Proposed As PART I - RATE Direct Costs ...................... 4311,286 (1) (042,817) 0268,449 Indirect Costs: Administrative Costs . .............. 33,548 33,540 Data Proocssing Costs ......... I . I .. 6,985 (2) (51905) Central Garage Costs ............... 5,000 5,000 Replacement Costs .................. --t37,�QQ (3) (63500) 1 t14,QQQ_ TOTAL COSTS .................. 523,279 (112,282) 410,097 Evergreen's share (based on sowor flows) .. 8.9077%0 8.86776A Costs Applicable to Evergreen .......... 46,403 (9,957) 36,446 Evergreen's sewer flows (in gallons) ..... __ _25,246.= RATE (Per Thousand Gallons) 11,80 11,43 PART 11 - CAPITALIZATION COSTS • Sewer flows as reported by the City of Kalispell: Total for the City of Kalispell ......... 291,452,000 gallons Evergreen Sewer District ............ 25,844,961 gallons Evergreen's share as a % of the total 8.8677% NOTES: �� (1) Sea attached schedule - page 2. Dft R A (a) Sea attached schedule -page 4. RONALD PAUL FOLTZ CERTIFIED PUBLIC ACCOUNTANT (3) Replacement reserve as calculated by the Clay 0335,000 AdjustMOnt, see attached soheduie - paga 5 t127.0001 As adjusted ..................... Six-month share - one-half ............ I I 1b4j2;0: 1 From : Rona:a Foltz, CPR PHONE Pig. : 40726a1?0 Mar. 03 1995 11:36A;1 r of t- • ANALY$18 OF DIRECT COSTS INCLUDED SY THE CITY OF KALISPELL IN THE CALCULATION OF SEWER CHARGES FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 Proposed Adjusted Personal Services: Enginber ...... . .......... 76.0% $10,714 06,823 (1l 1$6.823) WWTP Manager ............100.0% 31,000 1%540 016,549 Chief Oparetar ............ . Assistant Engineer ........... 20.0% 01260 4,209 (1) (4,209) Adm(nistrative Coordinator ... 26.0% 5,875 31180 0) (3,1961 Clerk It ....... . ..... . . ... 25.0% 4,333 1,948 (1) 0,948) Billing Clark ... , ..... , ..... 50.09E 8,881 5,868 (21 15,868) Motor Reader ............. 25.0% 6,224 3,011 (2) 13,611) Operator/Maintenance ........ A00.0% 99,880 $7,145 57,146 Laboratory Technician ........100.0% 23,649 14,955 14,966 FICA and Medicare Taxes ...... 18,259 Workers Componsatien ... • • ... 16,068 Unemployment Taxes ......... 744 Other Adjustments ........... 11,241) (1,241) Merit Reserve ............. .Q45 _ Sub -total ................ 231,208 112,073 (24,055) 87,418 • ��• t -9-MEEK-wT61,14 Total ................. 241,208 118,977 (24,655) 94,322 Retirement Contribution ....... 14,240 31619 (3) (1,164) 4,455 Health Insurance 33,828 16.114 (3) (.131) 11,975 Total Personal Services 289.276 139,706 _�, 128.9 11) 11 Q,7 izT 5 Matoriala and Services: Contract Services ........... 130,000 37,850 37,860 Electricity ................. 100,000 $0,983 60,983 Natural Gas ............... 26,000 81589 8,689 Property & Liability Ins ........ 23,500 22,793 (4) c!� (11,396) 11,397 Chlorine and Chemicals ........ 91500 4,214 -- 4,214 Repair and Maintenance ....... 8,650 24,582 24,662 Billing Costs ............... 1,700 2,186(2) (2,186) Postage .................. 200 284 (2) (284) All tither ................ 27,4 0 10,,QgQ 10 029 Total Materials and Services .... JZ%Q04 171, a„S"Q 1 &601 15102A Total Direct Costs . , .......... 1815, 7 4311.266 (�42.8171 _4268,449 NOTES: (1) These employees are employees of the Public Works department of the General Fund which is included in the administrative costs allocated to the Treatment F lent, It does not seem reasonable to allocate the same costs directly and indirectly to the treatment plan. (2) These personnel and costs relate to billing operations, not related to the treatment plant operation. (3) These payroll related costs are adjusted by the, porcentage adjustment to personnel coats. (4) It appears that this is the full -year cost of insurance, the adjustment is to reduce the cost by 50% to only cover the six-month period used to determine the rate. 2 P?--'nj Rcnalc FDitz, CPA PHONE NO. : 4C72b9133 Mar.03 1995 :1:34AM Pe4 ANALYSIS OF INDIRECT ADMINTRATIVE COSTS INCLUDED BY THE CITY OF KALISPELL IN THE CALCULATION OF SEWEK CHARGES The City of Kalispell allocates the following administrative costs to other funds: 1996 City D$oeriment Rudoat General Government ............... 4109,177 NPRELIMH " " r% City Menagor ................... 97,939 Muyor/Clty Council 90,656 FinBnce Department ............... 122,4$3 City Attorney 99 717 ROI ALA PAUL FOLT7. Public Works Department......... , 128,232 CERTIFIED PUBLIC ACCOUNTANT City Hail Maintenance .............. 77.t37Q,- Total...................... These costs are allocated to seleoted other City funds or absorbed by the General Fund based on total costa as follows; Per Cant 1995 of Total Allocated PAr Cent Fund Budget B GENERAL FUND Allocated Departments ............ 0705,854 Other Departments ............... 3.564.$$0 Total ........ , . . SPECIAL REVENUE FUNDS Airport...................... Tax Increment .................. Lighting Maintence ............... Decorative Light Malntence ......... Special Street Malntence ........... UDAG Loan ... ......... . CAPITAL PROJECT FUNDS Sidewalk & Curb Construction ....... ENTERPRISE FUNDS Water .................. Sewer Operating ................ Wastewater Treatment ............ StormSewer ............... . . . Ambulance •.. .............. Solid Waste Operating ............ ALL OTHER FUNDS 4,350,334 27.86% $342,381 43.57% 8,401 0.05% 506 0.06% 2,914,452 18-ee% 172,511 21,95% 77.066 0.49% 4,516 0.57% 8,174 0.05% 1,074 0.14% 301,878 1.93% 14,410 1.83% 422,081 2.70% 28,518 3.83% ,o. VOA "t •a� 1,123,028 7.19% 81,500 7.83% 437,434 2,80% 30,118 3.83% 1,546,128 9,90% 67,097 8.54°% 313,913 2.01 % 14,708 1.87% 389,629 2.49% 18,517 2.36% 330,713 3,31L740 2.12% 21, 28,000 3,56% f M * � � R/ ��., Ia• Ili 11�'. The allocation of administrative costs to sclecmd funds based on total costs Is a normal method of cost allocation. The variances are probably not Significant because of the following reasons: - The per cent of total budget includes the administrative cost allocation. Allocated amounts were based on prelminary budgets. All funds are included, even funds whose costs are allocated to other funds. - Inclusion of the Public Works department In administrative costa. 3 F,:,n : Rene i c Foltz. CPA PHONE r!o.-:07283:33 Mar. d3 1995 1.1; 33AM P03 A-14ALYSIS OF OTHER ALLOCATED COSTS INCLUDED BY THE CITY OF KALISP'ELL IN THE CALCULATION OF SEWER CHARGES FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 DATA PROCESSING CENTRAL 3A—AAGE- 1095 Per gent 1095 Per Cont udaet of l 0Vj22t of.,j GENERAL FUND 031,197 38.E5% 105,981 43.09% Cash Carryover credited to the General Fund ........ . .... 14,461 16.152% SPECIAL REVENUE FUNDS Airport ..................... 300 0.349E Special Street Maintanoo ......... 1,572 1.8095 55,00/�0 22.36°hr UDAG Loan . ...... . . . . . . . . . . 1,350 1,54% 11000 0.41% ENTERPRISE FUNDS Water .... . .. . ............. 9,529 10.80% 10,000 4.07% Sewor Operating . . . ..... . .... . 9,528 10.89% 10,000 4.07*A Wastewater Treatment Plant ...... 91530 10.89% 10,000 4.07% Storm Sewer .. . . ... . ........ 1,048 1.20% Ambulance .. ........ I ... 5,000 5.71 cA 6,000 2.44% Solid Waste Operations .......... __ 4.000 4.52%. 42,00 1 a., k1h Total .................... 87,515 �40.80°%024 .881 , .0096 Unfunded Depreclation .......... 18,315 Total... ................. A.1,2jiggo DATA PROCESSING Tho City of Kalispell allocates data processinq costs to other funds as shown above. Allocated costs Include capital outlay of $33,100 and debt service of 026,390. This method of allocation is unusual. An internal service fund Is supposed to be operated in a manner to recover all of its costs (including depreciation) as if it were an outside service organization. The inclusion of capital outlay and the principal payment portion of debt service does not meet this requirement, but probably approximates, in the long run, the ommission of depreciation which should be included. Further, the portion allocated to the ganural fund Is re -allocated to the other funds as part of administrative costs. Based on my understanding of the operations of the treatment plant, none of these costs should be allocated to the treatment plant, which pays for its share through the administrative cost allocation. Data processing billing costs should not be allocated to the treatment plant. CENTRAL GARAGE The City of Kalispell allocates central garage costs to other funds as shown above. The allocation of Central Garage costs are based on City management estimates. The reasonableness of this allocation to the treatment plant would depend on facts and circumstances. The treatment plant uses these services for its sludge hauling truck and there appears to be no reason to question this allocation. 4 ""-,DM • Ronald i r�ltZ. iwRZ PPOt,C- No. : 4072'9913o Mar.03 1995 11:.33AM P02 ANALYSIS OF REPLACEMENT COSTS INCLUDED BY THE C17-Y OF KALISPELL IN THE CALCULATION OF SEWER CHARGES FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 General guilding Construction ... . Sltework................ Yard Piping .. ............ . Miscellaneous Metals ........ . Proeeas Piping .............. t Ieotrloal ... . Mechanical HVAC and Plu-nbing . Painting.................. Sp®cioltios ................ Miscellaneous Pr®peas Equipment Mobilletion, Bonds ar►d Insurance Process Equipment and Materials. Aluminum Nandralls ......... Aluminum Domes (not received) . All Other Equipment ........ . Coats from InEIGM In Construction City's Proposed As Contraot Celcutatian A t m Adl=,i iti 190,000 Total 28,899.000 5,778,500 Divided by 20 years .......... 288,925 Added, apparently from page 12 of the interlocal agreement .... Added, balance forward, annual amount from first plant ....... Other adjustment and rounding ... Repacernont reserve reported as depreciation in the 1095 budget . 31,000 (4) 47,000 (5) •r irr it ir• • rrr 0250,000 :rr 0+• 600,000 it r+r r Ur1 i irr ri+ r++ (1,610,000) 4,168,500 (80,500) 205,425 (31,000) (47, 000) (31,225) t41 31,50 4t 25f LW 444401 • + • + r • r : ryi�r (1) Yard piping appoars to Include an extension of the sewer lines. These Costs, which ounsist primarily of footings, foundation drains, trenching, etc., do not appear to be equipment that would be replaced in 20 years. (2) Miscellaneous metals Include metal stairs, walk ways, drains, weirs, etc, and does not appear to be equipment that would be replaced in 20 years. It is, essentially, part of the building. (3) Based on dlseUsslenS with the District's engineer, a fair estimate of the arru;unt of costs Included in these categories that is equipment that would be replaced in 20 years would be fifty percent. (4) The" two adjustments appear to be offsetting. (5) The District's responsibility Is to provide Its share of the replacement reserve required for the new treatment plant. The equipment in the old treatment plant should have already been replaced. PRELIMINARY RONALD PAUL FOLTZ CERTIFIED pUSUC ACCOUNTANT SECTION 7. WASTEWATER FACILITIES REPLACEMENT FUND, A reserve fund called the "Wastewater Facilities Replace- ment Fund" is hereby established within the wastewater utility fund, as an interest bearing account, for the purpose of providing suffi- cient funds to be expended for obtaining and installing equipment, accessories and appurte*nance6 during the useful life (20 years) of the wastewater treatment facilities necessary to maintain the capa- city and performance for which such facilities are designed and con- structed. A deposit of $ 31,000-00 — per year, beginning on July 1, 1982, shall be made into the said reserve fund and an additional deposit in the amount of ond-twentieth (1/20) of the cost of equip- ment, accessories and appurtenances added to the Wastewater Treatment Plant shall be made each y6ar beginning on the first July I date fol- lowing the completion of the addition. The amount added to the fund shall be reduced after the twentieth ( * 20th) payment for each specific piece of equipment, accessory or appurtenance.