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Posted on: December 2, 2015

City of Des Moines Proposed Utility Tax - UPDATE City Council meeting postponed until first of year

The City of Des Moines was planning to add a 16% utility tax on water and sewer bills effective January 1, 2016 at its October 29th City Council meeting. Thanks to the utility district representatives and the citizens who sent emails and/or spoke in opposition to the proposed city utility taxes, the City did not pass its ordinances to implement the utility taxes on your water and sewer bills at that meeting.

The City plans to bring this utility tax matter before the City Council again at its December 17th Council meeting. You need to continue to let the City Council know your opinion on this matter. Please plan on attending the next meeting:

City of Des Moines Council Meeting
21630 11th Avenue S., Suite C
Des Moines WA, 98198
December 17, 2015 at 7:00 PM

Below are Highline Water District Responses to the Question and Answers section from the City of Des Moines web page regarding the utility tax. KCWD54 agrees with everything Highline states:

CITY OF DES MOINES WATER & SEWER UTILITY TAX

The City of Des Moines posted on its website a Frequently Asked Questions (FAQ) to address their position on the proposed Water-Sewer Utility Tax. Highline Water District believes it is important for the Citizens and Ratepayers to see both sides of the issue. The following lists the Questions posed by the City, the City’s response and Highline Water District’s response.

1. QUESTION: WHY IS THE CITY OF DES MOINES CONSIDERING A UTILITY TAX ON WATER AND SEWER DISTRICTS?

Des Moines Response: Without new revenues or extreme budget cuts, the City will have spent all of its cash reserves by the middle of 2017 and be unable to pay for all services it is currently providing. Also, residents are asking for expanded police services; which would further increase costs.

Highline Water District Response: The proposed 2016 City Budget presented on October 27, 2015 includes over $3,483,385 in new revenues, including $1,292,100 in one-time revenues from Property Taxes, Sales and B&O Taxes and Development Fees. Yet, the budget increases spending $2,647,030 from current levels and includes only 3 new officers in October 2016 (totaling $85,000). Based on the City’s calculations, the City will run out of cash reserves in 2017 without the additional revenue to support the increased spending, but not if current 2015 spending levels are maintained.

2. QUESTION: DO OTHER CITIES IN WASHINGTON CHARGE A UTILITY TAX ON WATER AND SEWER SERVICES?

Des Moines Response: Yes, many other cities in Washington charge a utility tax on water and sewer services. In fact, residents in many surrounding cities such as Kent (13%), Renton (6.8%), Auburn (7%), Tukwila (10%), etc. all currently pay city utility taxes as part of their utility bill.

Highline Water District Response: It is true many cities tax their OWN water and sewer utilities. Highline Water District is NOT a city-owned utility. Highline Water District is a Title 57 Special Purpose District formed by a vote of the people and owned by the ratepayers in the seven cities it serves. It is our belief that Des Moines will be the first city to tax a Title 57 Water-Sewer Utility in the State of Washington.

3. QUESTION: WHAT % WATER AND SEWER UTILITY TAX DOES THE CITY OF DES MOINES PLAN TO IMPLEMENT?

Des Moines Response: The current proposal sets the water and sewer utility tax at 11%. Originally, City Council was considering establishing the tax at 16%. In response to continued public input and discussion of priorities and ways to solve the budget deficit, City Council’s latest budget proposal permanently eliminates additional employee positions, reduces employee compensation for 2016 by 4.6%, authorizes the sale of surplus land, as well as raises various fees and taxes.

Highline Water District Response: The proposed City budget includes a significant increase in expenditures from current 2015 spending.

4. QUESTION: DOES THE CITY PLAN TO INCREASE THE WATER AND SEWER UTILITY TAX EACH YEAR?

Des Moines Response: No. The city has created a 2015-2020 Financial Plan to bring the city’s financial position back to a sustainable level. This long range plan takes into account long term revenue growth and tight fiscal control over expenditures. If economic conditions remain stable, then the long-term cuts in costs (such as the reduction in full time employees and 2016 compensation cuts) are expected to be adequate without further changes to utility taxes.

Highline Water District Response: The City states it does not plan to increase the utility tax each year. However, nothing prohibits the City from increasing the tax rate in the future. The City Manager advised the District the City intends to increase the tax in future years, and that the utility taxes will become one of the City’s primary revenue sources. That is a why the City did not want to enter into a franchise agreement for a fixed fee.

5. QUESTION: HOW MUCH WILL THE UTILITY TAXES ON WATER AND SEWER DISTRICTS COST THE AVERAGE HOMEOWNER?

Des Moines Response: That depends on the amount of water a homeowner uses. For example, a monthly water bill for $40 may have about $5.30 in utility tax added. A monthly sewer bill of $25 may have about $3.30 of utility tax added.

Highline Water District Response: The estimate appears in the range for a typical homeowner using an average amount of water; however, 11% of $40 equals $4.40. We do not understand the City’s math calculation to arrive at $5.30. With the proposed ordinance, some local businesses may pay tens of thousands of dollars in additional tax each year. This increased expense will affect local prices for goods and services throughout the City further impacting City residents.

6. QUESTION: THE WATER AND SEWER DISTRICT COMMISSIONS SAID THEY MAY SUE THE CITY IF THE WATER/SEWER UTILITY TAX IS IMPLEMENTED, IS THE WATER/SEWER TAX LEGAL?

Des Moines Response: The utility tax is legal. Many cities already tax water and sewer services. The Water and Sewer District Commissioners claim they are exempt, however the Chelan Public Utility District and the City of Wenatchee have already gone to court over this very same issue. The initial legal decision was even appealed and the Court of Appeals still ruled the utility tax to be legal.

Highline Water District Response: The City says the tax is legal but that is not certain. Des Moines will be the first city to test the appellate court ruling on a Title 57 RCW Water-Sewer District. Highline Water District believes the tax is unlawful. For over 30 years, the Washington State Supreme Court ruled that one governmental agency could not tax another governmental agency without EXPRESS statutory authority instituted by the Legislature. Cities have tried for many years to obtain this authority through the Legislature and failed. The Wenatchee v. Chelan County PUD decision was never appealed to the State Supreme Court and we believe this ruling to be an anomaly. One Appellate Court judge in the case stated this taxation issue to be “razor thin, if not silly.”

The District does not take the decision to litigate lightly. We continue to propose a solution to negotiate a franchise with the City to provide a fixed and certain franchise fee to provide mutual consideration for the citizens and ratepayers. The City has denied the request. Why? So the City can increase the tax in future years on the ratepayers to any rate they choose.

We are hopeful to resolve the differences in opinion. However, the District may seek a legal solution to invalidate the unlawful tax.

7. QUESTION: DO ALL THE OTHER UTILITIES THAT OPERATE IN THE CITY PAY A UTILITY TAX?

Des Moines Response: Yes. All the other utility providers pay the utility tax. These other utilities service customers inside and outside of Des Moines and have successfully implemented ways to track each cities’ different utility tax rates.

Highline Water District Response: The City taxes their OWN utilities and those they have express statute authority to tax, like electricity and gas. The City now plans to extend this tax to utilities they do not have express statute authority to tax, namely Water and Sewer Districts. It is our belief the City will be the first in the State to tax a Water/Sewer District.

8. QUESTION: IF THE WATER AND SEWER DISTRICTS SUE THE CITY WILL THE CITIZENS HAVE TO PAY THE LEGAL COSTS FOR BOTH SIDES?

Des Moines Response: Yes. If the Water and Sewer Districts file a law suit in an attempt to change existing law, the customer’s monthly utility payment will go to paying for the utilities’ legal costs to bring the lawsuit. Then the same customer will have to also pay via scarce tax money for the City’s lawyers to defend the City’s right to set the appropriate level of taxation to pay for the services taxpayers demand.

Highline Water District Response: Yes, unfortunately this is true. The City can avert this expense by coming to the table and negotiating a franchise agreement like many other cities across the State have done previously, including the City of Des Moines with Lakehaven Utility District.

9. QUESTION: THE WATER DISTRICT COMMISSIONER SAID IF THE WATER UTILITY TAX WAS IMPLEMENTED THAT THE WATER DISTRICT WILL BILL THE CITY TAXPAYERS FOR THE COST OF FIRE SUPPRESSION FACILITIES. IS THAT LEGAL?

Des Moines Response: Not any more. In 2013 the law was changed to specifically address problems and confusions created by a couple of court cases and to clarify the law. The current law now clearly states public water districts (like Highline Water District and KC Water District #54) can continue to bill water customers the same as they always have. The law acknowledges the sale of water has always served the dual purposes of providing safe drinking water and fire suppression services. Because different governments entered into different agreements before 2013 (such as the City’s franchise agreement with Lakehaven Water/Sewer District), it also provided those agreements are also legal to continue or can be renegotiated IF BOTH PARTIES AGREE. Thus while the PUDs used to, they no longer have the legal right to force cities to use their very limited tax revenue to pay for fire suppression facilities. And since the Des Moines’ citizens receive their fire protection through the Fire District (and not the city) then if the Water PUD wanted to bill an entity, the appropriate entity would be the Fire District, not the City.

Highline Water District Response: This is not true. The District continues to have the authority to bill Des Moines for the District’s costs to provide fire suppression facilities and fire flow capacity in the City under the State Supreme Court’s 2008 Lane v. Seattle decision. The 2013 law did nothing to prohibit that fact.

10. QUESTION: THE CITY HAS ENTERED INTO A FRANCHISE AGREEMENT WITH THE LAKEHAVEN WATER/SEWER DISTRICT. WHY HASN’T THE CITY ENTERED INTO FRANCHISE AGREEMENTS WITH THE OTHER WATER AND SEWER DISTRICTS THAT SERVE THE CITY OF DES MOINES’ CITIZENS?

Des Moines Response: Back in 2011 the City offered all the water and sewer utility districts similar franchise agreements at the same time as the Lakehaven Water/Sewer District. The City signed franchise agreements with Lakehaven Water/Sewer District and KC Water District # 54. The other Water and Sewer Districts did not accept similar agreements.

Highline Water District Response: This statement is not true. Highline Water District was not offered a franchise in 2011. The City did not provide any documents for discussion or review.

11. QUESTION: WHY WOULDN’T REDONDO AREA RESIDENTS HAVE TO PAY THE WATER AND SEWER UTILITY TAX?

Des Moines Response: The franchise agreement with Lakehaven Water/Sewer District precludes the City from taxing their revenues until 7/19/2031 (when the agreement expires). When the agreement expires, water and sewer service to those citizens could also then be taxed.

Highline Water District Response: If the City negotiated with Lakehaven Utility District, why not Highline Water District?

12. QUESTION: WHY WOULDN’T RESIDENTS IN THE CITY WHO HAVE WELLS AND SEPTIC TANKS PAY THE WATER AND SEWER UTILITY TAX?

Des Moines Response: The utility tax applies to revenues generated by persons in the business of selling water and sewer services. Since property owners with wells and septic tanks don’t sell their services to others, they are not subject to the tax.

Highline Water District Response: The tax only applies to the District’s water customers.

13. QUESTION: DOES THE WATER AND SEWER UTILITY TAX FORCE THE WATER AND SEWER DISTRICTS TO CHANGE THEIR BILLING SYSTEMS? DOES THE CHANGE CAUSE A HARDSHIP FOR THE WATER AND SEWER DISTRICTS AND WON’T THIS COST LOTS OF MONEY FOR THEM TO IMPLEMENT? SHOULD THEY BE GIVEN A REASONABLE AMOUNT OF TIME TO UPDATE THEIR BILLING SYSTEM?

Des Moines Response: The utility billing systems already contain the data needed to calculate and remit the utility tax because they need the same information to send their customer’s utility bill. The Water and Sewer Utility Districts have the service address and the amount billed to each address. These are the components of the tax calculation. State law has determined sixty days as reasonable notice to utilities.

The challenge is not about whether Water and Sewer Utility Districts can calculate the tax, they have the data. Rather the issue is how long it will take the Water and Sewer Utility Districts to establish and implement new rates to reflect the higher cost of providing service. The state requires 2 months’ notice; the City has offered to double that to four months and possibly longer if good faith effort has been made and more time is needed.

Highline Water District Response: City staff has no knowledge or understanding of the District’s billing system. They are unaware of the difficulties the water-sewer districts will have billing Des Moines customers for the tax and paying the City. The proposed ordinance still has an effective date of January 1, 2016, and there is no provision in the ordinance for delayed enforcement.

14. QUESTION: THE UTILITY COMMISSIONER’S LETTER SAID THE WATER AND SEWER UTILITY TAX ORDINANCE WAS PUT BEFORE CITY COUNCIL WITH LITTLE NOTICE AND NO PUBLIC INPUT? IS THAT CORRECT?

Des Moines Response: That is not correct. The discussion of various solutions to the City’s budget shortfall, including the option of raising water and sewer utility taxes has been part of public open meetings and discussions since August 8, 2015. The public has attended several meetings to provide input to City Council regarding which services and how much service the citizens want.

Highline Water District Response: Highline Water District was first notified about the tax at a meeting on October 22, 2015; one week prior to the October 29 Council meeting where they intended to pass the tax. The District’s objection is the City staff did not reach out to constructively discuss options to create a “win-win” solution in advance.

15. QUESTION: IF THE CITY PASSES A UTILITY TAX, DOES THAT MEAN MY BILL WILL INCREASE THE SAME % AS THE UTILITY TAX%?

Des Moines Response: It doesn’t have to. The utility tax is only one component of the total rate. The Water and Sewer Utility Districts’ Commissioners are elected officials. The Water and Sewer Utility Districts are holding millions of dollars in cash reserves which can be used to pay for sudden cost changes such as this. The Commissioners can vote to offset some or all of the increased costs using existing, unrestricted cash reserves relating to Des Moines’ ratepayers and then raise the rates slowly over several years.

Highline Water District Response: This statement is a fundamental misunderstanding of Highline Water District’s financial obligations and the City’s response is the opinion of City Staff. Applicable state law (including RCW 57.08.081) requires the District only recover its cost of service to its various customer classes. There is no profit in its rates but only the recovery of actual costs incurred to provide utility service. Any City tax will be a cost of service, which must be recovered from the affected District ratepayers.

Highline Water District serves water in seven cities including Des Moines, Burien, Federal Way, Kent, Normandy Park, SeaTac, Tukwila and portions of unincorporated King County. If the District was to “absorb” the tax without passing it on directly to those affected, the State Auditor would consider it a gifting of public funds. In addition, the District may be exposed to a third party lawsuit by a ratepayer in another City who believes his/her water bill is subsidizing a tax in the City of Des Moines.

When a city decides to construct or pave a new road, the District must upgrade aging pipes at the same time at the District’s sole expense. The City does not provide any financial assistance. The District has over 100M in identified projects in the next 20 years to improve the reliability of its water system. Reserves help mitigate sudden spikes in water rates. We believe this to be the most effective way of maintaining the ratepayer assets in perpetuity without drastically increasing rates to address a specific District or city driven project.

Many cities, like Federal Way and SeaTac, who impose a Utility Tax where they have the statutory authority to implement, have a rebate program to help low income and disabled residents. We recommend the City institute a program to help these people in need.

Des Moines Comment:
Ratepayers can attend the Water and Sewer Utility Districts’ rate setting meetings to provide input on what annual changes to rates are considered fair and reasonable.

Water and Sewer Utility Districts Unrestricted cash balances at the end of 2014 are as follows:

Midway Sewer District* $22,421,369 2014 Increase in cash from 2013: $1,182,003 Highline Water District* $16,659,637 2014 Increase in cash from 2013: $2,384,049

Midway Sewer District annual tax impact at 11% is estimated at $421,000 Highline Water District annual tax impact at 11% is estimated at $449,000

As a point of comparison, the City’s General Fund’s 2014 ending fund balance was not $16 million or $22 million like the Water and Sewer Districts, but rather was only less than $678,000.

* Des Moines ratepayers’ share is approximately 51% of Midway Sewer District and 27% of Highline Water District


Highline Water District Comment:
The District welcomes public comment on its water rates. When proposing a water rate increase, the District has a rate hearing open for public comment and publishes it in advance of the hearing in the local newspaper and on its website. The District had no rate increase in 2015 and is currently not proposing a water rate increase in 2016.

According to the 2014 Annual Survey of Wholesale Customers of Seattle Public Utilities (latest data available), Highline Water District average residential water bill is $37.94/month and the average of all 27 SPU wholesale customers is $39.70/month.

The District invests significant resources into capital improvements to increase the reliability of its water system. The District’s reserves help pay for needed capital projects and stabilize rates. For 2016, the District plans in excess of $7 million in new capital improvements. This approach to improve the water system and maintain reserves helps support the District’s AAA Bond Rating. This high bond rating allows the District to obtain a low-interest revenue bond, if required, to pay for large capital improvement projects, such as water main replacements due to the WSDOT SR-509 Expansion project.

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