At its regular meeting Monday, May 2, Council voted 5-2 to introduce an ordinance at its next meeting, Monday, May 16, that will double its old water commodity rate from $2.36 per 1,000 gallons to $4.72 and increase its sanitary sewer rate 75¢, from $2.63 per 1,000 gallons to $3.38, about a 29 percent jump.

If adopted at the next meeting, the increases will take effect for July bills.

Don Gustafson and Paul Grondin voted against the new rates, wanting more justification for them and more consideration of cost-cutting measures that could keep rates lower.

“I don’t know what’s occurred here,” said Mr. Gustafson toward the end of Monday’s meeting, wondering how the utilities funds could have been depleted so badly, especially since things seemed all right when Council adopted its new budget in December. “We don’t have a handle on what’s going on.”

Indeed. The city’s elected officials have not heeded, or failed to understand, its auditors’ warnings for three years, or have just not read the auditing reports, and while the city’s costs to treat water and sewerage have been rising, the city has not increased its rates to customers since 1995.

Just three weeks ago, on April 18, the city’s Utility Committee was debating rate increases of $1 for water and 30¢ for sewer. But at a special meeting last Thursday, April 28, with its auditor, Rehman Robson Certified Public Accountants of Cheboygan, Council was told to wake up and address a serious shortfall.

At Monday’s meeting, staff and council members stopped short of outright finger-pointing, but there was no clear consensus as to how things got to this point. Ultimately, the responsibility rests with the city council, which oversees the administrators.

“The council has been made aware of these issues,” City Manager Pete Heckman told Council Monday, “but we’ve been dragging our feet” on raising rates.

“It’s up to you and (City Treasurer) Gene (Elmer) to tell us how bad things get,” said Councilman Ollie Boynton later in the meeting. Afterward, however, he added that he didn’t feel like the auditors, with whom the city has worked since 2001, made it clear a year ago the urgency of the situation or how Council could have headed this off.

“I don’t think they came across strongly enough,” he said.

Mr. Boynton had put forth the most dramatic proposal of the night, introducing a motion that would create a clearer separation of the water and sewer fund from the city’s general fund, require council approval for any transfers from the water and sewer fund, and require the city to produce financial statements of those accounts for council members each third-Monday meeting.

“We would at least be aware of what’s going on,” he said.

While the motion died for lack of a second, some council members suggested they might be interested if they had more to consider it.

Offering a different perspective, Mr. Heckman introduced the idea of having an water and sewer authority with representatives from St. Ignace and Moran Townships, which he said could reduce the politics in the decision making. Such an authority would hire water and sewer employees and would no longer be considered a department of the city.

There is no doubt that some kind of water and sewer rate hike will be imposed; the questions is how much. Council also wants to consider budget cuts on a list created by Mr. Heckman which includes pay freezes for administrators and temporary employees, modest staff cuts, eliminating street paving for this year, eliminating fluoride in the water, and furloughs which would have city employees bank four hours of every 80-hour pay period toward retirement.

“We can’t raise rates without addressing expenses,” said Mr. Gustafson. “We’re selling less water. We need to look at that total package. What cuts do we need to make to get to what level?”

“It comes down to the fact that we need cuts, but everyone says don’t cut me,” said Mr. Heckman. “We have some severe cash-flow issues and this seems to be the only way to deal with it.” He added that any cuts couldn’t be put in an ordinance, anyway.

Department of Public Works Manager Les Therrian said that his staff could not afford a cut.

Auditor Annette Eustace, who addressed Council last Thursday, was clear in her report, however, what the bottom line is.

“You have to increase revenue or decrease expenses,” she said.

Mr. Elmer said Monday that she suggested privately to him that tripling the commodity water rate should be considered if the city really wants to get back on its feet this year.

Even with such an increase, rates would be competitive with other northern Michigan communities, according to a survey of rates in 12 areas done by the city.

There’s been no discussion of raising the readiness-to-serve rate that residents and businesses pay, which is a flat $16 a month for water and $15 for sewer. Funds raised from that rate are used to reduce the bond debt.

That is because Council sees usage as the problem. A slowing economy has caused a drop in water usage from 139 million gallons in 2001 to 132 million gallons in 2003 to 123 million gallons in 2004. Sewer usage has dropped from 108 million in 2001 to 101 million in 2003 to 91 million last year.

The smaller rate increases of $1 and 30¢ discussed by the Utilities Committee wouldn’t get the city above the break-even mark until 2008, or address the bond reserve situation. The larger increase of $2.36 and 75¢ could solve these problems by late this year, Mr. Heckman calculated. He said the city could consider lowering rates somewhat after the deficit is made up.

His projections, however, are based on usage that approximates the 2003 figures (130 million for water, 101 million for sewer), then continue to grow. Adding St. Ignace Township residents and the new casino as sewer customers this summer and the new casino as a water customer next spring will help build those numbers.

Mr. Heckman also recommended to council that it consider a one-year, one-mill levy to be dedicated to street funds. The city currently levies 15.26 mills, plus one mill for recreation, short of the allowable 18 mills it can levy. A one-mill increase would add about $75,000 to the city’s coffers. On the other hand, he said, if council passes the higher rate increases, the city may be able to avoid the millage levy.

The city normally experiences an April income slowdown anyway, and coupled with the problems already in place, forced the city to cash in a $250,000 CD for to pay the bills and meet the payroll.

City officials contend they didn’t know they had to keep a bond reserve fund.

“We refinanced a water bond in 2002 because our bond council (Miller-Canfield of Detroit) said the rates were good and we’d save $350,000 to $400,000,” said Mr. Heckman. “But one big thing we weren’t advised of, and the auditors even missed it the first year, is that we had to have a bond reserve of $300,000 to use for our last payment. We’re supposed to have that set aside for restricted cash that can’t be used for operating expenses.”

In the auditors’ prior year comments and recommendations, they stated several concerns they had noted about the city’s financial management from 2001 through 2004. The statement said that last year, during the audit for 2003, it noted negative cash balances resulting from costs exceeding revenues in the water and sewer funds, which were classified as liabilities to note that cash was, in effect, owed back to other funds. They said they encouraged the city to monitor those funds closely in 2004 to ensure positive cash balances, but that the city was unsuccessful.

“Although the city has made strides to improve the cash status internally by improving systems and internal controls,” the statement said, “their efforts have not resulted in an improved cash position.”

In summarizing the current situation, the statement read, in part, “Because the City has most of its cash in pooled accounts, when [water, sewer, and other] funds spend more than the revenue generated, they, in effect, used cash of other funds to sustain operations. Each time a City fund falls to a negative cash position, City Council should be informed and should approve and/or authorize a transfer to the effected fund to cover the negative cash.

“Using restricted cash for operations is a bond compliance violation. This compliance violation may result in jeopardizing the City’s ability to obtain bond financing in the future.”

Mr. Heckman said the last sentence is a warning only, that the city has not tapped into its bond reserve fund of $300,000.

Other Council Business

The utility and audit issues put some other major actions in the background. A 15-year intermodal passenger facility lease agreed upon between the city and Indian Trails to operate a new bus station at the southwest corner of Church Street and Business Loop I-75 was approved.

The city is the title holder, but the project is funded and will be built by the Michigan Department of Transportation. The land is tax-exempt, but if for any legal reason the leased premises should be taxable, Indian Trails would be responsible for payment.

The lease will be subject to terms and conditions of a subsequent agreement the city is working on with the MDOT. “This agreement has been in the works for more than a year,” said Mr. Heckman. “MDOT wanted to make sure everyone was happy with it. The city isn’t sticking its neck out here.”

Council also approved a lease with the World Ocean School of Maine to moor its two-masted schooner Roseway at Dock No. 2, where the Maple currently sits next to the St. Ignace Marina. The school had reached an agreement last month with St. Ignace Hospitality Growth, led by motel owner and St. Ignace Visitors Bureau President David Swope, to bring the tall ship to St. Ignace in late May or early June and conduct day sails this summer and early fall.

The school will pay the city $2,000 a month to use the space. The Maple is expected to vacate the space later this month.