Once a municipality has done its early preparation, they have the tools to develop a preliminary rate structure. This typically involves several steps:
- Converting financial needs into revenue requirements.
- Establishing a preliminary apportionment structure and preliminary rates.
- Learning the community’s priorities.
- Deciding whether to move forward with a fee measure.
Preliminary Revenue Requirement
The programmatic and financial needs established in the homework phase must be converted into an annual revenue need. This can involve amortizing (dividing up) the costs of a large capital program over many future years to estimate an annual cost. The amortized annual cost would be combined with annual operational and regulatory needs, forming the basis of the revenues required. Amortizing a capital improvement program will require a municipality to consider whether it wishes to do one of the following:
- Take on long-term debt (bonds or loans) to raise enough capital to build the needed projects right away.
- Move forward on a pay-as-you-go basis, thereby building projects only as enough revenues are collected to pay for them.
- Or some combination of the two.
It should be noted that if long-term debt is incurred, the fee structure must be in place for at least as long as the debt repayment term. In other words, a fee cannot “sunset” until all debt obligations are done.
Preliminary Apportionment and Rates
Proposition 218 requires that property-related fees “shall not exceed the proportional cost of the service attributable to the parcel.” Therefore, it is essential to develop an apportionment of costs that best reflects the stormwater services provided by the municipality.
Across the U.S., most stormwater fee structures are based on the amount of impervious surface on a parcel, which is proportional to the amount of rainwater that runs off a parcel. This is a straight forward method, although impervious surface data may be difficult or expensive to obtain. Rate-setting consultants have experience working around this issue with sampling and statistical approaches, which can satisfy the Proposition 218 “proportionality” test.
The majority of stormwater rate structures utilize an equivalent residential unit (ERU) as a basis for fees. ERUs estimate the average or median characteristics for a residential property. For stormwater, land use, impervious surface cover, or total size are possible metrics. Once established based on a sample of properties, each parcel in a municipality can be assigned an individual number of ERUs, which is multiplied by the base residential rate to establish the individual fee. With the ERUs assigned and totaled, the revenue requirement is divided by the total number or ERUs to establish the base residential rate.
This is typically adequate for the preliminary rates to be used as part of a community survey. Further refinement of ERU assignments, along with other factors to consider such as green infrastructure incentives or trash and pollutant loading, can be left to the final Fee Report process.
Since a stormwater utility fee will eventually require voter approval, it is essential that the voters’ priorities are factored into the process. This is best done through a rigorous, statistically valid community survey that would test messaging (to help in the community engagement process), program elements (to learn which activities are seen by the community as valuable) as well as rate levels (to learn the willingness to pay).
To be statistically valid with meaningful results, a survey must be crafted and deployed in a manner best left to professionals. Surveys are often done by telephone, but recent telephone habits (no land lines, not answering unknown numbers) are dampening the viability of the phone survey method. Additionally, two factors of a property-related fee ballot measure make a phone survey less preferable: 1) It is conducted through a mail ballot proceeding (NOT as part of a general election cycle), so a mailed survey most resembles the eventual ballot; and 2) It is a vote of property owners (NOT registered voters) many of whom do not reside in the municipality but can be contacted by mail. For these reasons a mail survey may be the best fit.
A properly done survey will reveal key information. Which stormwater program elements are priorities in the community? Which message elements resonate (or do NOT resonate) with the community? What rate levels will be acceptable to a majority of property owners? These will all factor into a draft rate study and final recommendations to the municipality’s governing board.
Go or No-Go
With the community survey completed and preliminary rates established, a municipality’s governing body can make the decision whether or not to move forward with a formal rate study and ballot measure. The willingness-to-pay threshold is a major factor, as it will determine whether sufficient revenue can be raised to meaningfully address the identified needs.
Below are some examples of surveys (both telephone and mail):