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UG-BPU meetingAt a joint meeting of the Unified Government and Board of Public Utilities, an increase in the UG's PILOT fee on BPU bills was discussed. (Staff photo)
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UG-BPU meetingListening to speakers at the UG-BPU meeting July 25 were, left to right, BPU Member Bob Milan, UG Commissioner Jim Walters and UG Commissioner Gayle Townsend. (Staff photo)
A Unified Government proposal to increase the PILOT fee on Board of Public Utilities customer bills presents a challenge, BPU officials said Thursday night.
The joint UG Commission – BPU meeting was held in the Reardon Center.
Don Gray, BPU general manager, said the BPU anticipates having another rate hearing where it may ask for an increase in rates within the next six months. A number of groups may challenge that, and the increase on fees from the UG on BPU bills adds to the total possible increase, according to BPU officials.
The BPU also faces questions about PILOT fees from bond rating agencies, he said.
Gray said he realized that the UG had to make tough decisions, and the BPU has to make tough challenging decisions as well. The BPU is facing environmental regulations that may be expensive to implement.
Gray suggested working on a timeline for the reduction of the PILOT fee. Whenever the BPU sells industrial revenue bonds for the utility, the PILOT fee is one of the issues that is brought up by bond raters, he said. He added he always tries to paint a positive picture of a turnaround coming in the future.
The payment-in-lieu-of-taxes fee is placed by the UG on BPU bills. While maintaining a flat property tax rate, the UG administrator’s proposed budget would increase the PILOT fee by 1 percent this year, from 10.9 percent to 11.9 percent. That amount would raise about $3 million.
Last year, the UG Commission had proposed to do away with the PILOT fee, and change to a flat rate transferring funding from the BPU to the UG. UG Administrator Dennis Hays said Thursday the UG is still contemplating reducing the PILOT fee in the future.
While there was no vote on the PILOT fee at the July 25 meeting, some UG commissioners seemed to be leaning toward raising the PILOT fee 1 percent this year and at the same time studying ways to reduce costs for the future. Other UG commissioners did not make a statement about the way they will vote on the issue.
According to Hays, the staff during the past year worked on a plan to reduce the PILOT fee and replace it with another type of structure, but encountered many challenges.
UG officials on Thursday told BPU members that the UG is about a year or two away from anticipated increased revenues. There are increased property tax revenues anticipated next year from the Cerner development and some apartment projects. The STAR bonds at Village West are expected to be paid off in a few years.
Mayor Mark Holland cited a loss in state revenues of around $6.5 million a year, resulting from the elimination of the machinery and equipment tax, as one of the factors affecting the UG’s current situation.
BPU board member Bob Milan suggested the board should sit down and think about what it could do to reduce costs. He also mentioned future changes coming because of environmental regulations.
Holland and UG Commissioner Hal Walker also discussed an earlier idea of combining some BPU and UG functions, such as human resources, fleet management and purchasing, to achieve efficiencies. There were earlier meetings between the UG and BPU on efficiencies.
“There are ways to do that without layoffs,” Holland said. That would include capitalizing on attrition and retirements, he added.
“I think we need to be aggressive,” Holland said. “If we’re not aggressive about these issues, we’re not going to see those $13 million.”
While the idea of receiving $13 million in increased revenues from the STAR bond retirement in a few years sounds good, a 3 percent cost-of-living increase for employees, at $5 million, over the next three years would spend it all, Holland said. There is opportunity for significant structural changes, he said. “If we continue business as usual we’re going to be in trouble,” he said.
UG Commissioner Brian McKiernan said he would like to review the relationship between the UG and BPU, and the long-term strategy.
BPU President David Alvey said the consensus on the BPU board seemed to be that there are opportunities to save money, including combining services. But what was lacking were a structure by which BPU and UG seriously assess what those areas were and create a timeline and a set of outcomes they are looking for. He talked about a small steering committee of a few board members from each group that could work out these questions.
The BPU has planned its strategic planning meeting for 4 p.m. Sept. 12 to discuss its future options.
Milan said the proposed 1 percent PILOT fee would be added to a potential 3 to 4 percent BPU rate increase sometime in the next two years.
Walker said the UG had a 25-year-plus addiction to the BPU, which started with free electrical service for the city. “Over the years we have not made a serious attempt to curb that addiction,” he said.
Walker said a commitment had to be made to reduce the PILOT, possibly for the budget that will be considered a year from now. He said he is against any PILOT fee over 8 percent.
BPU board member Jeff Bryant said the city and BPU need to look at the big picture to see the effect they’re having on residents, and need to look at ways to lower the total bills. He said raising the PILOT 1 percent was probably the best vehicle for a short-term change because a lot of businesses look at the property tax rate first when they are considering locating to a community.
BPU board member Tom Groneman noted the national average rate for PILOT fees is 5 to 7 percent, so the PILOT fee on BPU bills is extremely high.
“When we all agreed we would not raise the mill levy, that left us with very few choices,” said UG Commissioner Tarence Maddox. If it has to be raised 1 percent, it will create problems for some residents, he said. He wanted to know if there was some mechanism for helping customers who might be struggling with paying the 1 percent increase.
UG Commissioner Gayle Townsend asked for an explanation of the difficulties encountered in switching from a PILOT fee to a flat rate from BPU to the UG.
Alvey said when it was first proposed, it caught the BPU off guard and there wasn’t a chance to assess how it would affect operations and finances. At first, the BPU saw obvious problems, and when it looked deeper, it saw serious problems, he said. Municipal utilities exist to be a source of revenue and to make sure all customers are treated equally, he said. The BPU has to maintain its own affairs and it works well that way, he said.
Gray said there were concerns about how to target a fixed fee among the four classes of energy customers. The classes are residential, small commercial, large commercial and industrial. There would be questions about residents paying a fixed fee, or lower usage customers paying the same fixed fee as those who use more energy.
“How do you apply a fixed fee to everyone?” he asked. “That was the key.”
Even though it would be a UG fee on the BPU bill, it would be included on the bill with the BPU charges, and the BPU would have to go through a rate hearing process to explain any changes that were made, he said. The four BPU rate classes have different rates. It could not be put in the base rate because it has to be separated out, he said. Other utilities do not use a fixed fee, he said. The BPU would still continue to look at the goal, he said.
The UG could set a fixed fee, but BPU would still look at applying it as a variable rate in order to make it fair to the customers, he said. If the UG target goal is $30 million, and BPU is projecting $28 million, then it would have to increase the rate to meet the ceiling of $30 million, he said.
The UG budget is scheduled to be adopted at 7 p.m. Aug. 1. The last public hearing before the budget adoption, with a time for public comments, is scheduled at 5 p.m. Monday, July 29, in the Commission Chambers, City Hall, lobby level, 701 N. 7th St.