Executive Summary
Setting water utility rates that incorporate the recovery of the costs associated with standard operating expenses and debt obligations is essential to ensuring the short-term and longer-term financial stability of the utility. Once these costs are covered, many publicly owned utilities make transfers to the General Fund (a practice known as “sweeping”) ostensibly to help pay for governmental services that do not generate revenue (e.g., roadway maintenance, public safety, etc.) and to help keep property taxes lower. Keeping property taxes low often means higher municipal utility rates to balance the general budget, a habitual practice that burdens utility customers with cross-subsidies and normalizes underinvestment in infrastructure.
These utility fund transfers function like a tax in that revenue generated by a city-owned utility is used to support general government services instead of being reinvested into the utility. Local governments that transfer, or sweep, revenues from publicly owned water utilities to the General Fund to finance unrelated programs and operations are more likely to need state funding or issue additional debt, and in larger amounts, to offset or supplement the financial burden of expenditures on water infrastructure.
This is not only unfair, but it also reduces the total amount of state funding and financial assistance available to other utilities and burdens current and future rate payers with debt — further increasing the likelihood of other publicly owned water utilities’ underinvestment and deferred maintenance of water infrastructure due to insufficient funding.
The revenue sweeps, coupled with reductions in federal funds for water infrastructure projects and in conjunction with the growing number of local government special project funding requests are clear indicators of the risks of undercapitalization of water infrastructure.
Florida law permits a municipality operating a water or sewer utility outside its corporate boundaries to generate additional revenue by selling utility services to customers outside their municipal boundaries. Municipalities are permitted to impose higher rates, fees, and charges on customers receiving service outside of its corporate boundaries as compared to the rates, fees, and charges imposed on consumers within its boundaries.
This is a regressive practice in that it creates a larger burden on lower-income customers than on middle- or higher-income customers.
When the municipal utility sweeps utility profits to the municipality’s General Fund, the customers who live outside the municipality’s boundaries have no vote in how that money is collected or spent. For those customers who do not live in that municipality, this is seen as taxation without representation, as they have no vote on how that money is collected or spent.
To help make sure that drinking and wastewater infrastructure is adequately maintained, and that future demands for water and wastewater service are met, Florida TaxWatch offers the following for consideration by the Florida legislature:
- Introduce legislation like HB 653 (2020) that will require revenue collected by utilities (both government-owned and private-owned) to be utilized only for the benefit of that utility’s operations and infrastructure. This practice is already a requirement for utilities regulated by the Florida Public Service Commission but is not standard practice for non-regulated and government-owned water and wastewater system operators.
- Adjusting purchase accounting to recognize a utility’s full market value is a fundamental aspect of a functional business environment. Establishing rules to recognize a Fair Market Value (FMV) basis for purchase price accounting could pave the way for more consistent investment in Florida’s water and sewer infrastructure. FMV laws allow private companies to offer municipalities fair market value for their utility, as determined by an unbiased appraiser.
- Provide stable mechanisms for capital expenditure (Capex) recovery: Allow regulated utilities to make capital outlays for needed investments and receive timely cost recovery through surcharges, which allows for steady rate increases, rather than rate shocks.
- Keep detailed records to support the rationale for transferring funds from a water and sewer system to the General Fund. Utility revenue must be used for expenses with a direct nexus to the utility system or from funds surplus to the needs of the system.
- Encourage consolidation and regionalization of smaller water and wastewater utilities. This is a proven approach around the country to address the industry’s infrastructure issues, provide economies of scale, improve consistency of service, and reduce non-transparent public subsidies.
- Require government-owned utilities to provide the state government with standardized annual financial reports, include all transfer payments and outstanding debt, would provide a platform for comparison of payment tracking across multiple utilities within the state.
- Introduce utility accountability standards to ensure that all utilities, regardless of ownership type, maintain effective operational and technical practices to protect customers and water utility systems. Consumer protection for this vital public good should be consistently applied; not a patchwork of requirements depending on type of utility ownership.