Lakeland Sewer System

The City of Lakeland operates the Lakeland Sewer System, which is a utility separate from the City of Lakeland. The City General Fund cannot subsidize or be subsidized by the Lakeland Sewer System. State law also requires that the Lakeland Sewer System be operated at least at a break-even for operational costs, including depreciation. Depreciation is an artificial bookkeeping cost normally used by private enterprise as a means of deferring taxes.

-For a number of years the Lakeland Sewer System used development fees to offset the cost of operating the sewer system, with the concept that existing residents should not pay for new development. This created an “artificially” low rate-not wrong since existing residents should not pay for development, but not reflective of our true costs, since development fees supplemented the sewer system costs.

-This year, we have the full impact of the new sewer treatment plant. The City was required to build a new sewer plant to meet new requirements for treastment of wastewater by 2007. The new treatment plant, due to the increased treatment of wastewater is more expensive to operate and maintain.

In addition to the cost of paying for building and maintaining the plant, the City has to fund “depreciation” of the new plant from current revenues. Unlike a private business where depreciation reduces taxes, the depreciation cost for public agencies is a cost paid for by current user. Depreciation cost is a cost that must be funded by sewer customers based on our current rate structure.

This did not affect us in the past, since development fees covered the depreciation expense.

-In addition, we had almost no development fees during the past two years. Since all development fees can be used as “current revenues”, development fees cushioned the costs of new development for existing users.

-The original intention was to use development fees and revenues from growth of new customers to supplement the payments. However, due to having to fully fund the deprecation cost and the lack of incoming development fees, the “three year rule” (the sewer system cannot have a loss for three years) is applied. While we are still getting experience with the plant, we are forecasting that the plant will cost substantially more per month more to maintain then the previous sewer plant.

-To make matters worse, growth in developments was not as strong as forecast. Sewer plants have “a long tail”-that is each additional user may be added at a minimal cost, while the Lakeland Sewer System receives the full revenue impact, at least up to the point where additional capacity is required. For example, (this is an estimate), an additional user may add $1.00 cost to the City, while the City receives the full $12.00 (or more) fee. A Report in 2003 projected that growth of the sewer system would be sufficient to pay for the sewer plant, with relatively small increases.

The State of Tennessee requires that a Utility which is separate from the City pay for itself (that is it should not subsidize the city, nor may the city subsidize the sewer system). No City revenue of any type can assist-it all has to come from sewer revenues. The Auditor is required to review our accounting each year to insure that the city does not subsidize the sewer system or vice-versa.

The Lakeland Sewer System has a cash balance of approximately $3,000,000. While this cannot be used to directly reduce or maintain rates, it can be used for capital outlay items, so that capital outlay projects and items (such as equipment etc.) can be purchased without affecting rates. The interest on investments also can be used as current revenues. The City Engineer is aggressively reviewing sewer operations to determine what costs can be cut or where capital investment can either reduce expenses or increase efficiencies to reduce future expenses.