Ask the Expert: Advantages of Incremental Rate Increases

by Brad Baird, P.E., President

One sure way to get citizens to pay attention to the local government is to suggest a water or sewer rate increase. Rate increases are typically the most difficult part of the funding process for infrastructure projects. Many cities do not raise rates every year, which means that rates are usually below what is required to keep the water or sewer department “running in the black.” Thus, not only is a rate increase needed to keep the water or sewer department financially healthy, but it is also necessary to fund improvements to water and sewer infrastructure. Because this kind of book-balancing rate adjustment often results in doubled rates, rate increases are never an easy sell and can cause considerable grief to municipal leaders charged with managing city infrastructure.

One way to combat the challenges posed by large, one-time rate increases is to consider an incremental rate increase every year. Everyone understands that the cost of gasoline, milk, bread, etc., goes up with inflation every year. Why not raise water and sewer rates every year to keep pace with inflation? Inflation usually increases prices by approximately 3 to 4 percent every year, but recently, yearly inflation has taken costs even higher. By increasing rates every year, municipal leaders can help their infrastructure budgets keep up with increased costs for materials and services, employee wages, benefits, and other expenses. Incremental rate increases also allow municipalities to maintain a healthy reserve to cope with unforeseen emergency situations, such as when a pump explodes and needs replacement, threatening to put a city’s water or sewer department in the red.

So, what would this financing scenario look like when implemented? Say your water rate is $25 per month for the base rate, and you decided to implement an annual rate increase tied to inflation. Assume that annual increase due to inflation is 4 percent. Given that 4 percent of $25 is $1, your new water rate for the next year would be $26 per month. If users understood that this small increase in rates was to occur every year and works out to a $1 per month increase (only a $12 increase per year), then it would be much easier for users to accept the rate increase, as the change is gradual and anticipated. This scenario for rate increases is far preferred by users to waiting 6 years and then raising rates by about $6 per month all at once, costing users an extra $72 over the course of the year. Plus, municipalities would receive more income over the same period by incrementally raising rates.

To summarize, the advantages of incremental annual rate increases are as follows:

• Much more acceptable to users than large, one-time increases
• Far easier to convince users of the necessity of rate increases
• Can be tied to inflation
• Provides more income to the water and sewer departments
• Keeps the public works departments financially healthy
• Helps to reduce or even avoid large, one-time rate increases to fund improvements

Please contact me at (541) 963-8309 or via email at bbaird@andersonperry.com to further develop the case for incremental user rate increases for your municipality and its specific needs.