Commissioner Briefing: SDC,FFBC, Extensions, & Unserved & Underserved

Communities December 21, 2016

In 1998 the General Assembly passed HB824 which transferred substantially all subdivision-sized line construction responsibility from WSSC to developers.

Why the Change?

◦ General Bonds were over half of all outstanding WSSC debt

◦ WSSC Debt Service was 49% of all WSSC expenses

◦ Counties were concerned with the potential impact of the level of outstanding, overlapping debt on their credit rating

◦ The cost of the water & sewer connection was not consistently reflected in the market price of a residence for developer built connections vs. WSSC supplied connections

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Applications for projects submitted prior to the effective date of HB824 could still be constructed by WSSC if the applicant so desired.

◦ These projects would be the only ones the 2017 FFBC charges would apply to

The transition from WSSC constructed extensions had a significant impact on the costs of the smaller projects needed for health hazard and single residential dwellings.

◦ Prior to HB824, the cost of these few, smaller projects were offset by the many, larger developer projects that WSSC constructed.

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MD Code Ann. Public Utilities Article 25 §§401-405.

Prior to 1993 the cost of growth related major water & sewer extensions (15” Sewer & 16” water) and related facilities (pumping stations & treatment facilities) was funded by water & sewer rates

The General Assembly enacted House Bill 883 in 1993, establishing a fixture-based System Development Charge (SDC) during its 1993 Session. ◦ The original legislation permitted no

exemptions Commission adopted a fixture based charge with

a maximum rate of $160 per fixture unit in 1995 (currently $203 per fixture for non residential).

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HB832 Approved in 1998:◦ Changed the SDC for residential construction from a fixture based charge to one based on the number of toilets◦ Increased SDC rates for new development. This is the last time the charge was increased.◦ Revised the rate structure for residential◦ Authorized the County Councils to create exemptions to the SDC

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1) “Growth pays for growth”2) The SDC charge is levied to new applicants for new or

expanded WSSC service. a) A first time connection of a property to the WSSC water or sewer

system, including: i) A direct connection of an improvement or building; orii) A connection of the improvement or building through an existing on-site system; or

b) A new connection or increased water meter size for a property previously or currently served by the WSSC if the new connection or increased meter size is needed because of a change in the use of the property or an increase in demand for service at the property.

1) SDC funds can only be used to pay for new water & sewage treatment, water transmission, and sewage collection facilities which were constructed after July 1, 1993, or to amortize any bond that is issued in connection with these new facilities.

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5) SDC is a dedicated stream of revenues used to accommodate increased system demand from new development by funding capacity improvements that would otherwise be funded by existing water & sewer ratepayers.

6) SDC funds cannot be used for enhancements, maintenance, or environmental regulation on existing or new system

a) These costs are borne equally by all ratepayers

7) SDC revenues are accounted for separately, apart from rate revenues.

8) Commission required to issue annual SDC report.a) Typically issued in February of the subsequent year.

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Rates are set annually by County Councils as part of approving WSSC’s budget.

State law allows the Counties to raise the maximum each year in an amount equal to the rate of inflation.

The maximum allowable charge has been increased each year since 1999 without changing the actual rates charged.

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Per WSSC Resolution 2012-1959, the following are the available SDC exemptions:

1. Public sponsored or Affordable housing

2. Revitalization projects

3. Elderly housing

4. Properties used for manufacturing or biotechnology research and development

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$1 MM per year

$500,000 per County

$50,000 maximum per project in Montgomery County.

No cap per project in Prince George’s County

Amounts remaining in the caps at the end of the year must be rolled over to the next fiscal year and allocated to properties in the same jurisdiction along with the annual allocation amount for properties in that jurisdiction.

◦ FY16 Carryforward:

Prince George’s: $2.4 MM

Montgomery: $5.8 MM

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Credits against SDC for developers who construct a major project in the Commission’s CIP or includes a water or sewer main that:

◦ Provides only local service

◦ Is 2,000 feet or less

◦ Has a diameter of 15 inches or more for a sewer main or 16 inches or more for a water main, and

◦ Is built to avoid unnecessary and uneconomical duplication when a major project is constructed

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SDC Revenues collected each year are used to ◦ pay eligible project costs on a pay-as-you go basis

in the Water Supply Bond Fund and Sewer Disposal Bond Fund

◦ Pay debt service on bonds issued in FY97-98 to pay SDC related projects. These bonds were fully amortized in FY16

◦ In FY16 WSSC Collected $27.9 Million in SDC revenues and transferred $8.4 Million to the Water Supply Bond Fund and Sewer Disposal Bond Fund

◦ Because SDC Capital expenditures are projected to exceed revenues collected the Commission may have to authorize an SDC supported general bond in FY17 or FY18

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Issue most recently reviewed by Bi-County Infrastructure Financing Working Group in 2013-14

Scope of Subgroup Efforts

◦ Document current conditions in each County

◦ Evaluate pros/cons of current system using “model communities” from each County

◦ Evaluation of financing criteria and alternatives

◦ Policy challenges/deficiencies of current system

◦ “Missing piece” – financing scheme/funds to implement

◦ Identify a roadmap to an “improved” system - Sub-district concept

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1 3 5 7 9 11 13

<-100 ft->

2 4 6 8 10 12 14

NEW SEWER EXTENSION

E

X

I

S

T

I

N

G

S

E

W

E

R

M

A

I

N

15 (failed

septic

system)

HEALTH HAZARD SCENARIO

(assumes all properties are developed)

(assumes all properties assessed Front Foot Benefit)

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WSSC’s Health Hazard Subsidy– Currently $15,000 per applicant

– Started in 1970’s

– Has not been adjusted for inflation since early 1980’s

– Not based on a specific formula

– Current formula reduces subsidy by future assessment

revenues (can significantly reduce if not eliminate

subsidy)

– Not all extensions are health hazards and are not eligible

for the subsidy

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Current System: Illustrative Example of Financing Issues

700 Linear Feet

$469 per Linear Foot1

$328,300 CONSTRUCTION COST

1. Taken from actual costs provided by WSSC Accounting Group.

1,500 Assessable Front Footage (100 feet per unit x 15 units)

$7.18 Sewer Front Foot Benefit (current rate)

$10,770 Subtotal Annual, Projected Assessment Income from All Unit Which Could be Served

$177,098 Subtotal Projected Assessment Income Over 23 Years

$15,000 Health Hazard Subsidy per Unit

15 Units

$225,000 Total Health Hazard Subsidy

-$177,098 Less Projected Assessment Income Over 23 Years

$47,902 Subtotal Health Hazard Subsidy

$225,000 TOTAL OFFSET TO APPLICANT

$103,300 APPLICANT'S DEFICIT PAYMENT

$6,300 Estimated Annual Payment

23 Years

$144,900 SUBTOTAL EXTENSION PAYMENT

$2,850 System Development Charge (3-4 toilets)1

$3,500 Connection Fee (sewer/septic hookup)1

$75 Inspections1

$95 Reprocessing Fee1

$2,500 Abandonment of Septic System2

$10,000 On-site Plumbing2

$19,020 SUBTOTAL ADDITIONAL COSTS

$163,920 TOTAL COST TO APPLICANT

1. WSSC Budget Office in conjunction with WSSC Permit Services Unit

2. WSSC Development Services Group estimate.

ADDITIONAL COSTS TO APPLICANT

EXTENSION COSTS TO APPLICANT

EXTENSION CONSTRUCTION COST

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Original system was designed to pool large and small extensions and allocate costs over a large number of connections which made extensions affordable

Current front foot benefit system does not work for small-scale extensions

Current system has significant policy challenges including affordability, financial sufficiency, equity, and participation

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• If homeowner is unable to finance or afford 100% of the costs, how is the funding gap to be covered?

• Rationale

• How much?

• Why? (public health, safety, welfare)

• When? (upfront or over time)

• What form? (cash, interest rate, matching funds)

• Who? (eligibility)

• To what end? (leverage desired policy objectives)

• Who Pays?

• WSSC ratepayers?

• County taxpayers?

• This issue may be considered again in 2017 when the County Councils review the 10 Year Water & Sewer Plans.

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• Potential options to address unserved/underserved

– Creation of Sub-districts within each County to finance

the improvements through loans, grants, or other public

subsidies

– Revolving loan program

– Property tax revenue backed debt or loans

– Property liens

– Federal programs

– State programs

– Other Public subsidies

– Combination of applicant funding and above financing

options