Suburbs warned: Double-digit water rate hikes possible

Suburban communities could face double-digit water rate increases this year in part because falling water sales have hurt revenue.

Detroit Water and Sewerage Department officials will propose new rates next month, but they warned suburban leaders this morning that this year's increase is likely to be far larger than the average 4% increases imposed the last two years.

The average suburban wholesale water rate would rise by 9.2% under one proposal and 14.1% under another proposal. A 9.2% increase would be the largest annual increase since 2002, when rates rose 14.9%.

Officials didn't discuss the rate for Detroit residents, which historically have risen even faster than average suburban rates because of unpaid bills.

The different rate proposals are based on how much money the department plans to have to finance capital improvements without new borrowing.

The projected increases come as the region prepares to launch the new Great Lakes Water Authority, a regional entity that will manage the department, which the City of Detroit owns. The authority was created as part of Detroit's bankruptcy and included a promise that it would limit budget increases to 4% annually.

But that doesn't mean rates can't rise more than that, officials said today.

That promise "was always that we would not move forward with a budget request that was more than 4% from the prior year," water department Director Sue McCormick said. "But that was a budget that contained a lot of unknowns, and some estimates, and some contingencies, so by the time we got the bond documents for planning purposes, we had changed our projections."

McCormick said members of the Detroit Board of Water Commissioners and the board of the new authority will decide how to proceed.

The Great Lakes Water Authority is expected to take over management of the system later this year and will pay Detroit a $50 million annual lease payment.

Deputy Oakland County Executive Robert Daddow, who chairs the Great Lakes Water Authority board, said officials were aware from the beginning that the 4% promise related to total revenue, not rates.

Revenue is based in part on the amount of water sold and if volumes drop, the rates must increase to cover that shortfall, Daddow said. Water sales have fallen about 25% in recent years.

"They were overly optimistic on the volume declines and this is catching up," Daddow said. "At some point, this needs to be corrected."

The city of Flint stopped buying water from Detroit, reducing revenue by about $12.5 million, Daddow said. A cold, rainy summer also decreased sales as homeowners didn't water their lawns as much.

As a board member of the new authority, Daddow wouldn't commit to either proposal yet, saying he was still reviewing numbers.

Macomb County Executive Mark Hackel said he wasn't surprised by the proposals but he expects many homeowners will experience sticker shock when they see them.

"I believe a lot of people thought they were going to be capped at 4% a year," Hackel said. "I think a lot of people are going to be questioning."

Hackel said local officials warned him early on that it was unrealistic to expect rate increases to remain under 4%. He said he wanted to explain that to the public, but a court-imposed gag order prevented him from talking about it.

Hackel said he thinks the proposed increases will increase voter skepticism.

"Whether it was an outright distortion, or a misstatement of fact, it doesn't matter now," he said. "People will think you misled what that 4% meant. We needed to be much more open and up front as this process played out. That wasn't possible because of the gag order."

Farmington Hills city manager Steve Brock said he was wary of the 4% cap from the beginning.

"It seemed so clear when it came out that there had to be more than that," he said.

Farmington Hills recently spent $16 million on a new 3 million gallon water tower along I-696. The idea was to fill it over night, when Detroit charges a lower rate, and pipe the water out to residents during the day when demand is highest.

The city expects to save about $3.5 million annually on its water bill and use the saving to pay off the tower in about five years, Brock said. The rate increases because of lower volumes changes the equation.

"It will add another element we didn't think about," Brock said.

Rate increases always vary by community based on a number of factors so it's too early to know what each city, village and township will pay. Those governments buy the water wholesale from Detroit and sell it at a markup to their residents and businesses.

Daddow said the department has done a good job cutting operating expenses. McCormick said the department has reduced its employee count by about 30% over the past three years and it continues a streamlining process that is expected to yield additional savings.

Contact John Wisely: 313-222-6825 or jwisely@freepress.com.