Purcellville Eyes Meals Tax Shift To Hold Down Utility Rates

For years, visitors stopping in Purcellville for a bite to eat have been helping to keep town residents’ real estate tax bills lower. Soon, they might help keep their sewer bills lower, too.

The proposed town budget envisions 7 percent increases for next year’s water and sewer rates—and similar annual increases for foreseeable future. Council members are hoping to avoid that scenario.

It’s a challenging balancing act. The costs of operating the town’s water and wastewater treatment systems are largely fixed; the council can’t impose cutbacks as they could in the town’s police department or central office staff.

The utility system’s two key revenue sources are user fees charged to residents and businesses, and availability fees, primarily charged to developers for new construction. With the rate increase, user fees are expected to generate $5.3 million in fiscal year 2018. Availability fee revenue is projected at $4 million next year, largely fueled by the Mayfair subdivision. That comes close to covering the cost of operating the systems and keeping up with debt service payments: $9.7 million in total, including $2.6 million in debt service.

But the revenue estimates are built on the assumption of the hefty 7 percent rate increases and a relatively robust development schedule. Council members don’t want to hike rates that much and the town’s construction boom is expected to peter out by fiscal year 2020 as the town reaches build out. After that, user rates will be expected to carry virtually all the load to cover costs.

During a two-hour budget work session Thursday night, the council honed in on a several of options.

First is the pursuit of “green box” initiatives. Town Manager Rob Lohr Jr. presented the council with a list of 24 town-owned properties that could be used to generate additional revenue. Ideas range from selling land to developers, to leasing out space for new communication towers to selling corporate naming rights to timbering wooded areas. Council members said they’re open to any ideas the town staff or residents have. But they also acknowledged those options aren’t likely to provide much help in the sort-term. An exception was the Town Council’s recent sale of a surplus lot and house to the Good Shepherd Alliance, netting a $300,000 boost to the wastewater fund.

Councilman Ryan Cool put his focus on the town’s policy of imposing “charge backs” on the utility funds.

Following the recommendations of utility consultants, previous town councils adopted a policy of fully recouping the time staff members  and other resources devoted to supporting water and sewer operations from the utility funds (supported by user fees), rather than the government’s general fund (supported by tax revenues). The goal was better reflect actual costs and to reduce the indirect taxpayer subsidy to the utility funds.

Cool’s concern is that the charge backs—totaling $1.2 million in FY18—may be too large, in effect, shifting too much burden to rate payers.

Eliminating or phasing out the charge backs would lower the pressure to increase utility rates, however, Assistant Town Manager Daniel C. Davis told the council that rate hikes will be difficult to avoid. He presented several future utility fund scenarios that have lower annual rate hikes—5 percent or 2 percent—but require other actions, such as success with the green box projects, more development to occur to generate availably fee revenue and/or debt restructuring.

Another option in play is diverting meals tax revenue to the utility funds.

The town established a meals tax in 1996. Lohr noted it is the only town revenue source that has increased every year. If the Town Council holds the meals tax rate at 5 percent, next year it will generate almost $2 million. Revenue generated by the meals tax is equivalent to a 15-cent increase in the town’s 22-cent real estate tax.

Among the ideas being discussed is to shift the revenue generated by 1 or 2 percent of the meals tax each year—roughly $380,000-$760,000—to the utility funds. That option would require reductions in general fund spending (or higher property taxes), as would the option of eliminating the utility fund charge backs, which would eliminate up to $1.2 million in general fund revenues.

Vice Mayor Karen Jimmerson suggested Thursday that the council also consider a tax-increment financing approach under which growth in meals tax revenues would be shifted to utilities.

While meal taxes are generally viewed as a general fund revenue source, town leaders see a nexus between those collections and utilities, as restaurants are among the town’s highest volume water users and pay higher rates under the town’s tiered rate structure. Using the meals tax to help fund utility operations could allow the council to back down some of the high-end rates, Lohr noted.

The council also is discussing whether to further reduce the town’s utility reserve funds. Once set at 300 percent of system expenditures to provide cash on hand to cover most emergencies, the current target is 100 percent. Council members asked about the merits of dipping below that benchmark for a year or two to provide a short-term cash infusion and reducing rate pressure.

The council will continue its review of Lohr’s proposed $20 million FY18 budget during a work session Tuesday night.

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