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Milwaukee faces dilemma with proposed water rate hike (Milwaukee Journal Sentinel)
Send to friendBy Dave Umhoefer
Plentiful and clean water was a big attraction for Cintas Corp. in 2008 when Milwaukee officials convinced the big uniform supplier to open an industrial laundering plant on the northwest side.
The Milwaukee Water Works even publicly touts Cintas, which now employs 85 people, when using water to lure businesses considering a location here.
Now, sticker shock over a proposed Niagara Falls-sized water price increase has the Cincinnati-based company rethinking plans to expand in Milwaukee.
"A lot of jobs we just created would be in jeopardy because this would hurt our profitability," plant manager Ryan Duncan said.
The reaction from Cintas and other water-dependent companies facing a big jump in costs has put Mayor Tom Barrett in damage-control mode - even as he markets Milwaukee nationally as a hub for water-technology companies.
Further, city officials are confronting sobering facts about Milwaukee's water and fiscal future:
. Water is still cheap here, but costs could spiral much higher without a regional approach to water sales and success in reversing past losses of big industries.
. Water consumption continues to fall, leaving the Water Works with aging or poor-quality pipes to replace and less revenue to pay for the job.
. Earlier City Hall decisions to hold down water rates have come home to roost, leaving the Water Works strapped for cash and in dire need of a large hike that has proven politically unpopular.
. Barrett has dropped plans to tap Water Works' surplus funds every year as a way to pay for other city services. That will put pressure on to raise other fees and taxes, or cut services.
Milwaukee last week resubmitted its rate-hike request in an effort to shave down price increases that might have ranged from 25% to 60% depending on whether the buyer was a property owner in the city or suburbs, or an industrial or commercial user.
The final price tags are up to the state Public Service Commission.
Most of the officials behind the branding of Milwaukee as a water-technology cluster don't think a fight over water rates will harm their fledgling campaign.
Milwaukee's liquid asset still will be cheaper than in many other cities even after rates rise, they note.
And it's true: Water prices here are very low compared with national and statewide rates, and would remain comfortably below average, various studies show. A dollar would buy homeowners 289 gallons, even at the new price.
Still, a major player in the "water-hub" idea, Badger Meter executive Richard Meeusen, worries about a possible "death spiral" of rate increases necessary to keep the water system intact.
"My concern is that this will happen again," said Meeusen, whose company is a leading maker of water meters. "You raise prices and more wet industries move to cheaper areas." That forces water rates higher for the companies that remain.
Milwaukee is hardly alone in seeking a much higher rate of return on water. It's a state and national phenomenon as consumption drops, more old pipes need replacement and chemical treatment costs surge.
But that doesn't make it any easier to swallow - especially during a recession.
"Wait a minute, don't we want to attract jobs, especially if we want to be the water capital?" said Bruce Seidner, an electrician on Milwaukee's south side.
And the cost of water doesn't exist in a vacuum; it's one element in the complicated calculus that businesses use when deciding on growth.
For instance, Duncan, the Cintas Corp. manager, said the price boost could "tip the scales" against adding jobs because combined costs for water, fuel and electricity are higher here than for Cintas plants across the country.
Serious fiscal issues
Why did Barrett and aldermen wait so long, making such a large rate bump necessary? Why did the city not soften the blow by seeking smaller, regular price increases in recent years?
The answers underscore the serious fiscal issues facing not only the city-owned water utility, but the city itself.
Just last fall, Barrett and Milwaukee aldermen took the unusual step of tapping $3 million from the Water Works to help balance a tight 2010 city budget that relied on controversial service and workforce cutbacks. That followed a short-lived debate over privatizing water operations to generate more cash.
To make the transfer happen, they had to amend the city's charter ordinances. They cited similar moves by other Wisconsin communities.
Says Barrett: "We didn't want to rely as heavily on the property tax" to fund the general city budget.
Officials envisioned an annual stream of surplus funds from a utility they hoped would soon be bolstered by $18 million in new revenue. That was to come from the rate hike submitted by the city around the same time.
But the city misjudged the downturn in water use, said Mark Nicolini, city budget director.
The trend dates back three decades and has picked up steam in recent years, as the industrial base has continued to shrink and water-efficient appliances have reduced residential use. At this point, Milwaukee could double its customer base and not have to build any new treatment plants.
Plus, negative reaction to the rate-hike proposal - and to the way the state Public Service Commission staff proposed to distribute the pain among industrial, city and suburban customers - has slowed dramatically the rate-approval process at the state level.
Barrett now says that he won't tap water funds for next year's budget as he did this year.
The money simply may not be there, according to a Journal Sentinel review of the Water Works fiscal state. It's unstable and getting worse.
City records show the utility ended up in the red in 2009. Further, by early 2010, its cash reserves - which tallied $31 million in 2006 - had been completely drained just to keep operations going.
The rate hike is needed to "restore the financial stability of the utility," said Water Works Superintendent Carrie Lewis.
Suburban elected officials who are buying Milwaukee water laud its high quality, but decry the diversion of Water Works revenue to pave streets or otherwise fund the general city budget.
"They want to use the water as a golden goose, a revenue generator," complained New Berlin Mayor Jack F. Chiovatero. "It's creative on their part, but we just signed a 20-year contract with them."
Rethinking '07 rate hike
The Water Works, in hindsight, needed a larger rate hike in 2007, when it last sought state approval for a sizable increase, said Lewis. In 2009, Water Works received a small automatic rate increase that did not require public input.
But Barrett at the time already was increasing other city fees and didn't want to pile on consumers.
"We saved ratepayers money by keeping the rate low," he said.
The strategy, though, forced the city in 2009 to seek water revenue hikes it initially thought would mean 28% increases for residents and businesses in the city, and 36% for its wholesale suburban customers.
But the state gets the final word. And much larger hikes seemed possible for heavy water users such as MillerCoors and some suburbs after the PSC staff suggested in April that variable rates were appropriate. The city itself, the brewery and various suburban communities are still contesting the PSC's methodology, leaving the final rate hikes up in the air until a decision by the full PSC.
Barrett said he did not think there was any way for the city to know the PSC would change its rate-setting methods, resulting in the larger-than-anticipated increases that MillerCoors protested.
The mayor and city hall in April sought a special fix for MillerCoors, which told the PSC it might have to cut production and move some jobs from Milwaukee if the larger rate hike went through. The city persuaded state lawmakers in April to insert a tax credit into state legislation. It will offset a good chunk of the brewery's future water cost increases. MillerCoors is by far the city's largest private water customer.
Cutting costs in the works
Barrett wants to avoid a repeat cycle of big rate increases, according to his chief of staff, Patrick Curley.
Getting there means cutting costs. Milwaukee can't mothball one of its two plants because of emergency backup needs and commitments to suburban customers, Lewis said.
But Curley said energy-saving plans are in the works for the city's Howard Avenue water plant. The Water Works has cut positions.
"There's this very hard, cold reality that the water delivery system is hundreds of miles of pipes and mains that were built to accommodate a much larger industrial base, but you still have to use that system to get water to everybody," Curley said.
Suburban officials argue that Milwaukee's pipe-replacement program is slow by industry standards. The Water Works acknowledges that but says it has sped up considerably compared with 15 years ago.
"Some places have very low rates because they don't do anything to fix anything," Lewis said.
Wauwatosa water superintendent James Wojcehowicz, a former Milwaukee water official, said suburban customers fear that rate increases will spiral out of control.
"At some point the infrastructure replacement is going to catch up to them," he said.
Ultimately, preserving cheap water may come down to regional cooperation - an elusive concept here - and attracting more "wet" industry.
Milwaukee was disappointed when South Milwaukee rebuffed Barrett's pitch to become a Milwaukee customer, instead building its own $9 million treatment plant. Water there is more expensive than in the city, and now South Milwaukee is seeking a 52% revenue increase as it pays for the new facility.
South Milwaukee Water Superintendent Doug Fischer said technical and financial issues complicated a Milwaukee deal. After 117 years on its own, South Milwaukee wasn't eager to switch.
Barrett said it would have been "the ultimate win-win" for both. "We have all this excess capacity. I think they wanted their autonomy."
Mequon's mayor, meanwhile, is threatening that his city could bolt as a Milwaukee Water Works customer unless the PSC knocks down the projected 59% rate increase for that community. Mequon and other suburban customers have hired a consultant to make the case.
"We won't stand for it," Mayor Curt Gielow said, "or we'll go to the North Shore utility."
Curley says the bottom line shouldn't get lost just because the city needs a big increase.
"Our water is still cheaper," he said.
