Solve this riddle: The Eureka Redevelopment Agency owes the city's wastewater fund more than $5 million. Yet, according to city officials, the city technically never loaned the agency that money (with one exception) -- not from the wastewater fund or anywhere else. It spent the money on sewer system projects, just as you'd expect: repairing pump stations, replacing sewer pipes, etc.
How can there be debt when no money was exchanged?
It gets more confusing. The Eureka City Council and the Eureka Redevelopment Agency are separate legal entities, yet they're made up of the same five people. This makes for a bizarre, Mad Hatter-type scene at public meetings when the City Council "adjourns" and then "reconvenes" as the Redevelopment Agency. They don't even stand up.
Eureka City Councilman (and, consequently, also Redevelopment Agency Board Member) Larry Glass even gets mixed up sometimes. "Some of these things are so complex and confusing you don't even know where to start asking questions," he said last week. Glass has been looking into the City's labyrinthine finances, trying to understand why residents' water and sewer bills are set to jump almost 75 percent over the next five years.
The reasons seemed straightforward back in September, when the council first laid eyes on a staff report about the issues: Maintenance and repairs are needed, as is new infrastructure like the Martin Slough Interceptor, a long-planned collection and pump station that will be shared by the City and the Humboldt Community Services District. The closure of the pulp mill is another factor, since it eliminated Humboldt Bay Municipal Water District's biggest customer. Its other customers, including the City of Eureka, now have to pick up the slack.
Not surprisingly, things have proved to be a bit more complicated than that. Glass has questioned the City's decision of three years ago to replace all its old water meters with electronic ones. The revenue boost that was supposed to result has not occurred. Meanwhile, San Luis Obispo developer Forster-Gill, Inc. has expressed doubt that the City's infrastructure can handle the company's planned new development in the Ridgewood neighborhood south of town. (The City insists it can.) And now, citizens and taxpayer groups are up in arms over the proposed rate hikes.
First, let's get back to that riddle: As of June 30, the end of the last fiscal year, the Eureka Redevelopment Agency owed the City's sewer fund $5,028,172 for a long list of projects, some dating back more than 25 years. To date, none of those debts have been repaid. On its face, this appears to be a violation of a City ordinance -- Title III, Chapter 5.015(C) -- requiring all loans from the sewer fund be repaid annually, with interest. But, according to City Finance Director Valerie Warner, that's not exactly the case. These particular debts, with one exception, aren't subject to that ordinance. Why?
"I think it's because they're not exactly viewed as loans," Warner said.
The money in question, she explained, came from the sewer fund and was used for sewer projects within the City's redevelopment area. If Eureka didn't have a redevelopment agency, these would all have been simple A-to-B transactions. Instead, the projects were "booked" to the Redevelopment Agency for the following reason: Magically, the sewage fund will eventually get reimbursed for work it might have done anyway.
This is due to the intricacies of redevelopment law in California. Redevelopment agencies have access to a unique kind of financing that city funds can't touch, called "Tax Increment Financing." This funding mechanism, invented by the state in 1952, allows redevelopment agencies to spend future tax revenues, based on the assumption that the improvements purchased with that money will eventually generate those gains.
Here's how it works: Say a city has an ugly piece of property. Property tax value in the area is minimal; sales tax is nil. But since the property falls into a designated redevelopment area, a redevelopment agency can spend, say, $10 million to clean up the site, build some new roads and maybe put in a cute little schoolhouse. Soon, people want to live there. Property values skyrocket. The city starts earning higher tax revenues, and the redevelopment agency's investment pays off. This is how redevelopment laws work.
In the case of Eureka's wastewater fund, various projects over the last 25 years were picked up and claimed by the Redevelopment Agency. The wastewater fund paid for the projects, and will someday be able to recoup its expenditures. The Redevelopment Agency, meanwhile, gets to claim the money that went into the projects as debt. And debt makes the whole redevelopment cycle spin; debt is necessary for redevelopment agencies to claim tax increment financing.
All told, the Eureka Redevelopment Agency owes the City more than $9 million, but almost all of that stems from the kind of financial wizardry outlined above. The only actual transfer of money from the wastewater fund to the Redevelopment Agency occurred in 1998: The fund loaned nearly $1.6 million to the agency to help finance the Eureka Boardwalk. Since about $675,000 of that loan remains outstanding, this particular transaction apparently did violate the City ordinance prohibiting such loans. However, Warner said that's a moot point.
"If we were guilty of violating our ordinance, the solution would be to pay it back immediately with interest, which is exactly what we're doing," she said.
City Manager David Tyson said Monday that when the City borrowed that money, officials were aware of the consequences. "At the time, the idea was that [the loan] was to be paid back at an interest rate greater than what the money was earning sitting idly in our reserves," he said. The proceeds for the payoff will come from bond sales, Tyson explained.
Some residents have characterized this redevelopment-enabled spending as irresponsible, and they've called for the agency to pay its debts to the City. But both Tyson and Warner said this is the standard procedure for financing major infrastructure. "The same way a person takes out a mortgage for their house, you pay for it over the period of time that you use the assets," Warner said.
Some residents, including City Councilman Frank Jager, argue that the City has allowed its metaphorical house to fall into disrepair. More than a third of the City's wastewater collection system was installed before 1920, including some pipes that are more than 100 years old. Deputy Director of Public Works Bruce Young said maintenance of the water and wastewater systems is "kind of like painting the Golden Gate Bridge: You need to constantly be working on your infrastructure to keep it moving forward." But there's no sense replacing something that's still functioning, he added. "It's a matter of, do you spend the money needlessly, before you have to?"
An exception to this only-as-necessary approach was the City's installation of electronic water meters -- a $2.8 million investment that was supposed to increase revenues, though Warner said that wasn't the primary reason for the change. The meters have streamlined the logistics of meter-reading and allowed for more accurate billing, she said. And sooner or later, all the old meters would have been replaced anyway. Still, she said, she's not sure why revenues have not increased as the City expected. Old meters tend to slow down, causing the City to under-charge customers, she said. But after a full year using the new meters with no additional revenue, the City started to troubleshoot. They found that some of the meters had been set up incorrectly, resulting in more under-billing.
"We made a number of corrections to those," Warner said, "and I'm still not seeing the additional revenue that we expected." The troubleshooting continues.
Justified or not, the rate increases will be more than in inconvenience to many Eureka businesses. Barbara Groom, owner of Lost Coast Brewery and Café, had the City calculate her projected bill over the next five years. The result was a jump of more than $60,000 per year -- from $44,000 to $105,000 under the new rates, she said. Most of that would come from her wastewater bill, which is based on water usage. But Lost Coast Brewery's water doesn't go into the wastewater system; it goes into bottles.
"It's very hard to compete up here as it is, since we're not on the I-5 corridor," Groom said. "But we always had lower water and sewer [rates] than big cities. That helped us stay competitive." The company, which has expanded in recent years in defiance of economic trends, is on the verge of acquiring property in Eureka for a new brewery. "We might have to rethink that," Groom said.
Tyson said the City will do everything it can to lessen the burden on businesses like Lost Coast Brewery and residents alike. He even hinted that the proposed rate hike may yet be negotiable. In fact, City staff may be rethinking its proposal entirely. "We are looking at alternatives to the [increased] rates," Tyson said, adding, "I can't share them yet because we're still in the analysis phase."
One way or another, though, infrastructure improvements must be made, and the City's meager reserve funds must be built up. While staff understands the burden this puts on rate-payers, these are necessities, Tyson said, not, as some have argued, items on a wish list. "It's really time for the City to address ... to continue to address its infrastructure," he said.
The City Council will hold a public hearing on the possible water and sewer rate increases at its Jan. 5 meeting.