City of Marco Island - SEPTIC TANK REPLACEMENT PROGRAM

Approximately 70% of the Island’s wastewater is treated at the central sewer plant. This includes all condominiums, commercial properties, and about 40% of the single family homes. There are about 800 undeveloped lots with sewer service available. The remaining 6,127 lots are either vacant or are developed and utilize septic systems. About 150 residential units treat wastewater with an on-site advanced treatment system.

The Wastewater Treatment Plant (WWTP) was built in stages by the Deltona Corporation. There are three separate treatment facilities on site with a total combined treatment capacity of 3.5 million gallons per day (mgd). The 2005 Utility Master Plan developed by Montgomery Watson Harza (MWH), and subsequently supported by other engineers, recommended both upgrades and expansion of the existing treatment systems to 5 mgd.

The WWTP Improvement Project is estimated to cost $29.4 million. The first phase, under way at this time, is to remove a 1 mgd treatment plant and replace it with a 3 mgd facility. This will not add to the permitted treatment capacity. (The other two treatment plants will eventually be removed and replaced with a total of 2 mgd treatment processes for a combined capacity increase to 5 mgd.) The WWTP Improvement Project cost will be shared by all users (utility rate base).

The cost associated with the expansion of the treatment capacity of the Wastewater Treatment Plant is $37.7 million. This includes capacity expansion as well as upgrades to the facility that would not have otherwise been necessary without the expanded capacity. It also includes a share of the cost to upgrade the sewer lines along Collier Boulevard to handle the added capacity. The WWTP capacity expansion will be funded by:

The WWTP improvements and capacity expansion ($67.1 million) will be funded by grants and the issuance of tax exempt utility revenue bonds. Repayment of the revenue bonds will be derived from three sources. These are: the utility rate base (all customers), sewer impact fees, and sewer assessments upon property owners through the Septic Tank Replacement Program (STRP).

City Council has approved the expansion of the central wastewater collection system to serve those areas that currently rely on septic systems. The cost to install new sewer lines and to pay for the expanded capacity of the wastewater treatment system will be recovered through a special assessment process. By resolution, City Council may establish assessment areas that encompass only those properties specially benefited by improvements, and funding for those improvements will be derived from a special assessment to those properties. City Council, therefore, may impose assessments against property located within an assessment area to fund the capital cost of the local improvements (wastewater system). It is assumed that those benefiting from the STRP are:

An assessment district is established by an Initial Assessment Resolution. The resolution shall describe the improvement, the estimated capital cost, the method of apportioning the capital costs among the parcels within the assessment district, and the legislative findings that recognize the equity provided by the apportionment methodology.

Thereafter, a preliminary assessment roll is prepared and the owner of each parcel is provided a notice of the proposed assessment. City Council shall then consider a Final Assessment Resolution and consider any written or oral testimony, make adjustments to the assessment roll as deemed appropriate, establish the maximum assessment, approve the assessment roll, and determine the method of collection.

The assessments to properties benefiting from improvements are computed in a manner that fairly and reasonably apportions the capital cost among the parcels of property within the assessment area. There are two components of the capital cost. First is the cost associated with the expanded capacity of the WWTP and existing sewer system to accommodate the additional wastewater generated by the new sewer lines. This is referred to as capacity cost. The second is the capital cost to construct the expanded sewer system within each assessment district. This component is called the construction cost.

The expansion of WWTP capacity is normally funded through impact fees for each Equivalent Residential Connection (ERC). Impact fees are payable upon the issuance of a building permit or upon the issuance of a permit to connect to the sewer system. In the STRP, the capacity cost includes the impact fee. This allows payment of the impact fee over time through the annual assessment on the property rather than immediately upon connection. The current impact fee is $2,910 for each ERC.

An ERC is an Equivalent Residential Connection for a home with 1,500 to 2,500 square feet with four bedrooms or less. Each additional bedroom or 750 square feet is an additional 0.33 ERC. The STRP assumes that all homes built before June 1, 2005 are one (1) ERC. All homes built thereafter will be assigned and assessed based on actual ERC (size of structure and number of bedrooms).

Construction costs include legal, planning, engineering, construction and administration of new sewer lines, lift stations, fees imposed by the Collier County Tax Collector, bond issue expenses, program administration, and associated expenses. The islandwide Sewer Master Plan (Boyle 2006) includes cost estimates applicable to the 13 remaining assessment districts ranging from $12,570 to $22,720 per parcel. The construction cost for the two districts underway at this time are:

While not a component of the assessment charge, there is a cost incurred for work on private property to take the septic tank out of service and to connect the home to the sewer main. The estimated cost for this work is $2,000. To facilitate this connection, the City has agreed to contract for the proper permitting and construction to take the existing septic tank out of service and to connect the home to the sewer main. The City can only do this work upon the agreement of the property owner. If the property owner agrees, the City will have the work done, will bill the property owner on the next regular monthly utility bill, and will require a lump sum payment. Again, the property may allow the City to contract for this work or they may make the arrangements themselves as long as they connect within the required 90-day period.

· Assessments plus interest may be paid with the annual property tax bill in equal installments over a 20-year period. With this option, one may elect to prepay a portion of the assessment, and one may elect to pay the balance at any time. Payment of the unpaid balance is due upon transfer of property ownership.

On December 5, 2005 City Council conceptually agreed to an amendment to the payment option for properties with on-site performance based sewer treatment system. This policy must be formally adopted by City Council through resolution and will provide for the following:

· Defer sewer assessments for those properties that have a performance based treatment system (as specified by the Florida Department of Health – FAC 64E-6.025(1) or (12) for a period of ten years following installation of the on site system or upon transfer of ownership.

On February 21, 2006 City Council conceptually approved an amendment to the Septic Tank Replacement Program that would lock in the year 2006 construction estimates for future districts. Construction estimates have been determined for each of the remaining thirteen assessment districts. This modified assessment process is as follows:

· When the sewer assessment district is created in the future, property owners who have voluntarily prepaid the assessment will not be required to pay additional construction costs if the construction cost is higher. If the construction cost is lower, property owners who have prepaid will be refunded the difference. Property owners who have not voluntarily prepaid will be assessed the actual cost of construction.

· Property owners who do not volunteer to pay the fixed construction costs during the first year may be allowed to pay the fixed construction costs in the year following the first year, plus C.O.L.A., so long as payment is made prior to the establishment of the assessment district for their area.

North Barfield	$12,870	East Winterberry – North	$15,130
North Marco	$15,190	East Winterberry – South	$18,770
West Winterberry	$14,410	Gulfport	$15,050
Lamplighter	$12,570	Copperfield	$13,570
Sheffield	$15,790	Goldenrod	$14,350
Kendall	$14,890	Estates	$22,720
Mackle Park	$14,530

Fundamental to the use of special assessments to fund improvements is that the method be equitable and the cost to provide the benefit (sewer service) is equal to or greater than the assessment. There are many ways to achieve this objective. Options have been considered and are summarized as follows:

· Equivalent Residential Connection (ERC): An ERC is an “Equivalent Residential Connection” that generally represents the usage requirements of a single family residential customer for a home with less than 2,500 square feet. City Council policy provides that each home built before June 1, 2005 is considered to be one ERC (even though it may be larger than 2,500 square feet). A commercial property may have more than one ERC depending upon the commercial use of the property. For vacant properties or for existing homes that are expanded in the future, there may be an additional ERC cost that must be paid upon issuance of a building permit. For instance, a vacant lot will be assessed as if it were one ERC. When a home is actually built and if the air conditioned square feet exceeds 2,500, then there will be a 0.33 ERC charge for each 750 additional square feet.

As an alternative, each home could be assessed a capacity cost based on the actual ERC as defined in the City’s Code of Ordinances (Impact Fee). That would require a determination of the air conditioned square footage for each property. With this option, homes in the same neighborhood would have different assessments because of the square foot differential.

· Sewer Impact Fee: A sewer impact fee for the 800 ± lots that have sewer lines available is $2,910. As stated previously, the capacity cost portion of the assessment consists of both the impact fee and a portion of the cost to upgrade sewer lines along Collier Boulevard and to upgrade the Wastewater Treatment Plant. The difference between the City’s program and that of other communities is that the impact fee is normally not built into the assessment, but instead, payment is required upon connection to the sewer system. By incorporating the impact fee portion into the assessment, property owners are able to take advantage of the three payment options for the impact fees as well as the other associated costs.

On February 21, 2006 City Council reaffirmed its desire to conduct an impact fee analysis to determine whether properties in the sewered areas should be required to pay a sewer impact fee ($2,910) equal to the “capacity cost” ($4,893) in the sewer assessment districts. A local government may not arbitrarily change an impact fee. The fee must be based on a financial analysis to be certain that the impact fee fairly represents the cost to serve the property with sewers. That is, the impact fee must be shown to fairly offset the cost to expand the collection and treatment capacity to serve the new development. An impact fee analysis is under way at this time and should be completed by July 1. At that time, if deemed appropriate, City Council may adopt an ordinance to establish a new impact fee schedule. The new impact fee may or may not equal the current capacity cost of $4,893. Thereafter, the new impact fee could then be applied against vacant lots in the sewered areas.

The current “capacity cost” for the unsewered areas has been reduced under the assumption that the impact fee analysis would support an impact fee approximately equal to the “capacity cost” of $4,893 and that all lots would develop over the next seven years. If these lots do not develop, the assessments will not cover the full cost of the expanded capacity and the difference ($2.2 million) would need to be recovered through the general rate base.

· Front Foot Assessment. With this method, each lot is calculated based on the front yard width of the property. Within any given neighborhood, the sewer assessment will vary depending upon the width of the lot. Corner lots would have more frontage than lots in the middle of the block and lots in the middle of a block may have a larger frontage than the lots on a cul-de-sac.

· Assessment Per Square Foot. With this method, the square footage of existing lots would be determined and the assessment would be based on the size of the lot. With this method, assessments in any given district will vary, depending on the size of the lot.

· Assessment Based on Equivalent Residential Connection. The current impact fee has a sliding scale of “blocks.” Smaller homes pay an impact fee of less than one ERC and larger homes pay an impact fee that is greater than one ERC. The size and resulting ERC could be determined for each structure and the assessment would then be based on the result of the appropriate ERC. In this example, similar size homes would be paying the same capacity cost. The actual capacity cost would have to be calculated for each structure and the property owner would then be notified of the basis of the capacity cost calculation and be allowed the right to appeal the determination.

The Septic Tank Replacement Program, including the construction of the new sewer lines and the expanded treatment plant capacity, will be funded through the issuance of tax-exempt utility revenue bonds or through loans from the State of Florida’s Revolving Loan Fund. The debt service payments, which are the bond principal and interest, will be paid through revenues collected by the assessments over a 20-year period. If people elect to prepay the assessment, then funds will not need to be borrowed since the cash can be used to pay for the construction. As property ownership changes and assessments are collected, the collected assessments will be used to pay down the debt.

The decision to fund the cost through assessments was based on an agreement that costs should be recovered from those receiving the new service. Any other method of financing the STRP may distribute costs to those not deemed to directly benefit. For example, if all or a portion of the cost were placed on the general rate base, then all customers would help pay for the new construction and expanded capacity. While this is an alternative, it is one that was rejected by City Council.

In theory, property tax revenues could be used to subsidize the STRP. Sanibel is funding about one-half of their sewer expansion program with property tax revenue. Funding support from property tax revenue was considered and rejected by the Marco Island City Council as being unfair to those who are not directly benefiting from the improvements.

· Grants. When grants are received, funds can be used to offset the assessment costs. Most probable are grants that will offset the cost of the Wastewater Treatment Plant expansion. Revenues from grants could, therefore, be used to lower the “capacity cost” portion of an assessment.

On February 21, 2006 City Council agreed to assume that an average of $500,000 in grants can be received each year for wastewater system improvements. With that assumption, the capacity cost for the STRP was reduced by $5.5 million and equally spread to benefit all properties in the 15 assessment districts.

If the grants are not received, there will not be sufficient funds to meet debt service obligations. Therefore, the cost to recover expenses will need to be obtained from another source, such as the general rate base charged to all utility customers.

· Ad Valorem Tax. During the FY06 budget public hearings on September 6 and 19, 2005, City Council considered the appropriate millage rate to fund the budget. City Council had previously established the maximum millage rate of 1.538, a 3% reduction from the then current tax levy. At a millage rate of 1.538 all homesteaded property owners would pay no more in tax last year than they paid in the prior year, and a surplus of $1 million would have been available for use as a General Fund contribution to the “capacity cost” of the assessment. The millage differential would have generated about $1 million per year for 10 years. The total capacity assessment would have reduced from $38,000,000 to $28,000,000. The capacity cost to each property would have been reduced by about $1,000. Council determined that it was inappropriate to use property tax revenue to pay a portion of the STRP.

City Council will again establish a millage rate for the upcoming FY07 budget. In previous years, City Council has reduced the millage rate to ensure that homesteaded property owners pay no more tax to the City in absolute dollars than the year prior. The result is that homesteaded property owners pay less in property taxes to the City of Marco Island today than they paid through the Marco Island MSTUs prior to the City’s incorporation in 1997.

A decision to reduce the millage rate by only 3% (assuming an 11% increase in assessed value) will generate an annual revenue surplus of about $3 million over five years. This surplus could be used to offset the cost of the STRP. The capacity cost could be lowered by about $500. If the millage rate is not reduced by 3% the annual surplus will produce $8 million over five years. If $6 million is used to offset the STRP, the capacity cost could be reduced by $1,000.

· Utility Rate Base. Utility rate base is a term used to refer to the monthly utility cost revenues for combined water and wastewater services. City Council previously considered and rejected using a portion of the utility rate base to offset the cost of the STRP. The general rationale for the decision was based on an understanding that approximately 40% of the existing single family homes that are on sewer paid for their system through a Collier County Assessment District in the 1980s, or they paid for the value of the sewer system when they purchased their property. Furthermore, it was believed that existing businesses and multi-family residential structures have paid for their systems through prior payments of development impact fees or the intrinsic value of their property when purchased included the cost of sewer service.

If a decision is made to increase the general rate base to help offset the assessment cost, it should be assumed that each 1.0% increase will generate $200,000 in annual revenues. A 5% increase in the general rate base on combined water and sewer services will generate an additional $1 million. The assessment cost would be reduced by about $1,000 for each property in the fifteen assessment districts. This could also be accomplished by increasing rates by 1% per year (beyond regular COLA adjustments) over five years.

· Other Revenue Sources. There are several other revenue sources that could be considered to offset the cost of the assessments. One is the existing electric utility franchise fee. By both a Franchise Fee Agreement and a Resolution, City Council has agreed to utilize a 5% franchise fee on the sale of electric services by LCEC to pay for the cost to place the electric utility lines under ground. Cities use the franchise fee revenue for all types of services. The decision to earmark these funds for the under ground of the power lines is a local decision and not one required by law. While not recommended, the electric franchise fee is an option to pay a portion of the assessment.

Another Revenue Source Is A Utility Tax. Florida cities are entitled to levy a tax on utilities, including electric, water, and sewer in an amount equal to 10% of the utility sales. The utility tax can be enacted through the adoption of a local ordinance. Most Florida cities have a utility tax of some kind, including nearby Naples. Marco Island has not opted to raise revenues through a utility tax.

While Marco Island receives funding form the state and other local sources these funds are used to offset the General Fund operations. Use of these funds toward these assessments would require an offsetting revenue from another source to keep the budget balanced.

Staff had been considering options that would reduce perceptions and valid conflicts in planned construction activities. Issues and concerns were discussed with representatives of MIAAR and a proposed amendment to district construction priority was developed as follows:

3. The underground power line project, scheduled to be completed in three years will extend to a six year, or longer, project. To the extent possible, underground power lines will occur simultaneously with the sewer construction in a district. Underground power line construction in the “sewered” areas will not begin until the North Collier Boulevard project is completed. Construction will occur during the April-November period.