The Pagosa Area Water and Sanitation District (PAWSD) Board of Directors discussed the district’s financial difficulties and potential upcoming fee increases designed to address them at its June 11 meeting.
At previous meetings, the board heard staff reports highlighting that the district’s income, particularly from capital investment fees (CIF) charged to new construction, are lower than budgeted, potentially reducing the district’s revenues and causing it to violate the agreements associated with its loans, which mandate specific ratios of income to expenditures called debt service coverage ratios.a
The board has also considered the possibility that it would need to impose additional fees on customers to make up the lost CIF revenues and maintain its coverage ratios.
PAWSD Comptroller Jack Dossett presented to the board about the district’s debt service coverage ratio, the difference between the previous and current budget estimates relevant to that ratio, and what components contribute to that ratio.
He explained that his presentation would be less focused on the potential fee increases to alleviate financial issues related to debt service coverage.
Dossett stated that many of PAWSD’s expenses and revenues do not have annual variations and could be estimated in the future with simple multiplication, while those expenses with seasonal variations were estimated partially based on comparison with the patterns in expenses and revenue for 2025.
He explained that drought conditions should “in theory” not impact the district’s income due to the drought surcharges imposed making up the lost rate revenues from lower water use.
Dossett stated that debt service has to be looked at from a bank perspective, which focuses on regular cash available and operations, and is less interested in onetime revenues like grants.
He commented that PAWSD had been including grant revenues as revenue in its budget and that this likely should not have occurred since it does not count toward debt service.
Removing this leads to a $150,000 reduction in the district’s income for the purposes of debt service, he stated, although this does not mean that the district will obtain less than the expected grant revenues.
In response to a question from board member Bill Hudson, Dossett emphasized that looking at debt service coverage is separate from looking at the district’s finances from a budgeting perspective.
He also stated that the district’s revenues from the water and wastewater enterprise funds and the debt associated with those funds are lumped together for debt service purposes, instead of the debt and revenues for each fund being considered separately.
In response to a question from board chairman Gene Tautges, Dossett explained that money paid by the Pagosa Springs Sanitation General Improvement District (PSSGID), which manages wastewater treatment for the Town of Pagosa Springs, to PAWSD to help fund capital projects is not considered revenue for debt service since it is support for capital projects, which are not considered in debt service.
He added that PAWSD’s agreement with the PSSGID requires it to pay for 25 percent of improvements to PAWSD’s Vista wastewater treatment plant as part of PAWSD treating the PSSGID’s sewage.
“For your debt service coverage, the bank wants to see that you can continue to pay that loan off, not that you have the money today to pay that loan off,” said PAWSD District Manager Andrew Connor. “They don’t care if you can make this month’s payment, they want to know in six months.”
Board member Glenn Walsh commented that PAWSD has not finalized an agreement with the PSSGID about how it will pay for recent regulatorily required upgrades to the Vista plant and that questioned if those payments could be considered for debt service if they are regularly scheduled payments explicitly outlined in an agreement.
“It’s hard to see how that isn’t a substantial, reliable income stream,” he said.
Dossett replied that capital projects do not count for debt service calculations, although he noted that they have asked PAWSD’s auditor that question.
Walsh commented that the district should look for potential ways to characterize this money from the PSSGID as being used in paying down debt since it is being used in paying down debt.
Dossett added that the loan PAWSD made to the PSSGID to finance building a pipeline to transport wastewater to the Vista plant and the associated payments are also not part of the debt service calculations.
PAWSD Programs Manager Renee Lewis noted that what counts for debt service is dictated by the terms of debt itself.
Dossett commented that, since he was recently hired at the district, he does not have a comprehensive understanding of the district’s debt service agreements, but that he believes that the district must maintain a 1.25 ratio of income to expenses to satisfy its debt service obligations.
Tautges commented that the “two largest things” the group had been discussing occurred because PAWSD was “acting as a bank” and loaning money, which it shouldn’t do in the future.
Dossett commented that the district loaning money to other entities is not highly relevant to the debt service calculation, but that he agreed that PAWSD should avoid doing so in the future.
Connor commented that the last two years have been challenging, with low water sales due to drought and rising costs to maintain its systems and retain regulatory compliance.
He added that he has cut maintenance budgets as far as possible this year, but that the district needs to look at other approaches to address its debt service issues.
Walsh emphasized that much of the issue is likely due to the district growing at less than the projected 2 percent growth rate included in the district’s rate study.
He added that he believes that the district will not grow at 2 percent per year in the future and that this belief drove his recommendation that the district look into a monthly capital surcharge to make up this shortfall.
Tautges added that water sales do not impact many of the district’s costs, meaning that lower water sales do not lead to reduced operating costs in most areas.
Walsh raised his belief that the district’s previous rate study, which included the construction of a $45 million water plant upgrade and expected 5 percent growth in key water operations costs but only recommended 3 percent annual water rate increases, could not “pencil out.”
“I think one of the reasons we’re having trouble is those increases in the water, just like the increases in the wastewater, should have been more like [10 percent], [7 percent], [7 percent] not [3 percent], [3 percent], [3 percent],” Walsh said. “I’m willing to be the bad guy because I don’t have to run for reelection, but when it gets around to recommending some things … we should cut, we should be prudent, but on both sides, we have to raise more money.”
“I think Glenn should make that motion and [Tautges] and [Boehmer] should vote in favor of it because I have to run for reelection,” Hudson said.
Boehmer commented that he ran for the board on keeping water rates low, but that he is concerned about delaying infrastructure projects to keep rates low since he believes that could “spiral out of control over time.”
“I’m worried about that,” he said, “that if we put off everything and run this like a skeleton crew, that down the road it’s going to bite us.”
Dossett commented that this was a “great call out” and noted that some of the cuts Connor was recommending were cutting redundant tools or equipment.
“When you start … not maintaining your aging infrastructure … it compounds on itself and starts becoming more expensive than just maintaining it,” he said.
He added that the district appears to have historically tried to keep rates low by not paying for infrastructure upgrades.
Hudson asked Dossett and Connor how they felt about the cuts the district has made and if they will cover the debt service issues.
Both Dossett and Connor replied that the cuts would be insufficient to cover the debt service shortfalls.
Walsh asked Dossett for his opinion on whether a mid-year 6 percent increase in water rates and a $5 per month surcharge for both water and wastewater would cover the shortfall.
Dossett commented that any additions would get the district closer, but that he would need legal advice about the district’s Colorado Taxpayer’s Bill of Rights restrictions before making any definitive comments.
Tautges concluded that the presentation was “very helpful.”
The board then voted to enter executive session to discuss several issues, including the potential surcharges and rate increases.
Later in the meeting, the board discussed that it would likely want to impose rate increases by the beginning of August to ensure enough revenue is collected, and that it would likely hold a work session or special meeting in late June to discuss the topic further.
josh@pagosasun.com
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