The Pagosa Area Water and Sanitation District (PAWSD) Board of Directors pondered the district’s 2027 budgetary problems with increasing costs, potential cuts and rate increases at its Sept. 24 meeting.
PAWSD District Manager Andrew Connor explained to the board that the district’s operating accounts currently are projected to have a $1.6 million shortfall for 2027 between the anticipated revenues and the revenues needed to meet the district’s debt obligations.
Jack Dossett, PAWSD’s comptroller, stated that the district has an obligation to meet a debt service coverage ratio of 1.1 for its debts, meaning that the district’s net operating revenues, which is total revenues minus expenses, must be 110 percent of the payments that the district must make to its creditors.
He indicated that PAWSD’s debt payments have grown by $543,000 for 2027, negatively impacting this ratio.
Dossett explained that calculation of the district’s net operating revenue does not factor in general fund revenues or capital expenditures and instead only incorporates the district’s enterprise fund revenues.
He stated that the district is at a debt service coverage ratio of 0.7 in 2027 with its current budget, but would need to reach a ratio of 1.1 at a minimum.
Connor commented that, if the district has issues with pipes rupturing due to a cold winter with limited precipitation or other unexpected costs, it needs to have funds set aside in its operating budgets to pay for these issues without falling below debt service coverage threshold.
Dossett stated that service fees are the primary revenue sources for these enterprise funds.
He explained that another issue contributing to the budgetary challenges is that PAWSD’s health insurance expenses will rise by 14 or 15 percent in 2027, even after a switch in insurance providers.
He added that, for its general insurance, the district has received more in claims than it has paid in premiums over the last several years, leading to an increase in its insurance premiums in 2027.
Connor noted that the distinction between billing various expenses between capital and operations expenses is complex, with operational expenses generally having more flexibility but contributing to debt service coverage issues, and capital expenses not contributing to debt service problems but requiring specific budgeting for any expenses incurred.
Dossett added that all supervisory control and data acquisition (SCADA) expenses had been counted as capital expenses, but that certain expenses, such as phone bills, were not appropriate for capital expenses and have been moved to operating expenses.
In response to a question from PAWSD board member Glenn Walsh, Dossett stated that the district’s auditor had not caught these errors so far.
Walsh replied that he appreciated “exactitude,” but that “organizational assumptions and practices” could potentially be followed if they have not caused problems and helped reduce the district’s shortfall.
Connor added that operational expenses have also grown due to growth of fuel and power expenses.
Walsh asked if the increase in debt service, which is partially driven by doubled charges for the final two payments for a loan paying for construction of the district’s Hatcher Lake water treatment plant, could be mitigated by arranging with the lender to extend payments for another year and split the payment over those two years in exchange for a small bonus payment.
Dossett indicated that he spoke with the loan provider on this issue and that the district does not have the ability to refinance the loan.
Connor stated that he wanted direction from the board about whether it wanted to cut operation budgets to try and meet the debt service coverage ratios, which he commented is “not possible,” or look at creative ways to raise more revenue or raise rates.
“Any kind of input from the board will allow staff to better present the draft in another two weeks when we sit down with this,” he said.
PAWSD board member Bruce Jones asked how much of a rate increase would be required to get the district to the 1.1 debt coverage ratio.
Connor stated that water and wastewater service fees would have to be raised by about 19 percent to meet this target.
He added that he had also provided potential cuts to the board, but that he did not recommend them due to potential damage to the district’s operations and that he would like “all the increases on the revenue side, but I do understand that we’re talking $1.6 million, close to a 19 percent increase. If we could meet in the middle at a 10 percent increase, then I’d go ahead and make these cuts.”
He added that approving recommended capital projects would help the district since it would repair infrastructure that might be a problem in 2027 while meeting in the middle in terms of rate increases and operational cuts.
PAWSD board member Bill Hudson commented that increasing nonoperating revenues would also help the board meet its budget targets.
Walsh highlighted that the district has been significantly short of its expected capital investment fee revenues for water and wastewater.
He added that he believed that the district should count any items that it has historically counted as capital expenses as so for 2027 and try to “fine tune” them in 2028.
Walsh stated that he would limit employees to a 3 percent wage increase with the potential for an additional 2 percent for merit instead of the proposed 6 percent increase, and would not move forward with the district retaining an external human resources consultant since it has not needed one in the past.
With these changes, he commented that he would also support an effort to “meet in the middle” and potentially look at 10 percent or 12 percent increases in revenues, spread out across rate increases and increases in costs for other services.
He added that direct rate increases could be reduced by creating a $5 or $6 per month capital investment rate that could be applied to customer bills and then removed if capital investment fees revenues increase in future years.
“I think we can be creative and fair, especially with … meeting somewhere near the middle,” he said. “I think 10 is nice, I think it’s going to be a 12, but I’m confident that we can be fair and … we’re going to have to spread the pain as fairly as we can.”
Walsh added that the district should consider increases to things like availability fees or capital investment fees to help balance increasing costs.
He suggested that the district could also investigate if there is a way to have income like that generated from payments on the district’s loan to the Pagosa Springs Sanitation General Improvement District added to its revenue calculations for debt service, which they currently cannot be.
“We do want to be careful. Every single year these operating costs are increasing and, if we don’t back them by monthly revenue coming in, we just simply keep continuing getting behind every year and when [Regulation 31, a Colorado regulation placing increasingly stringent standards on nutrient contained in wastewater] does come, hopefully it does not, we need to be able to absorb those extra costs,” Connor said. “I’m just leery of keeping everything at the floor and just hoping that we can ride out the years. I do agree and I’m hopeful that the board can meet me halfway on this debt service coverage with the cuts that I have in front of you. If you guys would look those over and provide me any comments so we can better prepare as staff for the Oct. 10 draft meeting.”
Walsh commented that having a capital fee could be a useful way to have a charge that can be identified to customers as increasing due to federal government regulations.
In a discussion with Hudson and Jones, Connor emphasized that the proposed cuts would hit key customer services like Dropcountr water use monitoring or incur potential additional expenses elsewhere since more staff time and travel would be needed for certain tasks after eliminating services like Starlink providing connection for remote control of certain systems.
He added that this was part of why he does not recommend these cuts and that the cuts would be to services that the district could still likely function without, although hitting the numbers would be dependent on problems like unexpected equipment replacements not happening.
Jones commented that these cuts would lead to significant declines in efficiency and staff time spent on efforts like landscaping, since PAWSD would eliminate funding a contractor to manage the landscape.
Connor added that staff would be used in different ways since the large projects they normally work on would not be funded.
“That’s why I did not recommend these, but I needed to bring something to the board,” Connor said.
“You showed that you’re willing, but again, it’s like, willing at what cost?” Jones said. “I can’t imagine how many pissed off people you would have if we dropped Dropcountr.”
He added that, in his work in disaster mitigation, he already deals with people discontented about damage from water leaks which Dropcountr allowed them to rapidly detect.
In response to a question from PAWSD board chairman Gene Tautges, Business Services Manager Cyndi Foster explained that, without Dropcountr, it would only be feasible to check for excess water use monthly since daily checks would require staff to download and individually examine reports for each customer account to detect excess use.
In response to questions from Tautges, Foster and Connor confirmed that checking these accounts would be an extensive and time-consuming process and would also require large amounts of contacting customers to inform them about water use that may or may not indicate a leak or other issue.
Jones pointed out that reducing items like water line maintenance might lead to a lack of progress on issues like reducing water leakage and increase costs over the long-term since deferred maintenance is likely to be more expensive overall.
Connor clarified that the proposed cuts would require a 10 percent increase in user rates in addition to the cuts to meet the debt service requirements.
In response to a question from Tautges, Dossett noted that the amount of money that could be transferred from the general funds to the enterprise funds to supplement them is limited and that, since the amount of reserves in the general fund is trending down, a large transfer could leave the district with significantly less than the six to 12 months of operating costs that the reserves should likely contain.
He added that he would recommend minimizing any transfers from the general fund.
“That’s a dangerous bucket to continually deplete your equity,” Dossett said.
Jones commented that there is a possibility that the district could make a larger rate increase for 2027, a smaller one for 2028 and then not perform rate increases for a few years in 2029 and beyond since the district’s Hatcher construction loan would be paid off and it would have approximately $1 million more in revenues per year.
Connor commented that a larger increase in rates for 2027 combined with cuts would help increase the district’s debt service coverage ratio and prevent the “same conversation” from occurring next year.
He added that a larger service rate increase would also allow more flexibility in making cuts while not negatively impacting the district.
Tautges commented that he appreciated Connor’s work on the cuts and that, if he wants to retain services like Dropcountr, he should find other things to cut to make up for the costs.
“I understand where you’re going with this,” Connor said. “When I say it’s the floor, you know me well enough, Gene, it’s the floor. There isn’t anything else to cut. If you want some of these cuts to not come out, you’re gonna have to leave me that monies with rate increases. I absolutely cut this to the floor. So, I agree with you, I’d love to put Dropcountr back in, but that means you as a board need to bring in those rate increases to cover that $15,000.”
Connor commented that he would look over the cuts again with the feedback from the board that “you guys understand the situation we’re in and we will need to get some more revenue to cover costs.”
He stated that he would look at cuts that eliminate tools the district currently does not have or are less impactful while keeping more impactful tools the district already has.
Connor stated that he would look over the budget again and would try to provide it to them sometime in the next week.
He added that he would also be happy to look over the budget one-on-one with board members and explain cuts.
He also emphasized that the board approving the recommended capital projects would help with operational expenses since it will reduce problems like pipe breakages by replacing problematic pipes.
“Well that’s great, the feedback,” Connor said. “I really appreciate that. I know Jack does, as well. We know that we should go as we present the draft to you in just a couple weeks. I will work on these cuts and get them back to you. Now, we’re at $700,000 right now. It’s going to be less, so I just want to make sure you know that.”
Following further discussion where Hudson considered various changes for how the general fund could support the enterprise funds and Dossett warned that excessive modifications to this relationship could risk the status of enterprise funds and cause disaster for the district, Connor closed by reiterating his timeline and suggesting that the board consider what approaches it would bring to its Oct. 10 meeting to raise additional revenues.
josh@pagosasun.com
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