City staff told a public meeting July 1 that current utility rates do not fully cover the city’s cost of providing water service and that the city is not meeting its Texas Water Development Board (TWDB) debt‑service coverage covenant. The presentation included five rate scenarios and showed that some scenarios would increase typical household bills substantially in year one.

Why it matters: Staff reported a debt‑service coverage ratio of about 0.62, below the TWDB covenant requirement of 1.1. Staff said failing to meet the covenant can hurt the city’s credit rating and increase borrowing costs, reducing the city’s ability to finance capital projects such as dam improvements and lead/copper service line replacement.

Key figures and scenarios: Staff described a recent Willdan rate study and multiple scenarios. Staff said the city’s existing debt service of about $881,394 must be covered and that capital projects in the current CIP would add about $8 million in new debt according to a March CIP update. The study presented five scenarios; Scenario 1 (a conservation rate structure) shifts more cost to high‑volume users through tiers while increasing the base rate; Scenario 4 (presented as a likely path by staff) adds a proposed wastewater/water employee and other costs. In staff examples, a three‑quarter‑inch meter household using about 5,200 gallons saw a current bill near $63 and an example Scenario 4 bill near $91 (roughly a $44 increase or a 12.4% change when electric is included in the example). A larger household example using 12,000 gallons showed an approximately $100 increase (about 16.6%) under the same scenario.

Staff emphasized the differences between base rates (which fund fixed, predictable costs) and tiered rates (which fluctuate with consumption) and argued base rate increases are the most reliable way to fund fixed commitments, including a proposed LCRA contract payment and dam‑improvement loan repayment. Staff also noted the city’s low‑volume residential customers currently shoulder a disproportionate share of costs and that some scenario designs aim to shift more of the burden onto high‑volume users.

Budget context and cross‑subsidies: The presentation explained how a portion of utility revenues is transferred to the general fund (described as a “fee in lieu of transfer”), which staff said is being proposed at about 10% in the 2026 budget discussions (previously as high as 17% in 2020). Staff said that transfer supports general fund activities and helps offset operating losses at some city venues. Council and residents discussed recurring annual operating losses at four amenities (JOK, golf course, Landex and the pool), which staff said have produced net losses in the hundreds of thousands in recent years. Staff said roughly $0.69 of an example water bill goes to cover losses associated with those amenities (a small portion of the total transfer), while other general fund revenues and the amenities’ own revenues also cover part of those losses.

Regulatory mandates and capital requirements: Staff said at minimum the city must complete a lead/copper service line replacement program estimated at about $3.5 million, driven by TCEQ and federal requirements with a 10‑year replacement timeline. Staff emphasized delaying required capital work increases future cost and risk. Staff also noted the city’s operating expenses for the water plant and distribution have risen substantially in recent years (staff cited a 38% increase for plant operating expenses and a 66% increase for distribution operating expenses over the prior three fiscal years) while rates rose roughly 16% in the same period.

Public comments and council questions: Several residents asked for more options to reduce costs and suggested the council exhaust grant and cost‑cutting opportunities before imposing large rate increases. Speakers also raised concerns about how transfers to the general fund are used and whether certain city amenities should be leased or sold rather than subsidized. Staff and some council members said they will ask the rate consultant to re‑run scenarios and to test multi‑year phasing and alternatives before finalizing an October 1 rate change.

Ending: Staff said council must adopt a budget by the mid‑September council deadline and that staff will return with refined revenue assumptions and scenario runs, but the city risks continuing deficits and reduced bond‑coverage metrics if rates are not adjusted to cover cost of service.