Palm Coast staff recommends staged rate increases, bond financing to fund major water and wastewater upgrades

Palm Coast City Council heard a detailed utility rate gap analysis that recommended staged rate increases and borrowing to pay for upgrades to aging water and wastewater infrastructure and to meet regulatory requirements.

The presentation, led by Karl Cody and rate consultant Murray Hamilton, said the utility is near capacity in several areas and faces a Florida Department of Environmental Protection (FDEP) consent decree. Hamilton and staff proposed a four‑year rate plan beginning with an 8% adjustment, effective as early as April 1, 2025, followed by additional 8% increases starting each Oct. 1 thereafter through Oct. 1, 2027, then an annual CPI-based index thereafter; the council was asked to consider a “wrap‑around” bonding scenario that would smooth customer bills while funding projects.

Why it matters: City staff said the utility operates as an enterprise fund that must recover its own operating, capital and debt costs from user fees rather than from general tax revenue. Staff and consultants said existing rates and fees will not support major work the utility needs — including rehabilitation, conversion to advanced treatment and expansion of Wastewater Treatment Plant 1 — or the near‑term capital and staffing needs to maintain the system and comply with the DEP order.

Most important details: Consultants described three financing approaches and presented a recommended scenario (called scenario 3) that spreads debt service across system users to reduce near‑term bill shocks. Under staff estimates, the prioritized set of “critical” capital projects totals about $415 million; the broader five‑year program is larger (roughly $701 million). The plan anticipates two bond issues: about $284 million as early as October 2025 and about $172 million as early as October 2027, with a mix of pay‑as‑you‑go funding (impact fees), state revolving fund loans, and long‑term debt.

Staff highlighted projects tied to regulatory compliance: Wastewater Treatment Plant 1 (original permanent capacity 6.83 million gallons per day, average daily treatment in 02/2024 ~6.581 MGD) is nearing capacity and must be rehabilitated, converted to advanced wastewater treatment and expanded (plant expansion cost estimate cited in discussion: $180 million; conversion/rehab estimate cited: $90 million). The consent decree effective Dec. 12, 2024, requires work on Plant 1 and related collection‑system corrective actions, with deadlines that staff said must be met to avoid civil penalties. As Murray Hamilton put it in the presentation, “the utility system, by itself, is a closed system. No money's come in from the general government to help offset the operating and capital costs.”

Staff and consultant assumptions and tradeoffs: The consultant used a forecast that includes a 3% annual growth of new connections and a 3% index already adopted in October 2024. Operating expenses were projected to grow about 7.4% per year on average (driven by labor, energy and chemical cost increases), while revenue growth from current rates was assumed lower. The firm modeled several debt‑service structures: level debt service (lower total interest cost but earlier payments), capitalized interest/deferral options (which delay some payments but raise peak debt service later), and the wrap‑around approach (recommended) that raises overall present‑value cost slightly but produces lower near‑term bill impacts for existing customers.

What the council was asked to do and next steps: Staff recommended the council adopt the scenario 3 rate path and proceed with the financing plan. The presentation listed these near‑term steps: draft and publish a rate ordinance for first reading on March 4, 2025; a public hearing and second reading March 18, 2025; and an effective date for the initial adjustment of April 1, 2025. Council members asked for additional scenarios that would show the bill impacts if specific projects were deferred or removed from the five‑year capital plan.

Concerns and council questions: Council members and residents pressed staff on alternatives, grant opportunities and whether portions of the program could be delayed. Vice Mayor Teresa Carle Ponteieri and others urged more grant‑seeking and asked staff to consider trimming the program or shifting some costs to future growth. Councilman Miller and others emphasized the consent‑decree deadlines and said delay could increase costs and result in fines. The city manager confirmed fines are possible if the city does not meet the negotiated consent decree and that projects must be approved by DEP.

Operational and customer impacts: A sample residential bill shown in the presentation illustrated that water and wastewater charges are roughly half of a typical monthly utility bill; staff said the recommended increases — applied to base and usage charges for water, wastewater, irrigation and reclaimed water — would be uniform percentage increases across those charge categories. The consultant presented bill examples for small and moderate residential users showing how bills would change under the recommended scenario compared with current rates and nearby utilities.

Missing/uncertain items and commitments from staff: Staff committed to provide additional details requested by council — including more granular scenarios that remove or delay specific projects, the collections/loss figure for unpaid accounts, and the historical purchase price paid for the utility in 1999 (staff said they would try to track that down). Staff also said it will continue to pursue state appropriations, SRF loan options and other grant opportunities to reduce borrowing needs.

Ending note: Council discussion focused on balancing the immediate need to meet DEP timelines with the political and financial impacts on residents. Staff and consultants asked for direction to publish the ordinance and begin the financing work; council members requested additional scenarios and indicated they want staff to pursue grants and to return with alternatives before final votes.