Annapolis consultants warn water and sewer revenues won’t cover costs without multi-year rate increases

Public works and outside consultants told the Annapolis Finance Standing Committee on April 29 that the city’s water and sewer enterprise funds will not cover projected costs under current rates, and recommended immediate, multi-year rate increases to avoid depleting reserves.

Dave Heider, a principal with Stantec, presented a 10-year financial forecast for the water and sewer funds and said the most significant new cost is an increase in charges for treatment at the county-operated wastewater plant. “They’ve gone from about $3,800,000 up to $5,000,000 in fiscal year 26. That’s about a 33% increase,” Heider said.

The consultants used the fiscal year 2026 budget as a starting point and projected operating expenses, cash-funded capital and debt service for each fund over a 10-year horizon. Heider said the combined water and sewer expenses in the starting year are roughly $21.8 million against combined revenues of about $17.7 million.

Why it matters

Heider and budget staff said that, without rate adjustments, the water fund’s cash balance would move below the city’s minimum target by about fiscal 2029 and could be exhausted shortly after. The sewer fund, pushed harder by the wastewater plant increase, would dip below the minimum sooner and could be depleted by fiscal 2030 in the consultants’ baseline scenario.

Heider said the consultant recommendation is a 4.75% increase in both water and sewer rates in fiscal year 2026, followed by comparable annual adjustments going forward. The firm modeled a typical single-family customer who uses 12,000 gallons per quarter: combined water and sewer bills would rise from about $181 per quarter today to roughly $190 after one year with the 4.75% increase, and to about $208 by 2028 if similar increases continue.

County wastewater costs and negotiation

Members asked why the county charge rose so steeply. Heider and public works staff said several factors contributed: expiration of nutrient-reduction credits the city previously received, capital upgrades at the county facility, and normal operating cost increases. “A share of the cost is not just the operating cost at the wastewater treatment plant — it’s also the share of the capital,” Stantec’s presenter said.

Public works Director Bert Vogel and other council members described limited leverage with Anne Arundel County because the city uses the county-operated facility rather than owning its own plant. Vogel acknowledged negotiations have occurred in the past but said success is limited: “We did negotiate with them years ago because we found they were significantly overcharging us for sewer. And so the charge we get from them came down, but then it’s risen steadily,” he said.

Council questions and alternatives

Alderman Renard asked whether a larger, one-time increase now — for example 6% — would be a prudent way to push the reserve crossover point farther into the future. Stantec said higher near-term increases would reduce the need for larger increases later, due to compounding, but the consultants recommended the 4.75% path as consistent with prior analyses while noting the wastewater charge meant higher increases were likely needed than previously anticipated.

Budget manager Jake Trudeau described an administrative charge increase in FY26 that appeared large on the spreadsheet; he said the increase typically reflects work allocation across departments (for example, billing performed by finance) and offered to supply a line-item breakdown to council members.

What the city asked for next

Council members requested additional details: a breakdown of the roughly $1.2 million wastewater increase by capital, operating and loss of credits; and a distribution of residential water use (deciles or percentiles rather than just tier counts) so elected officials can see how many households fall into each usage band.

Ending

The consultants and staff urged the committee to consider the proposed 4.75% FY26 increases and to weigh larger near-term increases if council prefers to push reserve shortfalls further into the future. Staff committed to providing the county charge breakdown and household usage distribution at a later date.