Council warned water rates may need to rise after auditor reports operating losses

The auditor told the council the city’s water fund posted an operating loss of $221,454 in 2024 and that recent capital additions and manhole rehabilitation increased depreciation and operating costs.

The presenter said operating supplies and repairs rose substantially—citing manhole rehabilitation and new equipment purchases—and described how capitalization and depreciation are increasing ongoing expense pressures in the proprietary (water) fund. “I hate to be the bear of bad news but that’s going to be my news to you today,” the presenter said when recommending the council consider revenue actions to restore fund health.

Why it matters: the auditor explained that while the city’s net position remains largely tied up in fixed assets, cash flow from operations is negative and transfers out of the fund have worsened the operating position. The presenter recommended considering rate increases, infrastructure fees or phased surcharges to spread the burden and avoid a sudden steep increase later.

Council members discussed options including flat infrastructure surcharges, phased increases, and reallocating some charges currently budgeted in the general fund. The presenter said other small cities have used targeted monthly infrastructure fees (examples discussed in general terms) to stabilize funds while spreading the impact to customers.

Next steps: staff will return with options and calculations for how meter-rate or flat-fee changes would affect a typical household and with timing proposals. The auditor recommended using clearer capitalization policies and tracking to ensure future projects and grant reimbursements are accounted for in rate planning.