Dave Naumann, senior project manager for financial analysis and rate design with the engineering firm Burns & McDonnell, presented an update on the water rate study to the Homewood Village Board on April 22.
Naumann had initially presented an introduction of the rate study to the board on Dec. 10, 2024, where he discussed the goals of the study.
“A water rate study is a detailed analysis that helps municipalities figure out how much to charge customers for water service,” Homewood Director of Finance, Amy Zukowski, said, adding, “the primary purpose is to ensure the rates can sustainably fund the day-to-day operations, maintenance and capital improvements, while working to ensure that the rates and potential increases are not detrimental to our customers.”
The Water and Sewer Fund is considered an enterprise fund, she said. It needs to be self-sustaining and generate the revenue required for anticipated work, including the removal of lead lines and construction of a new water tower. The fund doesn’t use tax money, only money from water billing.
According to Naumann, household water costs are rising about 5% each year.
Naumann shared a graph depicting water bills for neighboring municipalities in comparison to Homewood, where Homewood happens to fall in the middle with a cost of $47.54 monthly.
“There are a lot of reasons why bills are different among communities, but it’s good to have context to know where you sit competitively as you think about future rates,” Naumann said.
The lead service line that the village is going to replace over the next 10 years will cost about $76.6 million over the next decade, or three-quarters of the total $101.6 million needed for all projects. The lead service line work is mandated by the U.S. Environmental Protection Agency. As a result, capital funding will need to be over $100 million through 2035, Naumann said.
According to Naumann, options for funding a capital plan include zero interest Illinois Environmental Protection Agency (IEPA) loans in combination with municipal bonds and cash. There are opportunities for principal forgiveness and 40-year term IEPA loans, but that would cause risks of higher inflation and interest rates, he said.
The current revenue in the water and sewer fund is about $7 million, not enough to meet future funding needs, he said. Naumann calculated future revenue from a proposed rate increase of a 7.75% annually through 2034.
According to Naumann, that 7.75% annual increase would be necessary to solve the insufficiency of funds for the village. The increase would equate to a little less than $4 a month per residence, he said.
Regarding financial planning, Naumann recommends gradually increasing rates annually to ease the burden. The additional financial opportunities that the village would seek could help lower those increases, he said.
“I thought this was going to be a lot worse,” Trustee Lauren Roman said, adding, “if it really is worse-case scenario, $4 a month.”
However, the funding strategy that was presented was not necessarily “best” or “worse” case scenario, Zukowski said.
“This 7.75% ‘compounded increases’ assumes that we will receive low interest IEPA loans and revenues from ‘alternative funding sources,’ such as bonds,” Zukowski said, adding, “so in the first year it is $4 a month on average, but then that will continue to grow as it kind of compounds over time.”
“There is one clear and constant message that will be found in Homewood’s water rate study, and that is the absolute need to increase our current water rates,” Zukowski said.
Going forward, the third and final step of the study is to go over rate design options, which will be presented to the board in a month or two, Naumann said.