Utility Tax Changes in 2013
In 2013, the City adopted changes to utility taxes and water rates to comply with the Lane v. City of Seattle ruling. In October 2008, the Washington State Supreme Court ruled on Lane v. City of Seattle. The ruling impacted nearly all municipal water utilities. The ruling related to the allocation and cost recovery of fire suppression costs. The Supreme Court ruling confirmed that fire hydrants and other costs related to fire suppression are the responsibility of the general government and not water utilities. Leading up to the Supreme Court ruling, most utilities absorbed the costs of fire suppression because the maintenance and operations of fire suppression facilities and infrastructure are integral segments of the water system.
During the 2013 Legislative session, Substitute House Bill 1512 and Senate Bill 5606 were passed and signed into law by the Governor with an effective date of July 28, 2013. The focus of the new law is to solve the problem created by the Lane v. City of Seattle decision. The new law provides guidance and options for water utilities to legally recover fire protection costs from customers and governments. The new law authorizes water utilities to recover fire protection costs from rates and to contract with governments to provide fire protection and are authorized (but not required) to recover related costs. The current 5-year rate study and rate schedule were adopted in 2012 prior to the passage of the new law and encompassed the years 2013-2017. As allowed by the new law, the City's water utility will continue to provide fire protection and recover the related costs from the City's General Fund.
During 2012, the City's water rate study consultant developed a recommendation for compliance with the Lane v. City of Seattle Supreme Court ruling. The consultant developed its recommendation for compliance with the fire protection requirements using the Lane v. City of Seattle decision, other case law, and industry standards. The consultant’s study analyzed all sections of the water system (pumping, water mains, supply, reservoirs, and hydrants) to determine how much each section contributes to fire suppression. The final analysis determined that for 2013 $504,380 or 5.39 percent of water utility expenditures were related to fire protection services.
To continue the approach that fire protection expenses should be paid by the general governmental function, the City’s General Fund directly will pay the Water Utility $539,626 for fire protection services during 2014. The water rates were reduced in 2013 to reflect the fire protection expenses should be funded by the City's general government. The General Fund does not have the budget capacity to absorb a $539,626 expenditure increase, so it increased the public utility business tax rate on water distribution business activities by 6.04 percent to generate the funds necessary to pay the increased expense. Compliance with Lane v. City of Seattle and the subsequent new law has a net zero impact to the water customer. Many customers have multiple utility charges shown on their monthly bill such as stormwater, wastewater, and LOTT (Lacey, Olympia, Tumwater, Thurston County Clean Water Alliance); the increase to utility tax is limited to ONLY the water portion of the utility bill.
To illustrate the zero impact to the water customer, the 2013 rates and utility tax change will be used. The adopted 2013 water rates included a 5.39 percent reduction to the water rates prior to applying the annual rate increase. The utility tax on water utilities has been increased to a total of 12.04 percent. The reduction in water rates were calculated to reduce total revenue by $504,380 and the increase to utility tax is calculated to collect the same amount of funds. Please note that State statute does not limit the City’s ability to increase the utility tax on water. The 2013 adopted water rates also include a 6.5 percent increase for operations, maintenance, and capital improvements. The following presentation illustrates the net zero impact of the fire protection recommendation implementation using an average residential bill using 900 cubic feet of water per month: