Florida lawmakers may end utility revenue transfers to city general funds

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A practice municipalities across the country have used for decades to generate revenues and keep property taxes lower may be in jeopardy in Florida.

House Bill 653, filed for this year’s legislative session, would prohibit a municipal electric utility from using its revenues “to finance general governmental functions, to purchase bonds to finance general governmental functions, or to lend money to the municipality to finance general governmental functions within the municipality.”

The one-page bill, filed by Rep. Michael Caruso, R-Delray Beach, says municipal electric utilities “must use the revenues exclusively for electric utility operations and for building, maintaining, renovating, or otherwise improving the infrastructure of its electric utility facilities.”

If approved, the law would take effect July 1. Caruso didn’t respond to requests for comment about why he filed the bill this year.

The bill has drawn opposition from the 33 public power utilities in Florida that serve 1.4 million customers and from their municipal owners across the state, most of whom have for decades transferred excess utility revenue to their general funds to pay for public services — a practice that occurs across the country.

Rebecca O'Hara, deputy general counsel of the Florida League of Cities, is monitoring the legislation for the League, which opposes the bill on behalf of its members, some 400 cities, towns and villages. The measure is seen as a mandate from the state capital, according to the organization’s legislative bill summary.

“We are concerned the bill would severely restrict options for cities that have municipal electric utilities that receive some portion of revenues from that utility,” O’Hara said. “It’s a solution in search of a problem and it would greatly impact these cities from a fiscal standpoint because those revenues are used to pay for police and fire and public safety issues.”

O’Hara, who is served by a municipal utility, said she knows that her property taxes are lower because utility revenues are used to offset expenditures in the city's general fund.

Rep. Anthony Sabatini, R-Howey-in-the-Hills, said he co-sponsored HB 653 because most taxpayers don’t understand how revenues are funneled into their city’s general fund.

“First of all, most taxpayers are unaware that they’re being taxed through their utility systems,” he said in an interview with The Bond Buyer. “That defies logic because it is a tax in itself.

“The intent of the bill is that we don’t want extra money to get transferred into other types of spending that cities do,” he said, declining to say what municipality piqued his interest in co-sponsoring the bill.

Sabatini said he became experienced in municipal financing as a former commissioner in the city of Eustis from 2016 to 2018. Eustis’s electricity is provided by Duke Energy, an investor-owned utility.

Eustis, a city with a population of 21,000 in Lake County, is part of the Orlando–Kissimmee Metropolitan Statistical Area. It owns its water, sewer and stormwater utilities.

In fiscal 2018, Eustis transferred $1.5 million from its water and sewer department to the city’s general fund and $260,000 from the stormwater account for street improvements, according to that year’s comprehensive annual financial report.

While Sabatini didn’t comment directly on Eustis’ spending, he indicated that he might consider broadening the current bill to include water and sewer utilities because Florida law doesn’t appear to place any limits on spending those revenues.

Sabatini said his first reading of HB 653 didn’t include a prohibition on bond financing, but he said the probation on revenue transfers that support debt should be prospective.

The House bill doesn’t have a companion measure in the Senate, and it’s too late now that the legislative session is nearly half way through. The language could be placed as an amendment into a similar bill, Sabatini said, adding if that's doesn't happen he expects the issue to arise again next year. This year’s session ends March 13.

Florida isn’t the only state dealing with the issue of utility revenue transfers.

In California, three Riverside residents filed a lawsuit in December seeking to end the city’s longtime practice of transferring up to 11.5% of water utility revenue to its general fund to pay for city services.

The class-action lawsuit filed in Riverside County Superior Court alleges that Riverside is violating the state's Proposition 218 by overcharging ratepayers to generate excess water profits for purposes unrelated to providing water. California voters approved Proposition 218 in 1996 to prevent cities from levying utility fees and charges that exceed what’s needed to provide water or electricity, according to the complaint.

Riverside, which has a population of 326,000, is among many California municipalities that have faced litigation for the fund transfers, which some cities have defended as a charge in lieu of taxing the utilities.

In Louisiana, the subject of utility revenue transfers came up at the Jan. 29 meeting of the state’s Fiscal Review Committee, which evaluates the financial stability of the state’s political subdivisions. The committee is composed of state Legislative Auditor Daryl Purpera, Treasurer John Schroder and Attorney General Jeff Landry.

The committee heard from several municipalities that are working with court-appointed fiscal administrators to correct financial problems with their water and sewer utilities.

Louisiana has to “stop utilities from being able to take revenues and use them on anything else other than utilities,” Schroder said. He also suggested that the state should consider placing municipal utilities under the regulation of the Public Service Commission.

“We’re helping them hurt themselves,” he said, referring to the State Bond Commission approving loans for distressed communities. “Maybe…you just don’t allow towns to mingle utility receipts with anything else. It’s a problem.”

In Florida, during a Jan. 28 meeting of the House Agriculture & Natural Resources Subcommittee, the issue of how utilities spend revenues came up during a review of House Bill 1343 — a measure that includes creating a wastewater grant program to help utility districts pay for infrastructure upgrades.

Rep. Kristin Jacobs, D-Coconut Creek, spoke positively about the program, but questioned how cities are spending utility revenues, according to nonprofit publication The Center Square, which focuses on statehouse reporting.

“There are many city utilities that now find themselves struggling to find the dollars to stay abreast in maintenance,” Jacobs said, the publication reported. “Cities can’t keep stealing dollars from their utilities. (Utilities) know what their needs are but don’t have absolute control” of their budgets.

The Florida Municipal Power Agency, a wholesale power agency owned by 31 municipal electric utilities in the state, believes that a city’s ability to use utility revenues is like a dividend that helps keeps local property taxes down, said spokesman Mark McCain.

The benefit of having a municipally owned utility is similar to an investor-owned utility that makes franchise payments to a city, in addition to paying property taxes, he said.

“The transfer of municipal utility revenues to a city’s general fund is also called a payment-in-lieu-of-taxes,” McCain said. “Municipal utilities around the country make PILOTs or general fund transfers” to their municipal owners.

The Florida Municipal Electric Association, a trade organization that represents all but one of the state’s 33 municipal utilities, “adamantly” opposes House Bill 653, said Executive Director Amy Zubaly.

“This bad bill goes against one of the fundamental values of public power utilities and that is to reinvest in our communities to fund public safety and police services,” Zubaly said.

Prohibiting cities from using utility revenues to fund community needs is like preventing investor-owned utilities from sharing dividends with shareholders, she added.

“We take pride in the fact that we are community owned, and locally controlled and operated and our revenues stay in the community.” she said, noting that most municipal utility electric rates are lower than those of for-profit companies.

Zubaly said it’s not clear why HB 653 was filed this year, but if there’s a feeling that a utility is transferring too much money to a local government “we think otherwise.”

JEA, the combined electric, water and sewer utility owned by the city of Jacksonville transferred $116.5 million of revenues to the city’s general fund in fiscal 2018, according to a City Council resolution opposing HB 653. The contribution is expected to be $118.8 million this year.

Jacksonville is the largest city in Florida, by population and land mass. The consolidated city had an estimated population of 903,889 as of July 1, 2018, according to the U.S. Census Bureau. That’s a 10% increase since the census in 2010. The city limits, which incorporate Duval County, span 874 square miles.

JEA has 478,000 electric customers, 357,000 water customers and 279,000 sewer customers, and 15,000 customers that use reclaimed water.

“The intent of the bill is that we don’t want extra money [from utilities] to get transferred into other types of spending that cities do,” said Florida state Rep. Anthony Sabatini.

In December, the Jacksonville City Council passed a resolution saying that HB 653 would be detrimental to the city and “could hamstring or possibly extinguish the symbiotic relationship that the city and JEA have established over the last two decades.”

The Orlando Utilities Commission sent $87.2 million to the city’s general fund in 2018, according to an FMPA survey. OUC is the second-largest municipal utility in Florida, providing electric, water, chilled water and electricity to 246,000 customers in Orlando, St. Cloud and parts of unincorporated Orange and Osceola counties.

Zubaly, the FMEA’s director, said she believes HB 653 won’t be considered by lawmakers, as written, this year and that there aren’t any other bills with the same subject matter that could be amended to include the utility revenue transfer prohibition.

“We’re very confident it’s not going to make headway this year,” she said.

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