Following the Money: What Your Utility Bill Tells Us About How We Got Here
If you get a City of Independence utility bill every month, you've probably looked at it at some point and wondered how we arrived at that number. Who decides what we pay for water and sewer? Why do those rates increase? What happens to the money after we pay it? And, given everything we've been talking about lately regarding interfund transfers and loans, were our utility dollars always being used for our utilities?
These questions are more important to our current financial situation than they might seem at first glance.
I've spent some time lately writing about how Independence got here. We've talked about our structural deficit, Oregon's property tax system, grants and the difference between money we can use for projects and money we need to operate services year after year. Before we can really turn the corner and start talking about solutions, I think there are two more pieces of our financial history we need to understand: our utility funds and our debt.
Let's start with our utility bill.
Where do utility rates come from?
There can be a perception that City Council essentially sits down and arbitrarily decides what people should pay for water and sewer. In reality, that's not how utility rates are supposed to be established, nor is it how we currently do it.
Water and wastewater operate as enterprise funds. In very simple terms, the people and businesses using those systems pay rates, and the revenue from those rates supports the systems. When you pay your water bill, you're paying for much more than the water coming out of your faucet. You're paying for the employees, pipes, pumps, treatment, testing, electricity, equipment, maintenance, regulatory compliance, emergency repairs, debt payments and future replacement of infrastructure that make it possible for clean water to come out every time you turn on the tap.
Wastewater works much the same way. We don't think very often about what happens after we flush the toilet—and that's probably a good thing—but there is an entire system behind that simple action.
That's why cities conduct professional rate studies rather than simply picking a number.
Independence's 2023 wastewater rate study built a twenty-year financial model, with particular attention to the next five years. It looked at actual and budgeted expenditures, staffing, operations and maintenance, inflation, debt, reserves, anticipated customer growth and the capital projects identified in the City's wastewater facilities plan.
At its core, the process asks three questions:
First, what does the system need to generate in revenue to operate and maintain itself?
Second, how should those costs be fairly distributed among the different customers using the system?
And finally, how should the rates themselves be designed to recover those costs?
City Council ultimately makes the decision to adopt those rates, and I don't want to minimize that responsibility. But the number should be the end of the process, not the beginning, and needs to follow a clear path to a recommended rate.
Our sewer rates are a good example. The 2023 rate study recommended annual increases of 3.5% over five years, and Council adopted that schedule. The resolution adopting those rates specifically says that the City is required to regularly review and update sewer charges so they reflect the actual cost to operate, maintain and improve the system.
That doesn't make a rate increase any more enjoyable to pay, but it does explain where it comes from.
Keeping rates low doesn't necessarily keep costs low
I think this is an important distinction because we understandably face pressure to keep rates as low as possible. And remember, Councilors pay these rates also. We understand that every increase affects someone's household budget, including our own.
But there's a difference between keeping the cost of a service low and keeping the rate artificially low.
If it costs $100 to provide a service and we charge $90, we haven't magically made the service cost $90. We still have to find the other $10 somewhere. We can spend reserves, defer maintenance, borrow money or find another source to cover the difference. Any of those choices might work for a while, but eventually the math catches up.
That's why utility rate studies look several years into the future. The wastewater study didn't just ask what it cost to run the treatment system in 2023. It accounted for increasing labor and benefit costs, materials and services, construction inflation, debt, routine repairs and future capital projects. It also recommended maintaining a reserve of more than 90 days of operating expenses so an unexpected failure or cost increase doesn't immediately become a crisis.
The capital side is significant. Our wastewater system has aging infrastructure and major projects that need to be completed. The City's planning documents identified work involving biosolids removal, headworks improvements, lagoon aeration, pump stations and sewer lines, among other needs. The funding plan contemplated a combination of utility revenues, borrowing, System Development Charges and grant funding.
Our water system has substantial needs of its own. The 2024 water-rate work looked not only at current operations but also at the long-term capital investments necessary to maintain a reliable water supply and treatment system. Again, the point wasn't simply to ask what rate residents would tolerate. It was to understand what the system actually costs and how we responsibly pay for it.
This is also why having money in a utility fund doesn't necessarily mean the City is sitting on a pile of extra cash that should be refunded. If you have $10,000 in savings but know you're going to need a new roof, that money isn't really available for a vacation. It already has a job. The same is true of utility reserves, except the City's version of a new roof can cost millions of dollars.
And this is where our story gets more complicated.
What happened when utility money started supporting other funds?
For many years, Independence had a complicated system of money moving between funds. Some of that is completely normal, and I want to be very clear about that because interfund transfers and loans have become part of the current community discussion.
Cities use interfund transfers. Cities make interfund loans. Neither is inherently evidence of poor financial management.
For example, if our finance team spends time supporting the water utility, the Water Fund should pay its appropriate share of that cost. We calculate this based on the expected amount of staff time supporting the utility and then allocate funds to cover that cost; this process is included in our budget documents. Also, if one fund makes a temporary loan to another fund with appropriate terms and a reasonable repayment plan, that can also be a legitimate financial tool.
The important question isn't simply whether money moved between funds. The question is why it moved, how much moved, how often it happened and whether the City became dependent on it.
In Independence, those relationships eventually became significant enough that an outside credit-rating agency was raising concerns about them nearly a decade ago.
S&P Global Ratings' 2017 review of Independence identified the high complexity of our interfund relationships as an above-average management risk because it reduced transparency and increased the possibility of errors. S&P specifically discussed the regular and substantial transfers from utility funds supporting General Fund operations. In fiscal year 2016 alone, it reported $2.8 million in transfers into the General Fund.
S&P went on to warn that because the City's utility enterprises were providing such significant support to General Fund operations, disentangling those relationships would be difficult if Independence wanted to maintain its existing level of General Fund services.
I find that particularly striking to read today, because in many ways the difficult conversation we're having now is the disentangling S&P was talking about almost ten years ago.
Think of it in household terms. Imagine that you have one checking account for your regular household expenses and another account where you're saving for a new roof. Your checking account keeps coming up $500 short every month, so you move $500 from the roof account. The mortgage gets paid, groceries get bought, the lights stay on, and you’re occasionally going to a movie and eating out. From the outside, everything looks fine.
But you haven't actually fixed your household budget. You have covered the shortfall with money intended for something else, and you still need the roof.
In a sense, residents were already helping pay for these services
I've said before that in some ways residents have been paying for services like parks, the library and museum all along through this system. I want to clarify exactly what I mean by that.
There wasn't literally a hidden "library fee" tucked inside your water rate, and it would be inaccurate to suggest that we can identify a particular dollar on someone's utility bill and say it went to a particular park or museum expense.
What we can say is that utility funds were providing substantial financial support to the General Fund, and the General Fund supports services including police, parks, the library, museum and general government operations.
In other words, the cost of those services didn't disappear because residents didn't see a separate line on a bill for them. Part of the City's financial structure was using resources from elsewhere in the organization to help support them. That distinction matters a great deal in our current conversation about fees and what City services actually cost.
It also helps answer another question I've heard: if we've stopped using utility money that way, why haven't we simply lowered utility rates and given the money back?
The answer is that our utility needs never went away. The water and wastewater systems still need maintenance. Aging equipment still has to be replaced. Debt still has to be paid. Major capital projects are still ahead of us, and adequate reserves are still necessary to respond when something fails.
In other words, we still need the roof.
Making the funds tell the truth
Beginning with the FY2022–23 budget, the City started changing some of these accounting practices. The wastewater rate materials explain that personnel costs began being directly allocated to the appropriate utility funds rather than relying on certain transfers, providing better transparency into the actual staffing and operating costs of those systems.
That may sound like an accounting detail, but I think the principle is actually pretty simple: We want each fund to tell us what it really costs.
If an employee spends part of their time working for wastewater, wastewater should reflect its fair share of that cost. If the water utility uses City administrative services, it should pay its fair share. At the same time, if the General Fund can't support its ongoing services with the recurring revenues available to it, we should be able to see that clearly, too.
Unfortunately, making the numbers more accurate doesn't necessarily make them prettier.
The City's 2026 S&P review specifically recognizes the work that has been done to disentangle interfund dependencies. More importantly, S&P says those previous dependencies had masked a General Fund deficit.
That's probably the most important point in this entire post. Ending our dependence on these practices did not create Independence's structural deficit. It made an existing imbalance much easier to see.
And yes, that has led to difficult decisions and some extremely uncomfortable conversations about what services we can afford and how we pay for them. It would certainly be easier politically to move money around again and make one fund look healthier for a while.
But going backward is not the answer.
There are people in our current community conversation who point out that interfund loans and transfers are commonly used tools in municipal finance. They're right about that, to a point. Where I disagree is what Independence should learn from our own experience with them.
Going back to thinking about it in household terms, credit cards are also commonly used. And they can be a useful tool, if used responsibly and correctly. But overextending a budget with credit cards and transferring balances from one card to another doesn’t make the amount you owe go away. And eventually the payments extend you beyond what you can afford, forcing households to make difficult decisions.
A tool is one thing. Becoming dependent on that tool to support ongoing operations is something very different.
S&P was raising concerns about these relationships in 2017. Today, the same independent rating agency is specifically recognizing the hard work that has been happening to disentangle them. I don't believe our path to financial recovery is to fall back into using a financial system that covered up our General Fund deficit.
That doesn't mean every decision made in the past was wrong. It doesn't mean every transfer was inappropriate or every interfund loan was a mistake. Municipal finance is more complicated than that, and pretending otherwise doesn't help anyone.
It does mean we know more today, and we should learn from what happened.
For me, the issue has become a pretty simple one: We need to actually solve the problem, not just move it somewhere else. For too long, we were moving parts of the problem around and now we need to do the difficult part and solve it.
Before we get to that, though, there's one more part of our financial history I want to talk about. Along with moving money between funds, Independence accumulated long-term obligations over many years. Some financed infrastructure we needed. Some are nearing payoff. Others will be with us for a long time.
That's debt—and it's the final piece I want to explore before I turn my attention from how we got here to how we get out.