Chesterton Tribune

 

 

IURC rips Damon Run for buying sewer system from board president; slashes hospital rate; are homeowners the victims?

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By KEVIN NEVERS

In a decision which has the potential to dramatically increase the Special Benefits Tax paid by residents of the Damon Run Conservancy District -- property owners, that is, in the Eagle Ridge and Timberland subdivisions -- the Indiana Utility Regulatory Commission (IURC) on Wednesday slashed by more than half the revenues which Damon Run may legally collect from Porter Regional Hospital and two other so-called “benefited properties” located outside the district.

The IURC also cast a quizzical eye on Damon Run’s business practices, including its outright purchase of the district’s original sanitary sewer infrastructure from Olympia Development LLC, owned by Bernard M. Madej, who at the time also served as president of the Damon Run Board of Directors; the use and accounting of the proceeds from that sale; and Damon Run’s bookkeeping system.

The IURC issued its order in response to Damon Run’s petition, filed in January 2012, asking the IURC to verify its existing rates and charges for the three benefited properties outside the district’s boundaries: Porter Regional Hospital, Liberty Intermediate School, and Sunset Hill Farm County Park.

The kernel of Wednesday’s order is the IURC’s finding that Damon Run may not legally recover from the three benefited properties the cost of purchasing the original sanitary sewer and stormwater infrastructure in the Eagle Ridge and Timberland subdivisions. Specifically, the IURC disallowed the recovery of $666,543 in wastewater assets at Eagle Ridge, $861,926 in wastewater assets at Timberland, and a further $999,488 in stormwater assets at both subdivisions.

The IURC then essentially re-wrote the contracts under which Damon Run serves Porter Regional Hospital, LIS, and Sunset Hill, by increasing more than fivefold the user fee which the Damon Run charges each benefited property but eliminating altogether the “Payment in Lieu of Tax” (PILT) which the benefited properties have been paying.

The net result: Damon Run’s revenues from the hospital, the school, and the park--the latter of which is not yet connected to Damon Run--have been reduced from $337,989 to only $160,056: a decrease of $177,933 or 52.64 percent.

Impact on Eagle Ridge,

Timberland Residents?

The IURC said nothing in its order about how Damon Run might cover the newly created shortfall, but testimony cited by the IURC may give a hint.

Eric Walsh of H.J. Umbaugh & Associates, Damon Run’s contracted rate consultant, noted in his testimony that the district’s revenue requirements are based on the average annual debt service of $1,304,270 on the two bonds issued to finance the original purchase of the sewer and water infrastructure. Estimated receipts for debt service, Walsh stated: $484,456. Debt service shortfall: $819,814.

Walsh, as cited by the IURC in its order, “explained that this $819,814 shortfall will be funded via the district’s property tax rate imposed upon the taxpayers within the district’s boundaries.”

That tax is technically referred to as the Special Benefits Tax, it is paid only by property owners in the Damon Run Conservancy District, and it is established annually by the Indiana Department of Local Government Finance.

Meanwhile, Scott Bell, director of the Water/Wastewater Division of the Indiana Office of Utility Consumer Counselor, suggested in his testimony that the rates and charges already paid by Eagle Ridge and Timberland residents “are relatively expensive when compared with other regulated water and sewer utilities in Indiana.”

In particular, Bell stated that “if a customer using 5,000 gallons of water was charged on a monthly basis the Special Benefits Property Tax, a water bill of $126.19 and a monthly sewer bill of $146.50 would be the highest bills in the state based on the Commission’s Bill Surveys in its 2011 IURC Annual Report.”

As it happens, the IURC also denied Damon Run one other revenue source--a one-time tap-on fee for new customers of $2,500--which the district said it used not only to reduce the amount of debt needed to be borrowed but “also to provide a reduction in the amount of property tax needed to cover annual debt payment in the future.”

“We find that Damon Run has failed to provide sufficient evidence that the $2,500 charge was based on the cost to connect a customer to Damon Run’s sewer system,” the IURC stated.

The IURC did let stand a one-time tap-on fee of $2,200, which is remitted directly to the City of Portage, which actually treats the district’s wastewater.

Damon Run’s

Business Practices

But the IURC also found a number of curiosities in the way Damon does or has done business.

Begin with the decision to buy outright the original infrastructure, from Damon Run Board of Directors President Madej’s company, rather than donate that infrastructure to a utility, which would then record the property as a “contribution in aid of construction,” as Bell put it in his testimony.

Madej did file with the Indiana State Board of Accounts a uniform conflict of interest disclosure statement, dated Oct. 27, 2010, “after the transactions were completed,” Bell noted in his testimony.

“By purchasing the infrastructure,” however--rather than donating it--Damon Run “has significantly increased the debt that it must pass on to its customers.”

The IURC itself determined that the purchase of infrastructure was “unsupported,” “unreasonable,” and “discriminatory,” “because other developments connecting to Damon Run’s system were required to pay their own infrastructure and main extension costs in order to obtain service, while Eagle Ridge and Timberland subdivisions were not required to pay the same costs.”

More: the IURC had concerns about how the $12 million proceeds from two bonds, issued to purchase the infrastructure, were actually used. “There is insufficient evidence to tie the cost to construct Damon Run’s infrastructure to the amount it borrowed,” the IURC found.

The IURC then quoted from the Indiana State Board of Accounts’ July 2010 Examination Report of the Damon Run Conservancy District: “Neither claims nor checks (funds were electronically transferred) were used to document $10,138,541 of the net proceeds spent. These proceeds were used to repay the developer and his wife, personally, as well as his development company. The developer, who serves as the District Board President, was reimbursed $4,594,353 of the $10,138,541. The remaining $5,544.188 retired a loan taken out by Olympia Development LLC, a development company which is wholly owned by the District Board President and his wife. The only documentation provided to support any of the disbursements was a ‘Commercial Promissory Note’ documenting the full amount of the line of credit between the bank and Olympia Development LLC. All of these amounts were posted to the records as ‘principal paid on bonds.’”

“The commission is concerned that petitioner has kept virtually no records of the transactions that surround the district’s significant debt issuance,” the IURC concluded.

Finally, the IURC was surprised that Damon Run still “does not account for its sewer and water revenues and expenses separately,” an artifact from the early days when “Damon Run’s operations were small and a unified accounting approach was simple.”

The IURC accordingly ordered Damon Run to “maintain separate books and records for its wastewater utility from its water and stormwater utilities, using double-entry accounting.”

 

 

Posted 6/21/2013