May 11, 2009

The Ellettsville, Indiana, Town Council met for a Special Session on Monday, May 11, 2009, at the Fire Department Training and Conference Room. Dianna Bastin called the meeting to order at 6:07 p.m. stating Public Comment will not be taken this evening.

Town Council Members present were Dianna Bastin, President; David Drake, Vice-President and Dan Swafford. Sandra Hash, Clerk-Treasurer and Mike Spencer, Town Attorney were also present. Scott Oldham arrived late. Phillip Smith was absent.

Eastern Richland Sewer Corporation Members present Dave Willibey, President; Joe Peden, Vice-President; Larry Barker, Secretary, Mae Cassady, Frank Terkhorn, Ike Grimes and Avery Hays.

Mike Farmer opened the floor to any questions.

Ted Ferguson, Ferguson and Ferguson Attorneys at Law, is representing Eastern Richland Sewer Corporation (ERSC). His opening comments were on the interest earned on the Replacement Reserve account. Over the years interest was earned on the Replacement Reserve account which was created before the 1998 amendment to the agreement between ERSC and the Town. The interest was properly placed in the replacement account. The contract between the parties provided that monies deposited in the replacement account only be spent on mutually beneficial projects. It is appropriate the interest on this restricted account be added to such account, according to the Indiana Utility Regulatory Commission (IURC), the Office Utility Consumer Counselor (OUCC) and general accounting standards. In 2002, the Town transferred $63,000 (+) from the restricted account to its Utility Operating account without asking ERSC for its consent. In 2005, an ERSC auditor discovered this transfer. Later in 2005, ERSC objected to this transfer. There was a second transfer made in December 2005 from the restricted Replacement Reserve account and it was not disclosed to ERSC until April 2009. The disclosure was made, in a proposed amendment to the contract, which referred to the two transfers that had been made and that no party would seek to have those funds deposited back in the replacement account. There has been some discussion on whether the Replacement Reserve account was over funded. ERSC understood the Utilities Department rate consultants (H.J. Umbaugh) advice to the Town was these funds could be taken out of this restricted account based on some thought this fund was over funded. Mr. Ferguson pointed out in 2008 one of the rate proposal studies that Umbaugh did suggested increasing the amount that is placed into the reserve for replacements. Mr. Ferguson understood that Jeff and Mike Farmer suggested there was a lot of money in the account and those funds be left at the “then existing level” of contributions. The accountants suggested it would be appropriate to increase the amount that was being put into that account on an annual base. The Utilities Department and Town attorney has told the Council the interest being earned belongs to the Town. ERSC disagrees and proposes to set up their own Equipment Replacement Reserve account. ERSC can deposit funds monthly and the interest earned will be appropriately allocated to ERSC. The reporting will be clear and they will know exactly what is happening with that account. If the Town has a qualifying expense, they can ask for reimbursement or contribution from ERSC to be deducted from this account. ERSC further proposes that any portion of the Replacement Reserve be transferred back to them so they can earn the interest. Then there is the matter of the $134,000 that has been transferred from this account, ERSC feels they have a percentage of ownership. They are proposing to “repay ourselves” by deducting $1,000 a month from their monthly bill until ERSC has been made whole on that withdraw plus interest. ERSC proposes there be an amendment to the contract “a covenant of good faith and fair dealing” so that everything will be transparent and both parties will deal fully and openly with one another. Mr. Ferguson pointed out there was a spreadsheet prepared by the Town earlier this year that compared the 2002 transfer from the Replacement Reserve account of $63,000 and the interest it would have earned to the amount that ERSC would have paid according to the request to increase the billing and service fees from 2006. ERSC was not able to come to an agreement on that because they were concerned about the $63,000 while the Town had concerns about the increase in billing and service fees. Continual discussions, after 2006, regarding those fees never disclosed the 2005 withdraw. The billing fees should not have been compared to $63,000 but to $134,000 ($63,000 transferred in 2002 and $71,000 transferred in December 2005).

Jeff Farmer, Ellettsville Utilities stated that in 2002 H.J. Umbaugh reviewed the Utility Department books. They looked at the Equipment Replacement account and felt that it was over funded. From Jeff’s understanding, everyone (NRSC, ERSC and Ellettsville) paid in a certain amount to this account. According to the contract, the account needed to retain the amount paid in, less anything that was spent by the waster water plant. The Utilities spoke with Mike Spencer and went through the “right hoops” to make sure everything was being done correctly. It was the Utilities Department decision to transfer the money into the Operations and Maintenance account. It was the Utilities understanding the money is paid to the Town; the Town’s job is to maintain the account and spend out of that account for the waste water expenses only. The time came to “sweep” all investments into the O&M account in December 2005. The Utilities did not inform ERSC unintentionally; they were conducting their own business and did not feel they needed anyone’s “blessing” on conducting regular business. It was not intentional. The Utilities Department has always given any requested information to ERSC. Jeff offered to attend ERSC meetings to discuss purchases made. A spreadsheet was made to show how the billing costs have increased over the years. The Utilities has worked hard to keep the spending down so no one had to face a rate increase. Part of sweeping the accounts into the O&M account benefited all customers (Ellettsville, NRSC and ERSC) and prolonged a rate increase. Ellettsville Utilities paid the electrical bills, sludge removal and other costs; they did not pay for direct equipment costs and some money was “probably” spent just on Ellettsville but it benefited everyone. Jeff does not know how it will work with ERSC starting a new Equipment Replacement account. Jeff would like to see where ERSC thinks the funds have been misused (other than the interest accounts). The Utilities Department workers have done a good job taking care of the plant and prolonging the life of it so there wasn’t a rate increase like they had in 1995 – 1997. Dianna Bastin asked what the money was used for that was transferred out. Jeff explained it was transferred into an O&M account; used for various things. Sandra Hash explained salaries, benefits and utilities costs are paid out of that account.

Becky Wines, Utilities Department Office Manager stated office billings and bills for NRSC and ERSC are paid out of the O&M account. The O&M account is a checking account for normal everyday operations. Dan Swafford asked Jeff how much money has been used out of the Equipment Replacement fund in the past ten years. Becky Wines had the expenditures for the last eight years:

• 2008 $112,423
• 2007 $ 78,000
• 2006 $ 79,000
• 2005 $ 56,000

David Drake clarified what is being discussed is the interest on the money that ERSC and NRSC put in. We are not discussing the actual money that came from them; Jeff Farmer stated the money paid in is from ERSC, NRSC and Ellettsville. It is not stated anywhere the money is to be invested. The Utilities Department has not done a transfer on the interest account since 2005. Jeff explained if ERSC says the account was over funded in 2002 and 2005 then Jeff feels it is over funded as of today because there is interest still paid on that account. The interest is from monies paid in from all three entities. Some of the money that was paid in has been used to fix the equipment that has failed at the plant.

Jeff Farmer announced the annual deposit $136,800. Dan Swafford asked who set up this account, was it set up in the original contract and what were the percentages? Jeff explained this account is similar to the Debt Service payment; ERSC, NRSC and Ellettsville had a percentage of the Equivalent Dwelling Units (EDU’s). Each entity took a percentage of what they thought their equipment would cost to replace in ten to twenty years to come up with the figure of $136,800 with each entity paying their portion. Dan asked if this fund will be around forever even after the plant is paid off. Jeff said yes. Dianna asked Jeff if all three entities put together a contract when the new wastewater treatment plant was built. Jeff was not a part of that. Mike Spencer stated the contract divides the billing into categories; one is a monthly capacity payment and one is a flow rate. He went on to explain the contract states the monthly capacity payment for ERSC was $27,545. From the monthly capacity section there is another clause that states “a portion of that monthly capacity payment shall be designated as an annual contribution to the replacement account by the parties”. The annual contribution by ERSC shall be $52,680; the annual contribution by Ellettsville shall be $69,953. This is part of the monthly capacity payment which was decided as buying and reserving capacity in the plant. Then a portion of that was decided to be put aside for replacement of equipment. This is Mike Spencer’s interpretation of the contract; the wholesale customers were not entitled to any interest on the monies because everyone paid a “sum certain”. Mike Spencer asked “when the money started coming in, what became of those monies, how were they handled, what did you do to account for these monies, was there a separate bank account”. Becky Wines explained there was a separate fund created before she started working for the Utilities Department. Jeff explained a transfer is made every month. A payment is transferred into the Equipment Replacement account every month along with a payment to the Debt Service. There is also a state required Bond and Interest fund that accumulates $717,000 each year for the State Revolving Fund. Mike Spencer is trying to figure out the accounting process. Becky Wines explained there is Capacity User fund under the Operating and Maintenance (O&M) account. The Capacity User fund has a separate “line item” in General Ledger account. There is one bank account that has several “funds”. Certificates of Deposit are purchased from the one bank account and designated towards the Equipment Replacement account. Jeff Farmer stated ERSC pays the Utilities Department to run the utilities and manage the plant; once the money is entered into the Utilities Department, it is their job to make sure the money is put where it belongs. The argument is the interest received from the Equipment Replacement account; the Town attorney and accountants felt it could be swept into the O&M account. Sandra stated the interest goes into the O&M account and it becomes a benefit to all rate payers because of the items that are purchased out of the O&M account. Jeff can not say it is done equally on the percentages that are paid in. The interest received prolonged a rate increase for all customers. The Utilities Department goal is to take care of the waste water plant and make it last past twenty years. Jeff thought everyone was communicating well and now ERSC wants to separate. He felt there has been some miscommunication about the interest.

Mike Farmer, Ellettsville Utilities commented on Mr. Ferguson’s use of the word “transparency”. When the transfers were made, the Utilities Department accountants gave suggestions on sweeping out of several accounts and putting that interest into the O&M account to take care of the day to day. The Equipment Replacement fund was one of many. The first time this was done, in 2002, it was brought before the Council and there was a lot of talk and memos. Mike reiterated the money is paid to Ellettsville; their job is to run the plant, take care of all business and duties and be responsible. Ellettsville Utilities asked ERSC, in 2005, for a “simple raise” for the billing of their customers and ERSC said “no”. The Utilities Department has been running on a deficit since 2005 on just that one item. The Utilities Department is five months into a rate increase and still has not received any money from the wholesale customers. They are running at about a $6,000 - $7,000 deficit per month by not being able to implement the increase upon the customers. If ERSC wants their own fund, they should do their own billing, emergencies and customer actions.

Dave Willibey, ERSC President, feels as though they are partners in this. ERSC has 50% of the users and pay 50% of the mortgage. ERSC does not feel like they have been part of the decisions. They are not criticizing the funds used to repair the plant and feel Ellettsville has done a good job. In dealing with the “interest” situation, when the second transfer came up, they were not told. The IURC (Indiana Utility Regulatory Commission) and OUCC advised ERSC that interest should stay with dedicated funds. If the interest money is used on the plant, that is not a problem. If the Utilities Department started to run short, they should have asked for a rate increase sooner. ERSC has felt shut out even though they are paying for half of the waste water plant. Mike Farmer said ERSC could be part of the decision making but the day to day business has been handled for ten years by the Utilities Department. Mike also clarified ERSC is 50% of the capacity of the plant and paying for that. Does ERSC want to be 50% responsible for the operations, maintenance, fines and day to day responsibility of running the plant?

Dianna Bastin, being new to the Council, has learned that no one from all three entities has talked up until a year ago. The records are all open. Dianna asked the Town attorney about the interest; her personal opinion is that the money is the Town’s to invest. The attorney said the interest was not addressed in the contract. Dan Swafford feels as though the Utilities Department is being good stewards of the money in order to gain this much interest on this account by investing. Jeff Farmer reiterated that the Utilities Department sweeps interest from all of our investments; Capital Improvement, Debt Service Payment Reserve along with the Equipment Replacement account. All the interest was swept into O&M. Jeff feels as though ERSC was offended by not being told of the second sweep in 2005. The Utilities Department did not bring it up because they felt that it was daily business. The Town of Ellettsville does not “hoard” their money. The Town of Ellettsville has spent up most of their money; they have replaced a large portion of the sewer system in Richland Manor and Briarwood. Money that comes in is spent on the system. The Town of Ellettsville sewer system is older than ERSC but ERSC system has clay and needs constant attention. All Ellettsville Utilities is asking ERSC is to help with the costs; that is the reason for the rate increase and why ERSC should consider why the interest was swept off of the accounts. Mike Farmer asked ERSC to put this into context this was done with other accounts and the Equipment Replacement fund was not singled out.

Mike Spencer stated the Utilities Department is a public entity and the books are open. Rates need to be charged equally and fair across the board which is mandated by law. There was a proposal, at one time, about going from this point forward and talking about the interest remaining with that account. Mike Spencer does not know if the Board is agreeable with that but thinks it is worth a discussion.

Sandra Hash commented on the interest. Years ago there were checking accounts that did not draw any interest. State Board of Accounts told the Town to go to the bank and get an interest bearing checking account. When that was done, all the money was pooled into one checking account. There are now “sweep accounts”; Sandra started doing that with the checking account. There is a target amount that is held in the checking account daily and everything beyond that sweeps out everyday to receive a little more interest. This money is from all the funds combined together. The sweep is a small interest rate especially with the economy. Sandra looked at the large balances, decided to buy CDs, keep them separated by funds and earn a better percentage of interest. That is when you could see the interest amount.

Dave Willibey and ERSC felt as though the interest from the first transfer should have stayed with the waste water plant account. They were not happy at all about the second transfer; the money should not be used for anything other than plant purposes. Sandra asked how the Utilities Department reports to ERSC on financial situations or what accountability does the Utilities Department have to the ERSC. Mike Spencer said there isn’t any. Dianna reiterated this happened in 2005 when no one was talking to each other; ERSC wasn’t asking about the accounts and the Utilities Department wasn’t giving any information.

There was discussion about the contract not mentioning interest. Money deposited into the account is different than the interest deposited. Mike Spencer’s “perception of the interest flaw” is that originally the interest was earned on the O&M account. The Equipment Replacement fund was simply an accounting designation. Dan Swafford understands ERSC is upset the 2005 transfer was not disclosed but he did not know about it and Mike Farmer did not know about it. It was an accounting function of bookkeeping instructed by Town accountants to do this. Dan Swafford asked what ERSC wants. The money was transferred into the O&M account; do we need to amend the contract each time the Utilities Department wants to do something with the interest money? The Town is willing to work with ERSC because the Utilities have the rate increase and the money isn’t needed in the O&M account. We need to move on. Mike Farmer corrected Dan and stated “we do not have the rate increase”. Dianna stated the Town is open to suggestions on what to do with the interest. It has not been drawn on since 2005 and it won’t be drawn on, as an act of good faith, until an agreement is reached.

Scott Oldham sees this as two competing businesses doing the same job; needing to be one business controlled by both parties and hopes ERSC would consider this. We need to consolidate both operations so it will be quicker, cheaper, better and everyone will be on a level “playing field”. This has costs taxpayers too much money already.

Frank Terkhorn asked if we are trying to all get together, why is the Town of Ellettsville suing ERSC? ERSC wants to make sure the sewer plant continues to operate. Mr. Terkhorn asked if the people who manage the waster water plant are Ellettsville employees. Dianna stated they are contracted by the Town of Ellettsville.

Larry Barker, Board Member of ERSC, believes the key item is to take care of the customers. We need to work smarter and closer together instead of being divided. There are several members on ERSC board that have talked about creating a regional corporation that has equal membership of ERSC, NRSC and the Town to fix the problems we have. Money is being “thrown down the drain” with lawyer fees. We need to be putting money into our constituents’ pockets. Mr. Barker understands money was moved around to pay the bills and handle the plant on a daily smooth basis but they would like to have been told. The Utilities Department is doing a great job but we can do better by merging and cutting the cost. Dan Swafford asked if ERSC had a copy of the consolidation report that Umbaugh put together. Dianna said if anyone needs or wants a copy of the consolidation report, they can contact Jeff Farmer.

Sandra Hash can prepare any financial reports, monthly, for anyone who would like one. Dianna suggested stopping by Town Hall for any records and visit the waste water treatment plant.

Since ERSC is in agreement that they should merge with Ellettsville Utilities, Scott Oldham suggested they meet again. ERSC is meeting next Monday night and they will discuss this.

Adjournment

Dianna Bastin adjourned the meeting. Meeting adjourned 7:19 p.m.