The New Albany City Council must raise sewer rates by 70 percent immediately or risk breaching bond term agreements, a representative with the financial analysis agency Crowe Horwath said Thursday.

Hired last year by the Sewer Board to study the utility’s financial standing, John Skomp of Crowe Horwath reported to the body several benchmarks have failed to be accomplished concerning the approximately $52 million in outstanding sewer bonds still owed.

The utility is supposed to budget two months worth of operating expenses, but currently has a $2.7 million deficit in its operating fund balance. That means the sewer board needs to pay $900,000 a year for the next three years to balance the operating fund, Skomp said.

It also has to pay $700,000 each of the next two years to satisfy a bond anticipation note.

Skomp said a payment of $960,000 will have to made to the sewer’s bond and interest syncing account by March 1 to satisfy SRF agreements of the Indiana Wastewater Revolving Loan Program.

Additionally, New Albany owed about $1.6 million in outstanding claims as of Jan. 6, according to Skomp’s report. The utility has $5 million in debt backed by what Skomp defined as junk bonds that lost their rating after being secured by the city.

That basically means the sewer fund would have to back those bonds with about $5 million to take on new loans, if the state agrees since the city still would have SRF dues.

The utility wouldn’t be able to bond the payments it’s facing since it can’t take on more debt, Skomp added.

Crowe Horwath’s scenarios were limited to the substantial rate increase due to the outstanding debt, Skomp said.

“As we looked at where the utility is at and where it needs to be, all the options have fallen off the table,” he said.

The Tribune was unable to confirm Skomp’s numbers with New Albany as City Controller Kay Garry was off Thursday.

The sewer board did not act on the rate suggestion, instead tabling the matter until it meets with the council. Before the new rates could be implemented, the council would have to approve.

For the average New Albany customer, the hike would mean a $25 difference in their bill, from $35 to about $60 monthly, Skomp said. Fixed income customers typically pay about $10 monthly and would see a $7 increase, he continued.

If passed, the rates would go into effect for all New Albany sewer customers.

The council may be able to shift Economic Development Income Tax funds to the utility to offset some of the expenses, though the city only has an estimated $4.6 million in EDIT available.

There are other requests pending for EDIT, including a public safety plea for $2 million being considered by the council.

An EDIT subsidy of $870,000 is already paid to the sewer fund annually to keep the current rates. The administration asked Skomp to explore what the rates would be if the EDIT stipend was removed from the utility, but he said the state likely wouldn’t allow it due to the poor fiscal situation of the sewer department.

The ends have not been meeting in the utility for some time, as Skomp’s report studied the shortage of sewage revenue from 2007 to Sept. 30 of 2009.

The utility was consistently incurring expenses — operating tolls and debt payments — of about $11 million a year between 2007 and 2009 while only taking in approximately $9 million in revenue.

“We don’t have any choice,” sewer board member Ed Wilkinson said.

Beyond the outstanding debt, the lack of new credit could threaten sewer upgrade projects mandated by the federal government through the Environmental Protection Agency, which has a consent decree with New Albany.

Sewer board vice-president Gary Brinkworth said the body must re-evaluate its priorities for 2010.

“We’re going to have to take a look at these capital improvement projects before we go any further,” Brinkworth said.

If passed, the rates would be similar to what was approved by the Jeffersonville City Council in December. A 200 percent increase will be phased-in for Jeffersonville sewer customers over five years.

The first segment will see the average Jeffersonville customer paying $50 a month, up from $24.

But New Albany couldn’t phase its sewer hike because of the debt, Skomp said.

New Albany Councilman Bob Caesar attended the sewer meeting Thursday, and said it’s a disheartening situation. He added that even with a 70 percent increase, it would take a year just for the sewer fund to break even.

“For a lot of people, any kind of raise is going to make a big difference,” he said. The council is “concerned about the people of New Albany, we really are.”

At the same time, he acknowledged some raise will be necessary based on the numbers. Caesar pointed to Indiana statute that demands rates for utilities match operating expenses.

“We are breaking the law by not totally funding the sewer utility,” he said.

Before signing-off on a 70 percent hike, Caesar said the sewer board, administration and council need to have a work session to see if there’s any way to avoid such a costly raise.

The city may have to consider buying-out its contract with Environmental Management Co. and handling the sewer utility in-house, similar to what the stormwater department did last year.

Caesar added the city should consider forming a utility district to handle rates — a board that would remain constant instead of changing every time there’s a new administration or council.

“I just can’t help but think that there has to be some options other than just saying ‘we’re raising your rates 70 percent’,” Caesar said.