Town of Levinton The September 2010 Levinton Town Meeting was certain to be contentious. The views above reflected the wide range of opinions about the proposed $3M expansion of the town water and sewage system. The town’s treasurer was proposing to finance the expansion with 20 year bond issue. The bonds would carry an interest rate of 5% meaning that the town was looking at large debt service obligation. Approval of the expansion was by no means certain Background The town of Levinton was located on the Pacific coast of California, some 200 miles north of LA. It had been incorporated In 1800s, during the time of California’s gold rush, when it was popular with miners who had “struck it rich” in the hills to its east. Over the years it had grown and matured, and now was home to some 2000 permanent residents. About 30 new homes had been built each year over the past several years, mainly by retirees or people who wanted to leave LA and live simpler life. Many of these people purchased a local business and tried to make a go of it, or they started their own business, usually as professionals (stock brokers, accountants, lawyers) Levinton was a popular summer vacation spot, but the citizens, via their Board of Selectmen (3 people elected to staggered 3-year terms), had always voted to maintain the town’s small village feel by not allowing expansion in the number of tourist facilities (hotels &inns, beach parking, beach concession stands). As a result, the town had sleeping accommodations for only about 500 tourists at any one time, although due to vacation schedules and lengths, some 4000 people spent more or all of their summer vacations in Levinton each year. The town Manager estimated that another 2000-3000 people were “ day visitors” during the summer. The Municipal services department For over 20 years, the town’s water and sewer system had been operated by the Municipal service department. As Exhibit 1 indicates, from 2007 to 2009, the department had incurred sizable operating deficits. A deficit meant that the general tax revenues budgeted for the department ($0.5 of the general property tax) were insufficient. And tax revenues had to be diverted from other uses to eliminate the deficit, which had angered some residents. In 2009, the Board of Select men had told the town Manager to see to it that the department ran a surplus or incurred only a small deficit. The department had incurred a small deficit in 2010 and was forecasting a surplus in its 2011 budget Water and Sewer Units and Fees Initiation fees for “tapping into” the system, as well as ongoing usage fees for water and sewer consumption, were based on estimated rather than actual use. Estimated consumption was a function of the number of “units” in a building, which depended on the building’s size and design. For ex, building with many bathrooms, saunas, whirlpool tubs, wet bars, ice machines, extra sinks, outdoor spigots, and so forth had more units than buildings designed more ...

1. Town of Levinton
The September 2010 Levinton Town Meeting was certain to be
contentious. The views above reflected the wide range of
opinions about the proposed $3M expansion of the town water
and sewage system. The town’s treasurer was proposing to
finance the expansion with 20 year bond issue. The bonds would
carry an interest rate of 5% meaning that the town was looking
at large debt service obligation. Approval of the expansion was
by no means certain
Background
The town of Levinton was located on the Pacific coast of
California, some 200 miles north of LA. It had been
incorporated In 1800s, during the time of California’s gold rush,
when it was popular with miners who had “struck it rich” in the
hills to its east. Over the years it had grown and matured, and
now was home to some 2000 permanent residents. About 30 new
homes had been built each year over the past several years,
mainly by retirees or people who wanted to leave LA and live
simpler life. Many of these people purchased a local business
and tried to make a go of it, or they started their own business,
usually as professionals (stock brokers, accountants, lawyers)
Levinton was a popular summer vacation spot, but the citizens,
via their Board of Selectmen (3 people elected to staggered 3-
year terms), had always voted to maintain the town’s small
village feel by not allowing expansion in the number of tourist
facilities (hotels &inns, beach parking, beach concession
stands). As a result, the town had sleeping accommodations for
only about 500 tourists at any one time, although due to
vacation schedules and lengths, some 4000 people spent more or
all of their summer vacations in Levinton each year. The town
Manager estimated that another 2000-3000 people were “ day
visitors” during the summer.
The Municipal services department
For over 20 years, the town’s water and sewer system had been

2. operated by the Municipal service department. As Exhibit 1
indicates, from 2007 to 2009, the department had incurred
sizable operating deficits. A deficit meant that the general tax
revenues budgeted for the department ($0.5 of the general
property tax) were insufficient. And tax revenues had to be
diverted from other uses to eliminate the deficit, which had
angered some residents. In 2009, the Board of Select men had
told the town Manager to see to it that the department ran a
surplus or incurred only a small deficit. The department had
incurred a small deficit in 2010 and was forecasting a surplus in
its 2011 budget
Water and Sewer Units and Fees
Initiation fees for “tapping into” the system, as well as ongoing
usage fees for water and sewer consumption, were based on
estimated rather than actual use. Estimated consumption was a
function of the number of “units” in a building, which depended
on the building’s size and design. For ex, building with many
bathrooms, saunas, whirlpool tubs, wet bars, ice machines, extra
sinks, outdoor spigots, and so forth had more units than
buildings designed more abstemiously. A swimming pool or the
presence of lawn sprinklers added considerably to the unit count
The initiation (or “tap-in”) fee was one time, whereas the usage
fee was assessed annually. Because fees depended on units and
not actual usage, customers who tapped into the system paid no
usage fees during the tap-in year. From then on, they paid usage
fee only
The number of usage units had grown steadily each year as new
people tapped onto the system. Exhibit 1 shows these fees and
the number of usage unit for the past 4 years, plus the forecast
for 2011. As it indicates, there had been 435 initiation units in
2010, and, due to many existing customers 7270 usage units
The annual increase in units depended on a combination of the
number of new dwellings and the water consumption potential
(units) of each. The town’s planner indicated that she expected
the number of initiation units to be about 440 in 2011 and 450
in 2012. Usage units were forecast at 7705 in 2011 and 8145 in

3. 2012
The Bonds
If approved, the $3M 5% bond issue would be Levinton’s
second bond issuance for the Municipal Services Department.
The first (for $2M) had taken place in 1994 had been for 20
years and carried a 4% interest rate. It was using a sinking fund
to accumulate principal payments. The treasurer’s plan was to
use a sinking fund with the $3M issue also. Exhibit 2 contains a
schedule of payments into the sinking funds, earnings on the
sinking funds and principal repayment. Since the Town invested
the sinking fund conservatively, the 3% earning rate had
remained almost constant for the first 15 years of the $2M bond,
and was expected to remain at that level for its remaining life.
It also appeared to be reasonable for the $3M bond. Sinking
fund earnings were used by the town for general budget support
Issues
As the date of the town meeting neared, the debate about the
wisdom of the expansion intensified. According to an
accountant who had moved to Levinton some three years ago,
the financial forecast was not optimistic:
2011 budget forecast for debt service is fine, but it’s also
misleading in terms of expansion. In 2012, if we pass these
bonds, we’ll be looking at incremental debt service of $300,000,
on top of the $180,000 we’re already paying for the first bond
issue. How are we going to pay for that. More precisely, who is
going to pay for it? There are only 2000 of us. Do the math!
A longtime resident and retired attorney, agreed adding a new
dimension to the analysis
The math’s easy. Here is the tricky part- who came up with
those fees? Who should an initiation fee be $125 and a usage
fee $42. It just doesn’t seem right that they’re so close together.
And while we are at it, what about the earnings on the bond
sinking fund. What aren’t those used to help fund the deficit?
The owner of a local inn with about 50 beds and a large
swimming pool, added her own perspective:
Ok then what about the units themselves? Sure, I use water for

4. my pool, but the pool doesn’t use the sewer system. The same
for watering my grounds. Why should I pay the sewer rate for
the water that doesn’t use the sewer. I already pay and arm and
a leg because of the bathrooms in the inn
With only a few weeks left before the town meeting, almost
everyone was looking for the magic bullet. Surely there could
be some way to solve the problem
ASSIGNMENT
1. As a philosophical matter, without reference to any numbers,
what sort of cross –subsidization, if any, is appropriate in a
water and sewer system? Be sure to address, as a minimum,
whether new users should subsidize existing users or vice versa,
whether tax payers should subsidize the overall cost of the
system, whether people with pools and large lawns should
subsidize ( via the inclusion the overall rate) people do not have
these facilities.
2. Assuming the $3M bond is approved, and that the current
usage and fee trends continue, prepare a budget for 2012. Make
assumption where necessary
3. Assume there is a deficit forecast for 2012 and you want to
eliminate it. How would you change the fees and subsidies? As
part of your answer, address whether the general tax support
should remain, and whether the earnings on the sinking fund
should be considered as revenue of the Municipal Service
Department
4. Given above decision, forecast what will happen to the
surplus or deficit in 2012-2014 when there is debt service on the
2 bond issues. How would you eliminate a deficit during this 3-
year period? What will happen in 2015 and beyond, when there
is debt service only for the second bond issue?
5. Given all of the above thinking, prepare a propose solution to
the issues on the table that if presented at the town meeting
would be the magic bullet that everyone is seeking.
Town of Levinton

5. The September 2010 Levinton
Town Meeting was certain to be contentious. The views above
reflected
the wide range of opinions about the proposed $3M expansion
of the town water and sewage system.
The town’s treasurer was proposing to finance the expansion
with 20 year bond issue. The
bonds would
carry an interest rate of 5% meaning that the town was looking
at large debt service obligation. Approval
of the expansion was by no means certain
Background
The town of Levinton was located on the Pacific coast of
California, some 200 miles n
orth of LA. It had
been incorporated In 1800s, during the time of California’s gold
rush, when it was popular with miners
who had “struck it rich” in the hills to its east. Over the years it
had grown and matured, and now was
home to some 2000 permanent re
sidents. About 30 new homes had been built each year
over the past
several years, mainly by retirees or people who wanted to leave
LA and live simpler life. Many of these
people purchased a local business and tried to make a go of it,
or they started their
own business,
usually as professionals (stock brokers, accountants, lawyers)
Levinton was a popular summer vacation spot, but the citizens,
via their Board of Selectmen (3 people

6. elected to staggered 3
-
year terms), had always voted to maintain the town’
s
small village fee
l by not
allowing
expansion in the number of tourist facilities (hotels &inns,
beach parking, beach concession
stands). As a result, the town had sleeping accommodations for
only about 500 tourists at any one time,
although due to vacation
schedules and lengths, some 4000 people spent more or all of
their summer
vacations in Levinton each year. The town Man
a
ger estimated that another 2000
-
3000 people were “
day visitors” during the summer.
The Municipal services department
For over 20 years
, the town’s water and sewer system had been operated by the
Municipal service
department. As Exhibit 1 indicates, from 2007 to 2009, the
department had incurred sizable operating
deficits. A deficit meant that the general tax revenues budgeted
for the dep
artment ($0.5 of the general
property tax
) were insufficient. And tax revenues had to be diverted from
other uses to eliminate the
deficit, which had angered some residents. In 2009, the Board

7. of Select men had told the town Manager
to see to it that the d
epartment ran a surplus or incurred only a small deficit. The
department had
incurred a small deficit in 2010 and was forecasting a surplus in
its 2011 budget
Water and Sewer Units and Fees
Initiation fees for “tapping into” the system, as well as ongoing
usage fees for water and sewer
consumption, were based on estimated rather than actual use.
Estimated consumption was a function
of the number of “units” in a building, which depended on the
building’s size and design. For ex, building
with many bathrooms,
saunas, whirlpool tubs, wet bars, ice machines, extra sinks,
outdoor spigots, and
so forth had more units than buildings designed more
abstemiously. A swimming pool or the presence
of lawn sprinklers added considerably to the
unit count
The initiation (or
“tap
-
in”) fee was one time, whereas the usage fee was assessed
annually. Because fees
depended on units and not actual usage, customers who tapped
into the system paid no usage fees
during the tap
-
in year. From then on, they paid usage fee only

8. Town of Levinton
The September 2010 Levinton Town Meeting was certain to be
contentious. The views above reflected
the wide range of opinions about the proposed $3M expansion
of the town water and sewage system.
The town’s treasurer was proposing to finance the expansion
with 20 year bond issue. The bonds would
carry an interest rate of 5% meaning that the town was looking
at large debt service obligation. Approval
of the expansion was by no means certain
Background
The town of Levinton was located on the Pacific coast of
California, some 200 miles north of LA. It had
been incorporated In 1800s, during the time of California’s gold
rush, when it was popular with miners
who had “struck it rich” in the hills to its east. Over the years it
had grown and matured, and now was
home to some 2000 permanent residents. About 30 new homes
had been built each year over the past
several years, mainly by retirees or people who wanted to leave
LA and live simpler life. Many of these
people purchased a local business and tried to make a go of it,
or they started their own business,
usually as professionals (stock brokers, accountants, lawyers)
Levinton was a popular summer vacation spot, but the citizens,
via their Board of Selectmen (3 people
elected to staggered 3-year terms), had always voted to maintain
the town’s small village feel by not
allowing expansion in the number of tourist facilities (hotels
&inns, beach parking, beach concession
stands). As a result, the town had sleeping accommodations for
only about 500 tourists at any one time,
although due to vacation schedules and lengths, some 4000
people spent more or all of their summer
vacations in Levinton each year. The town Manager estimated
that another 2000-3000 people were “

9. day visitors” during the summer.
The Municipal services department
For over 20 years, the town’s water and sewer system had been
operated by the Municipal service
department. As Exhibit 1 indicates, from 2007 to 2009, the
department had incurred sizable operating
deficits. A deficit meant that the general tax revenues budgeted
for the department ($0.5 of the general
property tax) were insufficient. And tax revenues had to be
diverted from other uses to eliminate the
deficit, which had angered some residents. In 2009, the Board
of Select men had told the town Manager
to see to it that the department ran a surplus or incurred only a
small deficit. The department had
incurred a small deficit in 2010 and was forecasting a surplus in
its 2011 budget
Water and Sewer Units and Fees
Initiation fees for “tapping into” the system, as well as ongoing
usage fees for water and sewer
consumption, were based on estimated rather than actual use.
Estimated consumption was a function
of the number of “units” in a building, which depended on the
building’s size and design. For ex, building
with many bathrooms, saunas, whirlpool tubs, wet bars, ice
machines, extra sinks, outdoor spigots, and
so forth had more units than buildings designed more
abstemiously. A swimming pool or the presence
of lawn sprinklers added considerably to the unit count
The initiation (or “tap-in”) fee was one time, whereas the usage
fee was assessed annually. Because fees
depended on units and not actual usage, customers who tapped
into the system paid no usage fees
during the tap-in year. From then on, they paid usage fee only
Exhibit 1Town of LevintonExhibit 1 Operations of the
Municipal Service DepartmentRevenue and Expense

10. Item2007200820092010Budget 2011RevenuesNote Initiation
fees44,10046,20049,45052,20055,000 Usage
fees1240,000260,010280,440301,705323,610 Tax
support30,12531,02932,27033,23834,568Total
revenues314,225337,239362,160387,143413,178Operating costs
Direct2165,300170,259177,069180,611187,835
Indirect324,77825,52126,54227,07328,156Debt Service
Principal4100,000100,000100,000100,000100,000
Interset80,00080,00080,00080,00080,000Total operating
costs$370,078$
375,780$383,612$387,684$395,991Surplus(Deficit)($55,853)($
38,542)($21,452)($541)$17,186Tax base (assessed
valuations)5$ 60,250,000$ 62,057,500$ 64,539,800$
66,475,994$ 69,135,034Tax
rate/$10006$15.30$15.61$15.92$16.24$16.56Water
consumption
(gallons)50,400,00054,936,00060,429,60067,681,15276,479,702
Initiation fee7$105$110$115$120$125Usage
fee7$40.00$40.50$41$41.50$42Actual and forecast
unitsInitiation units420420430435440Usage
units6,0006,4206,8407,2707,705Notes1. Applicable for both
water and sewer costs. With a few exceptions (lawn watering),
water that entered a building went out through the sweage
system2. Includes salaries and wages of department staff, lease
payments for service vehicles, telephone, electricity, chemicals
and other materials used in water and sewage treatment, and
system maintenance ( which was contracted to a third party)3.
Allocation from the town's general expenses. Included the
department's fair share of such items as the Town Manager's
office, insurance, building maintenance and repair, legal
services, and cleaning services4.Paid into a bond sinking fund.
Interest earned on the sinking fund was considered part of the
town's general revenue. Because the entire cost of
constructingthe water and sewer system had been financed with
a bond and because the bond hsd s term of 20 years, after which
the plant was expected to need significant repair and renovation

11. work, principal payments were considered to be reasonable
surrogates fot the plant's depreciation5. Most property was
assessed about every 5 years and its new value used for purpose
of computing property tax6. This was the overall tax rate Of
this rate, $0.50 was allotted to the Municipal Services
Department. It was the only town department that received such
an allotment7. Per unit. Units were based on the estimated water
consumption in a building, which was determined by the
building's size and design. See the text for details.
Exhibit 2Town of LevintonExhibit 2 Sinking Fund and Earnings
(Assuming 3% Earning rate)Bond #1 2,000,000YearSinking
fundEarningsTown Budget SupportPrincipal RepaymentTotal in
Sinking
Funds19940$001995$100,000$3,000$3,000$0$100,0001996200,
0006,0006,000$0200,0001997300,0009,0009,000$0300,0001998
400,00012,00012,000$0400,0001999500,00015,00015,000$0500
,0002000600,00018,00018,000$0600,0002001700,00021,00021,
000$0700,0002002800,00024,00024,000$0800,0002003900,000
27,00027,000$0900,00020041,000,00030,00030,000$01,000,000
20051,100,00033,00033,000$01,100,00020061,200,00036,00036
,000$01,200,00020071,300,00039,00039,000$01,300,00020081,
400,00042,00042,000$01,400,00020091,500,00045,000 Bond
#2
$3,000,00045,000$01,500,00020101,600,00048,000Sinking
FundEarnings48,000$01,600,00020111,700,00051,00051,000$0
1,700,00020121,800,00054,000$150,000$4,50058,500$0$1,950,
00020131,900,00057,000300,0009,00066,000$02,200,00020142,
000,00060,000450,00013,50073,500$2,000,000450,0002015600,
00018,00018,000$0600,0002016750,00022,50022,500$0750,000
2017900,00027,00027,000$0900,00020181,050,00031,50031,50
0$01,050,00020191,200,00036,00036,000$01,200,00020201,350
,00040,50040,500$01,350,00020211,500,00045,00045,000$01,5
00,00020221,650,00049,50049,500$01,650,00020231,800,00054
,00054,000$01,800,00020241,950,00058,50058,500$01,950,000
20252,100,00063,00063,000$02,100,00020262,250,00067,50067
,500$02,250,00020272,400,00072,00072,000$02,400,00020282,

12. 550,00076,50076,500$02,550,00020292,700,00081,00081,000$0
2,700,00020302,850,00085,50085,500$02,850,00020313,000,00
090,00090,000$3,000,000- 0