A British adage says “where there’s muck, there’s brass” — with muck being manure and brass being money. That applies to a review by the Met Council of the “sewer availability charge” applied to businesses that expand their facilities or change hands or operations. For restaurants than may be mean remodeling. But in this case it is the businesses that must lay out substantial quantities of “brass” to have their “muck” go down the drain.
This particular situation involves interesting economics and has important outcomes for society as a whole. To what extent does the structure of charges for government services, like water and sewer, affect how our cities develop and how land is used?
The problem arises when the service involved entails large investments in long-lasting infrastructure like sewer mains and treatment plants. Amortizing such fixed costs is a large share of the total cost of the service. If the necessary investment was one-time for a fixed set of business and residences with no change in use, it would be easier. But when new facilities or developments are added to an existing system over time, you face the question of how to charge the new customers a fair share of the existing fixed costs or how to distribute the cost of entirely new facilities needed to accommodate new development over the customer base.
That all sounds pretty vague, so let’s start with an analogy.
Five friends go out, order onion rings, two pizzas and a couple pitchers of beer. They split the tab five ways. Simple and fair. There are no “fixed costs,” just the one time “variable costs” of the refreshments.
Or consider Fred who lives in Little Canada but gets a job in Excelsior and thus has a long commute. He discovers that Lois, a colleague, lives near him and is amenable to car-pooling. Cars have variable costs, like gas, tires and repairs, plus fixed ones like insurance and the purchase payments or lease. What is fair? They could each drive their own cars alternate weeks. Or one could drive all the time with the other paying cash to defray some expense. But how much?
The rider could pay the gas. But what if commuting is only a fourth of the owner’s weekly miles? Should the rider pay for every fill? Or what if the rider is an economist and says, “You are driving already anyway. It costs very little to have another 150 pounds in your car for those miles. So if I give you two bucks a day, you will be better off than if you got nothing.” The driver could retort “Look, you are already spending at least $50 a week on your own car, so if you give me $40 a week you will be better off.” Each is correct, but who is “right.”
Perhaps they can calculate an average cost per mile and have the rider pay half.
But now let’s say over time there are two more riders. The driver’s car needs replacement and he isn’t sure he is paid fairly, so he suggests they pool their money and buy a vehicle just for the commute. They can split the cost equally and rotate driving. One is an attorney and sets up a LLC. They find a five-passenger minivan, each pony up $500 for the down payment and they get a loan for the rest. They split the gas, maintenance, insurance and car payment four ways.
Two years into this, a new hire wants to join them. They have a fifth seat and splitting the monthly variable costs five ways would lower what each must put in. But what do you do with the fixed cost of the vehicle itself? The newbie could pay the original members a fifth of the down payment. Or she could pay a fifth of the value of the van on their LLC’s depreciation schedule, or a fifth of the bluebook value. But which is “right?”
And what if there are two or three or four new applicants? They could trade in the minivan and buy an eight or 11-passenger van. But the existing poolers have equity in a serviceable vehicle that might go many more. But its trade-in is minimal and each person’s monthly outlay initially might go up with a new vehicle loan. Over the long run though, the per-person cost would be lower. So must new people pony up to join?
Or what if someone has a baby and wants to take it along to on-site daycare? No problem on mommy’s lap as in an airplane, but that is no longer legal in a car. There is a vacant space to put a child seat, so simply make it one more membership? Yet what if it is just going to be for a year, or only three days a week?
There are not unsurmountable questions, but can be knotty nevertheless. And they become knottier if the pool is not a voluntary carpool, but instead is a government agency tasked with accommodating all new entities needing the service.
And if that service is sewer, how do we equitably share the costs between the usage needs of a single-family home versus those of a multi-table restaurant, whose toilets are likely to be flushed several thousand times a day?
It became clear decades ago that there were clear economies of scale, certainly from the point of society as a whole, in waste water treatment. Especially in a metro area such as ours, with myriad independent municipalities, it is cheaper to have a regional system than myriad small ones. But as population and commerce grow, how do you charge new users?
At first, such regional systems, or the municipal systems in cities that still had space for new housing and industry, took on new customers at the average cost of providing the service. That meant when a major expansion was needed, existing customers saw their rates go up too, even though the old infrastructure would have been adequate if not for newcomers. In economists’ jargon, newcomers were charged the “average cost” calculated over all users. This was less than the “marginal cost” associated with accommodating new growth.
Any time the cost to someone is less than the “marginal cost to society,” you have an incentive for overuse and economic inefficiency. That pricing approach subsidized urban sprawl. Inner cities in effect paid for newer suburbs. The result was that housing density was lower and intensity of commercial wastewater generation was higher than if the new developments had to pay the full marginal cost of treatment.
The economics made sense to officials. Connection charges became common. But new construction is not sole cause of additional sewer use. What if an existing plumbing shop is torn down and a sixty-child daycare goes up. Or a drugstore is remodeled into a sports bar? Or if a metal stamping shop becomes an organic sprout factory that needs to flush sprouts repeatedly? Or an Edwardian home in Merriam Park is torn down to build a 12-plex. Of if the house our old widower neighbor lived in for decades becomes a rental with 11 students?
Clearly, you need to impose some connection fee on such changes to existing property if you charge them for new development in Woodbury or Rogers. Yet how much and at what threshold? A toddlers doesn’t poop any more at daycare than if she were at home with a parent. If both are in the same town, what difference does it make on anyone’s sewer loads? Adding six sidewalk tables to an existing restaurant that will be used sporadically over five months of the year is not the same as an identical all-season expansion indoors. And what if you convert a sports bar near a college to an elegant tea shoppe or cupcake store? Should you get a refund? Flow into the sewer will be less.
Economists chant their mantra about making everyone pay marginal cost. At the operational level, that isn’t always easy. Some day new technology may solve the problem by making it cheap to measure liquids and solids passing any pipe. We are close to being able to assign the true cost of road use to a 2,400 pound Toyota Yaris at 55 mph or a 100,000 pound truck of soybeans going 80. It may not take all that long to get cheap and accurate measurement of sewer use.
Until then, it is a messy process. The Metro Council seems to be moving in the right direction on existing unfairness. But assigning the right amount of brass to some specific load of muck will remain messy for a while.