Electric-fund transfers are common

pseligson@newsobserver.comMay 30, 2014 

  • By the numbers

    Smithfield – electric budget, $20.06 million; transfers to general fund as a percentage of electric budget, 3.65 percent; total transfer, $731,589. The breakdown: $85,744 for property taxes, $331,189 for salaries and $314,656 for discretionary spending.

    Clayton – electric budget, $13.33 million; transfers to general fund as a percentage of electric budget, 7.28 percent; total transfer, $970,312. The breakdown: $335,000 for property taxes, $32,850 for franchise tax and $604,462 for salaries.

    Selma – electric budget, $9.31 million; transfers to general fund as a percentage of electric budget, 3.62 percent; total transfer, $337,114. The breakdown: $151,114 for salaries and $186,000 for discretionary spending.

    Benson – electric budget, $4.64 million; transfers to general fund as a percentage of electric budget, 1.74 percent; total transfer, $80,625. The breakdown: $8,313 for property taxes, $52,312 for salaries and $20,000 for economic development.

    Washington – electric budget, $35.9 million; transfers to general fund as a percentage of electric budget, 8.39 percent; total transfer, $3.01 million. The breakdown: $133,499 for property taxes, $1.09 million for franchise tax, $1.22 million for salaries, $470,000 for discretionary spending and $98,708 for economic development.

  • More information

Electricity is a charged issue in Smithfield: With town rates higher than those charged by Duke Energy Progress, households and businesses here face higher costs.

Complicating the matter is the town’s longtime practice of transferring electricity profits to its general fund. Price aside, critics say the transfers subsidize the town’s property-tax rate, a practice that tends to benefit the affluent at the expense of the poor.

Meanwhile, West Smithfield residents buy their electricity from the cheaper Duke Energy, while most customers east of the Neuse River must buy town electricity, which is roughly 15 percent more expensive.

Ending the transfer – which was $730,000 this year – could lead to an increase in the property-tax rate. But critics say it’s better to have everyone pay higher property taxes than have only some people pay more for electricity.

Though it has talked about doing so this year, the Town Council hasn’t stopped the transfers. Some council members say they first want to understand the full effects on the general fund. Others are waiting to see how changes in state laws will affect the electric fund.

Smithfield’s property rate is 57 cents per $100 of valuation. If the town ended transfers to the general fund without cutting spending, the property tax would have to climb by as much as seven cents.

Why transfer money?

Among public power towns, transferring money from the electric fund to the general fund is a common practice. But towns vary in how they account for these transfers: Some count the dollars as part of their electric budgets, not as actual transfers.

This year, Smithfield transferred about $730,000 from its electric fund. Town Manager Paul Sabiston said the transfers make sure the electric department is paying its fair share of town expenses. But about $315,000 of this year’s transfer wasn’t earmarked for a specific expense.

Smithfield breaks its electric fund transfer into three parts:

•  Salaries for employees, such as the finance director, whose duties cross into the electric department: $331,189.

•  Property taxes the electric department would pay if it was a private business: $85,744.

•  An additional amount allowed by state law: $314,656.

The rational goes like this:

Salaries: Some town employees split their time between multiple departments. For instance, if a town employee in the finance department spends half his time working on electric bills, half his salary should come from the electric department.

Taxes: If Duke Energy was the electricity provider in town, it would pay property taxes. Since Smithfield operates its electric department like a private business, it requires the department to pay “taxes” for wear and tear on roads, using the police department, etc.

Other amount: The $314,656 is allowed under a state law championed by Leo Daughtry, who represents Johnston County in the N.C. House of Representatives. Daughtry opposes the transfers, so in 2011, he sponsored a bill that limits transfers to 3 percent of the value of an electric fund’s physical assets.

Ending the $315,000 transfer would allow Smithfield to lower electricity rates by 3 to 4 percent for residential customers, somewhat less for other customers, Sabiston said.

How does Smithfield compare?

The Smithfield Herald looked at transfers in Clayton, Selma and Benson, the other public power towns in Johnston County, and also in Washington, which is close in size to Smithfield.

Smithfield scored on the lower end, transferring about 3.65 percent of its electric budget to the general fund, compared to 7.28 percent in Clayton and 3.62 percent in Selma. Benson transfers almost none of its electric budget, just 1.74, while Washington relies heavily on transfers, at 8.39 percent of its electric budget.

Selma is the only town that does not “tax” its electric department. And Clayton and Benson are the only two that don’t pay their general funds the amount allowed by state law.

Two towns, Clayton and Washington, reimburse themselves for the franchise tax the electric department would pay if it were a private utility.

Two towns also help fund economic development from their electric departments. Benson’s electric fund pays $20,000 of its economic-development director’s salary, and Washington spends about $100,000 on economic development. Both towns argue that economic development brings the electric department more customers.

Washington draws heavily from its electric department for salaries – $1.2 million. “It gives us economy of scale,” said Matt Rauschenbach, chief financial officer.

The town has just one finance department instead of separate finance departments for general government, electricity and water, so the electric department pays its share.

“It’s more effective to have one centralized department that handles that for the entire city, instead of each utility fund having their own, so I believe the utility funds receive a value by having it centralized,” Rauschenbach said.

Like Smithfield, Washington is transferring less from its electric fund than it used to. The amount not designated for specific expenses is now $470,000, down $1.17 million three years ago.

Rauschenbach said the town council there wanted to lower electricity rates. “They wanted to manage the cost of electricity to our customers, and this is one way to do it, to reduce the electric department’s costs,” he said. “It put a burden on the general fund, but it reduced the cost of the electric fund.”

‘It’s not fair’

In Smithfield, Councilman Perry Harris has pushed ending the transfers so the town can lower electricity rates. But so far, only Councilman Emery Ashley has joined him in voting to end the practice.

“It’s not fair,” Harris said, noting that subsidizing the property-tax rate with electricity profits means some Smithfield residents aren’t paying their fair share for town services.

“That’s the whole point,” he said. “The people who are using our system and using our facilities are not sharing in the cost.”

Harris disagrees with the rationales for the transfers, even the shared-salaries argument. “This is the system that has been set up that way in Smithfield for a long time, but there are other ways to do that.”

Harris thinks the council is reluctant to end the transfers because doing so could lead to a property-tax increase. But that concern should be secondary, he said. “It’s not fair to those citizens who are paying a higher electric rate than they have to pay,” Harris said.

East Smithfield resident Glenda Jordan agrees, and she wouldn’t mind higher property taxes in exchange for a lower utility bill. “I don’t have a problem with that,” Jordan said a recent Town Council meeting, “because I think every resident of Smithfield should pay the expenses of operating Smithfield.”

What next?

Smithfield appears unlikely to end the transfers in the budget year ahead, but it might lower the amount. The town manager has recommended reducing the transfer by $63,000. The Town Council has said it would like to see a $150,000 cut.

Mayor John Lampe has said he is reluctant to end the transfers now for two reason. For one, Smithfield doesn’t know how the higher state sales tax on electricity sales will affect electric department revenue.

Second, North Carolina’s public-power towns are negotiating with Duke Energy to purchase their ownership shares in four power plants. The towns borrowed heavily to purchase those shares, and the debt is reflected in their electricity rates.

Selling their shares could lower their debt and therefore their rates. A deal could happen by year’s end.

Harris said he plans to continue his push to end transfers, and while that hasn’t happened, he’s glad people are at least talking about the issue.

Smithfield’s electricity rates are another matter, with some residents openly questioning how their bills can be so high. Councilman Travis Scott is organizing a public forum about electricity rates, including how Smithfield calculating them.

Seligson: 919-836-5768

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