MEMORANDUM 09-87

TO: Mayor Hornaday and Homer City Council

FROM: Walt Wrede

DATE: June 19, 2009

SUBJECT: Anaerobic Digester

During the last two meetings, you have heard presentations about a proposal to seek grant funding from the Department of Energy to construct and install an anaerobic digester at the sewage treatment plant. This is indeed a very exciting possibility and the investment the City makes could pay large dividends in the future. There is a lot to like about this project. If it works as described, it could result in:

• A total project cost that is less than the project currently on the City CIP List
• 80% funding by DOE
• Reduced electricity costs
• Reduced heating costs
• Assistance with existing sludge management and storm event / infiltration problems
• Increased methane production efficiency for heating and electricity generation
• Reduced carbon footprint
• Local project managers – an economic stimulus benefit
• Homer could set an example and help the rest of rural Alaska deal with pressing energy problems and climate change.
• Implementation of the Climate Action Plan

As attractive as this project is, I wanted to express reservations about moving forward. My reservations have to do with the City’s financial and personnel limitations and its ability to absorb the risk that a project of this type entails. Following is a list of some of my concerns, starting with the general, and ending with the financial.

General Concerns

• Generally speaking, demonstration projects of this type are undertaken by universities or larger municipalities that have more staff and greater financial resources. This is a relatively large risk for a City of 5,000 people with limited resources. I think it is revealing that so far, Dr Schimel has only been working with states and foreign countries.
• This technology, while proven in the lab, is untested in this climate, at this size and scope, and with this particular application. So in that sense, it can be described as an experiment.
• If this system does not work, the City is stuck with the equipment, loses its investment, and receives none of the benefits associated with the project.
• We do not have a good understanding of what the possible hidden costs might be. Examples include connection to the grid, piping for heat to other buildings, the 6,000 square foot building that is needed to house the equipment etc.
• Performance records and data regarding operations and maintenance costs are not available. This could have significant financial implications down the road.
• Project Cost Overruns: This is something that should be anticipated with any construction project and in many scenarios, these additional costs would be the responsibility of the City.
• At the last meeting, I understood Dr. Schimel to say that the City would still need to retain its back-up systems. If true, that is disappointing because getting rid of the sewerage lagoon was one of the primary benefits from the City’s perspective.
• If built, this project will contribute to the on-going problem of too much expensive infrastructure and not enough customers to pay for it maintenance and depreciation.
• Staff limitations: The Water-Wastewater Supervisor has announced his retirement effective in December of this year after 25 plus years of employment with the City. The Lead Treatment Plant Operator has announced his retirement after 25 years as a City employee. These are very key positions and we are losing a great deal of knowledge, history, and expertise. Other retirements within Water / Wastewater are pending. We will be very busy recruiting to fill these highly skilled positions. When the new folks arrive, one of their first tasks is going to be to learn all about a new, sophisticated, and highly automated water treatment plant. The next few months will be spent working out the bugs in the system and making sure it is running properly. It is hard to imagine where we would find the time to participate in the planning and training necessary for a project of this type. There is too much going on here already with staff transition and new infrastructure to also deal effectively with a new, demonstration project at the sewer treatment plant.
• More Staff Limitations: We are already overwhelmed with projects and project management tasks. As you know, the project manager position is not filled for budget reasons. Even thought this proposal includes project managers, staff will still have to be engaged with overall planning, project management, training, etc. It is hard to see where the staff would find the time to do that unless we drop other priority projects for now. Right now we have a number of projects that are pending. Most importantly, we have $8 Million Dollars of grant and appropriation awards already on the table for projects that we are having difficulty pushing forward due to limited staff resources ( $2 Million Spit Trail, $ 2 Million Town Center, $2 Million Main St., $2 Million Deep Water Dock). Our time might be better focused on those right now.

Fiscal Concerns:

• The Local Match: This project requires a local match of 20%. For a proposed budget of $3.5 Million, that means a local cash match of at least $700,000. It has been stated that it is very likely that we could get another grant or appropriation to cover this cost. That may be so but it is also speculative. So, if we have to come up with the Money, where would it come from? And would the local match be limited to 20%? Other potential project costs are discussed above.
• HAWSP: In my opinion, the HAWSP Fund is already fully committed. This Fund is already burdened with $20 Million dollars of debt and the City’s annual debt payments are getting close to the amount of revenue HAWSP takes in every year. Revenues are sure to decline with a slowing economy and approval of the tax exemption for unprocessed foods. Adding more debt for this project would severely limit the Council’s flexibility to fund other projects, including water and sewer LIDs for years to come. Any potential default on debt payments would become the obligation of the General Fund or the Water and Sewer Fund; neither of which are desirable. Tapping the HAWSP reserves for a straight cash match is also not desirable in this economy and tax climate.
• Water and Sewer Fund: Council is well aware of the problems this fund has with respect to the general operating budget. I would recommend caution in any discussion about using the reserves for loan payments or a cash match. Since we are not likely to put any more than the 20% called for in the new model into depreciation, this Fund will not grow significantly. We should be very cautious in this economic climate about spending money from the reserves.
• Other Fiscal Issues. Even if the City is fortunate enough to get 80% of the project funded by DOE and the 20% local match funded through a grant by someone else, it is an open question whether the City can afford the maintenance and operations costs and the potential hidden costs discussed above. We don’t know if the potential to save electric costs and to produce methane will justify the initial expenditures. There is substantial risk involved. One thing we do know is that we can’t afford to raise operations costs ( and hence fees) for the Water and Sewer Fund.
• Staff Resources: This concern is described above but I think it is important to note that in this economic and budget climate it is likely that we will be talking about scaling back operations and reducing staff rather than the opposite.

Summary

As I stated above, this is a very exciting proposal and the benefits to the City if it makes this investment can be very significant. My concerns have to do with timing and with the City’s overall capacity (fiscal and staff resources) to take this project on in this economic climate and on top of everything the City already has going on. As the City Manager, it is my job to assess the overall health and viability of the City’s finances. Managing risk is a big part of that responsibility.

Some will argue that the City should seize the moment, be proactive, and move forward in a progressive manner. We all know the old sayings that go something like “nothing ventured, nothing gained, or you need to spend money to make money.” Those sayings are true enough, if you have the money to spend and you can afford to lose. There is another saying around Las Vegas that goes something like “don’t gamble unless you can afford to lose.” This is especially true when gambling the taxpayers money. I am not sure the City can afford to take this risk at this time. It is already fairly extended financially and it is facing uncertain economic times ahead. The City has already assumed a fair amount of risk on other projects and it is moving ahead on many other fronts to achieve the goals of the Climate Action Plan.

One of the problems with Stimulus funding is that states and municipalities are being asked to make very big decisions in a very short amount of time with very little information. There is little time for the normal due diligence process. Stimulus funding can be very alluring because it involves “free” government money and the chance to achieve program goals quickly. However, easy credit, low interest rates, and the appetite for more stuff has gotten many in businesses and governments in this country in big trouble. That potential exists here.

In my opinion, the Council should resist the idea that we need to do this right now because the opportunity will go away if we don’t. It might be more prudent to wait and see if this technology can be proven for this application by an organization with more resources than the City. I would love to see the Borough or the State take it on. If this technology is proven to work, there will be plenty of grants and other funding available later on if the City wishes to move forward.