Racine Intergovernmental Agreement for sewer service and revenue sharing

Thomas J. Bunker, P.E., General Manager, Racine Water and Wastewater Utilities, Racine, Wisconsin
William J. Mielke, P.E., R.L.S., President/CEO, Ruekert/Mielke, Waukesha, Wisconsin

The Racine Intergovernmental Agreement developed out of the need to expand the City of Racine, Wisconsin's wastewater treatment facility. The facility was in need of major upgrades and expansion, estimated to be in the range of $100 million. Some of the proposed improvements dealt with the system's inability to handle current flows and stormwater events. Instances of having to divert minimally treated wastewater into Lake Michigan or the Root River had increased. Necessary upgrades and replacement of equipment that was nearing the end of its useful life were required. But these upgrades to accommodate the existing population only accounted for 30.2% of the total project costs.

The fact that almost 70% of the project costs were associated with expanding the planned capacity of the system to handle growth through the year 2020, including interceptor system improvements, was a major problem. Current municipal customers of the Utility include the City of Racine, the Towns of Mount Pleasant, Yorkville and Caledonia, the Villages of Sturtevant, North Bay, Wind Point and Elmwood Park, and three Sanitary Districts. Without these system upgrades, the Village of Sturtevant and the Towns of Caledonia, Mount Pleasant, Yorkville and Raymond, all surrounding the City of Racine, would have restricted residential, commercial and industrial growth. Indeed, a total ban on any sewer extensions was implemented by the Racine Wastewater Commission in November of 2000. The Commission cited the wastewater facility's inability to deal with either increased flows or major stormwater events. Ruekert/Mielke, a consulting engineering firm in Waukesha, Wisconsin that was hired to assist in negotiating a wastewater service agreement, was able to attach hard figures to show that the majority of the improvements to the wastewater treatment facility were needed to accommodate the growth of the suburban areas west and north of the City of Racine.

These problems were caused, in part, by the City of Racine's actions in the 1960s. The City extended sewer lines to two areas—the SC Johnson Waxdale Plant in the Town of Mount Pleasant and a handful of subdivisions in the Town of Caledonia—without annexing the area. Essentially the City closed off its own borders, limiting its ability to expand into the open space directly to the west and northwest. Lawsuits and years of hard feelings followed, as the Towns of Caledonia and Mount Pleasant grew into the largest towns in the State of Wisconsin while the City of Racine's population dropped. Between 1990 and 2000 the city lost 2.9% of its population. There are now 81,855 residents, down from a high of 95,162 in 1970. On the other hand, Sturtevant's population grew by 39% between 1990 and 2000, with Mount Pleasant (15%) and Caledonia (12%) also posting impressive numbers.

While the City wasn't posting the kind of economic numbers necessary to stabilize or lower its tax rate, it was still providing amenities enjoyed by the entire region. The City of Racine Public Library, for example, is an asset whose circulation reaches far beyond the borders of the City. While Racine County partially compensates the City for use by nonresidents, almost 64% of the funding is provided directly by the City. The most recent $8.9 million expansion of the library was funded entirely by the City. It is estimated that the City has been subsidizing library service to the surrounding municipalities in the amount of approximately $697,000 annually.

Likewise, the Racine Zoological Gardens, one of only eleven free zoos in the United States, draws over two-thirds of its visitors from outside the city limits. With operating revenues covering less than 40% of expenses, the City of Racine was contributing over $400,000 per year to the zoo. The rest of the County combined, including the fastest growing suburbs, contribute only $69,625 through County property taxes.

The Wustum Museum of Fine Arts fits into a similar category. Boasting one of the four best collections of contemporary American crafts in the country, the museum offers free daily admission plus outreach programs. The County and suburban communities pay nothing toward the museum's support. The museum recently finished building a new $9.5 million facility at a downtown location, with no plans in place for cost sharing between benefiting communities.

Initially the Racine Utility hired a Madison, Wisconsin attorney and Ruekert/Mielke to negotiate a wastewater service agreement. Later an attorney from Quarles and Brady, Milwaukee, was retained to compliment the City Attorney and Racine General Manager to assist in the negotiations. Their initial finding was that any new agreement for wastewater service to the outlying communities would end up costing the City of Racine utility customers money. The solution typically used by other municipalities is to require annexation of a property before sewer or water services are provided. Racine had done just the opposite, not realizing the long-term consequences. Instead of requiring annexation, the City provided sewer and water service outside of the City limits and was now paying the price. It was clear that the City needed to find a new solution to the broader problems of inequity in service provision, and that the time was now, before sewer service was extended any further.

As part of the system upgrades, a new pump station was constructed to serve a new remote wastewater storage facility. This facility is capable of diverting up to seven million gallons of storm-related wastewater flows at a maximum rate of 17 MGD. The facility reduces the stress on downstream conveyance and treatment facilities.

Negotiations over the wastewater treatment facility expansion started in 1997. With each community protecting its own turf, negotiations started out on shaky ground. While the negotiations initially dealt with the upgrades and expansion of the facility, it was quite clear that little progress would be made without addressing the quality of life institutions. The City of Racine was clear in its position—a more encompassing intercommunity cooperation agreement would have to be drafted, or all parties would suffer the consequences.

As negotiations progressed, everyone had an opportunity to bring issues to the table related to wastewater service or cost sharing for regional services. Inequities in services or practices were examined as they arose, with the engineering firm examining documentation of actual costs versus perceptions of costs. This action served to dispel notions of inequities, either actual or perceived, among the neighboring communities. In this way, leaders were able to move forward with meaningful negotiations that were based upon facts rather than a history of mistrust.

The allocation of costs for the wastewater treatment facility upgrade and expansion was the first issue to be addressed. Traditionally, capital costs are billed to current customers as a percentage of current wastewater flows. Under this method, the City of Racine would pay for about 64% of the annual costs until growth in the suburbs caught up with usage. However, almost 70% of the costs were to expand the facility to accommodate future increased flows, only about 8% of which will be generated within the City of Racine. Recovering all project costs through user charges would have resulted in the City of Racine customers carrying the cost of capacity created to serve growth in the suburbs. Therefore, an entirely new approach to capital cost sharing was developed.

Instead of Racine fronting the costs, Ruekert/Mielke developed a plan that called for each community to purchase capacity rights in the wastewater treatment facility and to pay up front for their share of capital costs. The cost of service study was prepared in order to determine a fair allocation of capital costs to communities served by the wastewater treatment system. This analysis involved the examination of all the individual components of the system improvements, and an allocation of the costs based upon the design criteria and existing/future design flows for communities served. Each project cost was identified by Ruekert/Mielke as either an upgrade cost or an expansion cost. Upgrade costs were allocated to each community on the basis of existing volumes of wastewater flows and paid for through the user charge, while expansion costs were allocated on the basis of future increases in flows and paid for directly by the communities requesting the capacity.

A portion of this cooperative effort involved the formation of a new board to oversee the treatment facility's operation. The facility is still owned by the City of Racine, but an eleven-member board now oversees the budget. Membership breaks down like this: seven representatives from the City, two from Mount Pleasant, one from Caledonia, and one from Sturtevant. The concept of purchase of capacity rights gained acceptance relatively quickly, as each community saw the long-term benefits of the agreement paired with representation in the decision-making process.

The intercommunity cooperation agreement is structured so that growth pays for growth, rather than having the residents of the City of Racine shoulder the financial responsibility for suburban expansion. Each of the communities outside the City has purchased future capacity at the wastewater treatment facility. Mount Pleasant expects to have the most future growth, and has purchased rights to almost 30% of the total capacity of the upgraded and expanded facility.

While the allocation of expansion costs was relatively easy to resolve, the inequities of the "quality of life" institutions provided by the City of Racine was a major obstacle. This situation required bold thinking and new ideas. A detailed analysis for each institution covered in the study—the library, art museum, zoo, urban transit system, and sheriff dispatch—revealed the true costs of services as never before. While it was difficult to put a dollar tag on these services in relationship to how they attract new residential, commercial or industrial growth, it was possible to analyze budgets, contributions, and the geographic area served with greater clarity.

The communities agreed that additional funding for some of these services should come from the County, since the services are regional in nature. Racine County has raised the level of library funding and is considering additional funding for the zoo and the museum. In the interim, the agreement allows for the Racine Utility to use reserve funds to pay the City of Racine for a portion of the cost of these services related to serving nonresidents until the County funding is in place.

The situation faced by the City of Racine and its neighboring communities is a familiar one, often repeated throughout the United States. Some common themes in the literature on city-suburban relations are the relative inability of central cities to compete for new commercial and manufacturing development. Other problems that larger cities face include the loss of higher-income households to the suburbs, the struggle to continue providing services with a deteriorating property tax base, equitable means of providing area-wide services, and boundary and annexation disputes. While it is difficult to identify the initial causes of decline amongst multiple, interrelated causes, the effect can be observed in changes in the fiscal health of central cities compared to their suburbs.

This analysis prompted Ruekert/Mielke to produce a property tax-based revenue sharing plan for the service area. Ruekert/Mielke proposed that a workable model for Eastern Racine County should incorporate the following concepts:

  1. Contributions should be based on total commercial and industrial property values rather than increases in commercial and industrial property values.

  2. The plan should be self-financing and new distributions should sum zero.

  3. Distributions to all communities should not be guaranteed to be positive.

  4. The distribution formula should be based upon the difference between a municipality's fiscal capacity and the base fiscal capacity rather than a ratio of the two.

The overall result of the revenue sharing payments is to transfer property tax revenues from communities with a large proportion of commercial and industrial property value and high fiscal capacity to communities with low commercial and industrial property value and low fiscal capacity. The program was not intended to bring about a total effective equalization of fiscal capacities, but rather to work with and complement the existing Wisconsin Shared Revenue Program. It is noteworthy that under the State of Wisconsin's current Shared Revenue Program, the average effective fiscal capacity of the surrounding communities is 156% of that of the City of Racine.

Revenue sharing income that goes to Racine will allow the City to maintain social welfare programs, rebuild infrastructure and restore brownfield sites. This arrangement provides a politically acceptable means for municipalities to reduce fiscal disparities, share in the benefits of economic development, and foster increased governmental cooperation in the region.

Work on the Racine wastewater treatment facility has been completed. Construction of an equalization basin that holds 8.4 million gallons of wastewater, preventing the recurrent overflows that the system is now experiencing, is now complete. The expansion allows for the average daily flow to increase from the present 30 million gallons per day to 37 million gallons per day, with a peak hourly capacity of 232 million gallons per day.

The City of Racine has received revenue sharing checks in the amount of $4,396,403 since the program began. The City has formed several task forces to allocate the new revenues. Some of the money, however, is already earmarked for specific projects. For example, $6 million of the revenues coming from the Village of Mount Pleasant will be spent in a joint impact zone, with improvements to infrastructure coming within 10 years of the signing of the agreement. In the Village of Caledonia, the upgrade and improvement of a shared road is already earmarked for funding.

Mount Pleasant's petition for incorporation was granted on June 6, 2003. A referendum for incorporation passed on September 9, 2003, and a new Mount Pleasant Village Board was elected on November 4, 2003. Caledonia voted overwhelmingly in favor of incorporation on October 25, 2005. Elections for a full-term village board will be held in April 2006. The newly-formed Village of Caledonia is already anticipating major growth along the Interstate 94 corridor. With its borders now frozen, the Village can make long-range plans. It will also have new tools available, such as the formation of tax incremental finance districts, that previously were not available under its status as a Town.

A consolidated dispatch service for the Racine County Sheriff's Department was recommended in the study. This is still in the process of being studied. A retail water service agreement between Racine and the surrounding communities is being negotiated, with anticipated savings of over $5 million in capital and operation/maintenance costs.

The interdependence of local governments, due to location and shared services, presents opportunities for both cooperation and conflict. Too often municipalities choose to proceed down a path that incurs huge legal fees for their constituents, yet seldom results in an outcome that satisfies all parties. The acrimony that results from these actions can have effects that last years, and transcend political affiliations.

The suburban fiscal capacity cycle is one of continually increasing fiscal capacity and lower tax rates, supported by the infrastructure and amenities of the larger city or village. The central city fiscal capacity is one of continually decreasing fiscal capacity and higher tax rates. If this cycle is left to continue long enough, there are studies that suggest that a failing central city will cause the decline of the entire region.

The Racine Intergovernmental Agreement illustrates what can happen when innovation in management and approach are taken seriously by all parties. The wastewater treatment facility expansion proved to be the catalyst for developing a broad regional vision. It positions the City of Racine as a beneficiary to suburban growth. The suburban areas, likewise, benefit from the extension and enhancement of infrastructure that supports their growth. The entire area, including people from outside the immediate geographic boundaries, enjoys the art museum, zoo and library. The fact that this agreement was voluntary, rather than mandated by law, speaks to the visionary leadership that triumphed over political agendas that could easily have derailed the entire process.

Thomas J. Bunker can be reached at (262) 636-9430 or Thomas.Bunker@cityofracine.org; William J. Mielke can be reached at (262) 542-5733 or wmielke@ruekert-mielke.com.

Ruekert/Mielke provides clients with a broad range of municipal services, including street and highway design, stormwater management, water supply and system design, wastewater treatment facility design, GIS data mapping, infrastructure management programs, building design, and SCADA systems.