city of CINCINNATI Interdepartment Correspondence Sheet August 15, 2022 FOR YOUR INFORMATION To: Mayor and Members of Council atte (> From: John P. Curp, Interim City Mang et Subject: GCWW Private Lead Service Line Replacement Program-Assessment Financing, Debt Cancellation, and Cost-Sharing Refunds: Legal and Policy considerations This memorandum provides information about Greater Cincinnati Water Works’ Private Lead Service Line Replacement Program, including the legality and feasibility of paying the private debt of customers who had their private lead lines replaced prior to December 15, 2021 E In 2017, following national attention to the lead crisis in Flint, Michigan, the City implemented a Private Lead Service Line Replacement Program to incentivize property owners to replace their aging privately-owned lead lines and eliminate a potential risk to public health. This nationally recognized program offered owners the option to contract with the City to replace this privately-owned infrastructure with three components to improve access and affordability: 1) Cost-Sharing discount of 40% off of the City contractor price (up to $1,500--absorbed by GCWW. ratepayer funds) with the owner paying the remainder of the cost; 2) Assessment Financing: a mechanism to spread the repayment over 10 years interest-free billed on their real estate tax bill—an option that was not available to most customers outside of the City of Cincinnati due to different jurisdictions” laws, and ) HELP funding: a pool of non-ratepayer dol to provide qualifying low-income owners no-cost replacements. From 2017-2021, owners contracted for GCWW to perform 2,250 private lead replacements or approximately 800 per year. HELP funding provided replacement to 349 low-income owners at no-cost. In December 2021, USEPA updated its drinking water regulations, which will require GCWW to replace 3% of its lead service lines per year (1,200 lines per year) based on new sampling requirements. In order to incemtivize participation to this level, Council approved 100% Utility-Funded private replacements on December 15, 2021 ‘GCWW is currently on track for 1,200 replacements this year with an additional 900 properties on the waiting list due to funding limitations, While the new 100% Utility-Funded program is in great demand, a question has come up concerning City reimbursement and cancellation of debt incurred by owners who participated in the 40% Cost-Sharing program (but not low-income owners). ‘The City Administration does not recommend reimbursement or cancellation of these amounts for the following reasons, which are explained in further detail later in this memorandum:1) Cancellation of future assessment payments using ratepayer dollars would violate the terms of the water service contracts with Hamilton County and other jurisdictions because it would unequally benefit City residents. 2) Refunding all owner payments made under the previous Cost-Sharing program with ratepayer dollars would not serve any “purposes of the water works” as required by the City Charter. The applicable water purpose for spending utility funding is to incentivize removal of private lead lines from the water system. Once the replacement work and the water purpose have been completed, repayment of owners is not a permitted use of water revenue under the City Charter. 3) The use of general fund dollars to either cancel payments under future assessments or to refund cost-sharing, payments is not the best use of general fund dollars and still carries risk of litigation. The cost to the general fund fora full cancellation and reimbursement would be $3,605,363 that can be used for any public purpose, including increasing the rate of lead line replacements moving forward. Challenges to this use of general fund dollars would be costly because they include the risk of payment of attorneys? fees to plaintiffs. ‘Options Cost Beneficiary Tssues General Fund transfert | $2,341,283 | 1,390 City ‘© Funds could instead remove lead pipes GCWW to pay owner debt Residents for 670 additional properties in the City (Assessment ‘© Litigation risk Financing) '* 569 prepaying residents left out Unequal perception by —non-City ratepayers General Fund transfer to | $3,605,363 | 1,959 City * Could instead remove lead pipes for GCWW to pay owner debt Residents 1030 additional properties in the City PLUS (All Cost- + Litigation risk General Fund full Sharing) ‘© Unequal perception by non-City Tepayment of owners ratepayers In September 2022, the City Admi will transmit an assessment ordinance to City Council for private replacements performed in FY 2021 and FY 2022 prior to Council authorization of the 100% utility funded replacements. If Council does not approve the assessments, these amounts remain as the owners” contractual debt collectable by the City. Passage of this ordinance is recommended by the Administration. Background There are over 40,000 legacy lead water service lines in the GCWW retail service system, which serves over 240,000 accounts across Hamilton County and the City of Mason. Ingestion of lead can cause irreversible health effects, including interference with brain and nervous system development in young children and increased risk of high blood pressure and kidney damage in adults. These lead lines are concentrated in high poverty, predominantly black neighborhoods in the City, with around 90% in the City of Cincinnati, 78% in neighborhoods with high Poverty rates, and nearly 40% in predominantly black neighborhoods. At current pricing, replacement of all lead service lines in the service area would amount to over $143 million. GCWW maintains full compliance with federal and state drinking water quality regulations as to lead, including a robust corrosion control program to create a protective coating between lead pipes and drinking water. However, disturbance of the lead pipe or extended disuse of water can cause the protective coating to deteriorate, increasing the risk of lead entering the water. The utility has been replacing the public lead lines between the water main in the street and the private property line for decades. The property owner is responsible for the maintenance of their private service line between the right-of-way line and the water meter in the house per Cincinnati Municipal Code (CMC) 401-38 and 401-39. Because the owner is responsible for the cost (averaging $3,500) and work to contract with a plumber to remove their private lead line, very few owners replaced their lead lines when no City assistance ‘was available prior to 2017.ined Pi hari 9 Financing (2017-21 Following the Flint Water Crisis, Council established a policy directive (Ordinance No. 326-2016) to proceed without delay to fully fund and implement a program to replace all public and private lead water service lines in ‘order to eliminate the risk of lead exposure as a potential public health hazard. In June 2017, City Council approved the details of GCWW’s program to assist customers to replace their private lead service lines (Ordinance Nos. 185- 2017 and 187-2017). This nationally recognized program established GCWW as the first water utility in the country to offer private property owners the opportunity to contract with the City to replace their private lead pipe and provided owners a “cost-sharing” discount of 40% (up to $1,500) off of the total City contractor replacement cost. ‘A new CMC 401-128 prohibited existing lead lines (new lead connections have been prohibited since 1927) but provided a “grace period” in which GCWW would not enforce until the owner is provided written notice to replace the Lead Service Line with a minimum of 30 days to take corrective action. To date, GCWW has not required replacement except in the case of leaking or owner-caused disturbance of private lead lines (CMC 401-130 and - 131) due to the known increased in risk related to such disturbances. During water main replacement projects, GCWW replaces any public lead lines and notifies owners with known private lead lines of the risks of lead when the service line is disturbed and strongly encourages the owner to replace the pipe with their own plumber or through the GCWW program. Recognizing affordability as the main obstacle to private replacement, GCWW offered additional financial assistance to low-income customers through the Help Eliminate Lead Pipes (HELP) program funded by City ‘employee contributions, water tower lease revenue, and private donations. GCWW also obtained state grant funding, for replacements for childcares, low-income owners, and households with young children or pregnant persons. For properties inside the City of Cincinnati, GCWW leveraged the assessment authority of the City to offer “Assessment iancing,” allowing the owner’s share to be repaid to GCWW as a 5- or 10-year, 0% interest loan through assessments to the real estate tax bill for the property, with repayments returned to Water Works Fund 312 (private lead replacement) to fund additional replacements. Assessment Financing was expanded to properties in eight of GCWW’s cooperating retail service municipalities—Cheviot, Deer Park, Fairfax, Golf Manor, Mason, Mount Healthy, North College Hill, and Silverton—with those governments agreeing to assess properties in their jurisdictions. Owners of property in unincorporated Hamilton County! and 15 other retail service municipalities did not have the option to access Assessment Financing and prepaid in full their share of replacement costs per the terms of their contracts with the City. ‘The results of the cost-sharing program were dramatic. GCWW completed approximately 800 private lead service line replacements each year for a total of 2,250 replacements across the retail service area, with owners of over 740 properties repaying GCWW in full, and over 1,500 electing to repay through the no-interest assessment loan. No other water utility in Ohio has offered any comparable level of financial assistance for private lead service line replacement or has had this rate of private participation. The USEPA has recognized GCWW’s proactive cost- sharing approach as “a great example of a community taking the initiative to protect their residents” health and the environment” and has asked GCWW Executive Director Cathy B. Bailey to serve as a senior advisor to the USEPA to bring GCWW’s experience to assist water utilities across the country with implementing lead service line replacement. Next Level In June 2021, City Council approved a 5-year water rate increase, service line replacement in anticipation of changes to the USEPA Lead and Copper Rule, which became effective December 16, 2021. Beginning in 2024, the Lead and Copper Rule revisions will go into effect, requiring GCWW to star stricter sampling protocols which will trigger required lead service line replacement ata rate of 3%, or 1,200, per year — a replacement rate to reach removal of all lead service lines in 30 years (2052). In order to incentivize owner participation, meet the required replacement rate, and ensure equitable access, Council approved Ordinance No. 509-2021 on December 15, 2021, authorizing 100% utility-funded replacements. GCWW “The Hamilton County Prosecutor's office indicated to the City that the County did not have legal authority to assess properties for lead service line replacement costs. 3is currently on track towards the 1,200 required replacements funded by utility revenue, HELP low-income funding (water tower lease revenue), and state and federal grant funding (directed towards low-income owners and households with young children and/or pregnant persons). The response to the 100% utility-funded program has been overwhelmingly positive, increasing demand from 800 per year to over 2,100 this year — exceeding available funding and creating a waiting list of 900 replacement Fequests. The Environmental Defense Fund has applauded Council’s unanimous approval of the 100% utility- funded Private Lead Service Line Replacement program as “the latest act of leadership from the city as it works to address the environmental justice issues in its communities” and praised it as part of the City’s strategy to “provide quality healthy housing for all income levels.” sessment in great demand, a question arose concerning reimbursement and cancellation of the debt non-low-income owners incurred through participation in the 40% cost-sharing and 5- or 10-year, 0% interest assessment program as discussed below. The legal and policy considerations for this request are discussed below. ‘Legal Restrictions on GCWW and its revenue Because of restrictions on GCWW and use of its revenue, debt cancellation and refund payments affecting the water works fund are impermissible due to the City’s contractual requirements with other local governments and Cincinnati Charter limitations on the use of water utility revenue. ‘The City of Cincinnati contracts with the Board of County Commissioners of Hamilton County and over 22 municipalities to provide water to properties in the unincorporated areas of Hamilton County and muni Jurisdictions. Under these contracts, GCWW is required to treat persons and properties served outside of the corporate limits of Cincinnati “no differently” from those inside the City. Although al participating property owners ice area were provided the 40% cost-sharing discount, only City residents (along with those of eight ‘unequally benefit properties in the City (and part of properties in non-assessing jurisdictions (unincorporated Hamilton County and 14 muni their share of replacement costs in full, ies) who have GCWW is also unable to use water revenue funds to refund the owner’s share paid under the cost-sharing program because the expenditure lacks a “water purpose”. Article IV, Section 9 of the Cincinnati Charter, provides that “Revenue derived from the water works by the city shall be used for the purposes of said water works, and for no other purpose, and shall not be subject to transfer to any other fund.” The authorized water purpose for using water utility revenue to pay for private lead service line replacement is to encourage owners to replace their private lead service lines as soon as possible to protect public health. Once the lead service line is removed, the water purpose is accomplished, and subsequent refunds would not serve any permissible water purpose. Ifthe City loses a taxpayer action lawsuit, it must pay the attorneys” fees of the taxpayer(s) that sued. Unlike utility revenue, municipal general funds may be broadly spent on legislatively declared public purposes that promote public health, safety, morals, general welfare, security, prosperity, and contentment of municipal residents. Council could authorize refund of payments and the transfer of general funds to the Water Works Fund to pay off ‘owners’ replacement debt by declaring these uses to be a public purpose.’ Note that while courts generally defer to 2, In Mead-Richer v. Toledo, 114 Ohio App.369, 182 N.£.2 846 (6 Dist. 1961), the court upheld the public purpose of debt cancellation and repayments to owners when it was in connection with assessed public sewer infrastructure costs and the debt was attached to the property.legislative declarations of public purpose even if they incidentally benefit private interests, expenditures that advance purely private ends are considered impermissible. This question of whether cancellation of personal debt cr issuing refund checks for private utility connection costs constitutes a legal public purpose has not been addressed in Ohio case law and presents a legal risk if challenged in a taxpayer action. ‘A general fund response, though not recommended, could take two forms. Council could transfer general funds to GCWW Fund 312 (private lead replacement) to repay outstanding Assessment Financing debt for owners of City property (“Debt Payment Option”). This would benefit the owners of 1,390 properties in the City and would cost $2,341,283. The Debt Payment Option will not satisfy those who own property inside (569) the City anc fall and would not repay assessments amounts that City owners have already paid. In addition, the parti ‘owners of 291 properties outside of the City that participated in the program could not be assisted with Cincinnati general fund dollars. For context, $2,341,283 in general fund dollars could alternatively be used to fund 670 new lead service line replacements. The Full Repayment Option would reimburse and pay off all Assessment Financing debt for owners of 1,959 properties in the City and would cost the General Fund $3,605,363. This option would assist all cost-sharing participants with property in the City, but not assist any owners of the 291 properties outside of the City. For context, ‘$3,605,363 could alternatively fund 1,030 new lead service line replacements. Because of their litigation risk and significant cost, the City administration does not recommend either the Debt Payment Option or Full Repayment Option. These proposals would financially assist a small number of non-low- income property owners with payoff of a binding contractual debt with the City under the prior program and would ‘generally not include low-income owners who were eligible to receive full replacement funded by HELP and grant programs. Both options have the additional downside of creating negative perception among City taxpayers as to use of tax money to pay private debt and costs, and among non-City participants who will not receive any benefit. A batter use of these general fund dollars would be to remove lead service lines in the hundreds of City properties ‘on the replacement waiting list, which would more quickly advance Cincinnati toward its lead-free goal. FY 2021 and FY 2022 Assessment Ordinance To meet the county auditor's annual September 30 deadline for certification of assessments, in early September of, each year Cincinnati City Council and the village and city councils of Cheviot, Mason, Fairfax, Golf Manor, Silverton, Mt. Healthy, North College Hill, and Deer Park approve legislation to certify assessments to the tax of those owners who have chosen Assessment Financing to repay amounts owed to Water Works Fund for private lead service line replacement. The owners of 703 properties (686 Cincinnati/17 other municipalities) contracted with the City in FY 2021 and FY 2022 to repay their outstanding owner’s share via property tax assessments, The City Administration will transmit an assessment ordinance to City Council in September 2022 for these costs. If Council does not approve the assessments, these amounts will remain as the owners" contractual debt to the City. ‘The City will similarly send the assessment amounts for properties to partner jurisdictions for approval by their ‘municipal legislatures. ‘This memo is for informational purposes only. No immediate action is required by Council. ce: Emily Woemer, Interim City Solicitor Verna J. Amette, Interim Executive Director, Greater Cincinnati Water Works (GCWW)