Sewer System Organization and Financing - PUB2007

You need a central sewer system, but how should you organize to build, finance and operate it? Fortunately, you probably have several options.

Now you are ready to consider your organization and financing options more closely. This guide discusses the major organizational structures that you can use to finance construction and manage the sewer system. The guide does not discuss formation and financing of private or not-for-profit entities.

Sewer and other public service districts have latitude in how they provide sewer services. Districts may contract with a city, rural electric cooperative or a sewer service company for operation of their facilities. Likewise, districts may contract to manage the facilities of other entities; public or private, from large community collection and treatment systems to small on-site treatment systems. How you organize to build, finance and manage sewer services depends on your community’s situation, the capabilities of your community and the capabilities and willingness of other entities in your area to cooperate with your community. You should discuss doing a cooperative venture with other entities in your area before you proceed to form any particular district or structure. As a general rule, if your community can pay a reasonable fee to receive sewer services from some other entity, and avoid providing the service itself, that is the best strategy. This strategy becomes more attractive the smaller your community is.

Sewer services need not be provided to an entire community using a “one size fits all” technology. In some situations overall sewer services may be most economical when there is a blend of community-based collection and treatment where necessary, and on-site treatment, like septic tanks and drainfields, where that technology is suitable. If you do allow on-site systems within your service area, strongly consider requiring or even providing professional management of the on-site systems. District provision of this service can be the most economical and effective way to manage and maintain these systems properly. Under private control, such systems frequently get little or no maintenance at all by individual property owners, leading to their failure. Sewer service districts can be authorized to provide drinking water services, and the reverse is also true. Combining both services can further improve services and reduce costs due to efficiencies of scale.

There are many possibilities available to your area if you will contact the county commission, nearby cities, towns, villages, rural electric cooperatives and others before you form a district.

District formation requires public support. That seems obvious, but many sorely needed districts never get formed because those leading the formation effort fail to completely inform the property owners and future system users in the proposed district about why they need it, what it will do for them, and what it will cost them. Without good information, the property owners will not be motivated to support the district formation at the public hearing and the ballot box.

State statutes require public participation in district formation through petitions, hearings and elections, and they require public notices of these activities. As leaders of the formation effort, do not be satisfied with fulfilling the statutory requirements. Actively seek out opportunities to discuss the benefits and costs of the proposed district through informational newspaper articles, radio interviews, word of mouth and any other means available to you. You must inform people. You must motivate them to stop doing what is familiar and try something that is new. That is the hardest part of forming a district, the rest is just mechanics.

Three major agencies fund sewer district construction projects: Missouri Department of Natural Resources, Financial Assistance Center; Missouri Department of Economic Development, Community Development Block Grant program; and USDA Rural Development. If you use state or federal money, which you probably will, everyone within a specified distance of a collection line must hook up. Each funding agency can inform you of its funding requirements and other aspects of its programs.

There are four major structures available to organize and finance most sewer projects outside the limits of incorporated cities, towns and villages: common sewer districts with subdistricts, simple sewer districts, water districts authorized to provide sewer services and neighborhood improvement districts. Neighborhood improvement districts may be used alone or in combination with the other structures to facilitate financing in certain situations.

The Missouri Constitution authorizes general obligation bonds to be used to finance any of these organizational structures except unincorporated subdistricts of common sewer districts. General obligation bonds must be authorized by four-sevenths of the voters in a municipal general election, a state primary election or a state general election. At all other elections a two-thirds majority is required.

The discussions of organizational structures that follow are simplified and present only the major concepts for the formation and financing of various kinds of districts used for sewer projects. These discussions also do not take into account the effects of the Missouri Constitution, state statutes or regulations unless specifically noted. In the guide, when a narrative is followed by numbers in parentheses ( ), the numbers cite the pertinent state statute.

This document is intended to provide only general guidance based upon state statutes. For help in forming a district, contact the Department of Natural Resources, another community that has already established the structure you are interested in, a municipal planning consultant or an attorney who specializes in municipal law.

Common Sewer Districts and Subdistricts (204, RSMo)

The purpose of a common sewer district is to enable property owners within its boundary to acquire sewage collection and treatment services. A common sewer district can deal with the tasks of running multiple sewer systems, or subdistricts, with no involvement of other municipalities. Within the common sewer district, one or more subdistricts may be formed to authorize the common sewer district to incur general obligation bond debt to finance construction of the project for each subdistrict. When general obligation bond debt is authorized by formation of a subdistrict, taxes to retire those bonds may only be assessed to properties within that subdistrict. User charges to pay for operation, maintenance and replacement of a subdistricts system, and to retire revenue bond debt, are assessed to the users of the sewer system or the properties served by the system within the subdistrict.

A common sewer district is essentially an area of land enclosed by a specified boundary. It can be multiple counties, an entire single county, or just a part of one or more counties. The boundaries of a common sewer district can even be the same as the boundaries for a single subdistrict it contains. The board of trustees of the common sewer district is the decision making body of the district. The board may handle administrative duties, or hire an administrator to handle day-to-day operations of the district.

Formation of a common sewer district does not, in and of itself, authorize the district to incur debt, issue bonds or place assessments on the property owners of the district. If the property owners want to authorize the common sewer district to incur debt, they must approve that issue by the appropriate four-sevenths or two-thirds on a separate ballot issue.

Financing of Common Sewer Districts and Subdistricts (204.252 TO204.460, RSMo)

There are several options to finance and repay the costs of projects. In the process of forming a subdistrict, general obligation bonds are authorized to finance the subdistrict's project. In addition, or as an alternative to subdistrict financing, the common sewer district may be authorized to issue general obligation bonds. Either type of district may be authorized to issue revenue bonds. However, the board of trustees of the common sewer district has no authority to incur long-term debt until the board is authorized by election to issue bonds, or until a subdistrict is formed (204.252 and 204.253). All such bonds, however authorized, are obligations of the common sewer district. General obligation bonds may have maturities no longer than 20 years (204.252), and revenue bonds no longer than 35 years (204.380.3).

Simple Sewer Districts (249.430, RSMo)

This structure is similar to the subdistricts within common sewer districts except there is no common sewer district to manage the construction, operation, maintenance and finances of multiple subdistricts as well as the overall sewer system.

There are two main organizational structures for simple sewer districts. The first is set out at 249.440 RSMo and describes a simple sewer district governed by the county commission. This structure is the only type of sewer district formed by action of the county commission. All others are formed by action of the circuit court. This structure is available to selected first class counties, and all second, third and fourth class counties (249.450). The second organizational structure is set out in 249.763 RSMo and describes a simple sewer district governed by a board of supervisors. According to the statutes, this structure is available only to second class counties.

Financing of County Commission Simple Sewer Districts (Starting at 249.640, RSMo)

Like other incorporated municipal entities, county commission simple sewer districts may finance construction costs by issuing general obligation bonds or revenue bonds after such bonds have been authorized by voters in the district. The sections of this statute concerning county commission simple sewer districts do not specifically cover bonding or debt issues. Counties wishing to form this type of sewer district should consult their attorneys and financial advisors for guidance in financing.

Financing of Board of Supervisors Simple Sewer Districts (Starting at 249.785, RSMo)

Board of supervisors simple sewer districts may finance construction costs in several ways. They may issue general obligation bonds, revenue bonds or they may assess special taxes or fees. General obligation bonds must be authorized by voters in the district before the board can issue such debt (249.790). After giving proper public notice and not receiving objections, revenue bonds may be issued by the board without a vote. However, if sufficient objections are raised, the board must put the issue to a vote of the district (249.800). All bonds are obligations of the sewer district and subject to the limits set by the Missouri Constitution.

Special assessments, taxes, fees and charges

As an alternative to bond financing, following approval of a majority of the district voters, the board may place a special assessment, tax, fee or charge on properties in the district to pay sewer project expenses (249.777.17). However, this special assessment probably would be sufficient to pay for only part of the costs of most sewer projects. This assessment may be most useful to pay for engineering services that, among other things, would enable the district to estimate the amount of bond authorization to seek to finance the sewer construction project.

Sewers Within Water Supply Districts (247.035, RSMo)

Sewer systems can be financed, built and operated by public water supply districts specifically authorized to do so (247.035). If sewer services are now needed where a public water supply district already exists, using the water supply district for this service may be the quickest, most economical way to get sewer services. Otherwise, sewer and public water supply services may just as easily be obtained by forming a common sewer district with subdistricts, or by forming a simple sewer district.

Neighborhood Improvement Districts (67.453, RSMo)

Neighborhood Improvement Districts (NIDs) are a relatively new, special financing mechanism that can be used to finance a wide range of public improvements, including sewer and water systems. Neighborhood improvement district financing was legally challenged and subsequently ruled upon by the Missouri Supreme Court in spring 1996. That ruling modified the financing capabilities of neighborhood improvement districts. The ruling restricted the ability of the sponsoring entity, the county or city within which the district is formed, to paying debt service on the bonds issued out of current revenue sources only. The county or city may not issue new bonds or raise taxes to pay the debt service, should the neighborhood improvement district for some reason fail to make those payments. This restriction for debt service may adversely affect the marketability of NID bonds.

NIDs are simply an area of land or properties located within a city or a county. When a NID is formed, general obligation bonds of the city or county are authorized to finance the project for the district. The NID itself does not govern the construction of the improvement or perform any ongoing management of improvements constructed. The city or county performs these tasks. The NID is simply a financing mechanism.