Town Council to revisit collection of bad debt on utility accounts

Director of Finance B.J. Wilson briefs Town Council on bad debt collections of utility accounts. Photo and video by Mark Williams.

During the June 3, 2019 work session Town Council discussed revisions to Town of Front Royal Municipal Code 134-71 related to collection of bad debt on utility accounts and requested additional information regarding options on the wording of the ordinance and comparisons to other localities.

The Department of Finance collected information from other localities and organizations regarding deposit amounts, handling of LLC’s, bad debt ratio, and other means of collections.

Summary of findings include:

• Deposits – majority of deposits cover two months of services; whereas the Town of Front Royal requires a deposit for one month.
• Handling of Business Accounts – some organizations charge a higher deposit on commercial accounts and there were no organizations that required a personal guaranty.
• Bad Debt Ratio – majority of the organizations that were able to provide data show that their bad debt ratio is less than 1% of sales; which is the equivalent to the Town of Front Royal.
• Other Collection Procedures – majority of the localities process collections using the Commonwealth of Virginia’s debt set-off program, as does the Town of Front Royal.
• Four localities surveyed place liens on properties to collect from the owner of the property.
• Two localities obtain judgments, one of which uses an outside collection attorney.
• Previous items Town Council requested to pursue were:
  1. Judgments for bad debt on utility accounts
  2. Raising the minimum deposit amount from $125.00 to $150.00
  3. Personal guaranty on business utility accounts
  4. Proof of Income
  5. Ordinance amendment to include verbiage on collections

The Town Staff feels that the amount of bad debt written off by the Town is equivalent to other localities that pursue other/additional avenues of collection. Staff’s opinion is that if Town Council would like to lower the Town’s bad debt, the best course of action would be to increase the amount of deposit required to open a utility account.

Based on comparison and taking into account all services provided by the Town of Front Royal (water, sewer, electric); staff feels that the amount for utility deposits required by the Town of Front Royal are lower than all other organizations surveyed and should be increased.

Town of Front Royal statistics show that 87.4% of the utility accounts written off in FY18 for bad debt had a deposit on file when the account was closed & the deposit amount did not cover the remaining balance on the account. The amount of utility deposit required by the Town of Front Royal is not sufficient to cover service if a utility account holder vacates the property without the knowledge of the Town, resulting in disconnect for non-payment.

For example, if no payment were made on an account (not taking into account holidays/weekends) the timeline would be as follows:

-May 1st- May 30th usage occurs (1 month worth of billing)
-May 31st Utility bill is mailed; due date of bill is June 20th (allowing 20 days to pay)
-June 21st Delinquent notice is mailed; (10 days notice of delinquency)
-July 2nd Service is disconnected for Non-payment

In this example 63 days have elapsed from the date of initial usage until the Town would be able to disconnect for non-payment. The deposit amount equivalent to one month would not usually be sufficient to cover the remaining balance. Requiring a personal guaranty and/or furnishing proof of income should help reduce the Town’s bad debt expense, but will make the utility application process more cumbersome for applicants and is currently not a process that any other locality has implemented.

Staff recommends for the Town Council to consider raising the amount of deposit required to establish a utility account. Possible options to be considered, or a combination thereof:

A. Raising the minimum deposit amount to $250 or equivalent of 2 times highest bill;
whichever may be greater.

B. Creating a flat deposit amount per service:
Water: $75
Water/Sewer: $150
Electric: $200

C. Differentiating between residential & commercial:
Water, Sewer, & Electric – $350 (Residential)
Water, Sewer, & Electric – $500 (Commercial)

D. Average of 2 months of bills while property was occupied

The Royal Examiner’s camera was there: