March 30, 2004

SUBJECT: Response to Council Request for Analysis of Shortening the Utility Billing Delinquency Cycle  

REPORT IN BRIEF

On January 27^th, Councilmember Miller requested that staff consider the City’s current cycle for receiving and posting utility payments and if the 30 day period allowed for customers to pay their utility bill could be shortened. 

Sunnyvale currently allows all customers 30 days from the bill date to pay their utility bill.  On the 31st day, a 5% late payment penalty is applied and the customer is mailed a late notice.  Sunnyvale Municipal Code section 12.50.050 specifies that the utility bill becomes delinquent twenty-five days after the due date and that a 5% penalty be applied.  To address negative customer feedback regarding this policy, this deadline was extended to 30 days in late 1992 to account for the time involved in mailing and receiving bills.

In 1999 the City began offering customers the option to make Automated ClearingHouse (ACH) payments wherein the checking account of the customer is automatically debited for the amount of the utility bill.  This option is primarily used by residential customers.  The ACH debit is currently made on the 30^th day after the bill date to be consistent with the timeline followed by all other customers.

To address Councilmember Miller’s question, staff has identified four alternatives for Council consideration:

1. Change the Municipal Code to allow customers 20 days from their bill date to pay their bill.   
2. Change current practice to be consistent with the letter of the Municipal Code, allowing customers 25 days to pay their bill.  
3. Change the date that the City automatically debits customer’s checking accounts for those that have selected the ACH payment option to 20 days after the bill date, but do not change the current penalty date.
4. Make no change to the current process.

From the City’s perspective, each of these alternatives has various advantages and disadvantages, which are detailed in the Discussion section of this report.    Staff recommends Alternative 4, making no change to the current process.

BACKGROUND

The majority of Sunnyvale utility customers are billed on a bi-monthly basis, with some customers, mainly commercial/industrial, billed on a monthly basis.  Payment is received in four different ways: 1) a check through the regular mail or in the night drop, 2) cash, check, or credit card over the counter, 3) direct debit of the customer’s checking account (ACH), and 4) credit card over the phone.

The City started offering customers ACH payment as an option in September 1999.  There are currently 4,258 customers subscribed to ACH, most of which are residential customers.

The utility billing cycle has four major components: the initial utility bill, the reminder notice, the final demand notice and service interruption.  Currently, all customers, regardless of the method of payment they choose are treated in the same fashion and are held to the same deadlines for payment.  Timing of the process is tied to legal requirements and tailored to allow for steady and manageable work flow where permitted by law. However, the California Public Utilities Code dictates that the City may not begin the collection process earlier than 19 days after the bill date. 

After the final step, where service is interrupted, customers must pay their delinquent balance, their processing fee, and a minimum $33 charge to restore water service.  If payment is still not received after service interruption, staff places the account in the process to be sent to the City’s contracted collection agency, where a professional collector begins work on the account.

EXISTING POLICY

Sunnyvale Municipal Code section 12.24.020 (Attachment A) specifies that all bills are due and payable upon presentation, and that bills must be paid by the 25^th day after presentation.  Sunnyvale Municipal Code section 12.50.050 allows for the 5% late penalty after 25 days. 

The penalty date was extended to 30 days in late 1992 to account for the time involved in mailing and receiving bills. 

DISCUSSION

Staff is presenting four alternatives for Council consideration with regards to managing utility accounts in Sunnyvale.  These alternatives only address the penalty date.  The remainder of the delinquency cycle would be tailored to follow the penalty date if changed.

Alternative 1:  Change the municipal code to allow customers 20 days from their bill date to pay their bill.   

Alternative 1 is the strictest of the presented alternatives.  This alternative would have the largest impact on customers, cost of operations, and revenues. Choosing this alternative would require a change to the Municipal Code.  A Report to Council and corresponding public hearing would be required.   

Implementation of this alternative would involve significant public communication, most likely through utility bill stuffers and utility bill messages.  After a full two month noticing period, staff would make adjustments to current practices and delinquency settings in the utility billing system and implement a shortened cycle.

Even with ample public notification, the effect on customers of this change might be substantial.  Many of our customers function on a paycheck to paycheck basis, or are on a fixed income.  They rely on consistency in bill due dates to manage their finances.  These customers could potentially protest this change.

This change would also effect operations.  Implementation would require overtime hours to accommodate an expected spike in delinquency noticing and service interruptions.  This would also affect Public Works 24-hour standby staff, and Department of Public Safety after hours cashiering.

Alternative 2:  Change current practice to be consistent with the letter of the Municipal Code, allowing customers 25 days to pay their bill.  

This alternative would require no change to the Municipal Code.  The implementation of this alternative would be almost identical to Alternative 1 as staff would need to notice customers of a change to the bill due date.  Effects on customers would be similar (again, especially for fixed income customers).  Operationally, the amount of work required and the spike in noticing and customer calls would be similar to that under Alternative 1. 

Alternative 3:  Change the date that the City debits customer’s checking accounts for those using the ACH option to 20 days after the bill date, but do not change the current penalty date.

This alternative requires no change to the Municipal Code.  There would be no need to notice customers other than those on ACH.  Staff would recommend that a letter explaining the change be mailed directly to ACH customers.  This change may still impact our customers who function on a paycheck to paycheck basis, or are on a fixed income.  However, these customers would have the option to remove themselves from the ACH payment alternative and make cash, check, or credit card payments in accordance with the other alternatives. There would be no operational impact on the City with this alternative.  However, staff would not recommend making the ACH deadline shorter than the deadline for the other payment options because this would unfairly penalize this group of customers and may lead to some customers dropping the ACH alternative.  As Council is aware, ACH payments are more cost effective to the City than processing cash, check, or credit cards.

Alternative 4:  Make no change to the current process.

This alternative would leave the existing practice and operation as is, having no effect on customers, operations, or fiscal impact.

Recommendation

Staff believes that our current practice is working well for the City, resulting in an overall collection rate in FY 2002/2003 of 99.45%.  The current practice strikes an even balance between the fiscal benefits of timely revenue collection and allowing a fair and reasonable amount of time for customers to pay.  Staff recommends adoption of Alternative 4, making no change to the current process.  

FISCAL IMPACT

The fiscal impacts of Alternatives 1 and 2 are the same.  The Utility Billing program billed approximately $53.9 million in utility fees in FY 02/03.  If the due date was shortened to 20 days, staff estimates that, based on our current investment yield, additional interest would be collected which equals about one tenth of one percent of total revenues or about $50,500.  There would also be a spike in penalty, service restoration, and delinquency processing fee revenue from the accelerated delinquency cycle that is difficult to project. 

The cost associated with implementing both alternatives would require a budget modification to the Utility Business Management Program in the year of implementation.  Implementation costs would amount to about $7000 for  approximately 215 additional hours to make the changes required to the billing system, to handle the spike in delinquency noticing and management, and to cover the additional customer calls, disputes, complaints, and administrative hearings.  There would also be a one-time expense of approximately $1000 to design, print, and mail a special utility stuffer announcing the change.  Based on the above, it would cost about $8,000 to implement either alternative. 

In addition, both alternatives change policy significantly enough that the amount of ongoing work load with regards to delinquency management could increase.  Staff estimates that if this turns out to be the case, the program would incur approximately $7,000 per year in ongoing costs.  Therefore the net annual fiscal benefit would be about $43,500. 

The fiscal impact of Alternative 3 would be significantly less.  In FY 2002/2003, the City collected $4,550,000 in ACH revenue.  If the due date were shortened to 20 days, staff estimates that, based on our current investment yield, $4,360 in additional interest would be collected per year.  However there would be no cost to the city for implementing this change, so the net fiscal benefit would be $4,360.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City's official notice bulletin board, posting of the agenda and report on the City's web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk's Office.  

ALTERNATIVES

1. Change the Municipal Code to allow customers 20 days from their bill date to pay their bill.   

2. Change current practice to be consistent with the letter of the Municipal Code, allowing customers 25 days to pay their bill.  

3. Change the date that the City debits customer’s checking accounts for those using the ACH payment alternative  to 20 days after the bill date, but do not change the current penalty date.

4. Make no change to the current process.

RECOMMENDATION

Staff recommends Alternative 4.

Prepared by:

Timothy J. Kirby
Revenue Systems Supervisor

Reviewed by:

Mary J. Bradley
Director of Finance

Approved by:

Amy Chan
City Manager