DECATUR - The city hasn't raised water rates in almost a decade.

But without a rate increase, the city's water fund soon will be operating in the red.

City Manager Steve Garman said the water fund is the sole "red flag" he sees in the city's finances.

Garman proposed a 25 percent water rate hike, effective in May, and increases of up to 4 percent in subsequent years to keep the water fund from operating in the red.

That means if a water customer has a monthly bill of about $16, the increase would bring the monthly charge to about $20, costing an additional $48 per year.

The Decatur City Council will review the proposed rate hikes in coming weeks as it crafts a budget for the upcoming fiscal year.

Without a rate increase, the water fund is expected to run a deficit of about $1.8 million by the end of fiscal year 2010, city administrators say.

Mayor Paul Osborne has emphasized that an increase is necessary, even without considering the costs of building a new lake or securing additional water for residents and industries.

"If nothing else happened in terms of a new lake or anything else, we're still going to have to address the losses in the water fund," Osborne said.

The rate hike is needed to cover rising costs, pay for improvements of aging infrastructure and fund the dredging of Lake Decatur, among other projects.

"In some regards, we're a business like any other business, and our cost of doing business is going up quite a bit," said Keith Alexander, director of water management. "The price of almost every raw material in our water system is going up faster than the rate of inflation, whether it's metals, whether it's chemicals, whether it's power, whether it's labor."

The city sold a water treatment plant to Archer Daniels Midland Co. in recent years for about $20 million, but those funds are rapidly depleting. The city has used money to pay off bonds for the south water treatment plant and a nitrate removal facility.

The water fund's beginning fund balance for fiscal 2009 is estimated to be about $15.9 million.

And the costs of doing business continue to rise.

Electricity prices have surged. Costs for chemicals to treat the water have increased. Diesel fuel, necessary to power the dredging of Lake Decatur, also has gotten much more expensive.

Prices have spiked for iron, steel, brass and copper, all key raw materials in the city's water distribution system.

The city also is faced with aging infrastructure. The south water plant is almost 20 years old. Two elevated water tanks each are 50 years old.

"We have miles and miles of water main underground that are 50 to 75 years old," Alexander said. "Those products, although they're built to last 75 to 100 years, require more maintenance than ever before, and they don't last forever."

The city has scheduled about $1.2 million in preventive maintenance for the 86-year-old dam.

And then there are costs that usually escape public attention.

Since the 9/11 terrorist attacks, the city has spent about $2 million to improve security for the water system.

"Obviously, we can't talk about the details, but that's another example of a significant expenditure that we as a water utility had to make," Alexander said.

Even with the proposed rate increase, the city still offers a competitive rate for water, backers of the increase say.

City administrators last year provided to council members a survey of Central Illinois communities, suggesting Decatur's water is among the least expensive in the state. The study was conducted by Berns, Clancy and Associates.

Of the 80 communities surveyed, Decatur ranked 80th, with an average monthly rate of about $16.30.

The city still would be in the bottom 50 percent of average water rates, even with the rate increase, city leaders say.

"That's assuming that those utilities don't raise their rates in the future, and many utilities of our size are considering raising rates much higher than 25 percent," Alexander said.

Some Champaign County water customers, for example, could face a water rate increase of up to 60 percent.

Water providers also are facing increasingly strict and sometimes costly regulations from the state and federal Environmental Protection agencies.

Assistant City Manager John Smith laid out the worst-case scenario of not meeting financial and environmental obligations: "If you absolutely ignored keeping up with regulations and replacing equipment in your plant, at some point the Illinois EPA can step in and take over the plant and do what is needed to be done."

The state EPA also could restrict the number of new taps that can be added to the water system until problems are addressed.

"That would essentially end any new business or new houses being built," Smith said.

Mike Frazier can be reached at mfrazier@herald-review.com or 421-7985.