Bainbridge Island should complete an update to its water system plan before it considers cutting water rates or refunding millions of dollars to its customers.

That’s the view of Bainbridge Island City Manager Doug Schulze, who has spent the past two weeks reviewing Mayor Steve Bonkowski’s proposed changes to the city’s water utility. Bonkowski caused an uproar on the dais on June 5 after he unveiled a broad agenda of surprise proposals for the city’s water system, and the ideas included a 35 percent cut in water rates and a $3 million rebate to water customers by the end of 2013.

Schulze, however, is now suggesting that the city complete an update to its water system plan before making any alterations to the city’s water utility.

The update to the plan had been previously under consideration by Bainbridge Island, but was put on the back burner as talk instead shifted to turning the city’s water system over to the Kitsap Public Utility District.

Flaws in the proposed five-year contract with KPUD, and a potential legal fight with the city’s employee union over the KPUD contract, led Bonkowski to offer a new scenario where the city would retain control over its water system, but draw down the amount of money the utility keeps in reserve. Those ideas included cutting rates, offering rebates and having some costs of the water utility covered by the city’s general fund, the pot of money that pays for general government services such as police and planning.

Schulze said Wednesday morning that updating the plan will be a highly involved process.

“(The plan) would most likely require some external expertise to complete,” Schulze said. “It is also something that is appropriate for public involvement – somewhat like a comprehensive plan for the water system.”

In a memorandum to the city council this week, Schulze offered his view of the suggestions made by Bonkowski that would significantly alter the water utility.

Schulze told the council that the 2012 budget numbers cited by Bonkowski during his June 5 presentation on his water utility proposals — where Bonkowski claimed the city had “overbudgeted” for the utility by $250,000 — did not provide a complete picture of the utility’s financial situation, however.

The city manager said actual expenditures have not matched the budget because the city stemmed spending on the water system, given its uncertain future.

“Council consideration should be given to the fact that significant expenses have been delayed in the past years as a result of uncertainty associated with city ownership and operation/management of the water utility,” Schulze wrote in his memorandum to the council.

“For example, the city delayed updating the water system plan, which is a major component for identifying future capital plans and infrastructure expenses,” he said.

The city manager also noted another reason to update the plan: the suggestion to reduce water rates by 35 percent.

“Typically, rate adjustments are based on significant analysis and informed by rate studies and water system plans,” Schulze wrote.

Revenue to the water utility would likely fall from $1.4 million to $900,000 if Bonkowski’s rate reduction proposal was adopted.

Schulze also suggested that if the council does decide to reduce rates, it should do so by a smaller amount, perhaps by 10 percent.

If the larger reduction is made, it is possible that an increase to rates could later occur once an update to the water system plan is complete, Schulze said.

Bonkowski’s idea to refund $3 million to ratepayers would leave the reserve for the water system at $2 million. Schulze said the council should establish a policy for appropriate reserve levels.

Schulze also cautioned against doing too much at once.

“The combination of a rate reduction, refund of $3 million of reserves and use of reserves for capital project expenses raises concern about the rapid reduction of revenues and fund balances occurring simultaneously,” he wrote.

Schulze also pointed out that that Bonkowski’s presentation only considered operating expenses, and did not include capital project expenses or funds earmarked for equipment replacement.

The council is scheduled to discuss the water utility at its meeting at 7 p.m. Wednesday, June 19.