Here’s one property tax break City Hall leaders aren’t crazy about.

Under state law, city-owned utilities — such as the city’s water and sewer department — aren’t required to pay property taxes on their assets. That means the multi-million-dollar treatment plants, the pipes in the ground, and the smaller pump stations and other facilities scattered throughout the city aren’t subject to a tax bill.

That’s different from an investor-owned utility — like Westar, for example — which pays millions in property taxes that ultimately are paid by customers through their electric rates.

But now, City Hall leaders are saying its own utility department shouldn’t get such a tax break. At their meeting Tuesday, city commissioners will consider a policy that would allow the city to transfer money paid by ratepayers into the city’s general operating fund to account for how much property taxes the utility would pay if it were a privately operated business.

“Like privately owned utilities who pay property taxes, city utilities benefit from public safety, parks and recreation, economic development, planning and development services, and other city functions,” a memo from City Manager David Corliss’ office to commissioners states.

But the idea is creating some questions.

“It is a rationale I think we need to talk about a little more,” said City Commissioner Mike Dever. “We need some feedback from the community on this.”

The new policy would not immediately increase water and sewer rates. That’s because the city already has been making a payment-in-lieu of property taxes type of transfer for the last several years, although it did not have a policy in place that specifically called for such a transfer to be made.

The lack of a policy has been an issue that the city’s auditor has raised multiple times during the last four years.

“I hate to say it is just a transparency issue, but to some extent it is,” said City Auditor Michael Eglinski.

In 2012, the city will have to collect about $1 million in water and sewer rates to meet the payment-in-lieu of taxes provision. The policy also would apply to the city’s solid waste service and its stormwater management program, which are both services that rely on rates instead of taxes. The solid waste service — the city’s trash service — would have to collect $14,376 in rates to make the payment, while the stormwater program would need to collect $73,397 in rates.

The proposed policy, though, is silent on whether the city’s utilities should be required to make a payment in lieu of taxes to the county and the school district. Private utilities, like Westar, are required to pay property taxes to those jurisdictions. Corliss on Monday said he didn’t think this new policy would put the county or the school district in a position to start asking for a similar payment.

“I guess I can see the argument, but historically we have looked at those as separate issues,” Corliss said.

The proposed policy also gives the city the authority to make transfers of rate money into the general fund for several other reasons. They include:

• A payment in lieu of a franchise fee. Most utilities — like electric, gas, telephone and cable utilities — pay a franchise fee in order to use the city’s right of way to house their infrastructure. The city’s publicly owned utility is not required to pay a franchise fee. But the proposal recommends it should make a payment to the general fund in order to compensate the city for its right-of-way. State law caps most franchise fees to no more than 5 percent of a utility’s gross revenues. Corliss, however, is recommending that the city be allowed to charge up to 7 percent to the city’s water and sewer utility. He said waterline breaks are a major problem for city streets, and thus justify a higher rate.

“Anybody who has driven down Kentucky Street can see the inconvenience of a waterline project,” Corliss said. “Even though the street is patched, it is never the same.”

For 2012, the policy would allow for $2.18 million in rates to be transferred from the city’s water and sewer fund to cover the payment-in-lieu of a franchise fee provision. For solid waste, the payment would be $766,912. For stormwater, it would be $206,675.

• The policy would allow the city to make a transfer to cover the cost of general services the utilities receive from the city, such as services from the legal department, human resources, payroll and other functions that are done by City Hall but would have to be paid for independently if the business were operating on its own. The policy allows for $969,140 in overhead charges to the water and sewer fund, $320,312 from solid waste, and $80,298 from the stormwater fund.

• In total, the policy would allow for $4.7 million in transfers of rate money to the city’s general operating fund in 2012. But Corliss notes that the policy does not require the city to make the full transfer. In 2012, the city is estimated to transfer $3.6 million.

Corliss said he disagrees with some concerns that the transfers are an attempt to generate money for the general fund without having to raise the property tax mill levy, which historically has been politically difficult at City Hall. Water and sewer rate increases, however, have received more support from commissioners in recent years.

“I don’t think that is the case,” Corliss said. “I think the policy we have proposed provides a good rationale, but we will want to continue to see if we can refine it.”