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Home My WebLink About10A Segregate City and MCES Sewer Billing~~ PRI~~ ~ ~ ti U ~ "MVESO~/ 4646 Dakota Street S.E. Prior Lake, MN 55372-1714 CITY COUNCIL AGENDA REPORT MEETING DATE: NOVEMBER 16, 2009 AGENDA #: 10A PREPARED BY: STEVE ALBRECHT, DIRECTOR OF PUBLIC WORKS JERILYN ERICKSON, FINANCE DIRECTOR AGENDA ITEM: CONSIDER APPROVAL OF A REPORT IDENTIFYING SEWER AND WATER RATE ISSUES AND A RESOLUTION AUTHORIZING THE SE- GREGATION OF THE METROPOLITAN COUNCIL ENVIRONMENTAL SERVICES (MCES) CHARGE FROM THE CITY SEWER RATE. DISCUSSION: Introduction The purpose of this agenda item is for the City Council to receive a report on the status of the City Sewer and Water rate study, to consider approval of segregating the MCES Sewer Charge from the City's sewer rate, and to provide direction on the MCES Sewer Charge for the proposed 2010 Fee Schedule. Histo The City of Prior Lake operates and maintains a sewer collection and wa- terdistribution system. The estimated replacement value of the City's sewer and water infrastructure is more than $200 million and its operation and maintenance are funded through sewer and water rates. On June 1, 2009 Staff provided a presentation to the City Council on the rate analysis program developed for the. City by Bolton & Menk. On September 10, 2009 the MCES notified the City that the Met Council had adopted a 3.8% increase to the overall charge to cities for the treat- ment of municipal wastewater for 2010 and that additional increases can be expected over the next four or five years. The actual change for each city will vary depending on their flow as a percentage. of the overall flow. The Association of Metropolitan Municipalities represented cities on this issue and pushed for an interim phased-in approach to the increase. The increase was a result of the MCES changing their methodology for calculating municipal wastewater charges and shifting from the reliance on Sewer Access Charges (SAC) which are charged to new homes and busi- nesses as a part of construction. This change was ultimately necessitated by the economic downturn as it relates to building permits and a lack of flow. In order to provide sewer capacity for cities the Met Council has upgraded their facilities to meet projected needs. The debt incurred as part of those upgrades has been apportioned to user rates and SAC's. Because the SAC funding has dramatically decreased and is projected to continue to www.cityofpriorlake.com R:~~'oiu~ai1~2009 ~geud~ ,e~ortsi] t I b O~~~ie2%~r,~ZR~i~~~~-~i~~o~ Fax 952.447.4245 decrease, the MCES in order to maintain operations has recommended and the Met Council has approved this change. The actual impact to the City of Prior Lake is dependent on previously constructed capacity and actual flow. In 2009, the MCES charge to the City of Prior Lake is $1,048,717.53 for sewage treated at the Blue Lake Wastewater Treatment Facility in Shakopee. This computes to a charge of $1.75 per 1,000 gallons of wastewater. This amount is currently in- cluded as a component of the City's $3.65/1,000 gallon charge for waste- water to residents. The basis for that estimate was an estimated 597.8 MG of flow for the City. In reality, the City will produce closer to 560 MG of sewage in 2009. This decrease is due to a decline in new homes and reduced inflow and infiltration. A breakdown of the City's 2009 sewer rate of $3.65/1,000 gallons would be as follows: 2009 2010 $ 1.90 City Rate 52% $1.90 City Rate 49% $ 1.75 MCES Rate 48% $1.98 MCES Rate 51 $ 3.65 Total 100% $3.88 Total 100% The 2010 municipal wastewater charge to the City of Prior Lake will be $1,150,015.84 or $1.98/1,000 gallons based on an estimated flow of 560 MG. This equates to an increase of 13% to the City's 1,000 gallon rate. This is due to decreased flow from the City as outlined above and the MCES' capacity that has been previously constructed for the City. Current Circumstances City Staff plans to bring a draft Rate Study to the City Council in early 2010. It is Staff's intention to include the 20-year Water and Sewer Rate Study as part of the 2011-2015 Capital Improvement Program for City Council approval. This will provide long term planning for water and sewer rates and long term enterprise fund budget review and input for the City Council. As part of preparation for that report staff would like the City Council to provide direction on the following items: 1) Currently, the City charges the MCES charge as a component of the sewer rate. For 2010, Staff proposes to segregate the MCES sewer charge rate from the Sewer Rate to reflect the City's current charge of $1.90/1,000 gallons and MCES proposed charge of $1.98/1,000 gallons. The MCES is proposing to increase sewage rates for the next couple years and Staff believes it is important for the City Council and residents to see that these increased charges are not due to City changes or cost increases. 2) Currently, the City records all water and sewer revenues in a single fund (Water & Sewer Fund). Staff believes separate funds should be established to ensure transparent tracking of expenses and long term rate planning. This ensures that water and sewer rates RaCounsil17009 Agenda Reportsil 1 16 091Sewer l~ ater Rate A~enda.,doc will reflect the actual cost of these separate operations and each fund will be self-supporting. 3) Minimum fund balance for utility funds. Staff believes the City Council should establish minimum fund balance reserves (unre- stricted net assets) for these funds to ensure that the reserves and the rates are managed in a manner that reflects the City's long- term financial strategy. Rate adjustments would be implemented when reserve balances are at or approaching the established min- imum threshold. The minimum fund balance reserve could be tied to the yearly total fund budget or the operations and maintenance portion of the fund budget. An additional component of a minimum fund balance re- serve would be for emergency projects such as the CR 21 Water- main Project which cost the City $716,000. A substantial portion of the City's water and sewer system is at least 30 years old and, therefore, ongoing maintenance needs are expected to continue. The City's water and sewer revenues are also not evenly distrib- uted due to seasonal peaks and bi-monthly billing and, therefore, a fund reserve is required to provide cash flow. 4) The City does not have a long term water and sewer rate planning document. Staff believes this long term plan is an integral part of sound financial planning and budgeting for the City. As discussed above staff believes that as part of the CIP process the Council should annually review this document. Any recommended rate changes would be addressed as part of the annual budget proc- ess. ISSUES: The City Council will be asked to adopt the City's Fee Schedule in De- cember so that fees are set at appropriate levels for 2010. For that rea- son staff is recommending that the City Council approve the segregation of the MCES Charge from the Sewer rate. Staff will be recommending that the increase from the MCES be passed along to the utility customers for 2010. The MCES rate would be adjusted to reflect rates to be charged to the City for 2010. Should the City Council elect not to pass along this rate increase by the MCES the impact will result in the City's fund reserves being utilized for this amount and an acceleration of a need for a City Sewer rate increase which is currently not anticipated to be needed until at least 2013 depending on what rate strategy is adopted by the City Council in 2010. It should be noted that based on preliminary information received by the City it is anticipated that the MCES's rates will continue to increase annu- ally in excess of 4% for the next 4-5 years. FINANCIAL There is no impact to the City's reserves or funding if the MCES rate in- IMPACT: crease is passed along to the users. Should the Council elect not to pass through these costs it will result in an acceleration of a City rate increases P:ACc~uneih2009 .A~enda Reports\11 16 09~Secv~r 13'atax Rate f~~en~a.cloc in the future. The date and impact of future rate increase will need to be determined by the City Council in 2010. Based on preliminary analysis and items 2 and 3 above a City rate increase for Sewer operations may be needed as soon as 2012 if the rate increase is not passed through to us- ers. ALTERNATIVES: 1. Provide direction to City Staff on the issues highlighted in the report 2. Approve a resolution approving the segregation of the MCES Charge from the City Sewer Rate. 3. Table the Resolution for a specific reason. 4. Deny the Resolution. RECOMMENDED Alternative#1 MOTION: R:AC:ounci1~2.009 Ag~rrda Reporis111 16 (391S~:~rer ~Tiater F~a~P Agen*ia.doc /~ PRI~~ / ~ ~ ti u x \~NNESO't 4646 Dakota Street S.E. Prior Lake, MN 55372-1714 RESOLUTION 09-XXX RESOLUTION AUTHORIZING THE SEGREGATION OF THE METROPOLITAN COUNCIL ENVIRONMENTAL SERVICES (MCES) CHARGE FROM THE CITY SEWER RATE. Motion By: Second By: WHEREAS, Sewage from the City of Prior Lake flows to the MCES Blue Lake Wastewater Treatment Facility in Shakopee, MN; and WHEREAS, The MCES has constructed facilities based on the flow that it estimates it will receive from the City of Prior Lake; and WHEREAS, The MCES controls the costs to be charged to the City of Prior Lake; and WHEREAS, The City Water & Sewer Fund annual budget includes the cost charged by the MCES; and WHEREAS, Currently, the City of Prior Lake charges a sewer rate of $3.65/1,000 gallons to utility customers without identifying its component parts; and WHEREAS, This rate includes. implicit rates of $1.75 for the MCES charge and $1.90 for the City sewer rate; and WHEREAS, The City believes it is appropriate to reflect the separate charges for the City Sewer Rate and the MCES Sewer Rate on the utility bill to facilitate full understanding by sewer users. NOW THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF PRIOR LAKE, MINNESOTA as follows: 1. The recitals set forth above are incorporated herein. 2. Staff is authorized to show the City and MCES Sewer Rates separately on the Official City Fee Schedule and on the utility bill. PASSED AND ADOPTED THIS 16th DAY OF NOVEMBER 2009. YFG nm Hau en Hau en Erickson Erickson Hedber Hedber LeMair LeMair Millar Millar Frank Boyles, City Manager www. cityofpriorlake. com F~:tc~u,cin~un~ r~~en~~ ~e~~resti7 ~ ~ ~ ~s~~~~~7~~~~; /Fax 952.447.4245