HomeMy WebLinkAbout02 26 10 City Council Work Session~~MVESO~P
4646 Dakota Street S.E.
Prior Lake, MN 55372-1714
CITY COUNCIL WORK SESSION REPORT
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MEETING DATE: MARCH 1, 2010
PREPARED BY: STEVE ALBRECHT, PUBLIC WORKS DIRECTOR
JERILYN ERICKSON, FINANCE DIRECTOR
TOPIC: SEWER AND WATER RATES
DISCUSSION: Introduction
The City of Prior Lake operates a Sewer and Water Utility Fund. This Fund is
supported by revenues generated from the sewer and water rates. In order to
better operate this Fund, Staff believes the City Council should adopt along-term
funding plan that provides for rate planning and fund stability. In order to
complete that plan so it can be considered as part of the Draft CIP workshop on
April 5, 2010, Staff needs input from the City Council on several items.
History
The City last increased water and sewer rates in January of 2004. Historically,
the City has increased rates, built up a surplus in the sewer and water fund
reserve and utilized those funds to supplement operating costs until the annual
operating costs exceeded revenues to the point that fund reserves were reduced
to what staff believed was an insufficient amount to continue operations.
In November, 2009, the City Council approved the segregation of the sewer rate
($3.65/1000 gallons) into two components: City Sewer ($1.90/1000 gallons) and
MCES Sewer ($1.75/1000 gallons). The February, 2010, utility bill reflected this
change.
Current Circumstances
Staff has completed detailed projections for the Sewer and Water Fund from
2010 to 2031. These projections indicate that without any changes to the current
rates, the Sewer and Water Fund reserve balances will be at $0 sometime in mid
2013 to early 2014. The attached tables show projected Sewer and Water Fund
operating and maintenance expenses over the planning period.
Conclusion
The City Council should consider developing along-term funding plan for the
Sewer and Water Fund to protect the operations and provide rate stability.
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ISSUES: Staff has identified the following issues for discussion by the City Council:
7) Should the City Separate fhe Sewer and Water Reserve Fund
Balance? Currently, the City includes the water and sewer operations in
a single utility fund. The expenses and revenues are budgeted and
accounted for separately within the fund. The fund balance is the
accumulation of surplus funds from both operations. A combined fund
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balance does not provide the transparency about the viability of each
operation. Staff believes that each utility operation should operate
independent of the other and be reported as such to ensure that one
operation is not subsidizing the other.
Staff Recommendation: Staff recommends that the Sewer and Water
Fund be segregated into two funds: 1) Sewer Fund and 2) Water Fund.
2) What should the minimum fund balance be before a rate increase is
considered? As of 1/1/2010, the Sewer and Water Fund had an
uncommitted balance of about $6,000,000. As is noted above, based on
the projected expenses, that balance is expected to reach $0 in the next
couple of years. Based on the proportionate share of sewer and water
revenues recorded in the Fund, Staff would recommend splitting the fund
balance 42% Sewer and 58% Water. This would result in fund balances
of approximately $2.5 million and $3.5 million for the Sewer Fund and
Water Fund, respectively. Staff recommends that, as part of a long-term
rate strategy, the City Council should establish a minimum fund balance
with projected future decreases as a trigger for future rate increases.
Staff Recommendation: Based on analysis of cash flow for the funds
Staff recommends minimum fund balances of $1.2 million for the Water
Fund and $660,000 for the Sewer Fund which were set based on the
following factors:
Water Fund Sewer Fund
3 months o eratin ex enses $ 625,000 $ 300,000
1 ear of debt service $ 575,000 $ 95,000
3 months MCES $ 0 $ 265,000
Totals $1,200,000 $ 660,000
In addition to the above analysis, the lower fund balance for the Sewer
Fund is supported by the fact that revenues for this Fund are fairly
consistent whereas revenues for the Water Fund are generally lower from
October through April and spike during the summer months. Should the
City experience any unplanned or catastrophic utility failures the City
could issue Utility Revenue bonds to fund needed repairs and, therefore,
an additional contingency for emergency purposes would not be
necessary. Debt issuance would have an impact on future rates.
3) Should the Met Council Environmental Services Fee increases be
passed through to users or absorbed by the City Sewer operations?
The MCES Fee is the charge to all Prior Lake residents to treat and
dispose of sewage waste. The Met Council has adopted along-range
sewer user fee plan that will rely on annual increases ranging from 3.8%
for 2010 to between 4% and 5% for the next 4-5 years. Currently, the
annual MCES Fees represent just less than 50% of the City's annual
Sewer operating budget at approximately $1.1 million. By not passing
the increases through to the users, the City will need to absorb the
increased costs. Staff projects that with no increase to the MCES charge
to correspond with increases from the Met Council, the Sewer Fund will
be at $0 sometime in 2013. With the MCES pass through but no other
sewer rate increases the Sewer Fund will be at $0 sometime in 2015.
Staff Recommendation: Staff believes the MCES cost should be passed
through in an effort to be truly transparent about the costs of sewer
system operations. The timing and date of that pass-through would be
determined by the City Council. However, as is noted above, it will have
an impact on the timing of potential rate increases.
4) Rate Strategy: Based on direction related to the above items Staff can
develop some proposed rate strategies for Council consideration.
Currently, the City utilizes a two-tier system for water:
Water
Tier 1: 0-25,000 gallons - $2.65/1,000 gallons
Tier 2: 25,000+ gallons - $3.65/1,000 gallons
The City breaks out the City Sewer and the MCES Sewer rates as
follows:
Sewer
City Sewer: $1.90/1,000 gallons
MCES Sewer: $1.75/1,000 gallons
The actual 2010 MCES cost to the City is $1.98/1,000 gallons.
As was noted in the brief history discussion above, the City has
historically waited until fund reserves started to decline and then enacted
rate increases meant to meet several years of expenditure needs. This
strategy has resulted in large increases that collect and reserve funds
prior to the expenditure need and then used fund balance reserves for
capital and operating needs until the fund reserves were significantly
reduced or depleted.
Staff Recommendation: Staff believes a long term-rate strategy should be
adopted as part of the 2011-2015 Capital Improvement Program. This
plan will provide better rate planning, stability and transparency as it
would set budget guidelines and limits for the Sewer Fund and Water
Fund expenses.
In order to minimize impact to base users, Staff is recommending a
system that establishes a fixed base charge for up to a set level and then
tiered conservation charges. For example:
Base Charge:
Tier 1: 0-10,000 gallons/month
Tier 2: 10,000-25,000 gallons/month
Tier 3: 25,000+ gallons/month
The above system would recognize that everyone that is hooked up to
the system should have the same minimum charge. The intent would not
be to increase rates to base users but rather to adjust Tier 1 rates to
reflect the base charge. Tier 1 would serve as the basic use level. Staff
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is currently analyzing water use data to determine the separation point
between basic home use and homes that irrigate. Preliminary indications
are that this is somewhere between 7,500 and 10,000 gallons per month.
Tier 2 would primarily affect those accounts that utilize residential
irrigation. Tier 3, which is primarily homeowners associations or larger
irrigation accounts, would have the highest rate. In addition to these
tiers, Staff believes a separate commercial rate may be warranted to
ensure that businesses are not negatively impacted by this conservation
rate plan.
Staff is also recommending that rather than the historic approach of large
increases that build surpluses that an annual percentage increase that
matches the City Council's approved plan be enacted. This will minimize
future increases and allow the City to maintain a minimal reserve for
these Funds.
FINANCIAL Despite the fact that the last rate increase was in January, 2004, Staff is not
IMPACT: proposing a rate increase for 2010. However, the City Council should provide
direction on how they want to handle the MCES Fee increases because
continuing to absorb this fee increase does have an impact on the City's Sewer
and Water Fund reserves.
RECOMMENDED The City Council should provide staff with direction on the above issues so a
ACTION: draft long-term rate plan can be developed for City Council review as part of the
Capital Improvement Program.
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