HomeMy WebLinkAbout040504 Work Session16200 Eagle Creek Avenue S.E.
Prior Lake, MN 55372-1714
s lon,
Dinner
2
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Review of New Revenue Sources
Special Service Districts
Community Requested Facility Surcharge ("CRFS")
Street Light Utility
Franchise Fees
Street Overlay Assessment Charge
Wensmann Concept for Jeffers Pond.
Other Business~
5. Adjourn
~ Please note that the City Council reserves the right to add or delete items from the agenda based
upon time availability.
www.cityofpriorlake.corn
Phone 952.447.4230 / Fax 952.447.4245
Prior Lake City Council
NEW Revenue Workshop
April 5, 2004
5:30 p.m.
Introduction
The 2020 Vision and Strategic Plan identifies City Financial Resources as a vision element. Within this
vision element the City is to "Identify additional revenue sources." Accordingly a workshop has been
scheduled prior to the April 5, 2004 meeting to discuss at least five additional revenue sources that are
permitted by law but which would be new and different for the City. The City Council may wish to
consider these revenue sources.
The revenues described below are intended first and foremost to recover current and future city costs. In
virtually every case below, the general taxpayers are absorbing these expenses, most often through the
property tax levy. Implementing one or more of these new revenue strategies will align certain fees with
the service or benefit, as well as help diversify city revenue sources.
1. Special Service District:
A special service district (SSD) is a defined area within the city where special services are provided and
the cost of providing those services is funded from revenues collected from special service charges
imposed within the district. The property in a SSD must be classified and used for commercial, industrial
or public utility purposes. The concept of a special service district is that an increased level of service is
provided by the city to businesses located within the district. Some examples of special services that
could be furnished in a downtown area would be extra maintenance costs associated with rain gardens,
snow and ice removal, installation of sidewalk, special decorative street lighting, parking, kiosks,
benches, planters, trees and a whole host of other amenities.
As per Minnesota Statute 428 service charges may be imposed on the basis of the net tax capacity of the
taxable property located within the geographic area described in the ordinance. The establishment of an
SSD requires a petition of owners of 25 percent or more of the land and owners of 25 percent or more of
the net tax capacity of properties located within the proposed district. Also there is a veto requirement
whereby if owners of 35 percent or more of the land area file an objection the SSD may not be created.
In cases where businesses are supportive of"additional service levels" this type of revenue recovery is a
win-win situation for both business property owners and the city. The amount of the tax levy would be
exempt from the city's maximum levy limit which provides increased taxing capacity to the city and
businesses receive favorable Internal Revenue Service tax treatment for the service charge as opposed to
a special assessment that is not tax deductible.
2. Community Requested Facility Surcharge (CRFS):
There are numerous neighborhoods within the city where electric power utility lines are overhead rather
than underground. An alternative infrastructure funding source available for cities to pay for the cost of
under grounding overhead power lines in a street reconstruction project is to require the electric company
to assume the financial liability. This can be accomplished by directing the electric company to recover
the cost on the electric utility bill. This funding mechanism is called a community requested facility
surcharge (CRFS). It is charged only against the electric company's ratepayers within the community.
Typically the recovery period for the monthly billing surcharge would be anywhere from 12 to 60
months. The minimum amount of the surcharge is $1.00 per customer. As an example Excel Energy has
calculated a $1.00 surcharge to run for 24 months that would pay for the cost of dropping the overhead
power lines in the Downtown reconstruction improvement project. The alternative is to pay the $87,000
under grounding cost as part of the special tax levy associated with the downtown improvement project.
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If the Council wishes to implement this funding source, a policy should be adopted by the City requiring
the under grounding of all existing overhead power lines in future reconstruction projects and that the
appropriate electric company apply a CRFS for the cost recovery. By implementing such a strategy all
residents, regardless of electrical supplier, would receive the benefit of underground power and share on
an equitable basis the improvement cost in their utility bills.
3. Street Light Utility:
Of the 1612 utility enterprises operated by municipalities last year, the majority (1407) were water and
sewer utilities The next most popular (126) were electric utilities followed by natural gas of which there
were 31 city gas utilities in Minnesota. Relatively new on the municipal scene is the establishment of a
handful of street light utilities. Last year the utility cost for streetlights in the City of Prior Lake
amounted to $110,671.00. This escalating amount is paid for by the property tax each year. By removing
the cost from the General Fund the City would achieve a greater balance between property tax and non-
tax revenues. Also the City could more easily fund the replacement of street light pole standards such as
along CSAH 21 by establishing a capital charge in addition to an operational fee on the utility bill. Based
upon our present bi-monthly billing system, an initial charge of $5.00 would generate an annual income
stream of approximately $200,000. The downside is that we already have a flat rate charge established
for both water quality ($6.00 storm water charge) and our $7.50 CFAC charge for utility building needs.
Encumbering our water and sewer utility bill with an additional charge may be more difficult since we
will be increasing our water rate fairly significantly to pay the debt on our anticipated water revenue
bonds necessary to finance the future water treatment plant scheduled for construction in 2006.
4. Utili~ Franchise Fees:
Cities have the right to require franchise fees from gas and electric companies to recover expenditures
associated with the acquisition and maintenance of such right of way and other related costs. Prior Lake
has invested millions of dollars in right of way acquisitions, either thru direct negotiations or
condemnation, which directly benefits all utility companies. The City has expended more than $1.7
million dollars in right of way land acquisition just in the past five (5) years. It is only fair and equitable
that these utility companies share the cost burden since their infrastructure is located within city right of
way.
A franchise fee is typically incorporated into a franchise agreement that would set forth the terms and
conditions of the use of the public right of way by these utility companies and establish the franchise fee.
Outlined below are the three methods whereby a franchise fee can be charged:
1) Percentage Based- Basically the City would collect a certain percentage of the gross revenues
derived from operations within the City i.e. similar to the 5% that we presently charge Mediacom
for cable TV. The fee increases with increased revenues and is simple to apply. However when
gas prices spike up and down revenues can vary dramatically and can be perceived as the City
receiving an unearned "windfall".
2) Usage Fee - This fee type would establish a rate based on the usage of the customer. The fee
would be a fixed charge per btu (gas) or kwh (electric). The more energy a customer uses, the
higher the fee. It is also the least commonly used method.
3) Meter Account Fee - This fee attaches a fixed monthly amount to a meter installed at customer
premises. The advantage to this flat fee is the predictable, fixed amount to the customer and
predictable revenue to the city. It also captures growth in the community. The City would
determine a base revenue need and the appropriate meter fee would be established. The
following is a table that Minnegasco prepared for the City of Prior Lake customer base.
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EXAMPLE OF METER FEE IF APPLIED DIFFERENTLY FOR EACH RATE CLASS:
Rate Class # Cust. Flat S/mo # months
Residential 8,611 $1.50 12
Com A 159 $2.00 12
Com B 119 $5.00 12
Com C 78 $20.00 12
SVDF A 4 $100.00 12
SVDF B 3 $100.00 12
LVDF 0 $250.00 12
TOTAL 8,974
Total Feelyr
$154,998.00
$3,816.00
$7,140.00
$18,720.00
$4,80O.OO
$3,600.oo
$o.oo
$193,074.00
As illustrated above a flat monthly charge of $1.50 tiering upwards for commercial accounts would net
the City of Prior Lake nearly $200,000.00 just from Minnegasco. A like amount could be generated from
the electric utilities. Both the gas and electric utilities far and way favor the flat fee method because it
was the least regressive and the simplest form of fee application administratively.
One important consideration is that if franchise fees are to be implemented they should be charge to all
applicable utility companies (Minnegasco, Excel Energy, MVEC & Shakopee Public Utilities) to be fair,
in other words equal fees for all utilities. Instituting a franchise fee could be a win-win situation for both
the City and the utility company, if it were implemented in lieu of permit fees. Presently we charge a
right of way permit fee for any and all work undertaken by a utility company. These permit fees are
intended to recoup our annual administrative expenses for street utility openings but do not recover our
ROW acquisition costs which are significant. The customer's bill will identify that portion of their
payment collected by the city as franchise fee. Accordingly it will be important for the city to share the
rationale for franchise fees.
5. Street Overlay Assessment Charge:
Within the Street Department General Fund Operating Budget an approximate $ 100,000 tax levy is
allocated for overlaying streets that currently have concrete curb and gutter. Under our current policy the
City would overlay those streets that are identified by our Pavement Management software with these
funds but not assess any amount for the cost. The year 2000 was the last year that the City applied a unit
assessment in the amount of $931.42 for the bituminous overlay of Fish Point Road. Since then the
Council has directed Staff to incorporate street overlaying into the General Fund Street Department as an
item to be paid for by general taxation. The reason for the policy change was that the Council viewed
street overlay in the same context as street patching. These were considered to be annual maintenance
expense items that should be provided as general taxpayer services as opposed to assessing for them.
In an effort to diversify revenues, the Council could adopt annually a unit street overlay assessment
charge ranging from $500 to $1000 per improved lot that could enhance general fund revenues by
$50,000 to $100,000 based upon 100 parcels. Such action is more in line with the user fee philosophy of
the Council to charge back those costs that directly benefit a user, rather than ask all tax payers to
subsidize 100% of the street overlay improvement cost.
Summary
As the council is aware, the city's present policy is to raise these fees through property taxes. The
proposed revenue sources attempt to spread the costs to those who benefit from the particular service.
Accordingly these new revenue sources are more consistent with the council's philosophy that those who
benefit should pay. These revenue sources also add to the city's revenue diversification and would serve
as important pieces to a balanced budget in response to local government aids cuts and more restrictive
levy limits. Given the State's current financial condition it is realistic to assume that they may need to
consider additional local government cutbacks in the coming years.
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In addition to considering which, if any of these revenue sources to implement, the Council should also
consider the timing of these revenue applications in the face of anticipated community needs and their
property tax implications.
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