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HomeMy WebLinkAbout01 11 2016 Municipal Debt/Water and Sewer Rates Report 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL WORK SESSION REPORT MEETING DATE: JANUARY 11, 2016 PREPARED BY: PRESENTED BY: DON URAM, FINANCE DIRECTOR FRANK BOYLES DON URAM KATY GEHLER TAMMY OMDAL, NORTHLAND SECURITIES AGENDA ITEM: MUNICIPAL DEBT/WATER AND SEWER RATES DISCUSSION: Introduction At tonight’s regular meeting, the Council will be asked to: conduct a public hearing on the Manitou Road Project and, if appropriate, approve a resolution ordering the project. Prior to approving this project the Council should be aware of and factor in a number of financial considerations. Funding for this project comes from three primary sources including a property tax levy and contributions from the water and sewer enterprise funds. The deci- sion to construct this project will impact the 2017 tax levy and potentially the 2016 water/sewer rates. With the City’s goal to properly plan for the replacement of existing assets (streets, water, sewer, fleet, facilities, parks, etc.), revisions to the approved Cap- ital Improvements Plan (CIP) has showed an increased funding need. Because of that, City staff and Northland Securities continue to look for options for manag- ing the debt service levy and water/sewer rates on a long-term basis. The purpose of this work session is to provide the Council with an overview of the City’s current debt position, discuss the 2016 projects and overall CIP strat- egy, and to get direction from the Council on the practice of using cash to pay for capital improvements in the water/sewer funds. History The City has historically issued special assessment and reconstruction debt with 10-year terms. The City has also strived to stay within the annual $10 million limit for bank qualified bonds. Recognizing the pressure on the tax levy due to capital projects, the bonds issued in 2015 have a final maturity of 15 years. The City has also used cash funded by rate increases in the water/sewer funds to pay for im- provements. This is becoming increasingly difficult as the capital expenditures for transportation related projects in the water fund have increased from about $200,000 in 2011 to $2 million in 2016 and in the sewer fund from $100,000 in 2012 to $1 million. 2 The reasons for these precipitous increases are: 1. A recognition that our previous level of investment was unrealistic to main- tain the existing infrastructure. 2. Failure of one of more existing major utility installations (well 7, CSAH 21 water pipes). 3. Dramatically increasing construction costs. 4. Discovery of hot soils in the city. 5. More accurate planning for future utility needs including for example a new water treatment plant. Current Circumstances Development of the 2015 - 2019 Capital Improvement Program highlighted the challenges the City was facing with regard to the annual debt service levy. Th is challenge continued with the 2016-2020 CIP as the increase in debt service levy for projects planned for 2016 is estimated at $265k or an approximate 2.65% increase in overall tax levy. This is a reduction from the original plan since the Council has modified the CIP to limit the tax levy increase in 2017. There is also a proposed $0.25/1000 gallons water rate increase that was recommended in conjunction with the approval of the Capital Improvement Program (2016-2020). With the approval of the Manitou Project even under Option D, an unanticipated $0.75/1000 gallons City sewer rate increase would be needed. Future projects are also placing significant pressure on the tax levy. Considering this, the discussion held during the adoption of the 2016 budget and the concern with increasing water and sewer rates, City staff and Northland Se- curities’ have been reviewing financial options to fund the City’s CIP. While the CIP portion of the presentation will focus on overall strategy, the water/sewer portion will be directed at specific feedback and direction from the Council on rates and capital project funding strategies. Following is a summary of the information that will be presented at the work ses- sion. Financial Considerations Debt The City currently has about $33 million in total debt outstanding broken down by the following types:  G. O. debt payable from special assessments – $11,955,000  G. O. debt payable from taxes – $20, 635,000  G. O. debt payable from tax increments – $282,848  G. O. debt payable from revenues – $7,490,000  Lease Obligation debt – $2,574,450  Special Obligation debt – $290,000 The 2016 debt service payment for the existing debt outstanding is approximately $4.6 million. Of that total, approximately $3.4 million comes from property taxes. 3 At a workshop in March 2015, a strategy was presented to the Council that would help keep the debt levy at approximately $3.2 million annually. This required extended the term of the bonds from 10 years to 15 years and structuring annual debt payments around existing debt. The 2015 debt issuance was structured with a 15 year term. 2017 Tax Levy There are three primary drivers of the tax levy. These are; general fund opera- tions, funding for capital plans (equip. revolving, public facilities, etc.), and debt service. For 2017, preliminary projections indicate a $300,000 (3%) increase for the general fund, a $120,000 (1.2%) increase for existing debt service, a $265,000 (2.65%) increase for new debt service, and a $275,000 (2.75%) in- crease for the equipment revolving fund. This results in a total 9.6% tax increase before considering the EDA. The increase in the debt service levy is comprised of debt issued for the Manitou Road project, the replacement of the roof at the public works building, and the purchase of two 5-ton trucks. These projects and associated expenditures have been included in the CIP for several years. CIP Strategy Staff has developed and the Council has generally supported a CIP that has in- cluded the reconstruction of +/- 2 miles of streets and related infrastructure an- nually. This strategy is based on the theory that each of our 100 miles of streets will last 50 years thus two miles must be rebuilt annually. To achieve this, the streets and related infrastructure need to be maintained which has an operational cost impact. Not maintaining the streets and utility impacts operations as well, both financially and in decreased service levels to the residents. Based on dis- cussions during the 2016 budget adoption process, it seems that this two mile benchmark may not be achievable, at least in the short term. Staff is asking for direction on this issue as we begin the preparation of the 2017-2021 CIP. Water/Sewer Rates Lastly, staff will be presenting detailed information on the water/sewer enterprise funds. These operations are self-funded by user rates. According to the City’s Financial Policy, these funds are required to maintain a minimum fund balance equal to the following: 1. Three months operating expenditures 2. Debt service payments 3. Future capital projects 4. Contingency The cash required is about $1.6 million each for both water and sewer. Paying cash for large capital expenditures requires that rates be set at a level to allow the City to “save” for the expenditure while maintaining the recommended cash balance. This strategy requires a $0.25 increase in water rate and a $0.75 in- crease in sewer rate for 2016. 4 An alternative the Council could consider is the issuance of debt for large capital expenditures. The impact of adopting this strategy and the effect on rates will be presented at the work session. Conclusion The City has an investment of about $250 million (original cost) in the community. This includes an investment in each of the following:  Streets – $ 60.7 million  Water and Sewer Infrastructure – $ 41.8 million  Buildings – $ 38.7 million  Vehicles – $ 6 million  Trails – $ 2.5 million The implementation of a sustainable and consistent strategy for reinvestment in this infrastructure is critical as the City continues to grow. The Council can assist in this effort by providing direction on the following: 1. Manitou Road project – What should be the scope and funding sources? 2. CIP Strategy – While the replacement of 2 miles of infrastructure annually may be correct to effectively maintain the various systems, is it economi- cally realistic? 3. Water/Sewer rates – Should we continue the practice of paying cash for large capital expenditures (typically associated with road projects) or is- sue debt? 4. Other- How do we effectively communicate this complicated but critical topic to our residents so they understand what the City is trying to accom- plish? Please refer to agenda item 7A for the meeting this evening for more details on the Manitou Road project.