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HomeMy WebLinkAbout8A Water and Sewer Rates Report Phone 952.447.9800 / Fax 952.447.4245 / www.cityofpriorlake.com 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL AGENDA REPORT MEETING DATE: FEBRUARY 22, 2016 AGENDA #: 8A PREPARED BY: DON URAM, FINANCE KATY GEHLER, DIRECTOR OF PUBLIC WORKS PRESENTED BY: DON URAM AND KATY GEHLER AGENDA ITEM: CONSIDER APPROVAL OF AN ORDINANCE AMENDMENT REVISING THE CITY’S OFFICIAL FEE SCHEDULE BY ESTABLISHING SEWER AND WATER RATES FOR 2016 DISCUSSION: Introduction The purpose of this agenda item is to establish the city water and sanitary sewer rates for 2016 and to provide the framework for future rates which maintain operations, fund balances and funds planned capital improvements. This may include the occasional issuance of debt to minimize rate increases and to ensure compliance with the city’s Comprehensive Financial Management Plan (CFMP) with respect to fund balance levels. While staff’s recommendations are based on the city’s current plans, these recommendations may change as a result of a more comprehensive water and sewer systems analysis expected to begin this year. History To put things into perspective, the current water and sewer plans were completed in 2004 and 2005 as part of the comprehensive plan update. These plans are proposed to be updated starting in 2016 to reflect the current conditions and the requirement to update the comprehensive plan by 2018. The new plans will not only consider updates to the required capital investments and timing, but also address emerging issues surrounding water supply planning on a regional level and alternative water sources (i.e. water purchasing). Once the plans are updated, the identified capital investments will be incorporated into an updated water and sewer rates study. This portion of the study will look at both the volume based user rates and the trunk fees charged to developers and builders. The goal being to postpone the need for capital investments. The results of both the water and sewer systems study and the rate study will be used as guidelines by staff for future rate increases in 2017. The Council held a public hearing and approved the 2016 Official Fee Schedule at their meeting on December 21, 2015. Staff’s recommendation then was to defer the decision on any increases to water and sewer rates until they had the opportunity to evaluate the impact of the 2016 street and 2 infrastructure reconstruction project on the rates. Staff also wanted to present the option of using debt to finance the water and sewer portion of capital improvements which would have a lesser impact on rates than the current practice of funding projects with cash. At the Council workshop on January 11, 2016, Staff presented an overview of the City’s use of debt, a preview of the 2106 street and infrastructure reconstruction project, and a preliminary analysis of the impact of using cash verses issuing debt on sewer and water rates. The Council generally agreed that they preferred the use of cash to fund the water and sewer portions of reconstruction projects but expressed a concern about big changes in the rates. Council direction to staff was to evaluate the impact of water and sewer rate increases based on the approved Capital Improvement’s Plan (CIP) and to recommend a strategy going forward that may include the strategic use of debt. Current Circumstances The approved CIP did not comtemplate the lining of a 15” trunk sewer main adjacent to the Manitou Road project scheduled for 2016. This work added $500,000 to the project cost of $860,000. With this increase in cost, an increase to the sewer rates is necessary in 2016 to finance the addional improvement. Conclusion It is difficult to fund planned capital improvements and to maintain compliance with the City’s Financial Mangement Plan with cash reserves without fluctuations in fund balance. For example, with annual rate increases of $0.50 in 2016 and 2017, the sewer fund would see a drop in fund balance from the required $1.5 million to about $1 million in 2018. The same thing holds true for the water fund. With a rate increase of $0.25 in 2016 and a $0.50 increase in 2017, water fund balance drops from the required $1.5 million to about $800,000 in 2018. Based on the current plan, small annual rate increases (2% - 3%) will be necessary to increase fund reserves to be compliant with the CFMP. This will be reviewed annually to ensure that the fund reserves do not exceed the amounts necessary per the City’s policy. ISSUES: During the 2016 Budget process, several people voiced their concerns about the water and sewer rates charged by the city. The city’s average customer based on winter use in 2015 was about 10,000 gallons of water bi-monthly. Based on current rates, the winter bi-monthly bill would be $41.50 for water, $20.20 for city sewer, and $22.20 for MCES sewer. With an increase of $0.25 per/1,000 gallons for water and and $0.50/1,000 gallons for city sewer, the new winter bi-monthly bill would be $44.00 for water, $25.20 for city sewer, and $22.20 for MCES sewer. 3 Total annual increase for the average city water and sewer user based on 10,000 gallons would be $45.00 or $3.75 monthly. FINANCIAL IMPACT: To fund the sanitary sewer portion of the 2016 capital improvement project (Manitou Road), Staff initially projected that the rate would need to be increased by $0.75/1,000 gallons. Further analysis indicates that in order to fund operations, maintain a fund balance reserve that meets the intent of the city’s Comprehensive Financial Management Plan (CMFP), and fund the projects identified in the approved 2016-2020 Capital Improvements Plan, the following needs to occur: 1. Rate increases of $0.50 in years 2016, 2017, and $0.25 in 2018. 2. Annual rate increases of 2% starting in 2019. The water fund is projected to require a rate increase of $0.25/1,000 gallons in 2016 and a $0.50 rate increase in 2017. Annual rate increases of 3% are required starting in 2018. ALTERNATIVES: To reduce the rate of increase in both the water and sewer funds, the city has two primary alternatives that they can choose from. The first is to reduce the amount of capital improvement expenditures. The downside of this alternative is that it is inconsistent with the Council’s direction to staff to plan for the reconstruction of 2 miles of streets and related infrastructure annually. A good example of this is the lining of the sewer pipe in the Manitou Road project scheduled for 2017. By deferring this $500,000 expenditure from 2016 to 2020, the need for a $0.25/1,000 gallon increase in 2018 is eliminated. Other modifications to the CIP could reduce the rate of increase in the city sewer rates. Staff expects the MCES to continue to increase their usage rates on an annual basis. As mentioned previously, planned capital expenditures in the water fund in 2017 and 2018 reduce reserves below the level outlined in the CFMP by about $700,000. By deferring a portion (about $200,000 per year) of the capital expenditures proposed for 2017 and 2018, fund reserves would be adequate. The other option is to strategically use debt to ensure compliance with the CFPM. By issuing $400,000 in debt in 2018 in the water fund, the city could proceed with the planned capital expenditures without rate increases. Staff’s recommendation for each fund follows: 1. Sewer fund – Increase 2016 rates from the current $2.02/1,000 gallons by $0.50 to $2.52/1,000 gallons. Defer Manitou Road sewer lining project from 2016 to 2020. 2. Water fund – Increase 2016 rates from $4.15/1,000 gallons to $4.40/1,000 gallons. This rate applies to water use 25,000 gallons or less. 3. Fund Reserves – during the 2017-2021 CIP process and based on recommendations of the Water/Sewer Systems plan and Rate 4 Study to be completed in early 2017, the CIP be revised to ensure compliance with the CFMP. RECOMMENDED MOTION: 1. Approve an Ordinance amending subsection 106.600 (Adoption of Official Fee Schedule) as proposed or with changes. The new fees will be effective on March 5, 2016(publication date). 2. Delay action if the Council requires additional information. 4646 Dakota Street SE Prior Lake, MN 55372 CITY OF PRIOR LAKE ORDINANCE NO. xx-xx AN ORDINANCE OF THE CITY OF PRIOR LAKE, MINNESOTA, REVISING SECTION 106.600 OF THE PRIOR LAKE CITY CODE AND ESTABLISHING A FEE SCHEDULE FOR ALL CITY LICENSE FEES, USER CHARGES AND PERMIT CHARGES PURSUANT TO MINN. STAT. § 462.351 TO 462.364 The City Council of the City of Prior Lake does hereby ordain that Subsection 106.600 Official Fee Schedule is amended with the following changes: UTILITY BILLING RATES: Water Rate $4.40/1000 gals. 1st 25,000 gals. $6.06/1000 gals. above 25,000 gals. City Sewer Rate $2.52/1000 gals. This ordinance shall become effective from and after its passage and publication or on February 22, 2016 whichever is later. Passed by the City Council of the City of Prior Lake this 22nd Day of February, 2016. ATTEST: _________________________ __________________________ City Manager Mayor This Ordinance to be published in the Prior Lake American on the 5th day of March, 2016.