HomeMy WebLinkAbout1A Prior Lake Utility Study 4NOV2019Northland Securities, Inc.
150 South Fifth Street , Suite 3300
Minneapolis, MN 55402
Toll Free 1-800-851-2920 Main 612-851-5900
www.northlandsecurities.com
Member FINRA and SIPC
Registered with SEC and MSRB
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Letter of Transmittal
1. Introduction and Summary 1
Overview................................................................................................................................................1
Study Approach ..................................................................................................................................1
Revenue Suffi ciency...........................................................................................................................1
Rate Calculation..................................................................................................................................2
Organization of the Plan .................................................................................................................4
Water Fund Key Financial Summary Data, Table 1................................................................6
Water Fund Projected Ending Cash Position, Chart 1..........................................................7
Water Fund - Key Financial Summary Data, Charts 2-5......................................................8
Sanitary Sewer Fund Key Financial Summary Data, Table 2............................................10
Sanitary Sewer Fund Projected Ending Cash Position, Chart 6.....................................11
Sanitary Sewer Fund - Key Financial Summary Data, Charts 7-10...............................12
Low Volume Customer Utility Bill..............................................................................................14
Medium Volume Customer Utility Bill.....................................................................................15
High Volume Customer Utility Bill............................................................................................16
2. Background 17
Comprehensive Plan......................................................................................................................17
Water System....................................................................................................................................17
Sanitary Sewer System..................................................................................................................17
3. Best Practices Evaluation 18
Literature Search for Best Practices..........................................................................................18
Irrigation / Rate Structures................................................................................................18
Water Conservation Elements and Rate Structures.................................................19
Billing Cycles...........................................................................................................................20
Comparison to Other Minnesota Cities..................................................................................20
Chart 20 Water Services Comparison - Low Volume..............................................22
Chart 20.1 Sanitary Sewer Services Comparison - Low Volume.........................22
Chart 21 Water Services Comparison - Medium Volume......................................23
Chart 21.1 Sanitary Sewer Services Comparison - Medium Volume................23
Chart 22 Water Services Comparison - High Volume.............................................24
Chart 22.1 Sanitary Sewer Services Comparison - High Volume........................24
Twin Cities Metropolitan Area Rate Structures....................................................................25
Private Street Infrastructure Replacement.............................................................................25
Agreement with SMSC for Water..............................................................................................26
Trunk Funds.......................................................................................................................................27
4. Rate Structure 28
Equity of Current Rate Structure...............................................................................................28
Revenue from Fixed Rate Versus Volume Basis...................................................................28
Figure 1. Charges for Services Revenue..................................................................................29
Base Rates and Capital Facility Charge...................................................................................29
Evaluation of Funding Approach for Infrastructure...........................................................29
Funding Depreciation....................................................................................................................30
Price Elasticity of Demand for Water.......................................................................................31
Water Service Rates Proposed for Year 2020 and 2021, Figures 2-3..........................32
Sanitary Sewer Services Rates Proposed for Year 2020 and 2021, Figures 3-4.......33
Water Services Proposed Rate Structure Change and Revenue, Table 3...................34
Sanitary Sewer Services Proposed Rate Structure Change and Rev, Table 4...........34
Chart 23 - Water Revenue - Volume Basis Versus Non-Volume Basis........................35
Chart 24 - Sanitary Sewer Revenue - Volume Basis Versus Non-Volume Basis......35
Chart 25 - Water Customers - Bimonthly Bills based on Usage...................................36
Chart 26 - Water Customers - Bimonthly Bills / % Change............................................36
Chart 27 - Sanitary Sewer Customers - Bimonthly Bills based on Usage..................37
Chart 28 - Sanitary Sewer Customers - Bimonthly Bills / % Change...........................37
5. Capital Improvement Plan 38
Overview.............................................................................................................................................38
Capital Projects.................................................................................................................................38
Source of Funding for Capital Projects...................................................................................38
Trunk Reserve and Water Storage Funds (Trunk Funds)...................................................38
Water Purchase and Facility Expansion Agreement with SMSC....................................39
Issuance of Debt..............................................................................................................................39
Chart 29 - Water Fund - Annual Capital Project Costs.....................................................40
Chart 30 - Sanitary Sewer Fund - Annual Capital Project Costs....................................40
Table 5 - Water Fund - Capital Improvement Plan.............................................................41
Table 6 - Sanitary Sewer Fund - Capital Improvement Plan...........................................42
Table 7 - Bonds Outstanding - Existing and Future Bonds.............................................43
Table 8 - Bounds Outstanding by Series................................................................................44
Chart 31 - Bonds Outstanding Payable from Utility Revenues......................................45
Chart 32 - Annual Debt Service Payable from Utility Revenues....................................45
6. Financial Plans 46
Revenue Suffi ciency........................................................................................................................46
Key Assumptions.............................................................................................................................46
Water Fund .......................................................................................................................................47
Table 9 - Pro Forma..............................................................................................................49
Table 10 - Year End Cash Balances.................................................................................51
Table 11 - Customers/Usage and Rates.......................................................................52
Sanitary Sewer Fund .....................................................................................................................55
Table 12 - Pro Forma ...........................................................................................................57
Table 13 - Projected Year End Cash Balances.............................................................59
Table 14 - Customers/Usage and Rates.......................................................................60
7. Appendix 63
Appendix 1 Water Services Summary by Customer Type..............................................64
Appendix 2 Sanitary Sewer Services Summary by Customer Type.............................66
Appendix 3 Water Services Total All Customers Volume and Tier Data...................67
Appendix 4 Sanitary Sewer Services Total All Customers Volume and Tier Data..68
Appendix 5 Water Winter Customer Bills.............................................................................70
Appendix 6 Water Summer Customer Bills..........................................................................71
Appendix 7 Sanitary Sewer Winter Customer Bills............................................................72
Appendix 8 Sanitary Sewer Summer Customer Bills........................................................73
Appendix 9 Bill Comparison for Example Customers......................................................74
Appendix 10 Water Fund Change in Net Capital Assets................................................75
Appendix 11 Sanitary Sewer Fund Change in Net Capital Assets...............................76
Appendix 12 Volume Billed by Billing Period......................................................................77
Appendix 13 Bills by Customer Classifi cation .....................................................................78
Appendix 14 Volume by Customer Classifi cation..............................................................79
Overview
The Financial Management Plan for Water and Sani-
tary Sewer Services (the “Plan” or the “Study”) is
intended to serve as a guide for the fi nancial man-
agement of the water and sanitary sewer systems (col-
lectively referred to as the “Utilities” hereafter) of the
City of Prior Lake (the “City”).
The objectives of the Study were as follows:
•Revenue Suffi ciency - develop and populate a
forecasting model that will determine the level
of revenue needed to satisfy each system’s pro-
jected operating, capital costs, and debt service
while maintaining adequate reserves for future
capital needs of the City. The City desires to
avoid future debt issuance for capital improve-
ments
• Rate Calculation - Review existing rate struc-
tures for the Utilities and develop modifi ca-
tions, as appropriate, to ensure that rates refl ect
accepted practices, fair and equitable distribu-
tion of costs, and competitiveness with other
communities.
The Plan includes anticipated future capital improve-
ments for the Utilities for years 2020-2039 (the “CIP”),
as prepared by the City. Estimates were made by the
City for future costs and timing of projects. The actual
timing for future system improvements will depend
on the growth rate of the community.
While the specifi c timing of future improvements is
uncertain, awareness of the necessity of these future
improvements is important when considering rates
and level of reserves as presented in the Plan.
Study Approach
The following steps were taken as part of the Study:
• City provided information on customer activity,
including a database of customer billings for years
2017, 2018, and the fi rst billing period for 2019,
with water volumes and sewer volumes billed
by billing period and customer classifi cations. In
providing this information, the City noted that the
data as provided included manual volume esti-
mates and adjustments for certain customers and
other manual adjustments to the data. Northland
relied on the data as presented by the City to make
future projection of water use and volumes by tier
and average number of bills per year.
•City provided historical fi nancial data along with
current budget plans and capital improvement
plans.
• Information provided by the City was organized,
analyzed, and used to support the development of
the Plan. The prior year data included in the Plan is
reconciled with the City’s annual audited fi nancial
statements.
•City staff off ered input and feedback on the as-
sumptions, diff erent options for rate structures,
and desired outcomes, including rate structures.
Revenue Suffi ciency
The Study evaluated the suffi ciency of revenues to
meet all current and projected fi nancial requirements
for the Utilities over the next decade, and determined
the rates necessary in each year of the projection pe-
riod to provide suffi cient revenues to fund identifi ed
requirements. For purposes of the Study, the require-
ments include providing revenue suffi cient to achieve
projected year-end cash balance to cover the following
purposes:
• Three-months of operating expense
• Following-year debt service payments
• Following year capital acquisition (planned to be
paid from cash)
• Reserves for replacement of infrastructure located
under private streets
• Reserves for future capital improvements
The City accounts for water and sanitary sewer ser-
vices in the Water Fund and the Sanitary Sewer Fund,
reported as “Enterprise Funds” of the City. Govern-
mental accounting provides that Enterprise Funds are
used to account for ongoing activities that are similar
to businesses found in the private sector. These type
of funds are considered self-supporting in that the ser-
vices rendered by them are generally fi nanced through
user charges or on a cost reimbursement basis.
OtherrequirementsforanEnterprisefundincludethat
the activity’s costs of providing services, such as capi-
tal costs, depreciation, and debt service, be recovered
with feesand charges, rather than with taxes or similar
revenues. The fees and charges from one activity may
not necessarily fund the activities of another activity,
for example revenue collected to provide water servic-
es should not be used to pay for the cost of providing
sanitary sewer services. Providing of service includes
the acquisition of capital and payment of related debt
to provide these services.
The graphics and tables that follow in the Introduction
and Summary section of the Plan provide a summary
of key fi nancial information for the Water Fund and
the Sanitary Sewer Fund, including the revenue suffi -
ciency of the proposed rates to meet the objectives for
water and sanitary sewer services.
Rate Calculation
The City currently has a two-part rate structure for
the Utilities, comprised of both fi xed and variable
charges. A tier structure is recommended by generally
accepted practices and is a practice followed by most
cities within the Twin Cities metropolitan area. This
structure recovers a portion of system costs in a fi xed
charge, recognizing that the Utilities have certain fi xed
costs and customer service costs that are incurred
year-round. A provider of municipal utilities is incurs
these fi xed costs regardless of the level of water usage
by customers.
For Prior Lake, it is estimated, based on the 2019 bud-
get, that approximately 67% of the Water Fund ex-
penses, including depreciation, are fi xed and for the
Sewer Fund it is approximately 47%. The percentages
vary somewhat from year to year.
For usage or metered volume-based rates, based on
the results of the Study it is recommended that:
• Two new tiers be added to the current inclining
block water rate structure, for a total of four tiers,
and set the volume for each tier to refl ect customer
usage profi les and local data.
• Establish an inclining block sanitary sewer rate
structure, for a total of four tiers, and set the vol-
ume for each tier to refl ect customer usage profi les
and local data. No changes to the sanitary sewer
rate cap is recommended at this time. Pursuant to
City ordinance, the charge for sanitary sewer us-
age for each billing cycle for bills issued in August
and October shall not exceed 150% of the average
charge for sanitary sewer usage for the bills issued
in February and April.
• Postpone any adjustments to block rate structures
until year 2021 to allow time to communicate pro-
posed changes to customers and seek public in-
put, and to allow time for the City to implement
a planned new billing system. Adjustments to the
Plan and proposed rate structures may be neces-
sary based on public feedback and any presently
unknown limitations that may exist within the
new billing system.
•Proceed with planned infl ationary adjustments to
volume-based rates in year 2020 as part of the pro-
posed 2020 City budget.
• Maintain the City’s bimonthly billing cycle at this
time. The benefi ts of a monthly billing cycle is cov-
ered later in the Plan. Monthly billing should be
considered after the City has fully implemented
the tier structure changes and customers become
familiar with the new rates refl ected in bills and
the new billing system is fully implemented.
• Establish rates at a level that provides an appro-
priate level of cash reserves for future capital im-
provements that are not presently programmed in
the CIP. The reserves should be at a level that is
consistent with City’s past experience for contin-
gency and at a level that refl ects uncertainty about
cost of future infrastructure needs and desire to
avoid the issuance of debt.
After establishment of a new tier (block) rate structure
for water and sanitary sewer service in 2021, the Plan
anticipates a 1.5% average annual rate increase for wa-
ter services and 2.0% for sanitary sewer services, be-
tween years 2022 and 2029. The annual rate increases
are approximate and refl ect the anticipated net cost
increases for the Utilities and revenue suffi ciency ob-
jectives.
The impact of the proposed rates and block rate struc-
ture on customers is shown in the graphics and tables
that follow. Information is provided on the impact of
the proposed rates and block rate structure for low,
medium, and high volume customers of the Utilities.
The Appendix to the Plan provides additional data
and graphics related to customer impact.
For purposes of the Plan, a low volume customer is
shown to be a customer with billed volumes that are
at the 20th percentile of total customer water usage.
This means 20% of other customers are below this vol-
ume. A medium volume customer is shown to be at
the 50th percentile, and a high volume customer at the
80th percentile.
The graphics and tables that follow present the impact
to customer water and sanitary sewer bills at various
levels of water use resulting from the proposed rates
and tier (block) rate structure beginning with the fi rst
billing period in 2021. Amounts are shown on a bi-
monthly basis to be consistent with the City’s current
billing period.
The combined impact for water and sanitary sewer
bills at low and medium use volumes demonstrates
that low and medium volume customers will see a de-
crease in their bills. The decrease is mainly associated
with establishment of a new block rate structure to
bring revenue collection from fi xed base rate and vol-
ume-based rates into alignment with the current cost
of providing service. High volume users will see an
increase from a block rate structure that has a higher
cost per unit for higher volume users of the systems.
BasedonthePlanitisestimatedthatafterimplementa-
tion of new rate structure in 2021, approximately 52%
of water customers will see a reduction in their water
bills for the year and the remaining 48% will see an
increase. Similarly, for Sanitary Sewer, it is estimated
that approximately 53% of customers will see a reduc-
tion in their sanitary sewer bill for the year and the
remaining 47% an increase. See Appendix 5 through
8 for details on changes in bills for water and sanitary
sewer customer bills based on units (gallons) per bill-
ing period and by billing season (winter and summer).
The City should annually review utility rates and the
block rate structure to ensure that rates and structure
provides adequate revenues and cash fl ow based on
actual experience. Rates should be set based on actu-
al data and performance, which will include impact
of future development within the City. Furthermore,
any eff orts by customers to conserve and reduce water
consumption will have a direct impact on revenues for
the Utilities and require adjustments to the Plan.
Organization of Plan
The Plan is organized into seven sections:
1. Introduction and Summary provides information
on the Study Approach, Revenue Suffi ciency, and
Rate Calculations.
2. Background provides historical and statistical con-
text for the Utilities.
3. Best Practices Evaluation provides information on
literature search for best practices, comparison to
other cities, private street infrastructure replace-
ment approach, overview of agreement for pur-
chasing of water, and a brief overview of the City’s
“Trunk Funds”.
4. Rate Structure provides information on equity
of the City’s current rate structure, evaluation of
funding approach for infrastructure, capital facil-
ity charges, and funding depreciation.
5. Capital Improvement Plan provides information
on the City’s plans for maintaining and improv-
ing the water and sanitary sewer systems. This
includes estimates on project costs, timing, and
sources of funds. The time horizon for the capital
plan is years 2020-2039. Information on outstand-
ing debt obligation and debt service of the Utilities
is included.
6. Financial Plans provides the fi nancial plans (pro
forma) for the Utilities. The fi nancial plans include
historical, current, and projected sources and uses
of funds and estimated ending cash balances. Fi-
nancial plans take into account capital improve-
ment plans and proposed rates.
7. Appendix provides additional data and graphics.
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Water Fund
Estimated Based on Plan
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Sanitary Sewer Fund
Estimated Based on Plan
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Low Volume Customers Utility Bill
Estimated Based on Financial Plan
• Sanitary Sewer bill shown in the graphicsdoesnotinclude
the MCES fee the City collects from its customers for dis-
posal.
• The 2020 City fee amounts for water and sanitary sewer
services have not been adopted. The amounts shown here
are based on the preliminary 2020 City budget.
• The example low volume customer is based on volume at
the 10th percentile of all customers for water use for calen-
dar year 2018 billing period.
• Amounts include both base charges and volume-basis
charges.
Medium Volume Customer Utility Bill
Estimated Based on Financial Plan
• The Sanitary Sewer bill shown in the graphic does not in-
clude the MCES fee the City collects from its customers
for disposal.
• The 2020 City fee amounts for water and sanitary sewer
services have not been adopted. The amounts shown here
are based on the preliminary 2020 City budget.
• The example medium volume customer is based on vol-
ume at the 50th percentile of all customers for water use
for calendar year 2018 billing period.
• Amounts include both base charges and volume-basis
charges.
High Volume Customer Utility Bill
Estimated Based on Financial Plan
• The Sanitary Sewer bill shown in the graphics does not
include the MCES fee the City collects from its customers
for disposal.
• The 2020 City fee amounts for water and sanitary sewer
services have not been adopted. The amounts shown here
are based on the preliminary 2020 City budget.
• The example high volume customer is based on volume
at the 80th percentile of all customers for water use for
calendar year 2018 billing period.
• Amounts include both base charges and volume-basis
charges.
Comprehensive Plan
The source of information contained within this sec-
tion comes from the City’s Comprehensive Guide Plan
2040.
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ty approximately 24 miles south and west of down-
town Minneapolis. In 2018, the City limits encompass-
es approximately 19.5 square miles.
Prior Lake is also unique in that it is home to the Sha-
kopee Mdewakanton Sioux Community (SMSC) and
Mystic Lake Casino, the second largest Indian Gaming
Casinoin the nation. The SMSC is the largest employer
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Priorto1980,theCitycouldbestbedescribedasasmall
town, resort community. Between 1980 and 1990, the
population of Prior Lake increased by approximately
58 percent, households increased by 68 percent, and
employment increased by 75 percent. The City contin-
ued to grow and by 2000, the population increased an-
other 21 percent to 15,917. In 2010, the population was
22,796 and will be approaching 27,500 by 2020. Given
the current rate of growth and the Metropolitan Coun-
cil population forecast, the City estimates the popula-
tion will reach 37,600 by 2040.
Prior Lake has approximately 9,586 housing units in
Prior Lake, 88% of which are single family and 12%
of which are multi-family. Most homes are owner oc-
cupied (82%). Over the last ten years, Prior Lake has
added about 160 units per year on average. Detached
single-family homes continue to be the predominant
type of housing in Prior Lake but recent years have
seen more multi-family and single family detached
homes.
Water System
TheWaterSystemisservedbytwoelevatedwaterstor-
age facilities with a combined total of 1,750,000 gal-
lons, one in-ground storage facility with a capacity of
1,500,000 gallons and seven wells that have a capacity
to pump 6,050 gallons per minute or 8,712,000 gallons
per day. Average demand is 2,500,000 gallons per day
while peak demand reaches 7,000,000 gallons per day.
To provide for peak demand and a safeguard, the
City has interconnects with the City of Savage and the
SMSC as well as a water purchaser and facility expan-
sion agreement with the SMSC. Total tap water hard-
ness is 19 grains per gallon. There are approximately
142 miles of watermain.
Sanitary Sewer System
Sanitary sewer disposal needs are served by the Met-
ropolitan Waste Control Commission with 41 lift sta-
tions. Average discharge is 1,400,000 gallons per day
while peak discharge reaches 3,200,000 gallons per
day. There are approximately 130 miles of sanitary
sewer main. The city regularly jets approximately 30
miles of sewer lines per year as a preventative mainte-
nance measure.
Literature Search for Best Practices
The City requested a “best practices evaluation” to
help inform future decisions regarding conservation
and rate structure, among other purposes. Northland
has researched existing literature related to the eff ec-
tiveness of using rate structures to infl uence customer
behavior and reduce consumption.
Northland conducted a review of available informa-
tion on other cities, including Midwestern cities, to
identify experience of other cities modifying water
rate structure to reduce irrigation consumption. The
key fi ndings of Northland’s research follow below.
Irrigation / Rate Structures
Research regarding the relationship between inclin-
ing rate structures and demand for water is readily
available. Research specifi c to rates versus irrigation
demand is less prevalent, particularly for residential
customers as these customers often lack separate irri-
gation meters.
Research has shown that inclining rate structures are
often successful in reducing overall water demand,
which would suggest that demand for water used for
irrigation purposes would also decline.
Most studies specifi c to irrigation focus on the use of
metering, consumption control devices, and the use of
other measures specifi c to landscaping (i.e., soil addi-
tives, drought tolerant turf, etc.).
Separate irrigation metering has proven to be a suc-
cessful tool in reducing demand for water as it identi-
fi es the specifi c use of outdoor watering and is sepa-
rate from normal residential use.
Consumption control devices, such as weather sensi-
tive irrigation control switches (WSICS), have become
powerful tools in reducing irrigation demand, par-
ticularly for municipal clients (city parks, ball fi elds,
etc) and institutional users (schools and universities).
WSICS are designed to override automated or timer-
controlled irrigation systems to prevent over watering
during rainy or wet weather.
WSICS have also proven to be valuable tools for resi-
dential customers with automated irrigation systems,
particularly in suburban areas. Studies have shown
that suburban properties, like properties within Prior
Lake, are more likely to have in-ground irrigation sys-
tems. This, coupled with the fact that suburban lot siz-
es are generally larger than those in more urban envi-
ronments, often leads to a greater demand for outdoor
watering, particularly in areas with higher property
values. Additionally, research indicates that property
owners in these areas are more likely to be concerned
with the condition and appearance of landscaping and
maintaining lawn health.
High-demand residential water users are particularly
sensitive to increasing rate structures. Their outdoor
water usage tends to be rather discretionary and can
be scaled back should the cost of water become less
palatable.
Specifi c example of Midwestern cities with experience
in modifying water rate structures in a way that re-
sults in a reduction in irrigation demand, include cit-
ies of all sizes, located within large metropolitan ar-
eas and suburban areas. Most of the examples of cities
implementing programs for water conservation tend
to be focused on providing fi nancial assistance (grants
or otherwise) to assist private property owners with
acquisition of new plumbing (sinks, toilets, sprinkler
systems) to improve water conservation.
Prior Lake is applying to the Metropolitan Council for
a grant to provide a water conservation rebate to the
City’s water customers. The focus of the grant pro-
gram will be on acquisition and installation of smart
irrigation controllers for private property owners. The
City does not plan to include high effi ciency appliance
purchases at this time, which may be a consideration
in the future. The City’s grant application was submit-
ted in September 2019.
Water Conservation Elements and Rate
Structures
National studies support the fi nding that the utility
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Rates that are kept too low do not adequately cover
the cost of operation, future replacement, and infra-
structure expansion. Rates kept too low in the short
term provide inaccurate information to customers on
the long term cost of service.
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into account both the utility provider’s current and fu-
ture needs for revenue. The rates and structure need
to balance what are sometimes competing objectives.
Those objectives may include:
• Providing a stable source of revenue, recogniz-
ing water usage can vary from year to year due to
weather conditions and other factors, to cover both
variable and fi xed costs, both in the short term and
long term.
• Promoting water conservation.
•Providing for aff ordable and fair structure for
charging for services.
• Balancing the decision to pay for capital infrastruc-
ture with cash versus debt recognizing that future
customers will benefi t from the improvements
funded today.
Conservation measures include placing the lowest 10-
20% of users in the fi rst tier, the more average users
of 20-30% in the second tier, and the highest 20-30%
and 10-20% of users in the third and fourth tier, re-
spectively.
Tiered rates should increase respective to the desire
for water conservation. Some studies suggest that each
tiershouldbeincreasedby10,20,and30%,whilemore
aggressive rate structures may have each tier increas-
ing by 20 to 50%.
In Minnesota public water suppliers serving more
than 1,000 people, large private water suppliers in des-
ignated Groundwater Management Areas, and all wa-
ter suppliers in the Twin Cities metropolitan area are
required to prepare and submit a water supply plan
(WSP). Completing a WSP, fulfi lls a water supplier’s
statutory obligations to complete a water supply plan.
For water suppliers in the metropolitan area, the WSP
helps local governmental units to fulfi ll their statutory
requirements to complete a local comprehensive plan.
The water industry recognizes that there are many
ways to design rates. American Water Works Associa-
tion (AWWA) Manual M1, Principal of Water Rates,
Fees, and Charges, notes there is no one correct way...
no one size fi ts all” for a utility to select a rate structure.
Research and studies suggest that utilizing a three-or-
four tiered approach can demonstrate success in re-
ducing water usage and encouraging conservation.
The AWWA notes in the ‘JournalAWWA’, published
September 3, 2019, that: “...many utilities tend to re-
cover signifi cant amounts of fi xed costs through volu-
metric rates, primarily for the purpose of promoting
conservation. However, when drought-related water
shortages over the past fi ve years resulted in declining
water sales, those utilities found themselves at greater
risk of not recovering their fi xed costs. To improve
revenue stability, many utilities are re-examining the
pitfalls of shifting fi xed costs into volumetric rates and
whether they should be increasing the revenue they
collect from fi xed charges.”
TheproposedratestructureforPriorLake,tobeimple-
mented in 2021, will shift more of the City’s fi xed costs
(closer to half of the costs) into fi xed charges versus
volumetric rates. After experience with the proposed
rate structure, the City willbe able toevaluate whether
adjustments to the structure may be necessary to con-
tinue to meet the City’s objectives going forward.
Billing Cycles
Research has shown that monthly billing cycles can
be helpful in promoting water conservation as less
frequent billing tends to disconnect users from moni-
toring usage. Prior Lake has a bimonthly billing cycle
(i.e., six billers per year).
Billing on a monthly basis can more easily help to
identify issues with water supply (i.e., plumbing that
may be leaking) and allow customers to easily see the
impacts of increasing or decreasing usage which can
lead to behavior modifi cation.
Monthly billing may be more budget friendly for the
rate payer and can be benefi cial in reducing late pay-
ments.
For the water provider’s purposes, monthly billing
has a direct impact on costs associated with utility
billing due to the need for increased administrative
support and additional distribution expense. Provid-
ers that utilize and promote online billing benefi t from
reduced costs associated with printing and mailing
physical utility bills.
To more accurately analyze the cost of monthly ver-
sus bimonthly billing for Prior Lake, more information
would be needed regarding City data collection (i.e.,
meter readings) and other information gatheredby the
City on a bimonthly basis.
Comparison to Other Cities
As part of the study, Northland compiled and com-
pared water and sewer rate information for the follow-
ing cities:
• Andover
• Chanhassen
• Champlin
• Chaska
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• Farmington
• Lino Lakes
• Rosemount
• Savage
• White Bear Lake
The comparable cities above were identifi ed by the
City.Thegraphicsthatfollowcomparemonthlyequiv-
alent water and sanitary sewer service bills for these
comparable cities to Prior Lake. The billing period for
each of the cities varies. For purpose of comparison,
bills were calculated based on a monthly period.
The rates used to calculate the monthly bills for the
comparative cities comes from the most current pub-
lished fees schedule for each of the cities.
Similar to Prior Lake, these communities have ranked
fairly high in residential development activity over the
past few years, the 2010 populations are generally be-
tween 20,000 and 30,000, and all of them are located
on the edge of the core metro area. West, south, east
and north metro are all represented. Furthermore, the
City notes that these cities were not selected based on
comparable utility system infrastructure. Which is an
important point to highlight when comparing respec-
tive utility bills for these comparative cities.
Customers of Prior Lake water utility pay a higher
charge than compared to the other cities. City staff
identifi es the following reasons for the higher cost of
utilities in Prior Lake compared to these other com-
parative cities:
• Annual water tower antenna lease revenue is not
allocatedtothewaterutilityfund.Theallocationof
antennarevenue is acitypolicy decision and useof
antennarevenuevariesbycity.Somecitiesaccount
for antenna revenue as revenue to their water util-
ity funds. Prior Lake’s 2019 budgeted revenue for
antenna leases is approximately $300,000, which is
deposited into the City’s General Fund.
• In the next decade approximately 30% of Prior
Lake’s 145 miles of watermain will be 50 years or
older – a majority of the watermain is cast-iron
pipe. The estimated replacement cost is to be fund-
ed by revenue from water service charges, estimat-
ed at a cost of $30 million in today’s dollars.
• In the next decade, approximately 30% of Prior
Lake’s 130 miles of sewer infrastructure will be 50
years or older. The estimated replacement cost of
this infrastructure is $30 million in today’s dollars.
• The Water Fund continues to support ongoing
debt service for facility improvements including
the City’s water treatment facility constructed in
2009.
• The water and sewer utility funds support for
the cost of city personnel, general overhead costs,
equipment, and facilities varies by city. Prior Lake
charges approximately $680,000 to its Utilities to
pay for these type of costs (through transfers to the
City’s General Fund, Equipment Fund, and Facili-
ties Fund), with the cost split approximately 56/44
between water and sanitary sewer. The result of
this policy decision to allocate proportionate costs
to the Utilities is that these costs are borne by the
users of the water and sanitary sewer systems ver-
sus property taxpayers. Diff erent cities make dif-
ferent decisions on the allocation of costs to util-
ity funds and the source of revenue to pay these
costs, for example tax levy versus utility fees and
charges.
• The Sewer Fund supports the operation and main-
tenance of forty-one (41) lift stations in Prior Lake.
Based on the City’s information, this is a relatively
high number of lift stations compared to the other
comparative cities.
Note:
1. Bill amounts are shown on a monthly basis for comparative purposes. Cities have diff erent billing cycles, for example, quarterly, monthly, or bimonthly.
2. The sewer bill amounts shown in the graphic do not include fees cities bill customers for disposal charges and payment to MCES.
3. The determination of “low volume” customer was made based on the City of Prior Lake’s volume data for its customers for year 2018. It may not repre-
sent the experience of the other cities for a “low” volume customer.
Note:
1. Bill amounts are shown on a monthly basis for comparative purposes. Cities have diff erent billing cycles, for example, quarterly, monthly, or bimonthly.
2. The sewer bill amounts do not include fees cities bill customers for disposal charges and payment to MCES.
3. The determination of “medium volume” customer was made based on the City of Prior Lake’s volume data for its customers for year 2018. It may not
represent the experience of the other cities for a “medium” volume customer.
Note:
1. Bill amounts are shown on a monthly basis for comparative purposes. Cities have diff erent billing cycles, for example, quarterly, monthly, or bimonthly.
2. The sewer bill amounts shown in the graphic do not include fees cities bill customers for disposal charges and payment to MCES.
3. The determination of “high volume” customer was made based on the City of Prior Lake’s volume data for its customers for year 2018. It may not repre-
sent the experience of the other cities for a “high” volume customer.
Twin Cities Metropolitan Area Rate
Structures
In addition to providing a comparison of rate informa-
tion to other cities, Northland also gathered informa-
tion on rate structures used in the Twin Cities metro-
politan area. The Metropolitan Council’s Twin Cities
Regional Water Billing Analysis 2016 Report (the “MC
Report”), current report available, which includes the
following relevant fi ndings (for the approximate 273
cities included in the MC Report) that are informative
to policy considerations for Prior Lake:
• Customer Classes.Cities within the Metropolitan
Region use numerous combinations of customer
classifi cations. Of the 273 various rate structures,
80% use diff erent customer designations for rates
charged (i.e., residential, multi-family, commer-
cial, irrigation, etc.)
Billing Cycle. Approximately 57% of the cities
within the Region bill on a quarterly basis, 35%
bill monthly, 4% bimonthly, and the remaining
4% is a mix (i.e., residential monthly and com-
mercial quarterly).
• Uniform vs. Tiered Rate Structure. Tiered rate struc-
tures with increasingly higher rates for higher tiers
of water use are used in 69% of the rate structures
within the Region.
• Number of Tiers. Approximately 20% of the rate
structures with tiers have onlytwotiers,44% ofthe
tiered rate structures have three tiers, and another
34% have either four or fi ve tiers. The remaining
2% consist of rate structures that have six to ten
tiers.
• OtherAspects.Only nine of the 273 municipal utili-
ties included in the MC Report off er special dis-
counts for residential customers who are senior
citizens or have disabilities.
• Conservation RatesǯȱȱȱȱȱĴȱȱȱ
address the question of whether or not a notice-
able shift in water use occurs after a municipality
implements a conservation rate. The results were
mixed and inconclusive. The MC Report notes that
many factors infl uence overall water demand, in-
cluding improved water effi ciency among residen-
tial water-saving fi xtures. Other factors that are
noted as aff ecting water use include demographic
changes, change in the mix of residential and non-
residential customers, and water rates. This corre-
lates with the national literature search completed
by Northland discussed in the previous section.
• Average Residential Volume. The MC Report in-
cludes data that compares water use versus aver-
age annual residential growth rate for a city and
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dent when the average annual residential growth
rates are compared to average residential gallons
per day per connection. Data in the report does not
appear to point to any “normal” level for residen-
tial customer water consumption.
Private Street Infrastructure Replacement
Prior Lake owns municipal water and sewer infra-
structure below private streets throughout the city.
The City estimates it has 1,570 utility customers lo-
cated on a combined approximate 10 miles of private
streets.
As part of the study, the City requested that North-
land gather information on options to collect revenue
to fund the replacement of the private streets and in-
corporate the revenue and expenditure projections for
private street replacement into the study and model
development.
The Plan provides that the City will begin collection of
revenue from customers served by utility infrastruc-
ture located under private streets, beginning in year
2021.
The Plan includes anticipated use of funds for capital
improvements to infrastructure located under private
streets. The City estimates the total cost of replacing
utility infrastructure under private streets at $15 mil-
lion (in today’s dollars). Given the estimated age of the
infrastructure located under private streets, the City
anticipates that it will take approximately 50 years to
replace the water and sanitary sewer infrastructure,
with an average annual cost of $300,000. For purposes
ofplanning,theCIPincludesaverageannualspending
of $150,000 for water and sanitary sewer, respectively,
adjusted by 4.0% annually for cost increases.
ThePlan provides thatcustomers served by infrastruc-
ture located under private streets will be charged $20
per billing cycle (bimonthly). The Plan assumes this
fee will increase by 4.0% annually, at the same annual
rate the cost of the infrastructure replacement is esti-
mated to increase for purposes of the Plan.
The authority for implementing the rate for proper-
ties located on private streets is provided in Minnesota
Statutes, Chapter 444, which allows cities to charge
for “construction, reconstruction, repair, enlargement,
improvement, or other obtainment, the maintenance,
operation and use of the facilities”. In the case of prop-
erties located on private streets in Prior Lake, the wa-
ter and sanitary sewer services would not be available
without reconstruction of the utilities and replacement
of the private street. Cities are authorized to impose
“just and equitable charges for the use and for the
availability of the facilities”. The charges must be “as
nearly as possible proportionate to the cost of furnish-
ing the service”. The Plan demonstrates that the pro-
posed additional fee for private street replacement is
just, equitable and proportionate to the cost of replac-
ing the private street.
Agreement with SMSC for Water
The City obtains all its current and future water from
local groundwater aquifers and through a water
purchase agreement with the Shakopee Mdewakan-
ton Sioux Community (SMSC). The City has a water
purchase and facility expansion agreement with the
SMSC.
The agreement with the SMSC allows for the City to
meet its water purchase and facility expansion needs
into the future. The City was facing the prospect of
a $15 million expenditure to build its own facility or
spend $8.7 million to build the facility in collaboration
with the SMSC).
In 2017, the City entered into a Water Purchase and
Facility Expansion Agreement with the SMSC. The
SMSC constructed a new water treatment plant. The
plant can supply additional water to the City and will
have future expansion available to meet the City’s
long-term needs.
This approach provides Prior Lake with the fl exibility
to evaluate the pace and timing of development in the
“Orderly Annexation Area” within the City before a
substantial investment is needed to construct the ex-
pansion of the water treatment plant. According to
the City, the initial improvements, combined with the
long-term water purchase agreement, could provide
the City with enough water capacity for the next 15 to
20 years, depending on the rate of development.
Under the agreement, the initial maximum invest-
ment is $3.5, which was funded from Trunk Reserve
and Water Storage Funds (the “Trunk Funds”). The re-
mainder will become due when the second half of the
water treatment plant improvements are installed to
make the facility expansion operational. The City has
incorporated these anticipated costs into its CIP, and
the water development trunk fees, as part of its 2040
Comprehensive Plan update.
As part of the study and development of the Plan,
Northland gathered information and incorporated
plans for water purchase from the SMSC during the
period from 2020-2029. The Plan anticipates that the
City will pay for future facility expansion from the
Trunk Funds and not directly from the Water Fund.
Trunk Funds
As directed by the City, Northland did not model the
City’s Trunk Funds as part of the study. The Trunk
Funds are accounted for in the City’s Governmental
Funds and not the City’s Enterprise Funds, which in-
cludes the Water Fund and the Sanitary Sewer Fund.
The Plan includes projected future operating expense
intheWaterFundforthecostofpurchasingwaterfrom
SMSC. The future expense is estimated based on the
terms of the agreement with SMSC and the estimated
volume of water to be purchased in future years.
Suburban cities in the Twin Cities metropolitan area
accountforthecollection of“Trunk”fees or“Availabil-
ity Charges” diff erently. Some cities account for the
revenue collected in the cities Governmental Funds
(for example, a capital projects fund). And, there are
other cities that account for the revenue as part of the
overall revenue available in their utility funds.
Prior Lake accounts for the Trunk Funds in its Govern-
mental Funds and does not record development relat-
ed revenue collected in the Water Fund or the Sanitary
Sewer Fund.
Equity of Current Rate Structure
The Study included review and analysis of the City’s
current water and sanitary sewer rate structures and
development of a recommended rate structure. The
proposed rate structure is based on meeting the fol-
lowing objectives identifi ed by the City to guide the
City towards arriving at a conclusion on utility rates
structure and fee schedule for the next decade:
• Provide a clear understanding of the costs of mu-
nicipal utility services; and
• Provide several options of revenue generation
structures that are fi nancially solvent, fair to end-
users, economically competitive, and in alignment
with the City Council’s overall philosophy on user
fees.
The City’s existing rate structure is comprised of bi-
monthly fi xed charges per customer for water and
sanitary sewer services. The fi xed bimonthly charges
include a base charge of $2.50 and a capital facility
charge of $5.00 for water and sanitary sewer, respec-
tively. The City does not vary charges by classifi cation
or customer type.
The exiting volumetric water rates for customers is a
two-tier including block rate structure for water ser-
vices, with volume for Tier 1 capped at 25,000 gallons
per bimonthly billing period for water.
Sanitary sewer volume billed is billed at a fi xed rate
per 1,000 gallons. The City does not bill sanitary sew-
er services based on a tiered block rate structure. The
City does not vary charges by volumetric rates for
customers based on classifi cation or customer type.
All customer types pay the same rate for water and
sanitary sewer services, with one exception. Custom-
ers that are classifi ed as “Bulk Rate” customers pay a
fi xed fee of $5.00 per 1,000 gallons of water. The pro-
posed rate structure would have “Bulk Rate” custom-
ers pay based on the same rate structure as all other
customers.
The City does not apply any discounts, including for
example, there is no “senior discount” that applies, or
any other types of discounts. In the Twin Cities met-
ropolitan area, only a very few number of cities (less
than 10) apply any discounts for water and/or sanitary
sewer customers.
Figures 1 through 4 that follow, provide details for the
proposed volume based rates and fi xed rates for water
services and sanitary sewer services recommended for
implementation beginning in year 2021.
Tables 3and 4 thatfollow provide details for estimated
total operating revenue that is projected for year 2021
based on implementation of the proposed rate struc-
ture for water and sanitary sewer services.
Revenue from Fixed Rate Versus Volume
Basis
Charts 23 and 24 that follow provide a comparison of
volume basis revenue versus non-volume basis reve-
nue. The impact on revenue from the proposed change
to the rate structure in year 2021 is illustrated in the
charts.
As shown in Figure 1 that follows, for the Water Fund,
after implementation of the proposed rate and tier
structure changes in 2021, the estimated revenue from
a fi xed rate charge (non-volume basis) is 27% of total
revenue. For the Sanitary Sewer Fund, the compara-
tive estimate is 24%. Historically, the percentage of
revenue from fi xed rates has been closer to 10% of to-
tal revenue, for water and sanitary sewer, respectively.
After implementation of the proposed rate and tier
structure changes in 2021, revenue from the proposed
fi xed rate (non-volume basis) will cover 47% of the
Water Fund fi xed expenses. For the Sanitary Sewer
Fund, the comparative estimate is 58%.
Base Rates and Capital Facility Charge
The current adopted City fee schedule provides for
the collection of a capital facility charge. The City cur-
rently charges a $10 fee, which is split equally between
bills for water services and sanitary sewer services (a
$5 fee for each service).
The proposed rate structure in the Plan, does not in-
clude a separate capital facility charge. Instead, a base
rate (non-volume basis) fee is proposed for water ser-
vices at $20 per billing period and a $17 per billing
period for sanitary sewer services, adjusted annually.
These proposed fees are anticipated in the Plan to be-
gin in 2021.
The proposed base rates were determined based on
the following targets:
• Revenue collected from base charge (non-volume
basis) to equal approximately 50% of total fi xed ex-
pense for service
• Revenuecollectedfromabasecharge (non-volume
basis) to equal approximately 30% of total revenue
(total revenue includes non-volume basis revenue
and volume basis revenue)
Evaluation of Funding Approach for
Infrastructure
The CIP anticipates the City will fund future infra-
structure for the water and sanitary sewer systems
with cash from the funds in lieu of issuance of debt,
with the exception of year 2021 for sanitary sewer. The
CIP anticipates the issuance of $775,000 debt in 2021
for sewer improvements (part of street improvement
projects). The City has been raising rates for sewer ser-
vices to avoid the need for future debt issuance.
Recognizing that future customers will benefi t from
the improvements funded with today’s dollars, it is
always a balancing decision for the operator of a util-
ity to decide whether to pay for capital infrastructure
with cash versus debt. There are many factors to con-
sider, including balancing other city demands for debt
fi nancing of projects and the impact on the City’s over-
all outstanding debt obligations. The City should con-
tinue to consider which projects make fi nancial sense
to fund from cash versus the issuance of debt.
Funding Depreciation
The City requested the Study a focus on how to in-
corporate system infrastructure depreciation into the
City’s rate structure. The funding of depreciation,
ȱĴȱȱȱȱȱȱȱȱȬ
structure, is an important element for establishment of
suffi cient rates.
The Study focused on the City’s asset management
practices to maintain and replace aging infrastructure
at future estimated costs, including the City’s adop-
tion of a long-range capital improvements plan.
ȱȱȱȱȃȱȄȱȱȱĴȱȱ
to gain a strong understanding of the expected future
costs and, maybe more importantly, their timing, and
plan for replacement of infrastructure and facilities.
Using a planned schedule for capital improvements
and the incorporation of those plans into the Study
does that. Capital improvement plans combined with
fi nancial management targets are critical element that
ȱȱȱĴȱȱȱȱȱȱ¢ȱǯ
Financial management targets begin with criteria for
evaluating overall fi nancial condition. For instance, do
projections show suffi cient revenues to cover planned
operating and capital improvement expenses? The
ȱȱȱĴȱȱȱȱǰȱȱ¢ȱ ȱ
much?
The Plan helps to answer these question by allocating
projected year-end cash balance to defi ned purposes.
One of the purposes is for planned capital acquisition
and reserves for future capital. As previously stated,
the fi ve purposes are as follows:
• Three-months of operating expense
• Following-year debt service payments
• Following year capital acquisition (planned to be
paid from cash)
• Reserves for replacement of infrastructure located
under private streets
• Reserves for future capital
Taken together, these targets for ending cash help de-
termine if future fi nancial scenarios provide adequate
amounts of available fi nancial resources.
The Plan provides a second criteria to evaluate rev-
enue suffi ciency. The second criteria is ending unre-
stricted net position as percent (%) of expense. The
unrestricted net assets of the Enterprise Funds can be
considered a measure of available fi nancial resources.
The Plan sets a target (a fl oor ) to strive to maintain an
unrestricted net position in the Water Fund and the
Sanitary Sewer Fund in the range of 50% of the subse-
quent year’s estimated expenditures.
The majority of revenue in the Utilities comes from
user charges, maintaining an unrestricted net position
that is equalto atleast 50% ofthe subsequent year’sex-
penditures ensures that suffi cient resources are avail-
able to fund basic City functions between receipts of
user charges. Due to the complexity of the water and
sanitary sewer infrastructure within the City, the City
may desire to maintain a higher percentage of balance
to address any potential issues and future capital im-
provements.
The target (or fl oor ) for ending unrestricted net posi-
tion of 50% is meant to be an equivalent of the target
for an unrestricted fund balance for the City’s General
Fund. Prior Lake has a stated policy to maintain an un-
restricted fund balance in the General Fund within a
range of 40-50% of projected expenditures for the sub-
sequent year. Equity is reported as a fund balance in
the General Fund and as a net asset within the Enter-
prise Funds. Fund balance and net assets are the dif-
ference between fund assets and liabilities refl ected on
the balance sheet or statement of net assets.
Price Elasticity of Demand for Water
The model developed for the Study provides the abil-
ity to test diff erent assumptions for how water usage
may respond to price changes. The Study allows for an
input of estimated price elasticity of demand for water
to adjust water usage for each one-percent increase in
rate.
While the model provides the ability to input diff er-
ent assumptions for price elasticity of demand, the
Plan does not include a factor for reduction in demand
based on proposed pricing changes in the Plan. De-
mand is assumed to remain constant.
As noted, the Plan proposes the City implement four
tiers for billing volume beginning in year 2021. Based
on year 2018 volume data, it is estimated that approxi-
mately half of the City’s customers will be within the
fi rst tier (see tables that follow for estimated volume
by tier) and it is assumed that during the planning pe-
riod (years 2021-2029) that customers will not switch
tiers when water prices increase over this period. The
proposed volume-based rate structure in the Plan
is not proposed to be an excessively aggressive rate
structure between tiers and importantly most of the
volume is projected to remain at the lower tiers. While
not proposed in the Plan, a more aggressive rate struc-
ture may result in a stronger economic relationship be-
tween water use and price, with water use responding
to price.
Note: The Plan anticipates that the rates shown above in Figure 3 will increase by 1.5% annually.
Note: The Plan anticipates that the rates shown above in Figure 5 will increase by 2.0% annually.
Note: The City has six billing periods per year. Customer Bills Per Billing Period is based on 2018 data plus pro-
jected new customers to be added between years 2019-2021.
Overview
For purposes of the Plan, the City provided a Capital
Improvement Plan (the “CIP”) that included the an-
ticipated capital improvement projects, including esti-
mated costs and timing, for water and sanitary sewer
services for the period of years 2020-2039.
A purpose of the Plan is to provide the City with op-
tions and recommendation for fi nancing future capital
improvementprojectsforthe water andsanitarysewer
services. The fi nancial plans included within the Plan
are inclusive of all sources and uses of funds, both op-
erating and non-operating, including projected capital
spending included in the CIP.
The tables that follow provide information on the
City’s planned capital improvement projects for water
and sanitary sewer services.
Capital Projects
The projects in the CIP include projects to manage
both existing and expanding service demands and to
reconstruct or replace existing infrastructure. Future
updates to the CIP may include further service expan-
sion.
Also included in the CIP, is anticipated replacement of
water and sewer infrastructure located under private
streets within the City. The Plan provides for the pro-
posed implementation ofnewfees for customerslocat-
ed on private streets to provide a new revenue source
to pay for the improvements under private streets. The
replacement of water and sanitary sewer infrastruc-
ture under private streets in the City is estimated at
$1.5 million per mile, for an estimated 10 miles of pri-
vate streets within the City. The total number of cus-
tomers served by utilities located under private streets
is currently 1,570 customers.
Source of Funding for Capital Projects
The source of funding for the planned capital projects
is anticipated to come from the use of estimated avail-
able cash within the Utility Funds and the issuance of
debt on a very limited (one-time) basis.
The Plan includes future proposed utility fees and
charges at a level to provide for pay-go funding of an-
nual capital improvements and to avoid the issuance
of debt, with a limited exception. The Plan anticipates
the issuance of debt in 2021 to fi nance sanitary sewer
improvements, the City plans to continue to evaluate
the need for debt fi nancing based on actual fi nancial
performance and the availability of cash.
Trunk Reserve and Water Storage Funds
(Trunk Funds)
Future anticipated development will provide in-
creased revenue from collection of the City’s develop-
ment trunk fees. Capitalprojects the City plansto fund
from trunk reserve and water storage funds are not in-
cluded in the Plan and therefore are not shown in the
CIP included in this section.
As noted previously in the Plan, the City accounts for
the Trunk Funds in the City’s Governmental Funds
and not within the Water Fund or the Sanitary Sewer
Fund.
The Plan does not include planning for the City Trunk
Funds. The Study did not consider the fi nancial impact
of past and any future transfers from the Trunk Funds
to the Water Fund and Sanitary Sewer Funds to pay
for all or a portion of capital improvements accounted
for directly in the Water Fund and/or Sanitary Sewer
Fund.
Water Purchase and Facility Expansion
Agreement with the SMSC
As noted earlier, the City entered into a Water Pur-
chase and Facility Expansion Agreement with the
SMSC. The SMSC constructed a new water treatment
plant. The plant supplies additional water to the City
and will have future expansion available to meet the
City’s long-term needs.
Under the agreement, the initial maximum investment
is $3.5 million, which was funded from City’s “Trunk
Funds”. The remainder will become due when the sec-
ond half of the water treatment plant improvements
are installed to make the facility expansion operation-
al. The investment or costs for improvement to the sec-
ond half of the water treatment plant is not included
in the CIP included in the Plan because it will not be
funded from the Water Fund.
Issuance of Debt
The Plan does not anticipate the issuance of debt to
fi nance any water system improvements. As noted, the
Plan does anticipate the issuance of debt in year 2021
to fi nance sanitary sewer system improvements in the
estimated amount of $775,000. With the exception of
this planned issuance, pursuant to City’s direction the
Plananticipatestheuseofcash topayforfuturecapital
improvements for water and sanitary sewer improve-
ment projects.
The bonds outstanding
and annual debt service
amounts shown in the
charts here are for the com-
bined total estimated debt
payable from utility rev-
enues from the Water Fund
and the Sanitary Sewer
Fund.
The charts include com-
bined existing debt and fu-
ture estimated debt based
on anticipated bond issu-
ance as shown in the Plan.
Thechartsincludedebtsup-
ported by utility revenue
only and does not include
debt payable from property
tax levy or other sources of
revenue.
Revenue Suffi ciency
Based on historical fi nancial performance, current util-
ity rates and structure, and anticipated future capital
projects, fi nancial plans have been prepared for the
Water Fund and the Sanitary Sewer Fund. The reports
demonstrate revenue suffi ciency, which is the level of
revenue needed to satisfy each system’s projected op-
erating, capital costs, and debt service while maintain-
ing adequate reserves for future capital needs of the
systems. The following reports that follow are includ-
ed for the Water Fund and the Sanitary Sewer Fund:
• Pro Forma - Includes information on annual rev-
enues and expenditures and balance sheet line
items.
• Year End Cash Balance - Includes explanation of
the change in year end cash balances.
• Customers/Usage and Rates - Includes the num-
ber of customers, usage (volume billed) for prior
years and projections for future years. Revenue by
non-volume basis and revenue basis is shown by
customer type.
Key Assumptions
The fi nancial plans are based on certain key assump-
tions, which are as follows:
• Operatingexpenditures,includingpersonnelcosts,
materials supplies, utilities and all other operating
expense will increase by 2.0% per year, with excep-
tion for sanitary sewer disposal charges, which are
estimated to increase by 6.0% annually.
• Depreciation is adjusted for anticipated annual
depreciable capital acquisitions. New capital is de-
preciated over a 55 year term in the Plan.
• Capital improvement plan will be implemented at
estimated project costs and sources of funding as
included in the Plan.
• Water customers and volume billed is based on
historical customer volumes plus estimates for fu-
ture development. The Plan anticipates an average
annual increase of 133 new residential customer
units between 2019-2029. The average consump-
tion per unit is assumed to remain constant over
the planning period at 72,000 gallons annually for
water and 60,000 gallons for sewer.
• Rate increases to provide revenue suffi ciency. The
Plan anticipates fees and charges will increase by
an average annual amount of 1.5% for water and
2.0% for sanitary sewer services after year 2021.
Year 2021 includes changes to the base rate and
volume based rates and tier structure.
• Base rate and volume based tiered rate structure
includes charging a fi xed monthly fee for water
and sanitary sewer services. The Plan anticipates
the City will charge a base fee for water and for
sanitary sewer services, and discontinue charging
a separate capital facility charge. The impact of the
change in tier structure, beginning in year 2021, is
refl ected in the future estimate of revenue.
• Development related charges are not accounted
for in the Water Fund or Sanitary Sewer Fund.
The City accounts for these charges in the Trunk
Funds.
Background
The Water Fund is used to account for the operating
and capital improvement costs related to maintenance
of the water utility system. The Fund is in sound fi -
nancial condition. Future fi nancial performance will
be impacted by future capital improvement needs and
the timing of future development in the City.
Future development will increase the demands on the
water utility infrastructure but will also provide in-
creased operating revenue to support the maintenance
and operation of the system.
Expansion of infrastructure, including treatment will
be needed in the future. The City anticipates collection
of future development related revenue, which is ac-
counted for in a separate Trunk and is not accounted
for in the Water Fund.
Source of Funds
The major source of funds for the Water Fund comes
from the collection of bimonthly charges, including a
fi xed based charge and a capital facility charge to each
customer, along with volume-based charges for water
use.
The fi nancial plan for the Water Fund refl ects the pro-
posed change to the City’s rate structure in year 2021
and assumes an average annual rate increase of 1.5%
for years 2022-2029.
Interest income is earned on the cash balance in the
Fund that is recorded as revenue. The investment
earnings rate is projected to be 1.0% for future years.
Capital contributions in years 2017-2019 (from Capital
Project Funds) are considered to be one-time and are
not projected to continue.
Use of Funds
The use of funds is to pay for the operation of the wa-
ter system, debt service expense, depreciation, and
any authorized transfer of funds, including transfers
to other City funds. This includes transfers for debt
service payments the City accounts for in the City’s
Governmental Funds, and transfers to the General
Fund and other capital projects funds.
The Plan anticipate the addition of 1.0 FTE in year
2026. There are no other signifi cant operational chang-
es anticipated.
The City purchases water from SMSC. The cost of pur-
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the SMSC. The Plan refl ects the agreed to rates for pur-
chased water. Based on prior year data, the City pur-
chased approximately 1/3 of its water sold to custom-
ers. For purposes of the Plan, it is assumed that this
ratio will remain constant over the planning period.
The Plan includes a purchased water rate of $1.85 in
2020 and $1.90 in 2021, then infl ated by 3.0% annually.
Debt service expense includes interest expense on
bonds for existing outstanding bonds. No future bond
issuance is anticipated for any water infrastructure or
equipment at this time. The calculation of depreciation
expense is shown in Appendix 10.
The City anticipates it will need to provides funds for
payment of improvements for treatment of water in a
future year. The agreement with the SMSC allowed for
WATER FUND
the City to meet its water purchase and facility expan-
sion needs into the future. Under the agreement with
SMSC, the initial maximum investment was funded
fromtheCity’sTrunkFund(notfromtheWaterFund).
The remainder, future payment, to the SMSC will be-
come due when the second half of the water treatment
plant improvements are installed to make the facility
expansion operational. As noted in the Plan, the City
has incorporated these anticipated costs in its CIP and
the water development trunk fees as part of its 2040
Comprehensive Plan update.
Transfers
The Fund transfers cash to the City’s governmental
funds for diff erent purposes. The Water Fund trans-
fers revenue to the City’s General Fund to pay for
overhead and administrative costs that support water
services. The Water Fund transfers revenue to a City
Governmental Fund for payment on debt originally
issued in 2007 for the City’s water treatment plant.
The Water Fund also transfers revenue to City Capital
Projects Funds to pay for certain project costs related
to equipment replacement and facilities, pursuant to
the City’s equipment replacement plan and facilities
management plan.
Balance Sheet Items
The fi nancial plan includes projected assets and li-
abilities for the Fund. This includes projected annual
year-end cash balance. A table that follows provides
a detailed summary on projected change in cash year
by year.
Based on assumptions in the Plan, it is projected that
the cash balance position of the Fund will continue to
increase over the next ten years. The Fund is projected
to have future cash suffi cient to meet the objective of
available cash to cover the following:
• Three-months of operating expense
• Following-year debt service payments
• Following year capital acquisition (planned to be
paid from cash)
• Reserves for replacement of infrastructure located
under private streets
• Reserves for future capital improvements
WATER FUND
WATER FUND
WATER FUND
WATER FUND
WATER FUND
WATER FUND
WATER FUND
Background
The Sanitary Sewer Fund is used to account for the
operating and capital improvement costs related to
maintenance of the sanitary sewer system. The sani-
tary sewer utility system provides for the collection
and treatment of wastewater. The treatment of waste-
water is provided by Metropolitan Council Environ-
mental Services (MCES). The City builds and main-
tains the collection system that transports wastewater
to the MCES treatment facilities.
The Sanitary Sewer Fund is in sound fi nancial condi-
tion, but notably the level of reserves and net assets as
percentage of expense is comparatively less than com-
pared to the Water Fund. The City has in recent years,
andasproposedagainforyear2020,adoptedincreases
in sanitary sewer rates in order to increase the amount
of operating revenue that is being collected.
Future development will increase the demands on the
sanitary sewer utility infrastructure but will also pro-
vide increased operating revenue to support the main-
tenance and operation of the system.
Expansion of infrastructure will be needed in the fu-
ture. The City anticipates collection of future devel-
opment related revenue, which is accounted for in a
separateTrunk and is not accountedfor in theSanitary
Sewer Fund.
Source of Funds
The major source of funds for the Sanitary Sewer
Fund comes from the collection of bimonthly charges,
including a fi xed based charge and a capital facility
charge to each customer, along with volume-based
charges for volume billed.
The fi nancial plan for the Sanitary Sewer Fund refl ects
the proposed change to the City’s rate structure in year
2021 and assumes an average annual rate increase of
2.0% for years 2022-2029.
Interest income is earned on the cash balance in the
Fund that is recorded as revenue. The investment
earnings rate is projected to be 1.0% for future years.
Capital contributions in years 2017-2019 (from Capi-
tal Project Funds and Developers) are considered to be
one-time and are not projected to continue.
Use of Funds
The use of funds is to pay for the operation of the wa-
ter system, debt service expense, depreciation, and
any authorized transfer of funds, including transfers
to other City funds, including transfers for debt ser-
vice accounted for in the City’s Governmental Funds,
and transfers to the General Fund and other capital
projects funds.
The Plan anticipate the addition of 1.0 FTE in year
2021. There are no other signifi cant operational chang-
es anticipated.
Debt service expense includes interest expense on
bonds for existing outstanding bonds and planned is-
suance in year 2021. The calculation of depreciation
expense is shown in Appendix 11.
MCES charges the City a fee for the regional collec-
tion and treatment of wastewater (disposal charges).
The City does not have any control over this operating
expense. Future charges payable to the MCES are pro-
SANITARY SEWER
FUND
jected based on total estimated sanitary sewer volume
reported to the MCES with an estimated 6.0% per year
increase in the MCES fee charged per unit of volume.
MCES uses an allocation method based on previous
fl ow to calculate each municipality’s charges. For ex-
ample, the method uses 2018 calendar year fl ow to
allocate 2019 fees. The City pays the Metropolitan
Council a disposal charge based on volume. Disposal
charges payable to the MCES represent approximately
44% of the total budgeted 2019 expenses in the Sani-
tary Sewer Fund.
Transfers
The Fund transfers cash to the City’s governmental
funds for diff erent purposes. The Sanitary Sewer Fund
transfers revenue to the City’s General Fund to pay for
overhead and administrative costs that support wa-
ter services. The Sanitary Sewer Fund also transfers
revenue to the City’s Capital Projects Funds to pay
for certain project costs related to equipment replace-
ment and facilities, pursuant to the City’s equipment
replacement plan and facilities management plan.
Balance Sheet Items
The fi nancial plan includes projected assets and li-
abilities for the Fund, this includes projected annual
year-end cash balance. A table that follows provides
a detailed summary on projected change in cash year
by year.
Based on assumptions in the Plan, it is projected that
the cash balance position of the Fund will continue to
increase over the next ten years. The Fund is projected
to have future cash suffi cient to meet the objective of
available cash to cover the following:
• Three-months of operating expense
SANITARY SEWER
FUND
• Following-year debt service payments
• Following year capital acquisition (planned to be
paid from cash)
• Reserves for replacement of infrastructure located
under private streets
• Reserves for future capital improvements
SANITARY SEWER
FUND
SANITARY SEWER
FUND
SANITARY SEWER
FUND
SANITARY SEWER
FUND
SANITARY SEWER
FUND
SANITARY SEWER
FUND
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