090909 CC WS AgPCITY OF SHOREWOOD
CITY COUNCIL WORK SESSION
WEDNESDAY, SEPTEMBER 9, 2009
5755 COUNTRY CLUB ROAD
COUNCIL CHAMBERS
5:30 P.M.
2. COMPREHENSIVE UTILITY RATE STUDY Finance 120 minutes 5:30 p.m.
Director's CAF
3. ADJOURN 7:30 p.m.
COUNCIL ACTION FORM
Department: Finance Council Work-session: 9/9/2009 , Item Number: 2
From: Bonnie Burton, Finance Director/Treasurer Avv'�
City staff has been working with Northland Strategies over the past two months on the planning and
analysis of the future funding of the municipal utility systems. Staff and the consultant are now seeking
guidance and direction from the City Council as we move forward with analysis of alternatives. Attached
is a memo from Rusty Fifield and Paul Donna, of Northland Strategies, which contains background
information for the work-session.
Options
1. For Council information and consideration only.
Staff Recommendation
No Council action required. Staff and consultants seek guidance and direction from the City Council
during the work-session process.
Council Action:
NORTHLAND
STRATEGIES
Species! Projects Group
To: Shorewood City Council
Frog: Rusty Fifield and Paul Donna
Date: September 2, 2009
Re: September 9 Utility System Planning Work Session #1
Over the past two months, Northland Strategies has been working with City Staff on planning and
analysis for the future funding of municipal utility systems. On September 9, we will lead a working
session with the City Council. The purpose of this workshop is to review background information
on your utility systems and to obtain feedback on designing and analyzing user rate options. As we
move from initial planning to analysis of alternatives, it is essential to receive guidance from the City
Council. This step ensures that our work addresses issues of concern to the City Council.
This memo contains background information for the workshop. We encourage you to review it prior
to the meeting.
Project Timetable
We are still on track to complete the project by year's end. The following steps remain in the process:
1. September 9 — City Council Work Session #1.
2. September 17 — Northland meets with City Staff to discuss results of Council work session and to
agree on framework for final analysis.
3. September - Northland conducts next phase of analysis and prepares written findings and
recommendations.
4. Draft findings and recommendations provided to Staff for review and comment.
5. Draft findings and recommendations distributed to City Council.
6. October (date to be determined) - Northland conducts Council Work Session #2 to reach
agreement on utility rate structure.
7. November - Northland prepares final report and implementation plan.
8. November - December — City Council received final report and considers rate changes.
We will review and discuss this timetable at the workshop.
Nortldand Securities, lilt 45 South 701 Street, Suite 2000, Miruneapolis, MN 55402
Main: (612) 851 -5900 / Direct: (612) 851 -4992 / F. mail: rfifteldC +iioi-tldandsecuiities.com
www.northlandsecurities.com
Member FINRA and SIPC
Utility System Plat ring Work Session. #1
September 2, 20079
Page 2
Rate Framework
Overview
The scope of work for this project calls for the exploration of four rate alternatives for each utility. It
is easy to simply view a utility rate study as an exercise in financial analysis. We can create options
for building on the existing structure to produces the revenue required to operate the utility. While
financial feasibility is important, it is not the sole criteria for a rate structure. Guidance from the City
Council it is needed to ensure that the rate alternatives address the correct issues.
Key Questions
The following questions frame the discussion we want to have Staff about the framework for
alternative rate structures:
1. Besides financial condition, what principles should guide utility rates in Shorewood?
2. Is it important to describe these principles and get City Council buy in?
3. One issue that has been identified is the equity of the base /minimum water rate charge for
seniors and other small users. Do we need to evaluate a structure with a lower minimum
charge? Do you have any specific guidance about this issue?
4. Do other equity issues need to be considered?
5. Does the existing low income option need to be evaluated in this study?
6. Given the nature of water service in Shorewood, we assume that all residential sewer customers
continue to pay a flat rate. Is this assumption correct?
7. We assume that the basic tier structure for stormwater rates does not need to be evaluated. Is this
assumption correct?
8. The City has already made changes to the current water rate structure to comply with the
statutory requirements for conservation rates. Should additional conservation oriented changes
be evaluated?
Background
The City's current utility user charges appear at the beginning of Table 1. (following Page 5 of this
memo). Several factors can play a role in the creation and evaluation of alternative utility rate
structures. These factors include:
• User equity
• User behavior
• Statutory compliance
• Other considerations
These factors become the guiding principles /policies for setting and managing user rates.
Utility System Planning Work Session. #1
September 2, 2009
Page 3
User Equity
Utility rates spread the cost of system operations among system users. The rate structure determines
who pays for the system.
• A flat rate charges every customer the same amount regardless of use or impact on the system.
The base /minimum charge requires every customer to pay an equal amount towards system
operation. Higher base charges tend to be less advantageous to small users. These customers
may pay less than the minimum if solely charged for actual use.
• Customer "classes" differentiate between the impacts from customer types (typically residential
and commercial). Shorewood's sanitary sewer and water rates have a "low income" option. The
stormwater rates differentiate by lot size.
User Behavior
Utility rates may be used to alter customer behavior. The most common example is an escalating
rate structure for water use that encourages water conservation.
Statutory Compliance
Historically, municipal utility rates have not been regulated by State Law. In 2008, the Legislature
adopted new requirements (see Minnesota Statutes, Section 103G.291) for the adoption of water rate
structures that promote conservation. This statute applies to all public water suppliers serving more
than 1,000 people.
The City of Shorewood is required to use a "conservation rate structure" by January 1, 2010. The
statute defines a conservation rate structure simply as one that "encourages conservation ". The only
other stipulation is that each residential unit in a multiple - family dwelling must be considered as an
individual user.
The statute does not mandate a specific approach to a conservation rate structure. Alternatives listed
in the statute include:
• Increasing block rates.
• Seasonal rates.
• Time of use rates.
• Individual goal rates.
• Excess use rates.
Shorewood's current water rates use an increasing block approach that meets the statutory
requirements
Other Considerations
Utility rate structures and system planning are also influenced by purely local policy considerations.
Lltilitll System Planning Woi* Session #1
September 2, 2009
Page 4
Rate Comparisons
Overview
Comparisons with other cities provide one means of evaluating user charges. We have collected
current utility rates from the following cities: Minnetrista, Mound, Orono, Minnetonka, Victoria, and
Chaska. Table 1 (accompanying this memo) summarizes of the rate structures in these cities.
Key Questions
1. Do other cities need to be included in the study?
2. Do these approaches suggest issues that need to be explored in Shorewood?
3. To the degree possible, we will use this information to compare user costs between the cities. Do
you want other uses of this information?
Capital Improvements
Overview
The amount and timing of future capital investment is a significant factor in the financial planning
for the utility systems.
Key Questions
1. We propose to identify and analyze funding for capital improvements over the next 20 years. Is
this the appropriate time frame for the analysis?
2. During this 20 -year planning period, it is likely that Shorewood will face the need to build a
water treatment plant. We propose to include a rough cost estimate in year 12 of the analysis.
The objective is not to establish a specific finance plan, but rather to set some basic financial
planning directions. Is this approach reasonable?
3. The reconstruction of City streets provides the opportunity build /expand the municipal water
system. The current policy bases water system expansion on the property owner requests. This
study provides a means to evaluate a more proactive approach. We propose to work with staff
to identify street reconstruction /watermain expansion projects that may occur in the coming
years. We would use this information to explore options for funding the improvements. Should
the evaluation of watermain expansion be included in this study? If so, what information will
the Coumcil need to evaluate alternatives?
Background
Table 2 summarizes the data from the 2008 -2012 Capital Improvements Program with project data
from Staff. We are working with Staff to identify other long range improvements.
Utility System Planning Work Session #Z
Septennber 2, 2009
Page 5
Projections
Overview
The foundation of rate planning will be projection of future utility costs. These projections will
combine the capital improvements with operations.
Key Questions
1. We plan to project future costs using a combination of actual data and the 2009 Budget as a
starting point. Future operating costs will be projected using estimated percentage inflation
factors. Are you comfortable with this approach?
The addition of new water customers will be tied to the assumptions of system expansion for
capital improvements. Beyond this expansion, we will not assume any increase in the customer
base for any utilities. In addition, we will assume that overall water use remains constant. Are
these assumptions reasonable?
3. Fund balance is an important factor in the projections. System reserves allow the City to manage
rate changes, save for future capital improvements and deal with unanticipated expenses.
Should the study suggest specific fund balance policies? Do you have any suggestions for fund
balance policies?
Background
Tables 3 -5 that accompany this memo contain the 2007 and 2008 financial data for the Water, Sewer
and Stormwater Management Funds. These tables show past trends and inform assumptions about
the future projections.
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2008
Operating Revenues
580,158
606,593
4.6%
Operating Expenses
Personal Services
86,676
95,734
10.5%
Supplies
15,151
8,993
-40.6%
Repairs and maintenance
5,052
8,127
60.9%
Depreciation
205,400
237,023
15.4%
Professional services
2,000
2,250
12.5%
Contracted services
43,570
13,905
-68.1%
Insurance
7,135
7,900
10.7%
Water purchases
22,780
33,974
49.1%
Utilities
65,750
79,144
20.4%
Disposal charges
-
-
Rent
Advertising
-
-
Other
10,942
28,137
157.1%
Total Operating Expenses
464,456
515,187
10.9%
Operating Income (Loss)
115,702
91,406
-21.0%
Nonoperating Revenues (Expenses)
Special assessments
45,167
34,908
-22.7%
Permits and connection fees
55,277
920
-98.3%
Interest on investments
183,168
105,552
-42.4%
Gain on sale of capital assets
-
-
Other income
101,947
109,917
7.8%
Interest expense
(172,050)
(142,589)
-17.1%
Total Nonoperating Revenues (Expenses)
213,509
108,708
-49.1%
Income Before Transfers
329,211
200,114
-39.2%
Transfers
Transfers in
82,679
-
Transfers out
-
Total Transfers
82,679
-
Change in Net Assets
411,890
200,114
-51.4%
Cash Flows From Operating Activities
Receipts from customers and users
591,064
587,432
-0.6%
Other receipts and payments
153,784
63,866
- 58.5%
Payments to suppliers
(161,975)
(182,646)
12.8%
Payments to employees
(87,604)
(95,018)
8.5%
Net Cash From Operating Activities
495,269
373,634
-24.6%
Cash Flows From Noncapital Financing Activities
Due from other funds
-
-
Transfers in
82,679
-
Interest paid on interfund loan
-
Due to other funds
Transfers out
-
Net Cash Noncapital Financing Activities
82,679
-
Cash Flows From Capital and Related Financing Activities
Permits and construction fees
55,277
920
- 98.3%
Principal on bonds
(255,000)
(250,000)
-2.0%
Interest on bonds
(125,471)
(137,886)
9.9%
Acquisition of capital assets
(562,909)
(215,045)
-61.8%
Sale of capital assets
-
-
Special assessments collected
135,956
150,107
10.4%
Net Cash Capital & Related Financing Activities
(752,147)
(451,904)
-39.9%
Interest on investments
181,397
112,816
-37.8%
Net Increase in Cash & Cash Equivalents
7,198
34,546
379.9%
Cash & Cash Equivalents - January 1
3,732,853
3,740,051
Cash & Cash Equivalents - December 31
3,740,051
3,774,597
Net Cash Noncapital Financing Activities 212,500 50,000
Cash Flows From Capital and Related Financing Activities
0.4%
2.3%
12.0%
-53.7%
0.1%
333.5%
-56.0%
-6.3%
9.0%
-4.1%
3.6%
-3.2%
-26.7%
-76.7%
..34.7 ° ,' c
- 36.5%
-50.0%
-77.2%
0.3%
-6.7%
1.1%
63.0%
Permits and construction fees
2007
2008
Operating Revenues
823,293
826,867
Operating Expenses
Interest on bonds
Personal Services
85,256
87,189
Supplies
3,866
4,328
Repairs and maintenance
7,694
3,564
Depreciation
210,138
210,408
Professional services
2,000
8,669
Contracted services
21,665
9,530
Insurance
5,642
5,288
Utilities
9,058
9,870
Disposal charges
604,067
579,574
Rent
-
-
Advertising
-
-
Other
2,721
2,818
Total Operating Expenses
952,107
921,238
Operating Income (Loss)
(128,814)
(94,371)
Nonoperating Revenues (Expenses)
Special assessments
-
-
Permits and connection fees
9,663
2,250
Interest on investments
213,244
139,192
Gain on sale of capital assets
-
-
Other income
Interest expense
-
-
Totai Nonoperating Revenues (Expenses)
222,907
141,442
Income Before Transfers
94,093
47,071
Transfers
Transfers in
112,500
-
Transfers out
-
Total Transfers
112,500
-
Change in Net Assets
206,593
47,071
Cash Flows From Operating Activities
Receipts from customers and users
815,995
818,504
Other receipts and payments
-
-
Payments to suppliers
(658,372)
(613,949)
Payments to employees
(84,524)
(85,415)
Net Cash From Operating Activities
73,099
119,140
Cash Flows From Noncapital Financing Activities
Due from other funds
100,000
50,000
Transfers in
112,500
-
Interest paid on interfund loan
-
Due to other funds
Transfers out
-
-
Net Cash Noncapital Financing Activities 212,500 50,000
Cash Flows From Capital and Related Financing Activities
0.4%
2.3%
12.0%
-53.7%
0.1%
333.5%
-56.0%
-6.3%
9.0%
-4.1%
3.6%
-3.2%
-26.7%
-76.7%
..34.7 ° ,' c
- 36.5%
-50.0%
-77.2%
0.3%
-6.7%
1.1%
63.0%
Permits and construction fees
9,663
2,250
-76.7%
Principal on bonds
-
-
Interest on bonds
Acquisition of capital assets
(80,317)
(225,878)
181.2%
Sale of capital assets
Special assessments collected
-
Net Cash Capital & Related Financing Activities
(70,654)
(223,628)
216.5%
Interest on investments
213,488
144,228
-32.4%
Net Increase in Cash & Cash Equivalents
428,433
89,740
-79.1%
Cash & Cash Equivalents - January 1
3,958,626
4,387,059
Cash & Cash Equivalents - December 31
4,387,059
4,476,799
2007
2008
Operating Revenues
164,347
204,345
24.3%
Operating Expenses
Personal Services
26,708
15,519
-41.9%
Supplies
749
7,292
873.6%
Repairs and maintenance
-
-
Depreciation
19,833
19,833
0.0%
Professional services
13,220
131
-99.0%
Contracted services
-
62,366
Insurance
-
Utilities
Rent
Advertising
-
-
Other
912
1,002
9.9%
Total Operating Expenses
61,422
106,143
72.8%
Operating Income (Loss)
102,925
98,202
-4.6%
Nonoperating Revenues (Expenses)
Interest on investments
14,515
12,266
-15.5%
Gain on sale of capital assets
-
-
Other income
66
5,021
7507.6%
Interest expense
(2,466)
-
Total Nonoperating Revenues (Expenses)
12,115
17,287
42.7%
Income Before Transfers
115,040
115,489
0.4%
Transfers
Transfers in
41,049
-
Transfers out
(52,500)
Total Transfers
(11,451)
-
Change in Net Assets
103,589
115,489
11.5%
Cash Flows From Operating Activities
Receipts from customers and users
129,307
202,738
56.8%
Other receipts and payments
66
5,021
Payments to suppliers
(7,207)
(77,307)
972.7%
Payments to employees
(26,639)
(14,774)
-44.5%
Net Cash From Operating Activities
95,527
115,678
21.1%
Cash Flows From Noncapital Financing Activities
Transfers in
41,049
-
Interest paid on interfund loan
(2,466)
Due to other funds
(50,000)
Transfers out
(52,500)
Net Cash Noncapital Financing Activities
(63,917)
Cash Flows From Capital and Related Financing Activities
Acquisition of capital assets
Sale of capital assets
Net Cash Capital & Related Financing Activities
-
-
Interest on investments
14,556
11,998
-17.6%
Net Increase in Cash & Cash Equivalents
46,166
127,676
176.6%
Cash & Cash Equivalents - January 1
275,950
322,116
Cash & Cash Equivalents - December 31
322,116
449,792