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101308 CC WS MinCITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, OCTOBER 13, 2008 MINUTES 1. CONVENE CITY COUNCIL WORK SESSION Acting Mayor Turgeon called the meeting to order at 6:10 P.M. A. Roll Call Present. Acting Mayor Turgeon; Councilmembers Administrator Heck; Finance Director Burton Public Works Brown; and Engineer Landini Absent: Mayor Lizee B. Review Agenda 5735 COUNTRY CLUB ROAD SOUTHSHORE CENTER 6:00 P.M. Bailey, Wellens and Woodruff; City Planning Director Nielsen; Director of Wellens moved, Woodruff seconded, approving the agenda as presented. Motion passed 4/0. 2. ENTERPRISE BUDGET DISCUSSION Director Burton stated the first draft of the budgets for the Enterprise Funds for 2009 would be presented this evening for discussion. The documents consist of the budgets for Water Operations and Debt Service, Sanitary Sewer, Stormwater Management, and Recycling Funds. The Enterprise Funds are solely supported by revenues to the City's business operations. She noted she just distributed revised Water Operations and Water Debt Service budgets as well as a statistical document from Veolia Environmental Services regarding year-to-date recycling volumes and a document from Metropolitan Council Environmental Services (MCES) regarding wastewater charges. Water Bicdget Director Burton explained the Water Fund budget is comprised of two parts: the Water Debt Service budget and the Water Operating budget. The 2009 Water Debt Service budget includes principal and interest debt service payments for the existing bond issues. Over the years the City had issued water revenue bonds to fund improvements. The debt service payments are programmed at approximately $382,000 and will be paid for by a transfer from the Water Operating budget. She went on to explain the 2009 Water Operating budget revenues were projected to be approximately $727,000, while expenses (including depreciation) were forecast to be approximately $987,000. Proposed capital expenditures include $149,000 for the final phase of the Water Meter Radio Read project and the Boulder Bridge Well #2 inspection project. Burton noted the revised Water Operations budget reflected an increase in water rate revenue to $707,000 from the first draft budget of $582,000. She explained the revenue was adjusted to reflect projections based on the third-quarter billings for water usage. In response to a question from Councilmember Bailey, Burton explained some of the projected increase could be the result of more accurate water consumption readings by the new water meters installed in parts of the City. Director Brown stated once the current phase of the Water Meter Radio Read project is completed the installation CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 13, 2008 Page 2 of 6 contractor will test a subset of all of the new meters and try and project the improvements in tracking water consumption. Burton explained that in order for the Water funds to be self-supporting, to assure the system can provide for improvements, and to preserve fund balance at stable levels, water rates are periodically reviewed and increased when necessary. The current water rates are: $35 for up to 10,000 gallons; $2.95/1000 gallons for 10,000-50,000 gallons usage; and $3.75/1000 gallons for 50,000+ gallons usage. There are currently about 1,428 water connections that use an average of 30,000 gallons per quarter. She stated it is her understanding there will be some State laws going into effect requiring cities to have a water conservation rate structure, and she thought the City's existing step-rate structure would fulfill that requirement. In response to a question from Councilmember Wellens, Director Burton stated that approximately one year ago Council had discussed possibly having a lower rate for usage of less than 10,000 gallons. It was her recollection that she had looked at what the impact of adding glower-consumption rate would have on revenues, and she thought it would be revenue neutral. The discussion of adding a lower rate was not carried forward. She stated the lower rate may be of value to single-occupant households, seniors, and those who travel for the winter. Councilmember Wellens commented that more residents may connect to City water if there was a lower consumption rate. Councilmember Woodruff stated he wanted to have Staff prepare an analysis of the impact of the lower rate on total water revenue. There was consensus to have Staff prepare that analysis for discussion no later than November 10, 2008. Director Burton stated she and Director Brown have had discussions regarding what savings could be achieved in Public Works staffing because of the new meters. Director Brown explained there is the equivalent of 2.5 employees who read the manual water meters for three weeks per quarter. Because of the installation of some of the radio read water meters, and the resulting time savings, Public Works has been able to attempt to meet MCES requirements by checking storm water structures. Prior to that there weren't resources to do that. Burton stated the next revision of the Water Operations and Stormwater Management Utility budgets will reflect the adjustment in staffing. Burton explained that based on projected 2009 revenues and expenses there will be an approximate $135,000 decrease in the cash balance, If depreciation, which is a non-cash item, were added back there would be an increase of approximately $60,000. Councilmember Woodruff stated the budget reflects a transfer of $350,000 to Water Debt Service (an increase of $90,000 over 2008). He questioned if that entire amount should be transferred because it would only drive up the level of reserves in Water Debt Service. There was consensus to reduce the transfer from Water Operations to Water Debt Service to $260,000. In response to a question from Councilmember Bailey, Director Burton explained that the capital outlay for Water Operations does not reflect the budget overage for the SE Area Water Tower rehabilitation project. The revised budget will reflect an overage amount of approximately $108,000 in 2008, noting there was approximately $2.7 million in water reserves. Councilmember Woodruff stated Water Operations miscellaneous revenue varies from year to year, and he questioned the reason fora $15,000 increase over the 2008 budgeted amount. Director Burton explained interest income reflects an increase of $15,000 over 2008. In response to a question from Councilmember Woodruff, Director Brown stated the $24,000 in Capital Outlay for maintenance to Boulder Bridge Well #2 is sufficient for 2009. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 13, 2008 Page 3 of 6 Sanitary Sewer Budget Director Burton stated the City currently had approximately 2,800 connections to its Sanitary Sewer system. She explained 2009 Sanitary Sewer budget revenues were projected to be approximately $997,000. The proposed operating expenditures are contemplated at approximately $1.2 million, which includes depreciation of approximately $200,000 and capital improvements of approximately $237,000 (for refurbishment of two lift stations, and for Infiltration & Inflow reduction). In order to provide for a balanced budget, Council should discuss if a sanitary sewer rate increase is appropriate or if funds should be transferred from the sewer reserves to accommodate the shortfall. The current sewer rate is $70 per quarter and it has not been changed in six years. An increase of $3 per quarter per household would provide an additional $33,600 in revenues, and a $5 per quarter per household increase would provide an additional $56,000 in revenues. She noted the Sanitary Sewer Fund has a fund balance of approximately $4.3 million. Burton then stated Metropolitan Council Environmental Services (MCES) provides the City with information about the sanitary sewer flow in millions of gallons annually. She explained MCES determines the 2009 cost by calculating each city's share using a formula based on the last actual known flows from the period July 1, 2007 -June 30, 2008. The MCES wastewater charge, which is the amount the City must pay for wastewater processing, will be $576,200 for budget 2009; the City's charge is based on a flow of 328.26 million gallons. The monthly processing charge does not include Inflow & Infiltration (I & I) surcharges, which MCES could impose. She stated there is $50,000 in the 2009 budget allocated to mitigating I & I. If the City fails to do so, or if the City's I & I exceeds a certain flow, the City could be placed on a surcharge program. The City again has been exempted from the I & I surcharge program for 2009. She noted the Sanitary Sewer budget reflects a $60,000 transfer in from the General Fund for the debt service payment on the City-owned house. Councilmember Wellens stated it was his understanding that a lot of the I & I was because of the storm water problem at Lake Mary, and that was scheduled to be fixed in 2009. Director Brown stated he did not think the Lake Mary problem was an I & I issue. Director Burton explained no sanitary sewer rate increases were planned for in the 2009 budget. The 2008 budget anticipated there would be ten local sanitary sewer connection charges, and to date there has been one. Therefore, the 2009 budget reflects one charge resulting in a reduction in Charges for Service in 2009. Supplies and materials reflects a $15,000 increase in maintenance of equipment for an annual lift station rehabilitation. There was $30,000 budgeted in Support Services for engineering fees in 2008 that was eliminated in 2009; and there is an additional $28,000 budgeted for the MCES wastewater charge. In response to a question from Councilmember Woodruff, Director Brown explained that a lot of the lift station rehabilitation work and inspections and rehab work are done in the later part of the calendar year which is why year-to-date capital outlay is so low. Brown stated he hopes the cost to rehabilitate Lift Station 15 in 2009 will decrease. Director Burton stated some cities charge for sanitary sewer utility based on metered flow, but it would be difficult for the City to do that because 100 percent of the City is not on City water. In response to a question from Councilmember Bailey, Director Burton explained if the City stopped collecting sewer service utility charges the Sanitary Sewer Fund reserves would last approximately four years. Director Brown stated some of the City's lift stations service from 35 - 150 homes. If there were to be a major problem with one of the stations, damages to homes could be significant. He noted the City CITY OF SHOREWOOD WORK SESSION MEETING MINiJTES October 13, 2008 Page 4 of 6 does have insurance to cover the damages. Bailey stated there are two reasons to have reserves; one is for contingencies and the other is for improvements. Bailey questioned what the future maintenance cost projections were and what the future cash flow needs were. Director Brown explained that the majority of the City's sanitary sewer system was installed between 1970 and 1975, and it was constructed out of PVC materials. He didn't know how long the PVC materials would last, but he anticipated that a sewer line was good for 50 years. Because the majority of the sewer system was installed at the same time there is likelihood that it will have to be replaced close to the same time; therefore having approximately $4 million in reserves is not unreasonable. In response to a question from Councilmember Woodruff, Director Brown stated as part of any major roadway project the sewer lines are televised to determine the condition of the line. Brown did not think it was necessary to replace lines as part of roadway projects at this time, In response to a comment from Acting Mayor Turgeon, Director Brown stated that some of the reserves can be used to fix I & I problems. Brown noted that I & I discharge fines start at $60,000. The fines will be credited to improvements made to fix the I & I problem. Director Burton noted that the Sanitary Sewer Fund reserves have been used to make internal loans when needed for unanticipated items or projects. Councilmember Bailey stated he did not think it was prudent to build reserves just to fund other projects. Recycling Budget Director Burton stated the number of households participating in the recycling program remained stable at approximately 1,100 per month, and an average of 90 tons is recycled each month. She referred Council to the monthly report prepared by Veolia (the recycling firm) showing the monthly and year-to- date tonnage recycled and a breakdown of the types of material recycled. The year-to-date tonnage was 666.2 tons, and approximately 63 percent of the households put recycling out for pickup. She stated the City again anticipates receiving approximately $21,000 in grant monies from Hennepin County Grant Funds, and revenues from Charges for Service are programmed at approximately $61,000. She explained the 2009 Recycling budget contemplates expenditures of approximately $94,000. Expenditures include the City's recycling obligation based on the Veolia contract and $10,000 for City's spring clean-up program. Although every effort is made to recover costs through collection fees for some of the items collected during the clean-up effort, the City may have to subsidize a portion of this program to encourage participation. In order to do so, a slight rate increase may be necessary and Council may wish to consider a change from $1.75 per household to $2.75 per month per household. This $1.00 per month rate increase will generate an additional $33,000 annually and should be adequate to offset the increased costs for recycling and clean-up activity. In response to a comment from Acting Mayor Turgeon, Director Burton stated costs and revenues for the 2008 spring clean-up effort were appropriately reflected in the 2008 year-to-date actual amounts. Councilmember Woodruff stated the 2009 project revenues from Charges for Service are $13,000 less than the 2008 budgeted amount, and they are also less than the 2006 and 2007 actual amounts. He questioned what the reason was. Director Burton explained 2008 was the second year for adrop-off spring clean-up program and the 2008 budget contemplated collecting $13,000 in fees. The $61,000 in revenues from Charges for Service are from the recycling charges on the utility bills. In response to a question from Councilmember Bailey, Director Burton stated the cost for curb-side recycling through Veolia is a fixed cost based on a 3-year contract and increased participation will not increase revenues. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 13, 2008 Page 5 of 6 Acting Mayor Turgeon stated the last few years the City's spring clean-up day was the same day as the City of Minnetonka's spring clean-up, and Minnetonka does not charge to drop items off because it's conducted in conjunction with Hennepin County. Hennepin County residents can drop off things such as electronics, hazardous waste, etc., at no charge. There was Council consensus that the City should schedule its spring clean-up day different from Minnetonka's. Director Brown stated there was a benefit to having it on the same day; there are usually some residents who come to the City's drop-off site with hazardous materials and they can be directed to the Minnetonka drop-off site to dispose of those items. Stornzwater Management Budget Director Burton explained the 2009 Stormwater Management budget revenues are projected at approximately $228,000. Expenditures are contemplated at $643,000, including proposed capital expenditures of $555,000. The capital outlay contemplated is for the Lake Mary outlet ($457,000) and Harding Lane Drainage ($97,000). If these projects proceed as planned, there will be a net deficit in the Stormwater Fund. She suggested Council discuss how to fund storm water management projects, including a possible rate increase from the current residential rate of approximately $15 per quarter. She noted the rate was increased to $15 from $5 per quarter in 2007 and that was the first rate increase since 1993 when the charge was first put into place. She stated during the 2008 budget process Council discussed the possibility of funding storm water system improvements through a Chapter 444 special tax district process. During the discussion some Councilmembers wanted aCity-wide tax and others wanted a specific district tax. She stated storm water revenue bonds could be another funding approach, although the municipal bond market was not very good at this time. Councilmember Woodruff stated there is $100,000 allocated for capital outlay 2008, but there are no storm water improvement projects scheduled. Therefore, the amount needed for capital outlay in 2009 is actually $455,000. He then stated the draft 2009 Stormwater Management budget reflects an ending cash balance of approximately a negative $98,400. He questioned if there was a way to spread the $455,000 additional capital outlay requirement over 2009 and 2010 and achieve an ending cash balance minimum of $75,000. Director Nielsen stated the Chapter 444 special tax district process which does not require the City to demonstrate the benefits of the improvement to properties. Director Brown explained there had not been a problem with Lake Mary until a few years ago. Since that time the City has had to pump each year because a couple of homes were put at risk of flooding if nothing was done. The Lake Mary outlet project is a costly project but the number of benefiting properties is not very large (approximately 40 properties). In response to a question from Councilmember Woodruff, Director Brown explained one-half of the pipe for the Lake Mary outlet project could be installed in 2009 but not used until the rest of the project was completed. The City could not assess for the project until it was completed. Brown stated the residents would probably not be in favor of extending the project over two years. Woodruff stated the first half could be funded out of the available funds in 2009 and then a decision will have to be made regarding how to fund the 2010 portion of the project. Councilmember Wellens suggested a loan or permanent transfer be made from the Sanitary Sewer Fund to the Stormwater Fund for the Lake Mary outlet project. Director Brown stated that would be a more practical way to fund it. Councilmember Woodruff stated a special taxing district would be contentious. Councilmember Bailey stated paying for the project with a loan from the Stormwater Fund in effect CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 13, 2008 Page 6 of 6 meant all residents would pay for the project. Woodruff stated lift station improvements are paid for by all residents, and the Shady Island Bridge project was paid for out of the Local Roadway Fund. Director Burton stated there may be a number of stormwater improvement projects that may be City- wide. Therefore, it may make sense to make the taxing district City-wide. She discouraged Council from transferring money from the Sanitary Sewer Fund to the Stormwater Fund. The City could borrow from the Sanitary Sewer Fund; that would be accomplished through adopting a resolution and interest would have to be paid on the loan. She noted if a loan was made, the Stormwater Management budget would have a debt service component that would have to be funded, and that may require a rate increase. She stated it may be appropriate to make an internal loan from the Sanitary Sewer Fund and to increase the storm water utility rates. Director Burton stated she will prepare some potential funding scenarios for discussion at a future meeting. 3. ADJOURN Woodruff moved, Bailey seconded, Adjourning the City Council Work Session Meeting of October 13, 2008, at 6:58 P.M. Motion passed 4/0. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder ATTEST: Christine Lizee, Mayor