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101209 CC WS Min5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 5030 P.M. INUTES 1. CONVENE CITY COUNCIL WORD SESSION Mayor Lizee called the meeting to order at 5:30 P.M. A. Roll Call Present. Mayor Lizee; Councilmembers Bailey, Turgeon, Woodruff and Zerby; Administrator Heck; Finance Director Burton; Planning Director Nielsen; Director of Public Works Brown; and Engineer Landini Absent: None B. Review Agenda Woodruff moved, Turgeon seconded, approving the agenda as presented. Motion passed 510. 2. COMPREHENSIVE UTILITY RATE STUDY Director Burton stated Rusty Fifield, a Senior Vice President with Northland Securities, was present to talk about the comprehensive utility rate study. Mr. Fifield stated the focus of the work done to date on the utility rate study was intended to provide Council with information that will help Council establish utility rates and the utility enterprise budgets (stormwater management, sanitary sewer and water operations) for 2010, and to identify the next steps for completing the planning process. Once Council has provided input on the report provided for this meeting, the intent is to then determine the effects the decisions made will have on the long -term financial issues. He noted that during its September 9, 2009, work session Council stated it wanted to concentrate on addressing the basic rate scenarios before it addressed the long -term financial issues. Mr. Fifield explained the estimates for 2009 revenues and expenses are based on actual revenues and expenses through June 30, 2009, and 2009 budgeted revenues and expenses. Those estimates served as the starting basis for the projections. The operating expenses for the three utilities were projected to increase by 2 percent in 2010 and 2011, and an increase of 4 percent was used for each year thereafter through 2029. He clarified this effort continues to be a work in progress. Mr. Fifield stated he would like to discuss each utility individually starting with stormwater management. Mr. Fifield explained during its September 9`' work session Council stated it wanted to stay with the City's basic three -tier, fixed -user rate structure for stormwater. The rates do not vary based on consumption. The goal was to identify how to increase the rate structure to provide funding for capital improvements and infrastructure maintenance. Three broad scenarios were identified to do that. Scenario 1 depicts an "inflationary" increase of user rates of 3 — 4 percent per year. The 2010 increase generates $82,000 for capital improvements and $25,000 for infrastructure maintenance. The additional capital CITE' OF SHOREWOOD WORK SESSION MEETING MINUTES October 12, 2009 Page 2 of 9 Mr. Fifield stated that from his vantage point a scenario close to Scenario 2 would make the most sense. Scenario 2 does not provide enough funding to do some of the larger capital improvements. It does generate enough financial resources in combination with annual funding, prudent use of the stormwater fund balance and internal borrowing to make the necessary improvements to the stormwater management system. He suggested Council consider holding down increases in the other two utility rates to help lessen the impact of a 40 percent stormwater rate increase in 2010. Councilmember Turgeon stated the stormwater analysis indicates capital outlay in the amount of $614,000 in 2009, noting $457,000 of that was targeted for a potential Mary Lake outlet project. Council had recently made the decision to cancel the Mary Lake project. She suggested the capital outlay average for 2008 — 2012 be recalculated to reflect that. Mr. Fifield stated the numbers will continue to be refined based on what has or will occur in 2009. Councilmember Woodruff stated the analysis depicts capital outlay of $97,000 for Harding Lane drainage improvements and $60,000 for and Smithtown Lane drainage improvements. He suggested Staff review the actual cost of the Harding Lane improvements to determine if the actual cost is less then what was budgeted. Director Brown cautioned that the bids for projects in 2009 may have been reduced because of the economic climate and the lower bids should not be used as the basis for future projects. He stated he thought the estimates in the CIP were solid and they were based on a good average. Woodruff suggested the estimates for the Mary Lake outlet project be removed from the CIP average because it skews the average. Director Brown explained Staff and Mr. Fifield discussed whether or not the entire amount should be removed. They decided not to because there generally is a project of that size that comes up that has to be done. Council can decide if it wants to reduce the amount for that project to zero, leave it as is or change it to something in between. Councilmember Turgeon stated various councils have discussed the Boulder Bridge Pond project over a number of years. Some Council will either have to decide if it will want to assess property owners for improvements or pay for it. She thought the Mary Lake outlet project skews the average. She commented it was her understanding that it would cost the City approximately $9,000 to pump Mary Lake each time the need arose. She noted it had not been pumped since 2006. She suggested a more realistic number should be used. Councilmember Bailey asked if Scenario 2 would generate sufficient funds for the potential Vine Hill Road project. Mr. Fifield stated he would like guidance from Council and general feedback about what size of rate increases it would find acceptable. The analysis depicts an "all in" rate increase. Council could chose to step into the increases to build to a certain balance in the capital fund. If Council agrees that Scenario 2 is the broad direction it would like to take, then the scenario can be refined and adjusted as Council deems appropriate. CITY OF SH REWOOD WORK SESSION MEETING MINUTES October 12, 2009 Page 3 of 9 Councilmember Bailey stated he thought Scenario 2 was more reasonable than Scenario 3 because of the uncertainly about what significant projects will be done in the next few years. Councilmember Woodruff stated he thought the intent was to establish a reasonable run rate for capital projects. The City has a 20 -year Pavement Improvement Plan (PMP) which mostly reflects the cost to reconstruct roadways including stormwater improvements. If capital improvement projections were based on what's in the PMP it would likely be the worst case scenario for capital funding. In response to a question from Woodruff, Director Brown explained the Boulder Bridge lift station project in the CIP is for a stormwater lift station. Councilmember Woodruff asked what growth factor was factored into the maintenance costs. Mr. Fifield explained lie thought it was 2 percent, then 2 percent, then 4 percent for subsequent years. Councilmember Woodruff stated he liked Scenario 2. He commented that although a 40 percent rate increase in 2010 may appear startling, the actual dollar increase was not that significant. Councilmember Turgeon stated the City already has higher stormwater rates than most of its neighboring cities. Many residents are experiencing tough economic times and she expressed she did not support increasing rates. Councilmember Turgeon questioned why the number of users varied between stormwater and storm sewer in this analysis and also in the Comprehensive Plan (Comp Plan). Director Nielsen explained the numbers in the Comp Plan reflect residential households; the number is quite accurate. The stormwater and sanitary sewer billings include both residential and commercial properties. Stormwater also includes vacant land Therefore, there are differences in the number of users. Director Burton explained any lot that has a property identification number is billed for stormwater even if the land is vacant. Burton then explained Staff is measuring the number of bills as well as the revenue generated. Should a property change hands during the quarterly billing period, the previous owner and new owner will both receive a bill. Councilmember Woodruff stated the analysis reflects the cash balance in the stormwater fund is projected to be approximately $435,800 at the end of 2009 and approximately $1.1 million at the end of 2029. It also reflects capital expenditures ranging between $150,000 and $300,000 during the same period. He asked Mr. Fifield what Northland Securities thought the appropriate fund balance should be at the end of the 20 -year period. He stated lie would find it difficult to tell a resident the City was building a reserve and keeping it in the bank for them. He preferred residents keep their money in the bank and pay it to the City when it's needed. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 12, 2009 Page 4 of 9 Mr. Fifield stated the City did not need a $1.1 million balance at the end of 20 years. He explained the projections are more realistic for the next 5 — 10 years. Beyond that they become increasingly "fuzzy" He stated it's possible the City may find itself in a position at some time where it has a sufficient stormwater fund balance and therefore doesn't need to implement a rate increase for a while. He clarified he has some difficulties distinguishing what things are desires and what things are needs. He stated the City will have to make changes or improvements because of new federal and state stormwater management mandates. Those are not factored into the projections because they are not known. He clarified the analysis is intended to depict that based on the assumptions used there would be $1.1 million in the balance at the end of 20 years, but it is not very likely that would be the case. Councilmember Woodruff stated the analysis indicates the balance will increase to approximately $582,000 at the end of 2015 from $435,000 at the end of 2009 and that is not a dramatic increase. The large increase is in the last five years of the projection. He stated if there was insufficient balance in the earlier years the City could borrow from other enterprise funds for improvements. Councilmember Zerby stated he thought having reserves equal to 100 percent of annual expenditures could be sufficient, but he would appreciate guidance from Northland Securities on that. He then stated he was in favor of Scenario 2. He thought it prudent to educate the City's residents on what the stormwater fund is needed for and why it's necessary to increase the stormwater rates. He suggested the analysis be adjusted to include a few years prior to 2006 to have a more fine tuned average for capital outlay. He stated he was unsure of what the financial burden would be on the City because of potential mandates being discussed. Director Brown commented that because regulatory agencies want control but don't have control over property owners they impose mandates on cities and communities to address issues. He foresees the need for things such as additional ponding facilities and ground water recharge. The cost to do those things may not be as significant as the Mary Lake outlet project, but they will add up over time. Engineer Landini stated that with regard to upcoming mandates the City will have to have a total daily maximum load study done on Lake Virginia and an outcome of that will be the City will have to remove a to- be- determined amount of phosphorous. Landini explained the study will be funded by the Minnesota Pollution Control Agency and the Minnehaha Creek Watershed District. The City does not have any Land next to the Lake to meet the phosphorous load reduction. It may be possible that the City could have to install a stormwater treatment plant in the wetland. Councilmember Turgeon stated there are 20 - 30 homes located in Shorewood with Lake Virginia Lakeshore. The majority of the properties are not in the City. The City has no control and no public land. From her vantage point the only thing the City could do is sweep the streets one more time to reduce phosphorous, and it's her understanding that should satisfy the agencies. She stated there is no way for the City to know what the phosphorous level is in the ground, especially on private property. Director Brown stated when mandates are first implemented there is a lot of pushback from communities. After a while, the mandates are modified and then they become costly because the City has to obtain land or make some other costly improvement. Councilmember Zerby stated stormwater management is becoming more costly. There is more sensitivity to the natural resources. He thought it prudent to build in enough rate increase to handle future mandates and improvements. Councilmember Bailey stated he was unsure of what the fund balance should be. He thought a balance of $500,000 would not be adequate should some of the projects such as Mine Hill Road come to fruition. He thought a fund balance in the range of $500,000 — $1 million would be adequate for stormwater, and Scenario 2 is a roadmap for achieving that. Councilmember Woodruff stated WSB and Associates conducted a stormwater issues study. He recollected the study identified costs to correct certain stormwater issues. He suggested that study be reviewed and incorporated into this rate study. Mr. Fifield went on to discuss the sanitary sewer analysis. Mr. Fifield stated Northland Securities had been charged with determining if the sanitary sewer fund balance needed to be as large as it is noting it's projected to be approximately $4.2 million at the end of 2009. Northland Securities believes it's larger then it needs to be. It also believes some of the fund could be used to fund other public service needs. Mr. Fifield explained three different scenarios were developed for looking at sanitary sewer needs. For example, if Council wanted to draw down on the fund balance and forego future rate increases then the analysis needed to identify how long the no- increase approach could go on based on certain assumptions. Scenario I analyzes this. It does not include any rate increase through 2018. In 2019 there is a 4 percent increase. But, in 2020 there is a 61 percent increase to reestablish a fund balance equal to 100 percent of annual expenditures. He thought that would be the appropriate level of reserves. In 2021 — 2029 there is a 3 percent increase. He stated the analysis factors in what is currently known about upcoming sewer access charge increases by Metropolitan Council (Met Council) for 2010 — 2012. Beyond that nothing is factored in. He commented the City is buying waste water treatment services from the Met Council. He explained the Met Council's projections were based on a certain level of growth that is not occurring. Therefore, it has to increase its rates to compensate for that. Mr. Fifield then explained Scenario 2 involves the creation of what is termed an "infrastructure bank ". Rather than have a sanitary sewer fund balance that is significantly larger then what is needed, a portion of the fund balance would be used to create the infrastructure bank that would be used to make internal loans for stormwater system and water utility improvements. The advantages of doing that are it would minimize the City's costs to issue bonds, the City could pay interest to itself rather than a bond holder, it would give the City more flexibility in structuring the repayment terms and it is more economically efficient for smaller projects. Mr. Fifield went on to explain Scenario 3 reflects implementing consumption based rates. Customers who receive metered water would be charged based on their water consumption. An analysis was done based on the assumption that the City would want to generate the same amount of revenue as it would under Scenario 1 which has no rate increase for 2010. The proposed consumption rate uses a $50 quarterly minimum for up to 10,000 gallons of water used and an additional $2 for each additional 1000 gallons used above that. He asked Council if it thought the water consumption approach makes sense. If CITY OF SZ OREWO D WORK SESSION MEETING MINUTES October 12, 2009 Page 6 of 9 so, then Staff and Council need to continue to work on determining what the rate should be. This scenario was intended to start the discussion. Councilmember Bailey asked if Scenarios 2 and 3 included an overall rate increase. Mr. Fifield explained the rate increases in Scenario 2 (zero percent in 2010, 2 percent in 2011, 3 percent in 2012 and 4 percent through 2029) are driven by having a lower fund balance to draw on and increasing costs. It is more of an inflationary increase. Councilmember Turgeon asked what the 3 — 4 percent inflationary increase is based on. Mr. Fifield explained the cost to provide the services will go up minimally the first few years but will increase after that. Councilmember Turgeon asked if all the projections were based on an anticipated 3.8 percent increase from the Met Council in 2010 and a 6.1 percent increase in 2011 to which Mr. Fifield responded they did. Mr. Fifield explained reserves will be used to mitigate the need for rate increases. Administrator Heck stated one of the largest costs for the City is its payment to the Met Council for providing sewage treatment services. Mr. Fifield clarified Council is not being asked to adopt a 20 -year plan. The longer -range projections are provided to give Council some understanding of the scenarios' implications 20 years out. He and Staff thought it prudent to consider smaller increases along the way rather then having more significant increases in the future. Councilmember Woodruff stated he believes the sanitary sewer fund balance is significantly more then what the City needs, and the City needs to use the excess. He expressed he had a philosophical issue with creating an infrastructure bank with the use of sanitary sewer funds. The residents who have helped create the fund balance are not the beneficiaries of the use of the infrastructure bank. He then expressed he also had a philosophical issue with having two classes of residents for the consumption based scenario. He questioned how the City could justify the difference in rates for residents who have City water and those who don't. Those without City water would pay a flat rate and those with it would pay a variable rate. He supported drawing down the fund balance and having no rate increase. He had no issue with using the fund balance as a loan source, noting interest earned should go back into the fund. Woodruff then stated all the analyses reflect a flat rate of depreciation for the 20 year period. He questioned if that is correct. He asked it be revised to reflect a more realistic depreciation schedule. Woodruff questioned the appropriateness of using the 2009 March billing (winter quarter water consumption usage) information for the Scenario 3 analysis. That billing information does not take into account the snowbirds that are not consuming water nor does it include any irrigation consumption. He thought it would be better to use more than one quarter's information. Mr. Fifield explained it's a very standard sanitary sewer billing practice to base it off of winter quarter billing. It rules out water that does not go into the sanitary sewer system. Woodruff stated he understands not including irrigation consumption. Woodruff stated the no- rate - increase analysis does not reflect actual CIP amounts for 2008 and beyond. Mr. Fifield explained that capital outlay is equal to funded depreciation. He noted the City has funded little for capital improvements to the sanitary sewer system. He explained sanitary sewer rates are not driven by the need for capital investments. The scenarios are broad and will be refined after receiving Council's input. Director Button commented the CIP is in process. Councilmember Zerby expressed concern about the no- rate - increase scenario. 2009 reflects a loss of approximately $328,000 in the fund balance which indicates the current rate structure does not support CI'T'Y OF SHOREWOOD WORD SESSION MEETING TINE MINUT S October 12, 2009 Page 7 of 9 water utility operations. He also expressed concern about having a different rate for those with City water and those without. Director Burton explained that creating an infrastructure bank is in all realty . lust formalizing what the City already does. The City already uses the sanitary sewer fund as a revolving loan fund. Staff believes it's reasonable for Council to consider formalizing the process. She commented that everyone in the City participates in the sanitary sewer fund. In theory, if the fund were to be used for other purposes it would be to the benefit of the City's residents through the payback to the fund with interest. Mr. Fifield stated he and Staff responded to the charge of determining if the sanitary sewer fund balance was too large. After agreeing that is was, they then identified what to do with it. Creating an infrastructure bank shows one way of decreasing the balance while mitigating rate increases. They thought it would be easier to explain an infrastructure bank balance then it is a very high sanitary sewer fund balance. The consumption based scenario was developed based on Council discussion during its September 9"' work session. Councilmember Zerby asked what the $125,000 Radio /ISP communications system capital improvement line item was. Director Brown explained it's for the lift stations. He thought Public Works needs more effective communications for the City's wells and lift stations. For the islands, if the City Public Works personnel respond to an alarm warning, they have to wait until they get to the lift station to determine what is wrong and often have to go back to Public Works to get what's needed to correct the problem. Zerby stated lie thought the cost might be high. Brown explained the cost is based on information he received in 2008 for installing a radio system in each of the lift stations. A new option may be available. Mayor Liz6e stated she thought the infrastructure bank scenario was reasonable. She then stated that although having no rate increases in the near future may be appealing, having a 61 percent rate increase in 2020 does not seem like sound fiscal management. Because the City already makes loans from the sanitary sewer fund, she thought establishing a separate fund would help when explaining it to residents. The analysis for this approach indicates a zero percent increase in 2010 and a 2 percent increase in 2011. She thought that was reasonable. Councilmember Woodruff stated the infrastructure bank scenario reflects modest rate increases starting in 2011 while drawing $1 million from that find for other purposes. He suggested establishing an interest rate for the infrastructure bank with the interest going to the sanitary sewer fund each year. Mr. Fifield explained the analysis reflects the interest going back to the bank so it can loan it out to the benefit of the residents. Woodruff stated the penalty the sanitary sewer user pays is a rate increase under that approach. Director Burton stated she thought the auditors would want the interest going into the lending fund (i.e., the infrastructure bank). She stated the challenge for Staff and Mr. Fifield is to identify a way to accommodate the infrastructure bank while keeping rate increases at zero in the short term. Councilmember Woodruff suggested a contract be written between the infrastructure bank and the sanitary sewer fund where the bank pays the find a 4 percent interest rate. Councilmember Bailey asked if would be possible to make a one -time transfer from the sanitary sewer fund to the stormwater fund. One fund appears to be over funded and the other under funded. He also questioned if it would be possible to lower the rate increase for stormwater management and keep the rate increase for sanitary sewer. He stated the City needs to determine what the appropriate fund balances should be. He commented lie is open to discussing creating an infrastructure bank indicating it could be smaller then $1 million. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 12, 2009 Page 8 of 9 Mr. Fifield then discussed the water utility analysis Mr. Fifield explained the water utility analysis involved using water consumption for each billing period from June 2008 through June 2009 (five billings). The current water rates were applied to actual water use for the four billing periods from September 2008 through June 2009. Only one scenario was developed, and it reflects no rate increase. The water fund balance is adequate to mitigate rate increases from some period of time in the future. There is enough income from cellular antenna rental going into the water fund and investment reserves to offset the need for additional revenues from users. Debt is falling off; therefore, existing debt places less demand on income from the water fund. Less capital improvement is being funded then what is being funded in depreciation. Mr. Fifield then explained the critical charge was to explore options for adjusting the minimum water charge. He reviewed the two options. Option 1 reflects reducing the minimum consumption charge to 5,000 gallons from the current 10,000 gallons. Ten percent of the users would pay the minimum amount. The corresponding reduction in the minimum charge would be reduced to $17.50 from $35, and it would lower the estimated revenue to approximately $602,000 from $629,499. The rates for users who consume over 50,000 gallons (tier 2 users) would be increased to make up for the lost revenues. The rate for this tier could increase to $4.25 from $3.75 per 1000 gallons. This increase is consistent with having water conservation rates. Option 2 reflects keeping the minimum use at 10,000 gallons while reducing the base charge. The base charge was reduced to $25 from $35. The first tier charge for each additional 1,000 gallons used would increase to $3.28 from $2.95 and the second tier would increase to $4.25 from $3.75 per 1000 gallons. Councilmember Woodruff stated he preferred the lower minimum amount option. He thought the option challenged high consumption users. He explained the analysis indicates there are 668 users over the five quarter period who consumed 5000 gallons or less. Approximately 800 consumed 5,001 — 10,000 gallons. Approximately 1,800 consumed 10,001 — 20,000. There were 1,143 who consumed more than 50,000 gallons, and he thought those individuals should be considering how to reduce their consumptions. Councilmember Zerby stated he just did a quick internet search which suggests the average family uses 90 gallons per day which equates to more than 8,000 gallons over a 90 day period. He was unsure of what the average was for the City's residents. He didn't think the rate structure encouraged much conservation. He suggested the range of 10,001 — 20,000 possibly be broken down further to encourage conservation by family's using more than double the average consumption. Director Brown explained the design rates typically used across the metropolitan area are 110 — 115 gallons per person per day. The Met Council is not overly pleased with the City's usage rates of 125 — 130 gallons per person per day, noting a large part of that is due to irrigation. The average household is about 2.8 persons per household. Councilmember Zerby stated over a 90 day period an average household would use approximately 28,980 gallons based on a per - person usage rate of 115 gallons per day. Therefore, the average household pays a quarterly rate of $64.50. In order to see a drop in rate a household would have to decrease the usage by about one half. Councilmember Turgeon stated she had requested Staff provide Council with the City of Tonka Bay's water utility rates because it treats its city water. Councilmember Bailey stated he thought most conservation is going to occur with high consumption users rather than those in the middle. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES October 12, 2009 Page 9 of 9 Councilmernber Woodruff stated the current rate structure is a flat rate up to 10,000 gallons and then an additional per 1000 gallon charge after that. Mr. Fifield indicated he will be in attendance at the October 26, 2009, Council work session to continue this discussion. Councilmernber Turgeon asked if Director Burton will then explain the difference between the estimated water revenues and billed revenues. Director Burton explained there are things such as partial billings, changes of ownership and so forth that will result in there being differences between estimated revenues and actual billing. Mr. Fifield stated because water utility revenues vary based on consumption it's difficult to predict water revenues with great accuracy. Therefore, there is more of a need for a fund balance because of the fluctuations. Councilmember Bailey stated if the City encourages conservation and that comes to fruition there will be less water utility revenues. 3. ADJOURN Turgeon moved, Woodruff seconded, Adjourning the City Council Work Session of October 12, 2009, at 6:58 P.M. Motion passed 510. RESPECTFULLY SUBMITTED Christine Freeman, Recorder - Christine Lizee, Mayor ATTEST �v Br"i w4feck, Administrator /Clerk 1