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102609 CC WS MinCITY OF S OIEWOOD CITY COUNCIL WORD SESSION MONDAY, OCTOBER 26, 2009 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 5:30 P.M. Acting Mayor Turgeon called the meeting to order at 5:30 P.M. A. Roll Call Present. Acting Mayor Turgeon; Councilmembers Woodruff and Zerby; Administrator Heck; Finance Director Burton; Planning Director Nielsen; Director of Public Works Brown; and Engineer Landini Absent: Mayor Liz& and COUllcilmember Bailey B. Review Agenda Zerby moved, Woodruff seconded, approving the agenda as presented. Motion passed 310. 2. COMPREHENSIVE UTILITY RATE STUDY Director Burton stated Rusty Fifield, a Senior Vice President with Northland Securities, was present to discuss the most recent information about the comprehensive utility rate study. Mr. Fifield stated the meeting packet for this meeting contained a copy of the most recent utility rate study information. He hoped Council would be able to wrap up its discussion about financial planning and rate setting for the City's utility system this evening. He clarified he did not expect Council to agree to what the final rates should be this evening. He did hope Council could reach agreement for what the broad rate parameters should be for 2010. Doing so would give Staff the guidance needed to draft utility enterprise budgets for 2010. Mr. Fifield suggested he discuss the water utility analysis first because there was limited discussion about it during Council's October 12, 2009, work session. Following that he would discuss stormwater and then sanitary sewer. He explained all of the utility projections have been updated; the updates are based primarily on input received from Council during its last work session. Capital outlay projections were updated based on input received from Staff. The revised capital projections have been factored back into the depreciations. He noted the utility rate comparison was updated to include the City of Tonka Bay rates per Council's request. Councihnember Woodruff stated Council has not agreed that water main would be extended (if it was not already in place) as part of each roadway reconstruction project. The capital projections reflect that would happen. He questioned why there were no revenue increases from new city -water users included along with an expanded water system. Mr. Fifield explained the projections are intended to determine what the cost implications of expanding the water system as part of roadway reconstruction projects are. He stated the capital costs are included on a cash basis and do not include any borrowing of funds. User revenues from an expanded customer CITY OF S O EWOOD WORK SESSION MEETING MINUTES October 2, 2000 Page 2 of 7 on a cash basis and do not include any borrowing of funds. User revenues from an expanded customer base are not included, nor are user connection charges and /or assessments. There was no way to reasonably project what the user revenues would be; and, Council has not discussed how it wanted to charge new users for the expansion. The water fund balance is significant enough to carry the expansion costs for a period of ten years without requiring a user rate increase. Acting Mayor Turgeon stated one component of the City's current water policy states water expansion will not be done as part of a roadway reconstruction project unless a certain percentage of affected property owners want it done. If water main is installed, residents are assessed for it at the time of installation. This water utility rate analysis is based on a different water system policy than what is currently in place. The projections assume the City fronts the cost to install water main. She indicated the water policy discussion is for another time. Mr. Fifield stated the analysis assumes the water fund fronts the cost of extending the system. It does not imply the cost is free to new users. The assumption is the City will either assess the property up front but defer the payment of the assessment, or the City will create a connection charge and the property owner will pay the charge when they hook up to the water system. The projections show the water fund has sufficient monies to allow that to happen. Administrator Heck explained when Staff updated the Capital Improvement Program (CIP) for the water system for this analysis it looked at the 20 -Year Pavement Improvement Plan to determine which roadways without water main could feasibly have it installed. The cost for water main extension needs to be reflected in the projections even if the decision to extend it is based on resident input. He stated that from his vantage point any time a roadway is reconstructed and the capacity exists to extend water main it should be extended and stubbed to the property and property owners would pay a fee when they connect. Councilmember Woodruff recapped the analysis reflects that for a period of ten years the City could adopt a philosophy of extending water main where needed and feasible as part of roadway reconstruction projects. That would be funded out of a sound water fund without there being any cost recovery for that and without there being any additional user revenues. The analysis is worst case. He thought this model was useful. Councilmember Woodruff stated during the October 12` work session there was discussion about having a lower minimum consumption amount or a lower minimum charge. At that time he expressed his support for the lower minimum amount which was a 5,000 gallon consumption amount at a cost of $17.50 per quarter. He did not think the updated analysis reflects that. Mr. Fifield stated he would be reluctant to suggest a substantial variation from the proposed rate schedule. The schedule is set up to achieve approximately $630,000 of user revenue in 2010. The 2010 rate schedule has not varied from the one discussed during the October 12` work session. The rate schedule is based on the user data he referred during the last work session, and the top tier user charge was adjusted to make up for the revenue that will be lost by lowering the minimum consumption amount and the minimum charge. It's difficult to predict what would happen if the rate structure is fundamentally altered. The analysis did not require any overall user charge increase in revenue going forward. Councilmember Woodruff stated this rate study exercise was driven by the question was it possible to lower the base water utility rate. He thought that was lost in this analysis. After ensuing discussion, Mr. Fifield clarified that financial projections were based on generating the same amount of water revenue with the proposed adjusted rate structure in 2010 as would have been CITY OF SHOREW OD WORK SESSION MEETING MINUTES October 26, 2009 Rage 3 of 7 generated with the current rate structure. The analysis reflects the lower consumption amount and charge. It reflects a minimum 5,000 gallon consumption amount at a cost of $17.50 per quarter, and an additional 1,000 gallon tier I charge of $295 and tier 2 charge of $4.25. In the analysis, the current rate structure, a rate structure with a lower minimum consumption rate, and a rate structure with a lower minimum charge, all produce the same revenue for 2010. Director Burton stated Mr. Fifield and Staff thought it prudent to provide Council with an analysis showing the impact of installing water main where needed as part of roadway reconstruction projects while deferring payment from property owners. Councilmember Zerby explained he had just done a quick calculation based on consuming 29,000 gallons per quarter per household. The quarterly amount for Shorewood households would be $91.05 based on the proposed new minimum consumption amount. For the other cities in the comparison they would be approximately: Excelsior $109; Minnetrista $106; Mound $98; Orono $104; and, Tonka Bay $113. He questioned the goal of wanting to lower rates. Larger cities such as Minnetonka and Chanhassen are in the $50 range and he assumed that was because of economies of scale. If the assumption was correct, he questioned if the Council may want to consider the expansion of the water system as a means of helping to reduce rates. He asked how many users consumed the proposed 5,000 minimum amount or less. Councilmember Woodruff stated the rate study information discussed during the October 12` meeting indicated there were 296 users who consumed 1,000 gallons or less and 668 users who consumed 5,000 gallons or less for the five billing periods from June 2008 — June 2009. The comparison chart in this evening's meeting packet reflects that all Tonka Bay household pay a flat quarterly charge of $11 plus $3.90 for each additional 1,000 gallons consumed. If a Tonka Bay household consumed 10,000 gallons in a quarter the water bill would be $50. Based on that, the City's current charge of $35 for 10,000 gallons is low. Councilmember Zerby questioned why the Council wouldn't want to tie the rate structure to water consumption only and not to the CIP. Councilmember Woodruff stated table 2 in the water analysis shows two approaches to lowering the minimum cost. Director Burton stated out of approximately 1,300 users per quarter, 100 — 200 accounts consume no more than 5,000 gallons. She noted the most number of low consumption users are in the winter quarter. Councilmember Zerby stated he understood the intent of what Council was trying to achieve. Councilmember Woodruff stated he was not terribly interested in what other cities' charge. He just wanted to ensure the City was financially solvent based on what it charged and that it did not gouge users. Councilmember Zerby stated as a business owner he looks at comparable data. Woodruff stated the information was interesting. Woodruff then stated Mound has a flat rate of $10.18 plus a $3.05 per 1,000 gallon charge; this would amount to approximately $20 for up to 5,000 gallons. The City's current minimum rate is $35 for up to 10,000 gallons. The proposed minimum rate is $17.50 for up to 5,000 gallons. In response to a comment from Acting Mayor Turgeon, Councilmember Zerby asked about the benefit of having another consumption breakout between 10,000 gallons and 20,000 gallons was addressed at the last meeting. Councilmember Woodruff clarified how the rate structure worked for Turgeon. There was Council consensus to go with the 5,000 gallon minimum consumption rate with a per quarter charge of $17.50. CITE' OF SHOREWOOD WORK ,SESSION MEETING MINUTES October 26, 2009 Page 4 of 7 Councilmember Woodruff requested Council discuss the five key issues identified. He wanted to add a sixth issue of the water fund reserve policy. Mr. Fifield reviewed the issues and decisions made regarding them. Issue I — there was consensus to adjust the minimum charge. Issue 2 — there was consensus to go with a minimurn 5,000 gallon consumption amount at a cost of $17.50 per quarter, and, a per additional 1,000 gallon tier I charge of $2.95 and tier 2 charge of $4.25. Issue 3 — the minimum rate for the highest levels of consumption will be increased for those consuming more then 50,000 gallons per quarter. Councilmember Woodruff commented that if the higher fee really does encourage water conservation the rate structure may have to be adjusted in the future to make up for the lost revenue. He noted there were 1143 users who consumed more than 50,000 gallons during the five billing periods from June 2008 — June 2009. Councilmember Zerby commented that there are cities that have seasonal adjustments. Director Burton stated the City's billing system can handle a number of different tiers, and she could check with the vendor to find out if it can handle seasonal rates. Woodruff cautioned against changing too many things at once; it's easier to assess the impact of one change at a time. Mr. Fifield returned to the issues. Issue 4 — the proposed rate structure should generate revenues equal to those projected for 2009. Issue 5 is whether the proposed approach to capital improvements and water system expansion is acceptable. Councilmember Woodruff stated that needs to be discussed with the full Council. He then stated the City now has the tools to analyze the impact of different options, and it now has the means for setting the rate structure for 2010 and understand what it means to the water enterprise budget. Director Burton noted the CIP will be discussed during the next Council work session. Councilmember Woodruff stated Council should discuss the water policy during its discussions about the CIP. Director Brown stated if water main is not installed as part of roadway reconstruction projects it will only improve the financial outlook. Councilmember Zerby suggested Council look at how the current roadway projects work with regard to potential water main installation as part of the roadway reconstruction projects before he settles on a policy. Issue 6 - Mr. Fifield stated in previous discussions Council had discussed having reserves equal to 100 percent of annual expenditures for sanitary sewer as the minimum threshold. He thought that same approach would be reasonable for water as water revenue is unpredictable because it's based on usage. Councilmember Woodruff suggested Council adopt a reserve policy for the water fund. He thought having the amount of one year's operating expenses as reserves was reasonable. Mr. Fifield encouraged the City to continue planning for capital improvements and depreciation. He noted the City did a very good job of forecasting capital needs and putting money aside for that. Mr. Fifield went on to discuss the stormwater management analysis. Mr. Fifield stated this analysis contained a lot more detail and projected future costs for stormwater management improvements then when it was discussed during the October 12`" work session. He complemented Staff on the job it did in trying to identify potential capital investment. He explained he identified two scenarios for Council to consider. Mr. Fifield explained the first scenario indicates that all annual capital investments will be paid for on a pay -as- you -go basis. It will be done by using a combination of annual operating revenue and stormwater fund reserves. This approach requires a 70 percent rate increase in 2010, no increase in 2011 and 2012, CITY OF SHORE WOOD WORK SESSION MEETING MINUTE October 26, 2009 Page 5 of 7 and a 4 percent increase thereafter. He noted that although a 70 percent increase sounds significant, the actual dollar amount increase is not that significant. He stated one way to try to make this increase more palatable is to not increase water and sanitary sewer utility rates in 2010. Mr. Fifield went on to explain the second scenario involves paying for all of the annual capital investments with internal loans. The projections for this scenario reflect the loans will be amortized over five years with an interest rate of 4 percent. The money is repaid to the fund it was borrowed from. This process continues on in perpetuity throughout the 20 -year cycle. This scenario results in an approximate 11 percent yearly increase in user charges through 2020. By then it's anticipated that the system, with funding depreciation, will have built up enough fund balance to offset rate increases. He stated there may be other ways to manage this. Although the rate increase is smaller in 2010 then in scenario 1, it does require a series of moderate rate increases over a longer period of time. Councilmember Woodruff stated the capital outlay reflects costs of approximately $86,900 for Meadowview Road and $88,600 for Nelsine Drive. The amounts in the report discussed on October 12"' were $20,000 and $16,000 respectively. The costs from the feasibility studies were approximately $89,300 and $29,500 respectively. There is no consistency in the amounts. The approximate cost for Valleywood Lane was listed as $45,000 in the October 12` report, and its $263,900 in this report. Costs for the Boulder Bridge lift station has been eliminated in the current report. He indicated he found it difficult to understand the financials because of the changes in projected capital outlay. He thought there needs to be an agreed to plan for capital outlay before there can be a meaningful discussion about the financial projections. Woodruff then stated in the projections for the first scenario the charges for service projected for 2009 year end is approximately $187,000; that amount is less then what was budgeted for 2009 and less then 2008 actual. He asked why this revenue will be less in 2009 then it was in 2008. Mr. Fifield stated assuming the specific capital projections were set aside he asked for Council's reactions to the two approaches. Councilmember Woodruff expressed concern that the 70 percent rate increase in scenario 1 is based on a capital improvement plan he is unsure of. He also doesn't like to see 11 percent increases for the next 11 years. He needs to understand if that really would be necessary. He stated WSB and Associates conducted a stormwater issues study a few years ago. The study identified a funding shortfall and funding needs. He suggested those findings be incorporated into this rate study. Director Brown explained as part of this exercise Staff made a concerted effort to provide better estimates about what stormwater improvements that would be made in conjunction with roadway improvement projects. That is the reason for the change in capital outlay amounts. The amounts will change again when the actual design work is completed. Councilmember Woodruff questioned why the Echo Road project has been advanced to 2010 from 2012. Director Brown explained the report for the October 12` meeting indicated Vine Hill Road was going to be reconstructed in 2011. The most recent report indicates a mill and overlay will be done instead. This allowed funds to be shifted. Woodruff asked if the financial projections reflect the Smithtown Lane project is delayed until 2010. Councilmember Zerby stated overall he is supports funding stormwater improvement projects through internal loans. He is not in favor of a 70 percent rate increase in 2010 needed in the pay -as- you -go scenario. Mr. Fifield went on to discuss the sanitary sewer analysis. Mr. Fifield stated the sanitary sewer analysis has changed relatively little since the October 12` work session. Capital outlay was added for years 2015 — 2029, and depreciation was adjusted accordingly. The analysis reflects transferring a $1 million dollars out of the sanitary sewer fund reserves to create a separate revolving fund for internal loans for infrastructure improvements. The projections reflect there is no rate increase in 2010, and there are modest inflationary rate increases after that. This approach achieves maintaining a minimum fund balance equal to 100 percent of annual expenditures. The cost of providing sanitary sewer services will increase at a slightly higher rate then the other two utilities because of the upcoming sewer access charge increases by Metropolitan Council for 2010 — 2012. This analysis reflects an effective use of the fund balance and minimizes the increases in user charges. Councilmember Woodruff stated the 2009 year -end projection was not adjusted to reflect the fact that the Lift Station 15 Rehabilitation project was not going to be done in 2009. The projected amount for capital outlay is $258,000. He thought the projection should be $183,000. In response to a comment from Councilmember Woodruff, Mr. Fifield explained the capital outlay amount of $174,600 in 2015 is the average of the capital outlays for 2010 — 2014. The projections beyond that reflect an increase in the average of 4 percent per year. No specific capital improvements projects have been identified for the sanitary sewer systems beyond 2014. Woodruff asked how much the $200,000 for Lift Station 15 affected the average and how often is it necessary to rehabilitate a lift station. Director Brown stated the City's history for improvements to the sanitary sewer system revolves around lift station projects. Brown explained lift station rehabs last 25 — 30 years. The City's focus has started to include more aggressive televising of sanitary sewer lines. The CIP for sanitary sewer will start to include more maintenance of these lines. He thought the use of the average for capital outlay planning is appropriate. Councilmember Woodruff stated he supports creating a revolving fund for internal loans for infrastructure improvements internal through the use of $1 million in sanitary sewer fund reserves. He CITY OF S GREW€ OD WORK SESSION MEETING MINUTES October 26, 2009 Page 7 of 7 Director Nielsen stated the City's Comprehensive Plan states that residents without City water will not be charged for water improvements. If a water project benefits from a loan from the infrastructure bank fund that would be contrary to that policy because the water project would not be paying interest. Director Burton clarified the water fund would be paying interest on the loan. The infrastructure bank fund would be used for infrastructure improvements that would be of city -wide benefit. Councilmember Woodruff stated virtually everyone pays a sanitary sewer fee. Everyone has contributed to building up the reserves, and the new fund can be used to benefit everyone. Acting Mayor Turgeon stated there was a time when General Fund monies were used for water system purposes. There was Council consensus to establish the infrastructure fund. Councilmember Woodruff asked Mr. Fifield if Northland Securities anticipated the City would be charged additional fees for what ever work remains on this project. Mr. Fifield stated the bid was a not - to- exceed amount. He and Northland Securities have no intention of billing the City for additional charges when the project is complete. He commented this meeting was not included in the original bid. Director Burton stated she believed the City has received a good value from Northland Securities on the utility rate study project. 3. ADJOURN Woodruff moved, Zerby seconded, Adjourning the City Council Work Session of October 26, 2009, at 6:48 P.M. Motion passed 4/0. RESPECTFULLY SUBMITTED Christine Freeman, Recorder Christine Lizee, Mayor ATTEST: ministrator /Clerk