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City Water Extension Policy MEMORANDUM TO: City Council FROM: Craig W. Dawson, City Administrator Larry Brown, Director of Public Works Bonnie Burton, Director of Finance Brad Nielsen, Director of Planning DATE: April 6, 2006 SUBJECT: Discussion of Policies regarding Extension of City Water for April 10, 2006, City Council Work Session At its March 13 work session, the Council had a wide-ranging discussion about provisions in the current City ordinance to extend City water and for property owners to connect to City water. The Council wished to look at alternatives to the City's use of a connection charge (currently $10,000) for the owner of a property to access City water. Re-statement of City Policy: To summarize what Council reviewed at the March 13 work session, a City water project process can be initiated by 1) 100% petition from owners of all affected properties. 2) 35% petition - from property owners whose frontage is::: 35% of the abutting streets. 3) 67% petition - from owners of at least 67 percent of the lots or parcels abutting the streets. 4) City-initiated project. In Cases 1-3, the property owners would have special assessments. In Case 4, there mayor may not be special assessments. The "67% petition" is a classification Shorewood has created for itself; it is not mentioned in State law regarding improvements or special assessments. Shorewood has used this 67% threshold to initiate a feasibility study to extend City water. According to MSA 429.031, . If there is at least a 35% petition (i.e., cases 1,2, and 3), the Council may begin the process upon approval by at least four-fifths of the Council. . The City may initiate the process, whether assessments would result or not, with approval by a simple majority of the Council. City Water Policy - Extension and Connection April 10, 2006, City Council Work Session Page 2 . If a project subsequently is ordered with special assessments by the Council, approval by at least four-fifths of the Council is required. . If there are no special assessments, the improvement may be ordered by a simple majority of the Council. FINANCING The City has a connection charge (currently $10,000) for property owners to access the City's water system. When a property owner connects to the City system, he/she pays the connection charge less any special assessment that may have been paid. For example, using the current $10,000 connection charge: 1) If a property has been assessed $7,500 for water improvements, the owner would pay $2,500 to connect to the City's system ($10,000 minus $7,500 = $2,500). 2) If a property has not been assessed anything for water, the property owner pays the full $10,000 to connect to the City's system. 3) If a property had been assessed any amount over $10,000 for water improvements, the owner would pay nothing additional to connect to the City's water system. . The owner would still need to pay for a water line to be placed from his/her building to the stub for the City's water in the right-of-way. The connection charge is intended to recover costs associated with the water system beyond the watermain placed under the street. These components include wells, wellhouse structures, treatment systems and controls, water towers, trunk watermains, etc., that are part of the overall City water system. Cities commonly use a uniform connection charge toward these costs. Council raised concerns about equity in its discussion of this policy. The costs of special assessments may vary, and it was thought appropriate for owners to pay the benefit (i.e., the increase in the value) to their properties. Several councilmembers believed that all property owners should pay the same to the overall water system beyond the assessment. They had questions about equity, in that this cost may vary due to differences between the connection charge and the assessment. In the examples above, (1) pays $2,500; (2) pays $10,000; and (3) pays nothing toward the City system. Limitations on Special Assessments: As a point of law in Minnesota, a special assessment levied shall not exceed the benefit-the increase in the value-to a property. In cases where costs exceed what can be assessed, those costs would be borne by the Water Fund (e.g., using accumulated connection charges from other projects, or including them in water rates), or the Council may determine the project not to be feasible and forgo it. If all property owners in a project wanted City water even though the costs exceeded what could be assessed, they could all agree to the higher amount-and not to challenge the assessment-and the project could proceed. City Water Policy Extension and Connection April 10, 2006, City Council Work Session Page 3 Preliminary Information regarding Value of Benefit: Staff has contacted several property appraisers to get a reading on the dollar value of benefit to properties having City water available. None was willing or able to provide a general range of value that would be typical for properties having City water available, and none would hazard an amount for Shorewood. A more detailed analysis and statement of determination can be engaged if Council so chooses. Uniform Connection Charges: Staff has reviewed a survey of several area communities of varying sizes that have uniform connection charges separate from the cost of installing watermains. These charges range from $1,600 in Wayzata to $5,000 in Chanhassen and Victoria. It is possible, though difficult, to establish the cost of Shorewood's system improvements and convert them into present dollars, and determine how much of those costs in present dollars have been collected over the years in connection fees. There will also be costs for future capital improvements to the system. It would appear reasonable that if a uniform connection charge (in addition to a special assessment) were established, that it be an amount comparable to other cities'. The City currently has 1,265 water customers (including ones in Deephaven). There are approximately 227 potential customers who have water in their streets, but have not connected to the City system. Approximately 93 units could be served if water is extended to their areas in conjunction with the street reconstruction schedule in the current CIP. Assuming a uniform connection charge of $3,000, approximately $960,000 could be received. Eauity Issues, Retrospectivelv: Council discussion at the March 13 work session explored assessing for water improvements and establishing a uniform connection charge, with some comments that this approach may have greater equity than the City's current policy. Staffhas identified several cases where equity issues could arise by changing the policy: a) There are several instances where City watermains have been installed by a private developer (with the costs then passed on to residents who purchased the lots), and owners of property along the line did not contribute to its construction. · From the Shorewood Village Shopping Center to the Minnetonka Drive/County Road 19 intersection. The shopping center owner and the new Linden Hills subdivision paid .for the cost of the installation in 2003; the residents along Minnetonka Drive did not. . From Boulder Bridge to Shorewood Oaks. The developer (actually, the lots in Shorewood Oaks) paid the full cost. Very few of the properties in the intervening 3,000 feet contributed to the cost of installation at the time (mid- 1980s), although there have been several connections since. · Along the southerly portion of Eureka Road, in conjunction with development of Shorewood Pond (2000-0 I). · Along Excelsior Boulevard, in conjunction with the Barrington development (2004). · Part of the W oodhaven area, in conjunction with development by JMS Development Company. City Water Policy - Extension and Connection April 10, 2006, City Council Work Session Page 4 In these situations, property owners would currently pay the full connection charge ($10,000), which would go toward the City system. In the policy change under consideration, they would pay only the uniform connection charge, and thus pay far less than other properties that have connected to City water. b) The connection of the Amesbury and Southeast Area water systems is ready to go immediately. Thus far and within current City policy, the project is considered to be an improvement to the City system and not to be assessed. Today, property owners would pay the full connection charge at time of hook-up. For this project, the same issues would arise as in (a) above with the policy change under consideration. If the project were to proceed immediately, there would be no assessments. Unlike the examples in (a) above, ratepayers-not new development- would pick up the full cost. The adjoining property owners would then pay the uniform connection charge in effect at the time of hook-up. The watermain for the interconnection will have a bigger pipe and greater scope of construction than would be typical to serve residential properties. In these situations, it is a common practice to determine costs attributable to the "oversizing" and have them assumed by the Water Utility. The rest is subject to assessment. If Council were to change the policy and follow a 429 improvement process for potential assessments with this project, it could not order the improvement and award a contract for the work prior to holding a public hearing. The developer of the Parkview subdivision has installed watermain in the subdivision under the premise that the City would extend City water this year. c) Some properties have been assessed for City water, but have not vet connected and paid the remainder of the charge. Assessments of $5,000 have been levied for most properties along Smithtown Road, Eureka Road north of Smithtown Road, and along the western end of Edgewood Road. If a uniform connection charge in any amount less than $5,000 were established, these properties would not pay the full $10,000 currently in effect. Statutory Authority for Current City Policy: The basis for the City's current connection charge policy is allowed in MSA. 444.075, Subd. 3.(a). The City may establish "just and equitable charges for the use and for the availability of the facilities and the connection with them, ..." Based upon analysis done several years ago, the $10,000 connection charge was determined to meet the 'just and equitable" test. It would be appropriate to review this amount periodically. Policv Considerations of Current Policy and Policy under Consideration: The City's approach for extension of and connection to City water is unique in that it is followed within a great deal of existing development, and is generally incremental and based largely on voluntary connection. Within the current policy, City Water Policy - Extension and Connection April 1 0, 2006, City Council Work Session Page 5 . The connection charge is the same. . The connection charge is generally predictable, and property owners can plan accordingly. . The connection charge meets statutory requirements. . The connection charge provides a benchmark for economic feasibility. . The policy of giving credit for any assessments paid against the connection charge has administrative difficulties (but is not insurmountable). . The connection charge results in variable amounts paid by individual property owners to the larger City system. With the policy under consideration, . Each property pays the same uniform connection charge for the larger City system. . There is administrative ease in having separate assessment and connection charges. . Total costs per property are variable-project assessment plus uniform connection charge. . Total costs per property may be more or less than the City's current connection charge. . There is no consistent amount to use as a benchmark for determining when a development is required to connect to City water. . Total costs resulting in less than City's historic connection charges may not be "equitable". POLICY ON EXTENSION ReQuired Extension: Section 903.15 of the City Code addresses cases where hook-up to the City water system is mandatory. They include properties used for commercial purposes and multiple- family residential purposes (4 or more dwelling units). Single-family residential developments of more than three lots must also COlmect to the municipal system, at the developer's expense, based upon the City Engineer's determination that the connection is feasible. This Code section specifically states that "[t]he connection is considered feasible if the cost of the providing water to the property line of the lots within the development does not exceed the connection charges ... times the number oflots in the development." Voluntary Extension: Section 903.04, Subd. 3.d., provides that "[f]or properties not presently served by municipal water service, developers or property owners who wish to extend water service to their property line, shall pay for the cost of the improvement or the water connection charge, whichever is greater." Petition Process: The City Council has practiced a policy that it does not initiate the improvement process unless a petition from at least 67% of the affected property owners is submitted. In Coniunction with Other Proiects: During its 2005 discussions on the water system, Council articulated a policy that the City would perform a feasibility study when other improvements, especially roadway reconstruction, were undertaken. City Water Policy Extension and Connection April 1 0, 2006, City Council Work Session Page 6 The water project would then be a City-initiated one. The Council should discuss whether it would proceed with installation of water (assuming it's feasible): . when, after presenting the information to the affected property owners, 67% of them indicate approval (by petition or other means), or . as a City improvement, possibly with special assessments, and without petition of the affected property owners, or . under some other basis. New Connection Charge Policv? Several projects are ready to go this year-notably the interconnection ofthe Amesbury and Southeast Area systems, and the street reconstruction of the Wedgewood/Mallard/Teal neighborhood streets. Delay on any project will very likely result in higher costs as contractors' schedules are filled this year or as inf1ation occurs into next year. The Council could consider a change in the connection charge policy whereby, a) The current connection charge remains in place for the balance of2006. All properties adjacent to City water as of December 31, 2006, that have not connected to the City water system, shall pay the current ($10,000) connection charge when they do connect. b) All properties to which water is extended beginning January 1,2007, shall be assessed for the benefit to their propeliies (unless all affected owners of property in a project area agree to pay more). The new uniform connection charge shall be paid at the time that the property is cOlmected to City water. WEDGEWOOD/MALLARD/TEAL AREA Council has stated its expectation that residents in this improvement project area will be provided complete and full y accurate information regarding the process to consider extending City water to this neighborhood, the costs related to the City system they can expect to incur, and the duration and terms available for financing them. Staffwill follow up with this information promptly after Council has determined what, if any, changes will be made to the current policy.