10.2. SR 11-19-2012Cty of
River
REQUEST FOR ACTION
TO
ITEM NUMBER
City Council
" 10.2
AGENDA SECTION
MEETING DATE
PREPARED BY
Administration
November 19, 2012
Justin Femrite, P.E., City Engineer
ITEM DESCRIPTION
REVIEWED By
Pavement Management Program Funding Options
Tim Simon, Finance Director
REVIEWED BY
Cal Portner, City Administrator
ACTION REQUESTED
Discuss and consider alternative approaches to funding the city pavement management program.
BACKGROUND /DISCUSSION
At the October 8, 2012, City Council Work Session, staff gave an overview of the pavement management
program and funding options. The overview explained the program methodology, highlighted existing
pavement conditions, and discussed the trending of city street maintenance over the next 40 years. Staff
also presented some pros and cons of funding the pavement management program with a fee or general
tax approach instead of a private property assessment approach. Council direction was to come back to a
future work session further detailing a general tax approach verses a franchise fee approach. An
underlying question to the discussion was how to make a change in policy fair for those property owners
that have recently paid a street improvement assessment.
As detailed at the July work session, 81% of Elk River's streets were constructed or rehabilitated within
the last 20 years. All of these improvements have been paid for by residents, either through special
assessments by property owners fronting the improvements or by new homebuyers through the purchase
of their home or lot. Ideally, the most favorable time to consider a different funding option for a
pavement management program is when the entire system is 100% new or 100% deteriorated. Neither
of these scenarios is likely, but with 81 % of our streets less than 20 years old, this may be as close as we
can get to a new system. The system's age and the continual challenges associated with the Minn. Stat.
429 assessment process make it an opportune time to consider alternative funding for the program.
Analysis of the pavement management program details the need to invest approximately $4.5 million for
rehabilitation every other year to sustain the current average pavement condition or $2.25 million
annually. Our current Municipal State Aid allocation dedicated to construction /reconstruction is
$750,000 per year, which leaves a $1.5 million yearly shortfall. The two long -term alternative approaches
previously discussed include a general tax increase or implementation of a franchise fee. Both of these
options, if implemented fully, would eliminate need to assess costs directly to the adjacent property
owners.
General Tax verses Franchise Fee
The first option is a general (special) tax levy against all properties in the city. Under this approach, we
would propose to generate the $1.5 million through the collection of a tax over all properties in the city.
Through this approach, the highest valued properties end up paying the largest share of the costs.
PO N ER E 9 e r
NATURE
Properties utilizing Tax Abatement or located in TIF Districts would not contribute to the program
funding as well as benefitting properties exempt from property taxes such as churches, schools and
nonprofits. The $1.5 million dollar levy would be added as a line item labeled pavement management or
something to that effect.
The second option is the implementation of a franchise fee. A $1.5 million franchise fee would be
charged to the power and gas service providers within the city. The utility providers would then pass this
cost on to their customers as a fee listed on their monthly bill. The flat fee is a tax increase and we would
propose to inform residents of the pavement management program funding plan and its benefits. St.
Louis Park generates revenue for its pavement management program through this option.
A franchise fee is the preferred approach based on public input and the benefits over the general tax
option, by other communities who have looked into alternative funding of their programs.
A breakdown of the estimated taxes verses a franchise fee payable by different value homes and
commercial /industrial properties is depicted in the following graphic. The graphic shows what a
monthly payment would be from each property in order to generate $1.5 million dollars in revenue.
*The actual tax levy impacts are based on current net tax capazty for 2093
The numbers presented for the franchise fee are based on estimated total accounts as received from the
Elk River Municipal Utilities. The final number of accounts and amount of the fee would need to be
refined through the implementation process with all affected utility providers.
Each approach described above has positives and negatives. We have tabulated staffs opinions of
positives and negatives of each option below:
Special Levy Tax -based Option
Pros
1) Simple transparent collection of revenue through general tax process.
2) Recognized taxing process understood by the public.
Cons
1) Larger levy and higher dollar amount on tax statements.
2) Unfairly distributes higher costs to higher valued properties.
3) Does not collect money from tax exempt street users.
4) Tax amount could only be adjusted annually and would vary based on property valuations.
p I I I R I I I
NATURE
Franchise Fee Option
Pros
1) No increase to the tax levy.
2) Stable revenue stream that can be readily adjusted anytime of the year.
3) Collects from all street users including schools and nonprofits who pay 429 assessments.
4) Smaller monthly fees instead of single larger amount on tax statement or assessment.
5) Collects money from renters, the actual street users, not just the property owners.
Cons
1) Less transparency in how the revenue is collected.
2) Would require public outreach to describe the fee and process.
Through staff's research into the options, the franchise fee has emerged as the most positive approach to
funding of a long -term pavement management program.
If it is the desire of the Council to move forward with a franchise fee, the next step would be to draft and
review a franchise ordinance and authorize the holding of a public hearing. Communication with the
public would be integral through this process. The process would culminate with the adoption of an
ordinance and notification made to the utility companies. The entire process for establishing a franchise
fee would take between 4 to 6 months.
Past Street Assessments
The largest challenge identified in making a funding transition is how we make it fair to property owners
that were recently charged a street assessment. There currently are property owners who are paying off
assessments. At this time, we are collecting payments on over $1.6 million of outstanding street
assessments. After discussions with other communities on how they have handled or propose to handle
this issue, we found that we are further ahead in this process than most others and we determined that
due to the timing and condition of our pavements it is difficult to make it any fairer for residents.
As alluded to in the opening paragraphs of this memo, all of the costs of the streets in Elk River have
been born by the residents. Either it was through the purchase of their property, the payment of an
assessment, or general property tax obligation.
A case can be made that those owners who purchased a new home, call them Owners A, have paid more
for the streets in Elk River than a resident, Owner B, who purchased an existing home and was assessed
for a street upgrade. In addition to Owner A paying for 100% of the road in front of their house, they
have been paying their prorated share of the 66% general city cost of the other reconstruction projects.
Owner B has paid 33% of the costs associated with their street in front of their home through an
assessment and then their prorated share of the 66% general city cost of the project.
Because of the system age and all residents having previously contributed to the system through either
the purchase of their lot or a special assessment, staff feels it is a fair approach to move forward with a
change in policy. The following are some ideas for consideration of the Council:
1. Charge all properties in the city a franchise fee starting July 2012. Refund about $1.6 million in
outstanding unpaid street assessments. No previously paid portions of any street assessments
would be refunded.
ParIn10 1
'NATUR
2. Charge all properties in the city a franchise fee starting July 2012. In consideration of those
property owners who are still paying a street assessment, offer a yearly rebate to refund the
amount paid for the franchise fee by that property for the year. This option would not refund
any assessment but would give consideration to those who have recently been assessed. Because
the franchise fee will be collected by a third -party utility company, it is impossible to administer a
program that would not charge a franchise fee for select properties that are still paying on
assessments.
3. Notice the community of the change in policy to establish a franchise fee. Downsize the
pavement management program for the next 5 years to only complete overlay and preventative
maintenance projects (no reconstructions). Finance these improvements out of the existing
Street Improvement reserve fund and do not assess the improvements. Begin collecting the
franchise fee from all properties in the city in 2017. All projects moving forward would be
reconstructed without street assessments.
Staff will be prepared to review the above - discussed information at the work session and take direction
on the preferred funding option.
FINANCIAL IMPACT
There is no financial impact associated with the discussion of this item.
ATTACHMENTS
None.
Action Motion by Second by Vote
Follow Up
P 0 N E A E 0 B Y
NATUREI
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