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ERMUSR OTHER BUSINESS 03-18-2003 Ilk River Municipal Utilities 322 King Avenue phone: 763.441.2020 Elk River,MN 55330 Fax:763.441.8099 March 13, 2003 To: Elk River Municipal Utilities Commission James Tralle John Dietz Jerry Takle From: Bryan C. Adams Subject: Miscellaneous Issues Enclosed is the packet for the March 18, 2003, commission meeting at 4:00 p.m. This will be the first meeting for our newly appointed utility commissioner, Jerry Takle. Welcome Jerry. Steve McDonald of ABDO, ABDO & EICK, completed the ERMU annual audit March 6`h & 7`h They will be at our April meeting to present this annual audit. Pat Hemza again did a marvelous job in preparing all of the necessary information for the auditors. Waste Management, our partners in the LFG projects, is also feeling the effects of the economy turn-down. Attached is an intemet article explaining their cut in jobs. On February 26-28, MMUA had it's 2003 Winter Legislative Meeting. This year we emphasized to our legislators the following three issues: Conservation Improvement Programs (CIP) & Renewable Energy Service Territory Municipal Telecommunications Attached, more for the benefit of Jerry, are the following MMUA position papers. These papers are also given to our state and federal legislators. The Right of Municipal Electric Utilities to Grow With Their Cities Municipal Telecommunications Deregulation and the Electric Utility Industry Nuclear Waste Storage Joint Ventures Why Public Power? Conservation Improvement Programs Renewable Energy State budget cuts continue to be the major topic as it should be. Attached is the following information for your review: • Pat Klaer's memo dated 2-24-03 to the City Council. • LMC's response to proposed wage freeze for public employees in discussing this issue with our state legislators, some legislators think it is a done deal while others say it will never happen. Our communication to the legislative leader- ship is that we are willing to step up to the line if it will help the problem, but we feel it is a local issue, not a state issue. The week of 3-10-03, we purchased and cut over approximately 210 customers from Connexus Energy. Connexus Energy also offers many special electric rates that we do not offer. We are currently reviewing these special rates, and will present our findings and recommendations to this commission at the next meeting. The Cretex Water Tower was scheduled to be removed on 8-12-03, but has been delayed a week due to the weather. I inspected the Jackson Street Tower and it appears to be in fairly good shape. The roof ladder is in need of repair. The interior of the tank and the roof will be inspected more thoroughly when the roof ladder repair is done. Subject: FYI Date: Thu, 20 Feb 2003 08:28:06 -0600 From: "Peter J. Weis" <pjweis @tvjohn.com> To: "Doug Tholo" <dtholo @hrgreen.com>, "Bryan Adams" <bryada@gwest.net> 7r- Gaily Reporter Main THE D1 ,s ` r�,S, i I A1 �■ J Construction News Editorials CONSTRUCTION NEWS AvantGo Channel Special Sections Printer Fri HardHat Mail Interne``inks Waste Management to cut 700 jobs Business Calendar Classifieds Feb.20,2003 Public Notices Sales Leads Houston (AP)-Waste Management Inc.,the nation's largest trash-hauling company, s Vendor Index Tuesday it is cutting 700 full-time jobs and 270 contract positions as it scales down Noi Site Search American operations. Advertising Subscriptions The Houston-based company disclosed the job cuts as it reported its fourth-quarter pri climbed 49 percent to $236 million, or 39 cents a share,from $158 million, or 25 cent Contact us final quarter of 2001. Revenue was flat at$2.8 billion. The results beat Wall Street forecasts for earnings of 34 cents a share. For all of 2002, Waste Management earned $822 million, or$1.33 a share, up from $503 7 e TOI million, or 80 cents a share, in 2001. Revenues Mentioned in this Article dipped to$11.1 billion from $11.3 billion in 2001. Waste Management Inc. The company,which sold international Contact Resources operations after running into financial problems in the late 1990s,said Tuesday the E-mail this Article to a Frien job reductions will come from reducing its Send an e-mail to the Editor market areas to 66 from 91 across the United States and Canada. THIS IS NOT THE END 4E STORY! About 60 of the full-time job losses and all of POST YOIIt the contract losses will come at the company's ° PS Houston headquarters. The other 640 jobs will be cut in the field,the company said in a news release. The company employed 57,000 people at the end of 2001, according to its Web site. Waste Management estimates it will take a $23 million charge related to the work-fort reduction. It expects to save$42 million this year as a result of the cuts and $50 million 1 of 2 2/21/03 2:06 PM FYI annual basis. The company also said its 2003 earnings would fall at the low end of Wall Street's tart range of$1.40 to$1.50 per share. Waste Management said the sluggish economy was creating little or no improvement i commercial and industrial waste volumes.Any revenue growth will come from acquisit the company said. I Construction News 1 Editorials I AvantGo Channel I Special Sections I HardHat Mail I 1 Internet Links I Business Calendar I Classifieds I Public Notices 1 Sales Leads 1 1 Vendor Index I Site Search I Advertising I Subscriptions I Contact Us I Main I @ 2003 Daily Reporter Publishing Co.,All Rights Reserved. 1 Terms&Conditions of Use I Privacy Statement I SUBSCRIBE TODAY! 2 oft 2/21/03 2:06 PM MASI IA MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800.422.01 19(MN) • Fax 763.551.0459 The Right of Municipal Electric Utilities to Grow With Their Cities Since the inception of the electric utility industry, Minnesota's municipal electric utilities have had the right to serve all customers within the borders of their cities. This right includes the ability of municipals to extend electric service to customers in annexed areas. Municipal utilities' right to grow with their cities: • Strengthens a city enterprise providing an essential service to all city residents. • Provides a municipal utility's only real source of growth. • Ensures that city residents will be served by a utility they already own. • Ensures consistent, uniform service and price throughout the city. This policy allows customers the maximum control of their utility and usually results in enhanced service to the customer. Finally, Minnesota Law recognizes the fundamental truth that cities grow because families and businesses want city services and other benefits of being located within the city. Cities are the engines of economic growth, and they work hard to attract development. It is only fair that cities should provide services in annexed areas as growth occurs. Municipal utilities' long-standing right to grow with their cities was affirmed in the 1974 Minnesota law establishing service territories for all the state's electric utilities. The 1974 law was the result of a landmark compromise between investor owned (IOU's), cooperative, and municipal utilities. The law gave co-ops a market guarantee for their planned $1 billion Coal Creek project and it preserved the right of municipal utilities to grow with their cities. The cooperatives enthusiastically supported the passage of this legislation. Since its passage, however, they have worked to secure ever larger compensation awards in cases brought before the Minnesota Public Utilities Commission (MPUC) and the courts. The 1974 law has worked very well for the electric cooperatives. It preserved the co-ops' customer base in the 1980's when they were troubled with rising costs and high rates. MPUC decisions concerning compensation paid for service territory purchased by a municipal utility have resulted in increasing awards to co-ops. Today, cooperatives not only receive full reimbursement for facilities, payment for any reintegration costs, and payment for lost revenue from existing customers; they are even provided compensation for future customers not in existence at the time that the municipal utility begins serving the area. Compensation paid to cooperatives now amounts to more than $16 million. After many years of court cases, MPUC decisions, and individual agreements, and more than $2 million in legal fees, the service territory law is now well understood. Many municipal utilities and cooperatives have even signed territorial agreements and are working together. Now that the work has been done and a body of precedent has been established, this is no time to open up this Pandora's box. Cooperatives have been afforded many new growth opportunities because of the service territory law and the compromise that made it possible. They have retained huge service territories within which they have cultivated substantial growth, particularly in the Twin Cities metro area and around many non-public power cities in greater Minnesota. This has resulted in kilowatt-hour sales and new customer acquisition growth rates for cooperatives that are higher than those of other types of utilities in the state. This situation has also benefited cooperatives by giving them new urban area that is five times the size of the area absorbed by municipal electric utilities after annexation. In the past few years, cooperatives have been urging that municipal utilities be denied their right to grow with their city boundaries. As it became apparent that municipal utilities would not forfeit their rights,the co-ops have pursued increasingly extreme positions in negotiations. At various times, the cooperatives have proposed increasing compensation amounts or lengthening payment periods for lost revenue. These new proposals have been excessive, without supporting evidence, and far beyond what the co- ops have already gained through the generous precedents established through the MPUC or the courts. It has become obvious that the co-ops are attempting to use these new proposals as ploys to obstruct municipal growth as much as possible. Municipal utilities are also concerned about efforts to use state law governing such issues as annexation and land use planning as a vehicle for dealing with the service territory issue before the legislature. Any effort to link proposed changes in annexation law to changes in statutory language protecting municipal utilities' right to grow with their cities should be defeated. The landmark service territory law of 1974 has allowed Minnesota's electric cooperatives to protect their power plant investments, to greatly expand their business, and to secure generous compensation for municipal acquisitions. This law was passed as a result of a compromise with the municipal utilities, whose only requirement was that they be allowed to grow with their cities. The co-ops now want to end this arrangement without proving a need to change. It's time they abided by the compromise they wanted in the first place. It's time they kept their word. Municipal utilities are willing to work to simplify the current process and make the law easier to administer for all parties. We are not willing to forego the basic right that we have had since the inception of the industry—the right to grow with our cities. Minnesota Municipal Utilities Association February 2003 NINS11111 111171,111 MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12905 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800 422 0119(MN( • Fax 763.551.0459 Municipal Telecommunications Few would argue that a modem telecommunications infrastructure is key to economic growth in the 21St century. Yet, many areas of our state are without this infrastructure, which is necessary to keep a community economically viable. The state's municipal electric utilities and small and rural telecom providers share much the same perspective on broadband deployment in Minnesota, a fact that emerged during testimony before the House Regulated Industries Committee on Jan. 29, 2003. One member of the Minnesota Association of Rural Telecos testified that his company began offering DSL three years ago because a local Polaris dealer needed it to remain in business. The company didn't do a business plan. It made the investment because broadband access was vital for the community. But small, local telecos are not present in all parts of the state. And they have only have so much money to invest in broadband deployment. Another small telephone company manager told the Regulated Industries Committee in an Oct. 30, 2001 hearing that broadband deployment in Greater Minnesota was cost prohibitive without subsidization. Minnesota's dominant local exchange carrier—Qwest—reported a preliminary net loss of $35.9 billion in 2002 and a net loss of$4.8 billion in 2001. The company testified before the Minnesota Public Utilities Commission Feb. 4 that it did not view DSL deployment in Greater Minnesota as a good business decision. Cities without broadband access should not be relegated to the economic backwaters. The Legislature can allow cities to better control their own economic destiny by: • Removing barriers to entry for municipal telecommunications efforts. • Giving municipals specific authority to enter into joint telecommunications ventures with other entities. • Giving cities an opportunity to bid on local exchanges, if they are to be sold. Remove barriers to entry. Like many local phone companies, municipals view broadband access as a service necessary to ensure economic viability. To foster broadband access, we must be allowed a reasonable opportunity to provide telecommunications services ourselves. That means reducing the 65 percent super- majority referendum requirement to provide phone service contained in current state law with municipal authority upon a vote of the city council. Removing the super-majority to provide phone service requirement will give cities leverage with incumbent telephone (and cable) companies, because the companies will realize that if they don't move to update service,the updated service might be provided without them. City council people are elected to make decisions for the city,just as state legislators are elected to make decisions for the state. The referendum requirement is a barrier to entry, given prohibitions on municipal advocacy on ballot issues. Joint ventures make sense.Municipal utilities have authority to enter into joint ventures with other entities for the provision of electric service. It is a logical extension to include telecommunications under the municipal joint venture authority. Municipal utilities are perfect partners for local telephone companies in the provision of broadband access in underserved areas. Cooperation between municipal utilities and telephone companies could result in a sharp reduction in the costs of making and delivering broadband services. It's a synergistic situation, where cooperation between the two could attract more customers for both. Joint ventures may make sense in many instances,but the fact remains that a city must have a willing partner to joint venture. Gladly, some independent phone companies appreciate this fact. According to at least one telecom company executive, municipal utilities are attractive business partners because: • Municipal utilities are vitally interested in their communities. • They have infrastructure that is thoroughly and accurately mapped (which translates into cost savings). • They understand construction. • They have been delivering sales and service functions for years. • Municipal funding can lower the cost of construction—Municipals can get it done. The local service option. In early 1999, US West wrote to city officials in its service areas advising them the company had decided to sell selected telephone properties in Minnesota"to assure that all of Minnesota customers have a high quality of telecommunication service." That sale fell through and many Minnesota customers are still waiting for high quality service. If the company, now known as Qwest, decides to reduce its staggering debt burden in part by selling exchanges, it should be required to offer them individually to local interests, including cities and municipal utilities. Conclusion. Cities should be able to offer all telecom services without barriers. The contention that public bodies shouldn't provide a service offered by private enterprise is disingenuous, as in many areas of the state the private sector is unable or unwilling to provide these services. In these localities, municipalities may be the only viable means of introducing such services. Like the small, rural telecos, municipals agree broadband access is crucial to a city's economic future. Minnesota Municipal Utilities Association February 2003 to MINNESOTA MuMOPAL unuTIES A55004TION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763 551 1230 • 800 422 0119 IMN) • Fax 763.551.0459 Deregulation and the Electric Utility Industry The federal Energy Policy Act of 1992 was intended to foster the development of a competitive wholesale market. In the wake of its passage, however, a number of interest groups, particularly those representing very large electric users, called for deregulating the industry at the retail level. Deregulation was seen as a gateway to lower rates in high cost states,particularly on the East and West coasts. In the latter part of the 1990s a number of states began implementing deregulation initiatives. Public power systems in Minnesota and throughout the United States urged policy makers to exercise caution and move very carefully in considering the potential transition to deregulation at the retail level. We noted that there are a number of factors that make the electric utility system unique, and the transition to a market-based retail system extremely complex. Electricity is a real-time product, with no viable means of storage. The exact amount being consumed in an instant must be produced in that instant. Failure to maintain this delicate balance can lead to blackouts and brownouts. Because there is no substitute for electricity, prices in times of shortage quickly skyrocket to ten, one hundred, or even 1,000 times the normal level. Capacity constraints and flow problems often prevent the movement of electric energy from areas where it is plentiful to areas where it is needed. The extreme complexity of the system provides ample opportunity for market manipulation,price gouging, and fraud. Fortunately, Minnesota has acted prudently and taken a cautious approach toward deregulation. Experience has shown this to be a wise course. Recent events have demonstrated that the drawbacks of retail deregulation can far outweigh the benefits. California's ill-fated experiment with deregulation cost consumers and businesses billions of dollars and led to blackouts and brownouts. Enron and other power marketers manipulated markets to deceive regulators, drive up prices, and extract huge profits. Energy trading and marketing companies lost 90 percent of their value in the last year. In 2002 Standard &Poor's downgraded the debt of 182 private power companies while upgrading only 15. California has suspended retail access; Arkansas, Montana,Nevada,New Mexico, and Oklahoma have delayed their transition to deregulation. It is abundantly clear that electric deregulation is an idea whose time has not yet come. Minnesota has wisely recognized the need to develop a robust transmission system and a healthy and fully functional wholesale electricity market before considering the leap to retail deregulation. Implementing deregulation in a period of shortage would likely cause prices to go up rather than down. For the foreseeable future Minnesota should continue to concentrate on strengthening the wholesale power market. Any attempts to implement deregulation on a piecemeal basis, such as pilot programs, initiatives limited to large customers, or proposals that would introduce deregulation in the guise of advancing renewables, should be recognized for what they are— attempts to start Minnesota down a slippery slope that can lead to shortages, price hikes and reliability problems that our consumers and businesses can ill afford. Minnesota Municipal Utilities Association February 2003 �%%%VW% MINNESOTA MUNICIPAL a nuiiES ASSOCIATION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800 422 0119(MN) • Fax 763.551.0459 Nuclear Waste Storage A 1994 Minnesota law allowed Northern States Power Company (now Xcel Energy) to store a limited amount of spent nuclear fuel in storage casks at its Prairie Island nuclear electric generating plant. If additional cask storage is not authorized, it may be necessary to shut down the Prairie Island plant in 2007 and the Monticello nuclear plant in 2010. H.F.332/S.F. 292 would allow additional dry cask storage at both Prairie Island and Monticello sufficient to allow both plants to continue to operate until the end of their federal licenses. The 1,100-megawatt Prairie Island plant and the 600 megawatt Monticello plant represent a substantial portion of Minnesota's total generating capacity, and are important components of the state's reliable and relatively low-cost electricity system. The future of these plants must be addressed while there is still time to develop alternate resources if necessary. While we recognize that disposal of nuclear waste remains a difficult and unresolved issue, we also recognize that continued operation of the Prairie Island and Monticello plants offers significant advantages over other likely resource options in terms of cost, reliability, and air emissions. Replacing these plants with new natural gas or coal-fired generation could have a significant impact on wholesale power costs in the region. In a time of state budget deficits, a struggling economy, and stagnant or declining consumer purchasing power, we believe that Minnesota should be particularly concerned about maintaining a reliable and low-cost supply of electric energy. Given the fact that dry cask storage is already in place and seems to be working, we believe that the benefits of shutting down the nuclear plants before the end of their useful lives should be weighed very carefully against the costs. The two nuclear plants are owned by a single entity, Xcel Energy, which bears full responsibility for their operations. The 1994 law included significant mandates for the development of renewable energy resources as a condition of allowing dry cask storage. If any additional mandates are imposed as a condition of allowing additional dry cask storage, those mandates should apply only to the owner of the plants. In summary, we believe that the legislature should address the future of the Prairie Island and Monticello plants in a timely manner, so that alternative resources can be developed and brought on line if the nuclear plants are to be phased out. The waste storage issue should be carefully balanced against the benefits the plants provide in terms of cost, reliability, and air emissions. In the event that any mandates are imposed as a condition of allowing additional dry cask storage at Prairie Island and Monticello, those mandates should apply only to the entity that owns and operates the plants. Minnesota Municipal Utilities Association February 2003 rriiifl iiiiu MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800.422.01 19(MN) • Fax 763.551.0459 Joint Ventures A significant number of Minnesota cities have operated retail natural gas utilities for many years. In recent years, a number of cities have installed new natural gas systems in their communities and have begun to provide this vital energy to their customers. It appears that there may be opportunities for joint ventures between cities and other public and private entities in the distribution of natural gas. There is also a pressing need for cities to become more active in providing telecommunications services. The 2001 omnibus energy bill contains language that allows cities to participate in joint ventures for providing electric service. Late in the legislative process natural gas and telecommunications were deleted from the legislation. Allowing municipal utilities to participate in joint ventures for providing gas and telecommunications services will likely result in greater economies of scale and enhanced service to customers. Therefore, we support legislation that would expand eligible joint ventures for municipal utilities to include natural gas and telecommunications. Minnesota Municipal Utilities Association February 2003 %%p MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800 422 0119(MN) • Fax 763.551.0459 Why Public Power? 126 Minnesota cities benefit from having a locally owned and locally operated municipal electric utility. Thirty-one cities have a municipal natural gas system. Fifty of our eighty-seven county seats are served by a municipal electric or gas system. A not-for- profit municipal electric or gas utility is a tremendous asset in these uncertain times. Here are some of the reasons why: • We have great service. We're part of the community and our policy makers, managers and workers are part of the community. Our crews are always on hand in the event of emergency. You don't need to call an 800 number to talk to us. • We're locally regulated. Members of the community who live in the community set rates and service practices. If you have a problem, you know who to talk to. • We're owned by our customers. There is no tension between the interests of customers and the interests of stockholders. Our focus is Main Street, not Wall Street. We work for you. • We're not in it for the money. Municipal utilities are not-for-profit and therefore operated in the public interest. Our goal is long-term community benefit, not short-term gain. We work hard to save you money. • We're the yardstick for the industry. For generations, public power systems have set standards for rates and service that other utilities have had to meet. • We'll be there. Many of Minnesota's municipal electric utilities have served their communities for more than a hundred years. In an era when new competitors come and go faster that we can learn their names, you can count on us. We will be there when you need us. • We're Public Power. We're here for you! Minnesota Municipal Utilities Association February 2003 N1 ANI�.�/ ,11101 MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12805 Highway S5 • Suite 212 • Plymouth, MN 55441-3859 • 763.551.1230 • 800.422.01 19(MN) • Fax 763.551.0459 Conservation Improvement Programs Since 1993, Minnesota law has required municipal electric utilities to spend 1% of their gross revenues on conservation initiatives known as conservation improvement programs (CIP). In 2001 the Minnesota State Legislature expanded municipal involvement in these programs by increasing CIP spending on electric operations to 1.5% of gross revenues, gradually reducing the amount of spending on load management that could be used to meet municipal CIP spending requirements. The new law also imposed new CIP reporting requirements on both electric and gas municipal operations. Through MMUA, municipal electric utilities launched a major effort to ensure that public power systems had the tools and information necessary to comply with the new mandates. This effort: • Educated municipal utilities regarding the new CIP requirements and the need to be able to demonstrate compliance. • Provided liaison with the Department of Commerce on municipal CIP matters; • Raised more than $100,000 to fund the development of new programs an program materials specifically tailored to help municipal electric utilities meet the new CIP requirements. • Developed a CIP primer to help municipal utilities understand the new requirements and how to comply with them. • Developed nine residential and commercial programs to be used by municipal electric utilities in meeting the new CIP mandate. Program materials include technical data, recommended rebate or assistance levels, forms, marketing materials and tracking spreadsheets. It will be several years before the law is fully effective and its impact can be evaluated. It would be inadvisable to make new CIP changes in the law until we know how well it is working. MMUA will resist efforts to impose additional CIP spending requirements or mandate additional CIP responsibilities on municipal electric utilities, particularly before municipals have had the opportunity to evaluate the impact of the current CIP program. MMUA will resist any effort to transfer control of municipal CIP programs away from local communities. However, it is already apparent that a "one size fits all" approach to CIP reporting is not practicable. For example, very small municipal electric utilities are finding that the Milli, MINNESOTA MUNICIPAL UTILITIES ASSOCIATION 12805 Highway 55 • Suite 212 • Plymouth, MN 55441-3859 • 763 551 1230 • 800 422 0119(MN) • Fax 763.551.0459 Renewable Energy Minnesota's public policy encourages the inclusion of renewable resources in the generation mix. The 2001 omnibus energy bill expanded on that policy by calling upon power suppliers to make a "good faith effort" to secure 10% of their total electric sales from renewable sources by the year 2015, and by requiring utilities to provide customers with power from renewable sources when requested. We believe that Minnesota's renewable energy policy should recognize the following principles: • State policy should recognize that all existing domestic hydroelectricity is a renewable form of energy. • Minnesota should adopt state policy that creates uniformity in defining renewable energy sources that encompass renewable initiatives at the federal level. That definition of renewable resources should include the following: > Conversion of cellulose biomass to liquid fuels > Ethanol and ethanol byproduct processes > Direct combustion or gasification of biomass > Biofuels energy systems > Photovoltaics, including utility scale and remote applications • Solar thermal, including solar water heating > Wind energy > High temperature and low temperature geothermal energy > Fuel Cells, including transportation and stationary applications > Nondefense high-temperature superconducting electricity technology > Source reduction technology > Landfill Gas • Advance district cooling > Hydropower > Refuse derived fuels > Mixed Municipal Solid Waste • Minnesota should avoid policies that would require utilities to provide a fixed percentage of all the electricity they generate or a fixed percentage of their generating capacity from renewable sources. Instead, utilities should be allowed to offer customers "green pricing" options. • Any change in Minnesota law concerning renewable energy should continue to recognize the need for communities to be able to maintain local control over Item 4k 5. 7. Ji Elk River MEMORANDUM TO: Mayor and City Council FROM: Pat Klaers, City Adminjstrator Kfr- DATE: February 24, 2003 SUBJECT: Budget Update Attached is a memo to the department heads regarding the impact of the Governor's proposal. The plan from the Governor reduces the city LGA and Market Value Homestead Credit by 50% in 2003, and 100% in 2004. The reduction is $644,138 in 2003, and $1,292,865 in 2004. All of the revenues that we receive from the State go into the General Fund Budget so most of the reductions likewise have to come out of the General Fund. The 2003 adjustments need to be made from an already approved and adopted budget. I will provide a verbal update to the City Council on this proposal and its potential impact on the city at the Council meeting. City of Elk .�-� River MEMORANDUM TO: Lori Johnson, Sandy Peine, Michele McPherson, Cathy Mehelich, Steve Rohlf, Phil Hals, Rich Czech, Dave Potvin, Terry Maurer, Gary Leirmoe, Bruce West, Tom Zerwas, Michele Bergh, Sue Kostanshek, Chris Johnson, Mick Stoffers FROM: Pat Klaers, City Administrator DATE: February 24, 2003 SUBJECT: Governor Pawlenty's Budget Proposal The League of Minnesota Cities (LMNC) has provided a summary of the LGA and Market Value Homestead Credit cuts for 2003 and 2004, as proposed by Governor Pawlenty. This information can be found on the LMNC website (www.lmncor The proposal from Governor Pawlenty impacts Elk River significantly. The Govenor has stated that the cuts represent a maximum of 5% of the total city revenues in 2003 and a maximum of 9.5% of the total city revenues in 2004. What is not said is that almost everything is included in the total revenue figure. If you levied taxes to pay bonds, that is part of the total revenue; if you received state funds for a street project, that is part of the total revenue. The reality is that the cuts need to come from the General Fund Budget as this is where the LGA and the Market Value Homestead Credit revenues are located. The Governor's proposal results in a $644,138 reduction in 2003. This is about an 8.4% cut from the already approved 2003 General Fund Budget. The proposal for 2004 is a $1,292,865 reduction in aids. This is a 16.8%reduction in 2004 from the adopted 2003 General Fund Budget. According to the Govenor's plan, in 2004 we are scheduled to receive zero ($0) LGA and Market Value Homestead Credit. Hopefully the final result will not be this severe for the City of Elk River. Additionally,we can hope that levy limits will not be imposed in 2004 but this seems unlikely and I have every expectation that some form of levy limits will exist for municipalities in 2004. (As you most likely know, all of this is in addition to a proposed wage freeze for two years for government employees, which includes municipalities.) s/Admin/PaJ/LC4&,s Nobody should panic at this time, as the proposal is just that—a proposal. However, the House is dominated by Republicans and history has shown that the Governor generally gets the majority of his requests, especially the first year. The city will have to use some reserves in order to cushion the LGA and Market Value Homestead Credit cuts but reserves is not the total solution to this potential action by the state. Reserves will be especially important for 2003, but we need to also look for permanent reductions that can help the 2004 situation. The city will have to look at which programs and services can be reduced or that we can do without and which programs and services can be provided in a different manner. About 74% of the city General Fund Budget goes for personnel services (employee wages and benefits) and it is unavoidable that employees will be looked at to be part of the city budget solution. Employees being part of the solution can take many different forms and shapes. I have already received some good information regarding budget reduction from department heads in response to my 1-8-03 memo. I am very concerned about the impact on services, especially for 2004. Along with cuts, any additional revenues that you think is possible from your department should be explored. All departments are encouraged to seriously evaluate their 2003 budget. Please include your employees in your budget discussions, and especially ask for their input as it relates to the employee situation. We will need to meet and set up contingency plans during the months of March and April and the budget will be a topic of discussion at our February staff meeting. S/Adm n/Pal/LGACal, MAR-13-03 THU 09:42 AM MMUA FAX NO. 7635510459 P. 02/02 LMC 145 University Avenue West,St,Paul;MN 55103-2o44 1„g„a ohfi„weis atiat Phone: (6$x)281-saoo U (800)925-u22 Ctna,b.d.a�ea.YaMea Fax: (651)281-1299 0 TDD(651) 281-1290 INFORMATION SHEET SF 2l4; Wage Freeze Proposed Leeislatiop: The proposed legislation would institute a freeze on salaries and wage rates for state and public employees. ,League of Minnesota Cities Position: The League supports local decision making authority and opposes legislation intended to interfere in local employment-related decisions. D Local units of government are in the best position to decide how to manage proposed local government aid cuts for their cities. Local officials have the tools and the authority to implement a wage freeze for their employees if they decide that is in the best interest of their city and their taxpayers. D Local officials may decide that other ways of reducing wage and benefit expenses work best in their cities. For example,some cities are considering voluntary unpaid leave programs, early retirement incentive programs,voluntary reductions in work hours and other methods of achieving wage and benefit cost savings. D. The proposed legislation gives an advantage to unionized employees. It will result in situations in some cities where they have substantial portions of their work force receiving wage increases in 2003 and 2004 and only a small portion of the work force feeling the effects of a wage freeze. This is likely to be perceived by employees as very unfair. 9 The bill does not address the problem ofpotential lawsuits from employees who believe they. had an expectation and promise of a wage increase based on the city's compensation plan at time of hire or from union employees who believe it is a violation of their right to bargain collectively. There are costs to defend such suits whether they are successful or not D The bill penalizes employees in their"high 5”years of public employment. Public employment pension benefits for city employees are based on the highest five years of earnings as a city employee. Those who are unfortunate enough to be in their final five years of employment during the wage freeze will have their pension benefits permanently affected as a result of this bill. D. Wage freezes do not save money in the long run. Wages inevitably need to be"caught up"to the market so that cities can attract and retain qualified employees. 9 The wage freeze penalizes cities that have taken prudent fiscal measures to prepare for local aid cuts and have budgeted appropriate funds to pay for employee wage increases. 9 The wage freeze creates severe recruitment and retention problems for certain classes of employees that are in high demand such as registered nurses for city hospitals.