4.2. ERMUSR 10-13-15 Elk River
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
Elk River Municipal Utilities Commission Troy Adams, P.E.—General Manager
John Dietz—Chair
Al Nadeau—Vice Chair
Daryl Thompson—Trustee
MEETING DATE: AGENDA ITEM NUMBER:
October 13, 2015 4.2
SUBJECT:
Payment in Lieu of Taxes (PILOT) and Other Donations to the City of Elk River
BACKGROUND:
Minnesota municipal utilities do not pay taxes to their city. It is very typical for the utility to
provide a payment in lieu of taxes(PILOT). ERMU has a policy which outlines the details of the
PILOT and other donations to the City of Elk River. This policy is reviewed at least once every
five years; the last policy changes were made on July 2, 2013.
DISCUSSION:
Delay for PILOT for Electrical Service Territory Transfer
On September 8, the commission reviewed proposed changes to the PILOT Policy that would
delay PILOT for the areas acquired from Connexus Energy through the March 20,2015,
electric service territory transfer agreement. The PILOT was proposed to be delayed for each
customer acquired until the loss of revenue(LOR)payments that are outlined in the
agreement would complete. These LOR payments are made for 10 years after the acquisition
with a few exceptions for municipal development.
The commission discussed the proposed policy revisions and directed staff to strengthen the
language to be specific to the March 20, 2015, electric service territory transfer agreement.
This would eliminate any confusion regarding PILOT for LOR payments related to previous
acquisitions. The proposed policy has been updated to reflect the commission's request.
Shift of Policy Mechanics from Donated Electricity to PILOT
The current PILOT Policy outlines in section 3.0 Donated Electricity stating that ERMU
"shall donate all electricity to the City of Elk River for all of their facilities not associated
with enterprise funds of the City of Elk River." The administrative process associated with
this donation is extremely burdensome. Due to its manual nature,this process is also subject
to human and keying errors.
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Since the September meeting, staff have had discussions with the City about an option to
maintain the level of donation to the city and reduce the administration burden and risk for
error. ERMU and city staff have been evaluating increasing the PILOT percentage
contribution from 3%to 4%, and eliminating the donated electricity not associated with street
lights and signal lights. An analysis of the donated electricity, less the usage by street and
signal lights, is equivalent to 0.8%of revenue generated from electric sales for Elk River
customers. An increase in the PILOT of 1%with an offsetting reduction for the elimination
of donated electricity(with the exception of street and signal lights)would nearly be a cash
neutral policy change. The city would be seeing an increased expense because they would be
billed the electric usage,but the City would also have an offsetting source of revenue in
excess of the increased expense by approximately$38,000 based on projected 2015 sales
numbers.
For ERMU,this change would eliminate significant staff time to record and post these
donations through the billing system and the general ledger. It would also give a more
transparent representation of the actual costs of the City facilities. As ERMU grows within
the corporate boundaries of the City of Elk River, the additional increase in revenues will be
further increased with the 1%change to the PILOT, resulting in additional funds contributed
to the City. It is extremely likely that ERMU's growth in sales will be a higher rate than the
growth of city government and the growth in city facility electric usage. This change is near
cash neutral for the City now, but will result in increased PILOT for the future.
Due to the 2016 budget approval process,utilities and city staff agree that a January 1, 2016,
implementation is better. However,to allow city staff to incorporate this proposed change
into their budget, staff looks to get commission approval immediately. This proposed
revision is attached separately and reflects the policy change proposed for October 13, 2015.
ACTION REQUESTED:
• Staff recommends the Commission adopt effective immediately the policy revisions to
"ERMU Policy 8.13 —Payment in Lieu of Taxes (PILOT) and Other Donations to the
City of Elk River"which reflects a delay for PILOT related to the March 20, 2015,
electric service territory transfer agreement.
• Staff recommends the Commission adopt the second proposed policy language change to
be effective January 1, 2016,which will result in a shift in policy mechanics increasing
the PILOT from 3%to 4% and eliminating the donation of electricity with the exception
of street and signal lights.
ATTACHMENTS:
• Proposed October 13, 2015,revision to ERMU Policy 8.13—Payment in Lieu of Taxes
(PILOT) and Other Donations to the City of Elk River
• Proposed January 1, 2016,revision to ERMU Policy 8.13—Payment in Lieu of Taxes
(PILOT) and Other Donations to the City of Elk River
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Elk River
Municip al Utilities
8.13 PAYMENT IN LIEU OF TAXES (PILOT) AND OTHER DONATIONS TO
THE CITY OF ELK RIVER
1.0 Purpose and Summary
The success of ERMU is linked with the success of our community. And the success of our
community is linked with the operation of our city government and ERMU. ERMU was
purchased by the City of Elk River in 1945 and separate governance was created per State
Statute in 1947. Although governed separately, ERMU is still an important component of our
local government and our city services.
It is typical for a municipal utility to provide a Payment in Lieu of Taxes (PILOT) and other
donations to their city, regardless of a separation of governance. Although typical, this
contribution should never inhibit ERMU's ability to make repayment on debt, cause ERMU to
become non-competitive, or inhibit needed investment in personnel or infrastructure which may
hurt ERMU's ability to meet the needs of their customers. For these reasons the PILOT and
other donations should be reviewed at least once every five(5)years by the ERMU Commission.
2.0 Payment in Lieu of Taxes (PILOT)
The PILOT transfer from Elk River Municipal Utilities to the City of Elk River shall be three
percent(3%)of the revenues generated by ERMU's electric customers within the corporate
boundaries of the City of Elk River which are not subject to a loss of revenue payment resulting
from the March 20,2015, electric service territory transfer agreement with Connexus Energy.
3.0 Donated Electricity
Elk River Municipal Utilities shall donate all electricity to the City of Elk River for all of their
facilities not associated with enterprise funds of the City of Elk River. As an example, this will
include buildings such as City Hall,Police and Fire Departments, Library, Park, Street
8.13 Payment in Lieu of Taxes Page 1 of 2 Adopted December 6, 1994
(PILOT)and other Donations to the Revised June 6, 2008
City of Elk River Revised July 2,2013
Proposed Rev Oct 13, 2015
61
Department Buildings, street lights, and signal lights; this shall not include such buildings as
Liquor Stores,Wastewater Treatment Plant, Ice Arena, or lift stations.
4.0 Donated Water
Elk River Municipal Utilities shall donate water for use by the Elk River Fire Department
(ERFD) for the purpose of extinguishing fires within the City of Elk River and other cities under
contract with the ERFD.
For the purpose of creating ice rinks for public/non-enterprise use, ERMU shall donate water for
use by the Elk River Parks Department.
Elk River Municipal Utilities shall donate water for the use by the Elk River Streets Department
for the use of street sweeping.
5.0 Donated Labor
Because of specialized skills and equipment,ERMU may be able to provide a better value to our
community by donating labor to the City of Elk River. For example, ERMU has trained
employees and the equipment to hang banners where the City does not. In this example, ERMU
is able to provide this donated service to the City for less cost than a third party, creating greater
value to our community. For such situations, ERMU shall donate labor to the City of Elk River,
as appropriate,where a greater value is created for our community and where ERMU is not
subjected to undue burden.
In addition to hanging banners, other examples include: maintenance of street lighting, relamping
signal lights, locating underground fiber optics and/or other facilities, administration costs
associated with the billing of city franchise fees, installation of temporary lighting, relamping of
city ball field lighting, installation and/or maintenance of city warning sirens,meter reading for
wastewater, assistance with tree trimming, etc...
8.13 Payment in Lieu of Taxes Page 2 of 2 Adopted December 6, 1994
(PILOT)and other Donations to the Revised June 6, 2008
City of Elk River Revised July 2, 2013
Proposed Rev Oct 13, 2015
62
Elk River
Municipal Utilities
8.13 PAYMENT IN LIEU OF TAXES (PILOT) AND OTHER DONATIONS TO
THE CITY OF ELK RIVER
1.0 Purpose and Summary
The success of ERMU is linked with the success of our community. And the success of our
community is linked with the operation of our city government and ERMU. ERMU was
purchased by the City of Elk River in 1945 and separate governance was created per State
Statute in 1947. Although governed separately, ERMU is still an important component of our
local government and our city services.
It is typical for a municipal utility to provide a Payment in Lieu of Taxes (PILOT) and other
donations to their city, regardless of a separation of governance. Although typical,this
contribution should never inhibit ERMU's ability to make repayment on debt, cause ERMU to
become non-competitive, or inhibit needed investment in personnel or infrastructure which may
hurt ERMU's ability to meet the needs of their customers. For these reasons the PILOT and
other donations should be reviewed at least once every five (5) years by the ERMU Commission.
2.0 Payment in Lieu of Taxes (PILOT)
The PILOT transfer from Elk River Municipal Utilities to the City of Elk River shall be three
I percent (34%) of the revenues generated by ERMU's electric customers within the corporate
boundaries of the City of Elk River which are not subject to a loss of revenue payment resulting
from the March 20, 2015, electric service territory transfer agreement with Connexus Energy.
3.0 Donated Electricity
Elk River Municipal Utilities shall donate all electricity to the City of Elk River for all of their
•• . . ..• . . - . • . , - . _ !-• - , - • • ,
8.13 Payment in Lieu of Taxes Page 1 of 2 Adopted December 6, 1994
(PILOT)and other Donations to the Revised June 6, 2008
I City of Elk River Revised July 2, 2013
*Revised October 13, 2015
Proposed Rev Jan 1, 2016
63
Department Buildings, street lights;and signal lights,; this shall not include such buildings as
- •- - - , . . - . --- - ' - , - • - ., . • .
4.0 Donated Water
Elk River Municipal Utilities shall donate water for use by the Elk River Fire Department
(ERFD) for the purpose of extinguishing fires within the City of Elk River and other cities under
contract with the ERFD.
For the purpose of creating ice rinks for public/non-enterprise use, ERMU shall donate water for
use by the Elk River Parks Department.
Elk River Municipal Utilities shall donate water for the use by the Elk River Streets Depaitment
for the use of street sweeping.
5.0 Donated Labor
Because of specialized skills and equipment, ERMU may be able to provide a better value to our
community by donating labor to the City of Elk River. For example, ERMU has trained
employees and the equipment to hang banners where the City does not. In this example, ERMU
is able to provide this donated service to the City for less cost than a third party, creating greater
value to our community. For such situations, ERMU shall donate labor to the City of Elk River,
as appropriate,where a greater value is created for our community and where ERMU is not
subjected to undue burden.
In addition to hanging banners, other examples include: maintenance of street lighting, relamping
signal lights, locating underground fiber optics and/or other facilities, administration costs
associated with the billing of city franchise fees, installation of temporary lighting,relamping of
city ball field lighting, installation and/or maintenance of city warning sirens,meter reading for
wastewater, assistance with tree trimming, etc...
8.13 Payment in Lieu of Taxes Page 2 of 2 Adopted December 6, 1994
(PILOT) and other Donations to the Revised June 6, 2008
I City of Elk River Revised July 2, 2013
*Revised October 13, 2015
Proposed Rev Jan 1, 2016
64