3.2. SR 11-18-2019
The Elk River Vision
A welcoming community with revolutionary and spirited resourcefulness, exceptional
service, and community engagement that encourages and inspires prosperity
Request for Action
To
Mayor and City Council, Chair and Utilities Commission
Item Number
3.2
Agenda Section
Joint Meeting
Meeting Date
November 18, 2019
Prepared by
Troy Adams, P.E. – ERMU General Manager
Item Description
Elk River Municipal Utilities Payment in Lieu of
Taxes Policy and Other Donations to the City of
Elk River Policy
Reviewed by
Reviewed by
Action Requested
Review Elk River Municipal Utilities Commission Policy G.2a1 Payment in Lieu of Taxes and Other
Donations to the City of Elk River.
Background/Discussion
Consistent with ERMU Commission Policy G.2a Commission – City Council Relationship and Roles, the
Commission reports to the City Council a change to the Payment in Lieu of Taxes (PILOT) policy that
will have a material financial to the city budget. On October 8, 2019, the Commission approved, by
motion, a revision to the PILOT policy which will increase the overall transfer from the electric fund to
the city general fund.
In 2016, the PILOT policy had been revised following the execution of a multi-year electric service
territory transfer agreement with a neighboring cooperative electric utility. The agreement included the
terms for the cooperative to transfer approximately 2,000 electric accounts and 12 square miles of electric
service territory within the corporate boundary of the City of Elk River to ERMU over a five year period.
Consistent with state statute, the terms included provisions for loss of revenue (LOR) payments to be
made from ERMU to the cooperative over a 10 year defined period of time. The areas of the multi-year
orderly transfer would each have their own LOR payment schedule. The effect of the ten year LOR
payments over five years of transfers is 15 years of LOR payments to the cooperative.
The PILOT from ERMU to the City is calculated on sales to customers within the city limits. The electric
sales in the affected areas of the transfer agreement previously served by the cooperative were not
included in the calculation for PILOT as they were not ERMU customers. As a way to pay for the costs
of electric service territory transfers, ERMU engaged the City about excluding PILOT on the transferred
customers until the LOR payments had finished. This exclusion of PILOT was revenue the city was
previously not receiving and there was an understanding that this was a partnership effort to invest in the
growth of the ERMU electric customer base for significant long term return on that investment.
C:\Users\tadams\Desktop\Commission Council Joint 2019 Meeting\Joint Meeitng Working Documents\Joint Meeting FINAL Documents\2019-
11-18 Joint Mtg - 3.2 ERMU Pilot Policy Memo.docx
In October, 2018, ERMU transitioned wholesale power providers from Great River Energy (GRE) to
Minnesota Municipal Power Agency (MMPA). The change allowed ERMU to lower electric rates by 5%
in 2019. And, ERMU is in a position to hold the line and have no electric rate increase for 2020.
The Commission determined that ERMU was in an improved financial position with the electric service
territory growth and the wholesale power cost reductions compared to when the PILOT policy had been
revised in 2016. And with consideration of all of those factors, the Commission determined that those
electric service territory transfer agreement PILOT policy exceptions should be lifted and the savings that
ERMU has experienced be shared with the city.
Financial Impact
The estimated increase in PILOT transfer from ERMU to the city for the 2020 budget year would be
$169,000. The estimated total increase in transfers over the 15 year LOR payment schedule period would
be $1,500,000.
Attachments
ERMU Commission Policy G.2a Commission – City Council Relationship and Roles
ERMU Commission Policy G.2a1 Payment in Lieu of Taxes and Other Donations to the City of
Elk River
______________________________________________________________________________
Page 1 of 2
COMMISSION POLICY
Section: Category:
Governance Governance Policies
Policy Reference: Policy Title:
G.2a Commission – City Council Relationship
and Roles
PURPOSE:
With this policy, the Commission describes its role in relation to the Elk River City Council and
the way in which it desires to interact with the City Council.
POLICY:
The Commission and the City Council share the responsibility for ensuring effective governance
of ERMU for the benefit of the City, its citizens, and ERMU’s utility customers. The
Commission desires to maintain a working relationship with the City Council that will enable
both bodies to coordinate and carry out their separate responsibilities so that ERMU is governed
with excellence.
Although governed autonomously by the Commission, ERMU is part of the City of Elk River’s
City government. This creates opportunities for bringing greater value to the stakeholders of
both the City and ERMU through a hybrid of municipal utilities and city governance. It is the
intent of the Commission to align its governance structures and processes with the city in ways
that will realize opportunities for greater value.
Consistent with the preceding, the Commission will:
1. Routinely monitor, evaluate, and strive to improve its performance, keeping the City Council
informed in a thorough and timely manner about the effectiveness of the Commission’s
governance with respect to the following:
a. Compliance with legal and fiduciary responsibilities;
b. Compliance with Commission-established Governance policies that are periodically
reviewed and updated, and that set expectations for ERMU’s strategic and business
results, governance, and management.
ERMU Commission Policy – G.2a Commission – City Council Relationship and Roles
______________________________________________________________________________
______________________________________________________________________________
Page 2 of 2
2. Support ERMU’s active participation in the City’s Economic Development Authority (EDA),
representing the interests of ERMU’s stakeholders and working to develop common goals for
economic development.
3. Provide an opportunity for the City Council to meet jointly with the Commission at least
once every three (3) years. The meeting will be held following completion of the annual
independent financial audit. The focus of this joint meeting will be a report by the
Commission to the Council of ERMU’s financial and operating results for the preceding
fiscal year, along with an opportunity for the Council to provide input to the Commission on
matters related to planning and budgeting for the next fiscal year. The Commission may
request or recommend additional joint meetings for other specific purposes.
4. Develop, update as necessary, and provide to the Mayor and City Council documentation that
is intended to ensure the appointment of qualified and committed ERMU Commissioners.
Such documentation will include relevant knowledge and experience, core competencies, and
character traits that are consistent with the Commission’s requirements and commitments to
effective governance. The Commission’s expectation is that the City Council will use this
information to appoint persons who are appropriately qualified and well-informed about the
expectations for service as a Commissioner.
5. At least annually at the time of budgeting for the next fiscal year, consider ERMU’s financial
condition with respect to voluntary payments in lieu of taxes (PILOT) and other donations of
services from the ERMU utility enterprises to the City that are likely to have material
financial consequences for both entities. The Commission will inform the City Council
promptly of any material changes in the PILOT and other donations. Further, the
Commission will use a process for determining PILOT and other financial donations to the
City that is transparent, consistent with state and national benchmarking comparisons,
forecasted and budgeted, and with a mutually understood methodology. In approving or
allowing other donations such as labor, street lighting, and water for fire suppression, the
Commission will subscribe to the philosophy that it is providing value to the community and
not just shifting costs from one entity to the other.
POLICY HISTORY:
Adopted May 9, 2017
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Page 1 of 2
COMMISSION POLICY
Section: Category:
Governance Governance Policies
Policy Reference: Policy Title:
G.2a1 Payment in Lieu of Taxes and Other
Donations to the City of Elk River
PURPOSE:
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.
POLICY:
The PILOT and other donations to the City of Elk River shall be as follows:
1. Payment in Lieu of Taxes (PILOT) – The PILOT transfer from Elk River Municipal Utilities
to the City of Elk River shall be four percent (4%) of the revenues generated by ERMU’s
electric customers within the corporate boundaries of the City of Elk River.
2. Donated Electricity – Elk River Municipal Utilities shall donate all electricity to the City of
Elk River for street lights and signal lights.
3. 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.
ERMU Commission Policy – G.2a1 Payment in Lieu of Taxes and Other Donations to the City
of Elk River
______________________________________________________________________________
______________________________________________________________________________
Page 2 of 2
Elk River Municipal Utilities shall donate water for the use by the Elk River Streets
Department for the use of street sweeping.
4. 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…
POLICY HISTORY:
Adopted December 6, 1994
Revised June 6, 2008
Revised July 2, 2013
Revised October 13, 2015
Revised January 1, 2016
Revised October 8, 2019