8.0. SR 04-26-1993
.
.
ITEM 8.
TO: MAYOR AND CITY C
FROM:
PAT KLAERS, CITY
ISTRATOR
DATE: APRIL 22, 1993
SUBJECT: WATER UTILITY S
The City Council has discussed water system needs at a number
of meetings since the joint meeting with the Utilities
Commission on February 17, 1993. I have previously distributed
the minutes from this meeting, a 4/5/93 draft memo from myself
regarding the water system needs and finances necessary to meet
these needs, and four financial analysis computer runs as
provided by Bill Birrenkott, Utilities Superintendent.
Additionally, I have also distributed the Utilities Commission
recommendation and the computer run that outlines the cash flow
scenario that is preferred by the Utilities Commission.
My position on
mechanism to collect
is well known to
again in this memo.
the financing necessary and appropriate
revenue to finance the water system needs
the City Council and need not be repeated
The Council should have all the information necessary in order
to reach whatever conclusion they feel is appropriate from a
financial point of view. The City Attorney, Peter Beck, will
be in attendance at this meeting per City Council request.
Peter will be able to discuss the legalities of what is being
requested by the Utilities Commission. There are very few
legal concerns regarding a water impact fee (WIF) being charged
to developers who are platting single family residential lots.
On the other hand, some legal questions do exist regarding the
collection of a WIF on property that is going to be developed
into commercial, industrial, and multi-family uses and on
property that is already developed and on platted property
whereby only a building permit needs to be obtained.
The purpose of this City Council discussion on the water system
needs is larger than simply discussing the finances and
mechanism to obtain revenues for funding the future water
towers and wells. Mayor Duitsman has requested that the
Council also evaluate the City financial contribution to the
northeast and west towers that are proposed in the next few
years.
A joint meeting with the Utilities Commission is scheduled for
7:00 p.m. on Monday, May 3, 1993, at the Elk River City Hall.
At this meeting it is anticipated that the City and Utilities
Commission will reach some conclusion and agreement on
financing the most immediate water system needs.
720 Dodge Avenue N.W., Elk River, Minnesota 55330 (612) 441-7420
.
.
.
/ -~ /
'"
~EIVI:il APR 12 199~
ELK RIVER i\IUNICIPf~L UTILITIES
3:: Kin~ .'\\cnu~
Elk River. "Iinn~llra 55330
?~on~ 16 i:i oW i -:020
UTILITIES COMMISSION MINUTES
April 6, 1993
3:00 P.M.
Present Were:
James Tralle
James Simpson
George Zabee
Bill Birrenkott
Glenn Sundeen
Don Heinzman
Terry Maurer
Pat Klaers
President
Vice Chairman
Trustee
Others present:
General Manager
Line Superintendent
Elk River Star News
Maier Stewart & Assoc
City Administrator
1) The meeting was called to order at 3:00 P.M. by President Tralle.
2) Motion by Mr. Simpson seconded by Mr. Zabee to approve the
agenda. The motion carried.
3) Motion by. Mr. Simpson seconded by Mr. Zabee to approve the minutes
of the previous meeting as distributed. The motion carried. .
4) The General Manager presented the Commissioners with several
scenarios to finance future tower expansion and wells for the
water department. The variables which were discussed were the
Water Connection Fee, the percentage of rate generated cash to be
applied to tower and well construction, impact fees, and length of
loan financing. Pat Klaers presented a case in which the there
would be no "impact fees" which was discussed to some degree.
Motion by Mr. Simpson, seconded by Mr. Zabee, to request the City
Council to pass an ordinance requiring an "impact fee" to
developers of $300.00 per residential lot to be assessed at time
of lot closing. The motion carried unanimously.
The Commissioners also agreed that the Utilities Commission would,
at future dates, raise the Water Connection Fee 5% per year until
a fee of $1,200 is reached. The Commissioners also agreed that a
philosophy of applying 20% of rate generated cash would be used to
fund future tower and well improvments. The Commissioners also
agreed that all bonds to be issued would carry a term of 30 years
with a "call priviledge".
5) Glenn Su~deen presented the Commissioners with a suggested change
to the Safety Manual.' Motion by Mr. Simpson, seconded by Mr.
Zabee, to incorporate the suggested change to be attached to 'and
become a part of these minutes. The Motion carried.
6) Developer fees for underground residential developments were
discussed. Motion by Mr. Simpson, seconded by Mr. Zabee, to
charge developers for underground electricity to lot corners
$320.00 for lots with sewer and water and $420.00 for lots without
sewer and water. The Motion carried. The Commissioners also
instructed staff to review these charges annually.
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,
JOINT MEETING OF THE ELK RIVER CITY COUNCIL
AND THE ELK RIVER UTILITIES COMMISSION
HELD AT THE ELK RIVER POWER PLANT
WEDNESDAY, FEBRUARY 17, 1993
Councilmembers Present: Mayor Duitsman, Councilmembers Scheel, Dietz,
Farber and Holmgren
Commission Members Present:
Jim Simpson, Jim Tralle and George Zabee
Staff Present:
Pat Klaers, City Administrator; Terry Maurer, City
Engineer; Lori Johnson, Finance Director; Bill
Birrenkott, Utilities General Manager; Glenn
Sundeen and Bob McCartney, Elk River Municipal
Utilities
Others Present:
Rick Foster, John Weicht and Don Heinzman
Mayor Duitsman called the meeting to order at 6:10 p.m.
Mayor Duitsman gave a short introduction of the topic relating to financing
water towers. He then turned the meeting over to Bill Birrenkott to discuss
the information that has been reviewed by the Utilities Commission.
.
Roger Holmgren arrived at this time.
Bill Birrenkott reviewed a memo he had written regarding the water tower
financing issue. He indicated that previously the need had never come up to
increase Water Access Charge (WAC) fees in order to set aside funds for a
water tower. Bill indicated that in the past, WAC fees have been mainly
used for watermain improvements and expansions. Recently, accumulated
WAC fees have also been used for the financing of the well and treatment
facility near Orono Park. The WAC fees have recently increased from $300
to $700 per connection. This increase will generate funds to help finance
future wells that are needed, but it is uncertain as to whether or not any
funds from this WAC fee will be available for the financing of water
towers.
Bill Birrenkott introduced the idea of a Water Impact Fee which could be
charged to the developer of vacant lands and the money would be set aside to
pay for water towers. Bill also discussed the possibility of using TIF
funds and requested that the Utilities payment of $120,000 paid to the City
to fund the 1985 TIF issue be refunded to the Utilities and be applied
toward the construction of the next water tower.
Mayor Duitsman asked whether projections had been made as to the water fees
and revenues that would be received over the next few years. Bill
Birrenkott indicated that the net water income, excluding the WAC fees, is
now approximately $120,000 per year, but no future projections had been made.
. Utilities Commission member, George Zabee, stated that there were several
criteria he felt the Utilities should look at when financing water towers:
~. .... . .~.,~::~~:
City Council/Utilities Commission Minutes
February 17, 1993
Page 2
.
1.
The method must be equitable and consistent.
2. It should not affect rate payers.
3. Developers should have to pay all associated fees prior to development.
4. If development doesn't occur, the Utilities must be able to handle the
payments.
s. A reserve must be set aside for emergencies.
George indicated that he agreed with the concept of a water impact fee.
A brief discussion was held regarding bonding for this project. Lori
Johnson, Finance Director, indicated that there were several methods
available; one being through water revenue bond, the other being a General
Obligation Bond. She indicated that pure revenue bonds are rather rare in
Minnesota and indicated there were several negatives including a higher
interest rate, a one year of debt service reserve requirement, and a pledge
of 120\ of revenues to debt service. These factors make revenue bonds an
expensive and less desirable financing mechanism.
.
There was considerable discussion regarding the proposed water impact fee
policy and how it would be applied equally to new development and existing
development currently not served by the water utility. All concurred that a
policy would need to be approved in order to make collection of the Water
Impact Fees (WIF) equitable.
Mayor Duitsman indicated that TIF monies are available from TIF District No.
4, to help finance the water tower needed near Orono Park. Commissioner
Tralle gave background information on TIF No. 4 and the RDF settlement,
indicating that funds would be available from the source.
Mayor
if the
10.
10.
Duitsman questioned how much additional water storage would be needed
Council approved the extension of water utilities along East Highway
Terry Maurer discussed water improvements needed to serve East Highway
Councilmember Scheel expressed concern over the city wells causing problems
with other wells in the area because they are all in the same aquifer. City
Engineer, Terry Maurer, explained that this would not be a problem.
Commissioner Simpson and Bill Birrenkott both indicated that the water
utility would be able to support the debt to construct a well in the western
area and a well in the northern area.
Mayor Duitsman asked whether the water impact fee would be a charge just to
developers or whether everyone hooking into the water system would need to
pay the Water Impact Fee.
.
Pat Klaers indicated that there was a
development proposals as fees are
that the WAC fee be raised in order
problem in collecting the WIF on
collected only on plats. Be suggested
to cover an amount which would be
;........
.........
\~.
.
city Council/Utilities Commission Minutes
February 17, 1993
Page 3
charged as a water Impact Fee, therefore, anyone hooking into the water
system would pay both fees.
There was discussion with developers Rick Foster and John weicht regarding
the payment of fees. Rick Foster indicated that he felt the up front fees
were excessive now and that adding additional fees would drive development
out. Councilmember Scheel agreed, indicating that the Council must figure
out a way to keep development fees low.
The City
time of
of water
further
help the
Council agreed that everyone should pay a WAC and WIF fee at
hook up. Mayor Duitsman indicated that he would like to see $60,000
utility profit annually dedicated to pay for water towers. He
indicated that the City would be willing to use TIF reserve funds to
Utilities fund the water towers.
.
The City Administrator summarized the discussion and stated that this
meeting related to an overall plan to help finance future water towers and
wells and did not necessarily concentrate on any specific area of the
community; that there was an agreement that a fee needs to be collected from
everyone that hooks up to the water system in the future and that this fee
could consist of the WAC and an assessment or Water Impact Fee. The City
Administrator indicated t1la:t the Utilities and City staff would get together
to review all available revenues and costs for future improvements in an
effort to determine a recommendation on an appropriate fee and method for
collecting the necessary fee.
The Utilities Commission agreed to authorize bids for the construction of
the water tower in the high pressure zone.
The joint meeting of the Elk River City Council and the Elk River Utilities
Commission adjourned at 8:15 p.m.
Respectfully submitted,
~.0. ~
Lori Johnson
Finance Director
.
"Y,r;f
.~(,
~\1
TO:
FROM:
MAYOR & CITY COUNCIL
UTILITIES COMMISSION
PAT KLAERS, CITY ADMINISTRATOR
DATE: APRIL 5, 1993
SUBJECT: FINANCING WATER SYSTEM
IMPROVEMENTS
INTRODUCTION
.
After analyzing the municipal water system needs and the
finances involved with this issue, the City staff and the
Utilities staff have come to the same conclusion. This
conclusion is that immediate water system improvements (known
to be present within five years) can be financed. The
questions before the City Council and Utilities Commission is a
policy issue. This policy issue is: if additional funds are
needed to finance the water system improvements, then what
mechanism should be used to generate this revenue? Should the
mechanism be a Water Impact Fee (WIF) or an increase in the
Water Availability Charge (WAC)? The staff's analysis of the
finances should provide the Council and the Commission with
some information on how much revenue is needed.
BACKGROUND
A joint meeting between the City Council and Utilities
Commission was held on February 17, 1993. A great deal of
progress toward resolving issues related to the municipal water
system was made at this meeting. This joint meeting was the
result of a number of individually held City Council meetings
and Utilities Commission meetings on the topic of the water
system needs since the last joint meeting on June 29, 1992. At
this most recent joint meeting, it was acknowledged that the
City and the Utilities have to work together in order to plan
the growth of the community and to meet our responsibilities in
providing urban services. At this meeting, staff was directed
to review all available revenues and costs of future
improvements and to formulate a recommendation on an
appropriate fee and method for collection.
.
At this stage of discussion in addressing the water system
needs, there are only three reasons why the City is involved
with this utility issue. If it wasn't for the fact that the
City will be issuing G.O. bonds for water system improvements,
which is backed by the full faith and credit of the City
(taxpayer), and for the fact that the financing mechanism for
the bonds may involve a new City development requirement, then
this issue would be more appropriately analyzed and addressed
by the Utilities Superintendent and the Utilities Commission.
If not for these two issues involving the City, the question of
720 Dodge Avenue N.W., Elk River, Minnesota 55330 (612) 441-7420
.
.
.
1)r~ - ~DK-
the financing of water system needs would not really involve
the City and our involvement with Utilities on this issue would
only relate to future growth needs within the system. This is
the third reason the City is involved; to ensure that the City
and Utilities remain partners in the City growth and that
municipal services are available in our urban zone for urban
growth.
At the 2/17/93 joint meeting (see attachment), staffs were
directed to analyze the system needs and review available
revenues and come up.with a preferred option to address the
issue of financing needed water system improvements. My
background in addressing this issue comes from finances
associated with the Wastewater Treatment System (WWTS). This
is appropriate as there are many similarities between the needs
and financing mechanisms for both the WWTS and the water
system. As noted above, it is believed that water system
improvements can be financed. However, it should be noted that
the Water Superintendent, Bill Birrenkott and myself prefer
different solutions to the financing question. This preference
for different solutions gets to the point where the solution is
a policy issue for the Utilities Commission and the City
Council.
WWTS EXPERIENCE
As I have indicated, my approach to financing water system
improvements is based on my experience with the WWTS. When I
came to the City in 1986, the Sewer Availability Charge (SAC)
money was being used to pay for an interceptor pipe. A need on
the horizon for plant repairs and a plant expansion led the
City Council to increase the SAC fee to $1,300. At the
minimum, this allowed the City to reserve $300 per SAC for
plant expansion or repairs, but the remaining $1,000 went for
interceptor debt. (This debt ended in 1991.) At this time,
sewer fees were also adjusted in order to help meet future
needs. From 1/86 until 1/92 the sewer fund balance went from
$175,000 to $960,000, excluding financing $250,000 for the
sludge land.
With plant repairs now taking place and a plant expansion
planned in the next few years, the City will need to use the
monies accumulated from rates and SAC charges to invest in the
system. Additionally, a bond will have to be issued based on
future revenues from SAC charges and operating profits from the
rates. There is no real distinction from the source of funds
as all of the SAC fees and operating profits go back into the
system for repairs and improvements.
The WWTS, like the water system, are enterprise funds that are
not set up to make a permanent profit, but do need to establish
a fee schedule to meet existing and future system expenses.
This is the City/Utility responsibility in order to accommodate
development according to the comprehensive plan. It is
somewhat surprising, but in analyzing the water system activity
yr~9+
vvK
.
for the past six years, this system has functioned in an
identical manner to the WWTS. Both systems assess out pipe
improvements and use rate profits and WAC or SAC charges to
finance system repairs, replacements, and expansions. Since
1986, the water department has used WAC fees and operating
profits to finance a new well, a new treatment building at the
old creamery site, and pipe replacements.
WATER SYSTEM NEEDS
The first step in :addressing the issues discussed at the
2/17/93 meeting is to analyze what is needed in the water
system. A water master plan is in draft stages and is ready to
come forward for consideration by the Utilities Commission.
This information from the City Engineer provides the background
on what needs exist for the water system.
.
After the well and treatment building are completed in Orono
Park in 1993, there is a need for a northeastern well and tower
and a western tower within the next few years. Further out in
the future, there will be a need for a northwestern high
pressure tower and well (Salk Junior High area or further
west), and appears to be a need along east Highway 10 for a
tower and well (depending on changes in our urban district and
a sewer plant expansion). Predictions as to when the need for
these northwest and east facilities will exist are more
difficult to make the further out in the future you go.
Additionally, further out in the future, as the City goes
toward full development in its urban zone, there will be a need
for additional wells.
Both staffs agree that our efforts should concentrate on the
three immediate needs - the northeast tower and well, and the
west tower and still keep in mind the longer term needs out
east and in the northwest. The cost for these three immediate
needs minus the City's contribution are used in the computer
runs from Bill.
WATER DEPARTMENT FINANCES BACKGROUND
Before making future projections on
status of past financial activity
must be evaluated. This background
the following:
available revenues, the
within the water department
from the audits indicate
.
Year
1986
1987
1988
1989
1990
1991
Operatinq Income*
$ 71,400
$110,750
$139,650
$106,350
$137,700
$131,150
WAC Fees
$23,150
$36,150
$44,000
$30,350
$26,650
$23,050
*Excludes depreciation deductions
.
.
.
~~-
~vt
Over six years, the operating income has been $697,000 and
has averaged $116,100 per year. Over six years, the total
income from WAC fees was $183,350 for an average of
$30,550 per year. At $300 per WAC fee, there are 102 WAC
fees equivalents collected per year. This WAC fee
increased in 1992.
The water operating income and WAC fees have been used over the
last six years to finance a well out west, a new building on
the creamery site, and system improvements associated with the
Proctor Avenue, Main: Street, and Jackson Avenue, Orono/Main
Street and School water projects.
The WWTS and the water system never make a profit, but must
have funds available for emergencies and to improve the
system. Prior to the mid 80's, limited water funds were
available for emergencies or system improvements. It now
appears that sufficient revenues are available to meet needed
system improvements due to growth in the water system. Since
1986, the improvements at the mall and in the Deerfield
subdivisions have added finances to the water department to
help with system wide expenses.
WATER SYSTEM FINANCES AND OPTIONS
Bill has completed a number of computer runs that show a
variety of options for financing the three most immediate water
system needs and still saves money for future needs in the
northwest and east. Most of these computer runs show a 30
year bond issue which is the preference of the City staff.
This may not be the preference of the Utilities Commission or
the City Council though. The reason the staff prefers a 30
year option is that the interest rates are low and bonds can be
paid off at any time when funds are available. The interest
rates are low at this time and it may be that, in ten or twelve
or fifteen years, the Utilities can invest their money at a
higher rate than what the bonds are selling for in 1993. The
longer term of course requires more total interest payments,
but also allows for a lower annual bond repayment. This
longer term with an lower annual rate allows the Utilities to
save more monies for future improvements.
Associated with any computer run related to future revenues and
expenditures, there are a number of predictions that are
involved. The predictions are more difficult the further in
the future you go. The assumptions used in putting together
the computer runs are always subject to scrutiny and second
guessing. Compounding the uncertainty of assumptions is the
issue of how the weather affects water utility revenues.
Nonetheless, the predictions include a growth rate assumption,
an assumption of the necessary improvements (the total cost and
when the first bond payment is due), the interest rates
projection, and a 100% WIF collection assumption.
yr4-t:t ~ 'P))t
.
The computer runs show that for a 30 year
necessary improvements based on a 4%
system, that immediate improvements can be
of ways.
- One extreme would be no WIF, no increase in the WAC, and
the bonds being repaid through using 1/3 of the available
operating profits and future WAC.
On the other side of the coin, improvements can be
financed with no money from rates, no increase in the WAC,
and from the existing $700 WAC and a new $500 WIF.
- In between these two extremes, the improvements can be
financed through a 20% allocation from the annual profits
and a modest increase in the WAC from $700 to $1,000 in
1998. This increase of the WAC from $700 to $1,000 in
1998 is equivalent to a WIF of $250, so therefore, the
system improvements can also be financed through a $250
WIF, no change in the WAC, and 20% from the annual profits.
bond for the three
growth in the water
financed in a number
.
As discussed earlier, and as the Commission and Council can
see, the immediate system improvements can be financed and it
now becomes a question of what method is best. All of these
options allow for a substantial percent of the annual operating
profit from the rates to be saved for emergencies, system
repairs, future improvements, and for new rules and regulations
enforced upon the water system. It is at this point that Bill
and I offer different recommendations on the preferred
solutions.
ISSUES TO TAKE INTO CONSIDERATION
Before a recommendation is offered, a number of side issues
need to be reviewed and discussed.
Like the WWTS, I believe that the City has a certain
responsibility to provide and finance the infrastructure for
urban development. Typically, only minor expenses are charged
to developers for the utility infrastructure. Developers are
typically charged for the pipes and the rates paid by the new
consumers provide revenues for additional expenses. If the
City is to develop in an urban manner according to the
comprehensive plan, then the City and the Utilities have a
responsibility to provide for the municipal system. A great
deal of discussion has related to the developer expenses for
the water system. There should be no mistake that any expense
charged to the developer is passed on to the homeowner. The
homeowner always pays for the utility system in one way or
another.
.
The City is constantly being accused of being
anti-development. An issue that cannot be ignored is that a
WIF relates to the new rules, ordinances, more administrative
work, and a perpetuation of the belief that the City is
anti-development. On the other hand, the WAC is already in
place and if additional revenue is needed, a WAC increase is a
relatively easy mechanism to provide revenues without a great
~~-~
.
deal of administrative work. There should be no mistake made
in that either the Utilities Commission or the City Council
will be subject to criticism for whatever happens if additional
revenues are required through a new fee or a fee increase.
A WIF on new development will miss some existing development
when they connect unless another mechanism is also put in
place. For example, a WIF may not be enforceable on the 350
homes existing in the western area of the City between the two
rivers. A WIF on these people may be possible, but it may
require more rules and work. On the other hand, a WAC increase
will get all new connections.
A comment has been tossed around that indicates that existing
rate payers should not pay for future improvements. I must
indicate that this is not the way the water system has operated
in the past, nor is it the way the sewer system operates.
RECOMMENDATION
.
As previously noted, my recommendation is different from the
recommendation from Bill. I do not believe that a WIF is
necessary. I believe that the immediate needs of the system
can be financed over 30 years, if the system experiences modest
growth, by using the existing WAC and using less than half of
the operating profits. This will still allow for funds to be
built up for future needs. The recent increase in the WAC from
$300 to $700 appears to sufficient to meet immediate future
needs. If it is not, it is recommended that this WAC increase
gradually to avoid the criticism that recently took place with
the big WAC increase. The basis of this recommendation include
the fact that finances are available, and that no new rules or
regulations or administrative work that is associated with the
WIF is needed. The financing of the water system improvements
in this manner is identical to the financing of the WWTS
improvements.
Two things are clear when looking at this situation. First,
the improvements should not be ordered until the need exists
and the question then becomes does the need currently exist or
not? Another point that needs to be restated is that the
City Council and Utilities Commission can finance the water
improvements in any manner deemed appropriate. It is a policy
issue on what mechanism should be used and it is a financial
analysis issue on how much is needed. WAC increases or a new
WIF can be implemented at any time. There is no perfect right
or wrong answer to this situation, but it certainly seems that
the issue can be addressed in a fair and equitable manner.
.
.
.
.
~ : ~ :.: ~:: <
.\7::;'~~~
-. -~~. .-...-'" --._..._~..
..
_' ......_...,A.~ ._'...,.........__" _. _. ..
~
FROM ELK RIVER UTILITIES
94.93.1993 10:12
P. 2
--( .I
ELK RIVER lVIUNICIPAL UTILITIES
321 King AVl'nuc
Elk River. l\.IinneJiOlll 5~33(1
Phone (61:) 4~ 1.2020
April 2, 1993
Memo to: Commissioners
From: General Manager
Rez Water Towers and Wells
At the next meeting, we will have to discuss the possible
implementation of a water impact fee and the financing of future
infrastructure for the water plant. At our joint meeting, I was
directed to meet with Pat Klaers and Terry Maurer to determine the
amount of that fee. This has been done and I have construced a
spreadsheet in which there are several variables which will help you
make the decisions which We must recommend to the City Council (if you
decide that a recommendation should be made).
The
1.
2.
3.
variables (and the decisions you must make) are:
The amount of the Water Impact Fee
The length of the loan
The per cent of money generated from rates which will
allocated to payment of debt
The amount of increase (if any) in the present Water
Connection Fee
4.
Pat Klaers will be at the meeting will present a
there will be no "Impact Fee", and tl:1e Utilities would
present Water Connection Fee or pay more of the money
rates or a combination of these.
Case in which
either raise the
generated from
I have prepared some spreadsheets with all of the
interactive, which will allow you to ask any "what if"
the meeting and We will have the answers immediately.
are included in this mailing.
If you have any scenarios which you would like to see, please
call me and I will run them out before the meeting.
variables
questions at
These examples
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