Review of long-term street maintenance and reconstruction financing options and cost estimate assumptions.

City staff has been evaluating the pavement condition of city streets for a number of years. The results of our evaluations show that a majority of city streets are severely degraded and are in need of maintenance or complete reconstruction. While the pavement sections on certain streets should receive maintenance or be reconstructed sooner than others, almost all city streets will need some form of maintenance or reconstruction over the next 30-plus years.

Based on cost estimates previously developed by staff, maintaining and reconstructing existing city streets at a reasonable level of service, which staff defined as a rating of 7 based on the Pavement Surface Evaluation and Rating (PASER) system, could cost up to $3 million per year over the next 30 years. Unless the existing funding sources are increased, or new financing options are identified and implemented, the city will not be able to afford to maintain our streets to this level so our streets will continue to degrade, falling further and further into disrepair.

In response to this issue, staff has been researching alternative financing options that would allow the city to adequately fund our long-term street maintenance and reconstruction program needs. Ideally, the desired financing option would allow for the implementation of a funding stream that is dedicated, dependable, and secure. In addition, it should be viewed by taxpayers as being beneficial, equitable and transparent.

N/A - No notifications are required in association with this case.

Update of Estimated Costs -

Previously, staff had estimated approximately $3 million would be needed annually to address the city's long-term street reconstruction needs. In conjunction with the 2014 budgeting process, staff is working to refine these estimated annual costs. To do this, several assumptions are being proposed as follows.

1. All city streets are proposed to be maintained and reconstructed “as is” (i.e. costs are being estimated assuming no changes to roadway type (urban versus rural), lane configurations or widths, number or location of turn lanes, pedestrian accommodations, public utilities, etc.

2. Estimated costs are based solely on 2013 construction costs for ease of comparison.

3. A PASER rating of 7 continues to be used as the target rating for our long-term street maintenance and reconstruction program.

If Council is not in agreement with any of these assumptions, it would help staff greatly to know which assumptions should be omitted or modified as soon as possible. This would prevent staff from spending time updating costs based on any assumptions not supported by Council.

Staff had originally proposed to update the estimated costs by developing numerous typical sections for various combinations of street widths for both urban (curb and gutter and storm sewer) and rural (no curb and gutter with ditches) streets, and by revising pavement section costs for each typical section based on the presence of either clay or sand subgrade sections as determined using known soils data. However, staff recently updated the existing streets database, which contains design information for each street section throughout the city, to ensure the database information is as accurate as possible. By utilizing this database staff can more accurately estimate costs for maintaining and reconstructing each city street section throughout the city, rather than by assigning each street section to the closest typical section design to estimate an average cost per mile to maintain and reconstruct each street segment.

Staff also plans to estimate costs for adding sidewalks, pathways and other pedestrian accommodations along applicable street sections based on the city's current sidewalk and pathway policy for new street construction projects. These costs will also be presented to Council in conjunction with the updated estimated costs for the long-term street maintenance and reconstruction program. Staff also proposes to develop draft language for a policy aimed to address the current lack of direction related to the inclusion or omission of sidewalks and pathways in association with street reconstruction projects. This current lack of direction was briefly discussed by staff during the Public Works Committee meeting on Tuesday, May 22nd. This draft language could then be reviewed by the Public Works Committee prior to requesting Council action on the policy.

Financing Options –

Numerous financing options are available to municipalities to provide funding for long-term street maintenance and reconstruction programs. Over the years, traditional financing options for such projects have included annual budgeting through the general levy, purchasing General Obligation (GO) bonds on a project by project basis, applying funds from our annual Municipal State Aid allotment, and applying special assessments as allowed for under Minnesota Statute Chapter 429. Each option has certain limitations and drawbacks which is making them less and less effective as a means for providing long-term funding.

Many cities are therefore exploring new financing options for funding long-term street maintenance and reconstruction programs. One such financing option that is rapidly gaining traction is the use of franchise fees, which is essentially a tax applied to private utilities that benefit financially from using the public right-of-way to conduct their business. And although this tax is typically passed along to the customer, franchise fees provide a dedicated, dependable, and secure funding stream for long-term street maintenance and reconstruction programs, and taxpayers generally tend to prefer making small payments on a regular basis versus being assessed thousands of dollars all at once.

Other financing options being considered by cities on a more frequent basis include borrowing against or leveraging revenues, including the use of toll charges and public-private partnerships (PPPs). And a number of State Statutes have been adopted in recent years with the intent of allowing cities to use such financing options due to their ability to provide more stable, long-term funding sources.

Attached is a table listing the more common long-term street maintenance and reconstruction financing options being explored by municipalities. Next to each option are listed the pros and cons commonly associated with each. Also attached is chapter 25 from the League of Minnesota Cities Handbook which explains available financing options for city improvements projects. Several slides prepared by Paul Donna with Northland Securities which explain some of the funding options in more detail are also attached.

As demonstrated in the attached table, franchise fees provide the greatest benefit for numerous reasons including their ability to provide a constant, dependable and renewable funding stream, and the fact that they provide a highly transparent funding source allowing taxpayers to better understand the cost they are paying in relation to the benefits received. In addition, fees are collected from property renters as well as owners, and fees are collected from properties regardless of tax status.

Special assessments, while still widely used, have been contested by taxpayers more vigorously in recent years, resulting in significant project delays and/or cancellations which negatively impacts long-term street maintenance and reconstruction programs.

As Council is likely aware, the city of Elk River recently completed a similar analysis to determine the best funding program for their long-term street reconstruction program. In the end, the Elk River City Council adopted the use of franchise fees to fund their street reconstruction program. In addition, they incorporated a rebate program for property owners still paying off their assessments from previous projects. This rebate simply refunds the annual franchise fee amount to each of those property owners over the remainder of their assessment term.

In April, staff emailed a survey questionnaire to other Anoka County cities asking for information on their current funding practices related to their long-term street reconstruction programs. Results from this survey will be presented to Council at the time the formal case for approving a funding program is presented to Council for consideration of action, which staff anticipates will most likely occur on August 13th.

Paul Donna, Senior V.P. with Northland Securities, and Finance Director Lund will be in attendance and can provide more detail on some or all of the financing options, especially as they pertain to the 2014 budgeting process.

Based on the information presented herein, staff recommends moving away from the use of special assessments as a funding source for our long-term street maintenance and reconstruction program, and instead utilizing franchise fees to supplement MSA, general obligation debt, and General Fund Revenues, to fund this long-term program into the future. If the City Council directs staff to pursue the use of franchise fees, staff will then develop a proposed franchise fee rate schedule for the private utilities utilizing our right of ways to conduct their business.

Staff recommends utilizing Franchise Fees to fund the city's long-term street maintenance and reconstruction program in the future.

Staff requests Council direction and/or feedback regarding preferred funding options and cost estimate assumptions associated with the city's long-term street maintenance and reconstruction program.