Consideration of Long-Term Street Maintenance Program (SMP) Costs and Funding Options

In 2009, staff estimated that the required annual cost would be $3,200,000 to fund the city’s long-term street maintenance and reconstruction program (SMP) to maintain a Pavement Surface Evaluation and Rating (PASER) system rating of 7 or better on all 141.82 miles of non-Municipal State Aid city streets. This annual cost was determined based on an assumed 40-year life-expectancy for a typical city street and accounted for all costs required to maintain and eventually reconstruct all roads at the end of their assumed 40-year life span, excluding initial construction costs. This then resulted in an estimated total cost of $9,588,203 to maintain all non-Municipal State Aid Streets over the 5 year period from 2011 to 2015, which equated to an annual cost of $1,917,640.60. Maintenance costs were also estimated for the same streets for the 10 year period from 2011 to 2020. These costs totaled $72,401,106.00, which equated to an annual cost of $7,240,110.60.

Per Council direction, staff has recently been working to re-evaluate these costs, which resulted in the following actions and findings.

Recent studies have concluded that streets constructed over solid, well-drained subgrade soils, such as the sands found in the Anoka sand plain which Ramsey is located upon, and that receive regularly scheduled maintenance, should realize a 60 year life expectancy. Therefore, if the City Council continues to annually dedicate the necessary SMP funding required to properly maintain all city streets, our streets should last for 60 years or more between reconstructions. The maintenance program staff recommends consists of crack sealing all streets 3 years after initial construction, overlay, and reconstruction operations. Concurrent crack sealing and seal coating operations should then occur in years 6, 13, 26, 33, 46, and 53, with an overlay and edge milling operation applied in years 20 and 40. Then, in approximately year 60, either a reclaim and repave project or a full reconstruction would occur, after which the maintenance cycle would begin all over again.

After updating the city streets database, which contains detailed design information for all street segments throughout the city, staff was able to more accurately estimate the annual costs needed to fund our long-term street maintenance and reconstruction program. This required staff to research and apply average 2013 unit bid prices for street maintenance operations including crack sealing, seal coating, overlaying, reclaiming and repaving, and reconstructions. The applied 2013 unit bid prices came from projects bid this year in other nearby cities, as well as from projects we bid this year, including our 2013 Street Maintenance Program.

As Council may recall, staff previously planned to develop a dozen typical sections or more to represent typical combinations of street widths and roadway types throughout the city, including urban (curb & gutter, storm sewer and boulevards) and rural (no curb & gutter and ditches) street sections and different pavement sections based on the existence of clay or sand subgrade soils. While this approach would have yielded reasonable cost estimates, by updating our streets database and applying average 2013 unit bid prices, staff was able to much more accurately calculate the estimated costs needed to maintain all city streets over their projected life spans, as well as over the next 5 to 10 years.

City staff has been rating and evaluating the pavement condition of all city streets for many years now. In general, roughly 23.5% of city streets are currently rated between 0 and 6, whereas 76.5% are rated between 7 and 10. This indicates that we have been doing a reasonable job of maintaining the majority of city streets at a PASER rating of 7 or greater, which is identified as one of the city’s Strategic Initiatives in Strategic Imperative II of the recently adopted Strategic Plan. However, these results also show that we have a ways to go before fully achieving this goal, which is reflected in the estimated street maintenance costs shown in Figure 1 (attached). It should also be noted that over 45% of our streets were constructed in the 10 year period between 1976 and 1985. As such, staff recommends following a maintenance program that allows these streets to be maintained in such a way that they will not all need to be reconstructed within a 10 year period, thereby avoiding a large budget spike in the future.

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

Updated Cost Estimates -

As noted earlier, staff previously estimated $3,200,000 would be required annually to fund the city's long term street maintenance and reconstruction program to maintain our 142+ miles of non-MSA city streets at a PASER rating of 7 or better. This estimate was based on the following assumptions and unit costs.
• Costs are based on maintaining 141.82 miles of non-MSA streets only
• Assumed 40 year design life for all streets
• 40 year maintenance costs included 4 crackseals/sealcoats, 1 overlay, and 1 reconstruction
• Estimated crackseal/sealcoat unit costs = $29,406/mile = $1.56/sq. yd.
• Estimated overlay unit costs = $96,096/mile = $5.85/sq. yd.
• Estimated reconstruct unit costs = $1,000,000/mile
• Included 18% overhead costs

As was also noted earlier, staff recently updated the cost estimates for our long-term street maintenance and reconstruction program, which included the following assumptions and unit costs, which are in many cases dramatically different from earlier assumptions and unit costs. Again, the updated estimate costs reflect the following regular maintenance schedule as outlined earlier including crack sealing all streets 3 years after initial construction, overlay, and reconstruction operations; concurrent crack sealing and seal coating operations should then occur in years 6, 13, 26, 33, 46, and 53, with an overlay and edge milling operation applied in years 20 and 40. Then, in approximately year 60, either a reclaim and repave project or a full reconstruction would occur, after which the maintenance cycle would begin all over again. The average 2013 costs associated with each of these treatments include $0.15 per square yard for crack sealing, $1.20 per square yard for sealcoating, $5.00 per square yard for a mill and overlay, and $50.00 per square yard for a partial/full reconstruction of the street. While some streets may only require partial reconstruction, which allows much of the curb and gutter to remain in place while the bituminous pavement section is removed and reclaimed and a new equivalent bituminous pavement section is installed.
• Costs are based on maintaining all 174.1 miles of city streets, including 32.28 miles of non-MSA streets
• Assumed 60 year design life for all streets
• 60 year maintenance costs include 9 crackseals, 6 sealcoats, 2 overlays w/ edge mill, and 1 reconstruction
• Estimated crackseal cost = $0.70/sq. yd.
• Estimated sealcoat unit cost = $1.80/sq. yd.
• Estimated urban section overlay w/ edge mill unit cost = $13.50/sq. yd.
• Estimated rural section overlay w/ edge mill unit cost = $11.00/sq. yd.
• Estimated urban section reclaim/repave unit cost = $22.00/sq. yd.
• Estimated rural section reclaim/repave unit cost = $20.00/sq. yd.
• Estimated urban section reconstruction unit cost = $60.00/sq. yd.
• Estimated rural section reconstruction unit cost = $38.00/sq. yd.
• Includes 18% indirect costs for in-house work to prepare PSE, bid PS, contract admin, stake/inspect construction, prepare as-builts, etc.

Per Council direction at the July 9th work session, the following assumptions were also considered when updating the estimated costs.
1. All streets shall be maintained and reconstructed “as is” with no changes to roadway design (number, width and/or configuration of lanes; traffic control measures; pavement material; etc.) or roadway type (urban vs. rural).
2. No costs are included for the addition of sidewalks and/or pathways along reconstructed streets (although this will be discussed at a later date as addressed earlier).
3. Costs are primarily shown as 2013 costs for ease of comparison, although construction inflation costs can easily be considered by applying a 5% per year inflation factor based on the current MnDOT recommendation for street improvement projects.
4. A minimum PASER rating of 7 continues to be used as the target rating for our long-term street maintenance and reconstruction program. If this rating changes it would impact costs due to decreased/increased maintenance costs and life expectancies for streets.

Based on the most recent design assumptions and estimated unit costs identified above, staff estimates the required annual cost will be about $4,368,000 to fund the city’s long-term street maintenance and reconstruction program (SMP) to maintain a Pavement Surface Evaluation and Rating (PASER) system rating of 7 or better on all 174.1 miles of Aid city streets, including non-MSA and MSA streets. This annual cost was determined based on an assumed 60-year life-expectancy for a typical city street and accounts for all costs required to maintain and reconstruct all streets at the end of their expected 60-year life span, excluding initial construction costs. The updated estimated total cost to maintain all 174.1 miles of city streets over the 5 year period from 2014 through 2018 is $11,011,879, which equates to an annual cost of $2,202,376. The estimated cost to maintain and reconstruct all city streets as needed during the 10 year period from 2014 through 2023 total $25,247,367, which equates to an annual cost of $2,524,737. Therefore, unless existing funding sources are increased or new funding sources are identified and implemented, the city will not be able to maintain our streets to the desired level and our streets will continue to degrade and fall further into disrepair.

Staff does not intend to discuss costs for adding sidewalks and/or pathways to existing streets at the time they are reconstructed, during this worksession. However, staff does plan to develop a draft policy for eventual Council consideration to address the current lack of direction related to the addition of sidewalks and/or pathways along reconstructed streets as was briefly discussed at the Public Works Committee meeting on Tuesday, May 22nd. The draft policy will likely reflect the city’s current sidewalk and pathway policy for new street construction. Of course, the draft policy language will first be discussed with the Public Works Committee before presenting to Council.


Funding Options -

Staff has researched alternative financing options that would allow the city to adequately fund our long-term street maintenance and reconstruction program needs as discussed above. Ideally, funding sources should be dedicated, dependable, and secure. In addition, any funding source should be viewed by taxpayers as being reasonably beneficial, equitable and transparent.

Numerous funding options are currently available to cities to fund their long-term street maintenance and reconstruction programs. In recent years, traditional funding options for street improvement projects have included annual budgeting through the general levy, purchasing General Obligation (GO) bonds on a project-by-project basis, applying funds from annual Municipal State Aid construction and maintenance allotments provided through MnDOT, and applying special assessments as allowed under Minnesota Statute Chapter 429. However, each of these options are becoming less and less effective and favorable as a means of providing dedicated, dependable and secure funding over the long term because local agencies are receiving fewer dollars these days from state and federal agencies, and since levies continue to shrink for various reasons.

Many cities are now exploring new funding options for long-term street maintenance and reconstruction programs. Such options include the increased pursuit of grant funding, the adoption of franchise fees, and the application of special legislation such as the recently proposed street improvement districts (this legislation was not passed so it is not an option at this time). Of these options, only franchise fees would provide a dedicated, dependable, and secure funding source to help fund our street maintenance program in the years ahead. This funding source is rapidly gaining traction and is being adopted by more and more cities across the state. Franchise fees, which could also be called franchise taxes, are simply fees charged to private utilities that benefit financially from using public right-of-ways to conduct their business. This fee or tax is then typically passed along to the consumer in the utility companies monthly or quarterly invoice, along with a note stating that the fee is being imposed by the city as a means to fund our street improvement program. Franchise fees can therefore provide a dedicated, dependable, and secure funding stream for long-term street maintenance and reconstruction programs, and based on the results of a city of Ramsey survey completed in 2011, a majority of the residents who responded indicated they would prefer to make small monthly payments through a franchise fee versus being assessed large sums of money all at once.

Other, lesser-used, funding options that can be considered by cities include borrowing against or leveraging revenues, including the use of toll charges and public-private partnerships (PPPs). 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.

A general (special) tax levy could also be applied against all properties in the city. Using this approach, the city could determine how much revenue is needed to pay for our expected SMP shortfall then apply a tax over all properties in the city. Under this approach, the highest valued properties would end up paying the largest share of the costs, and any properties utilizing tax abatement or located in TIF Districts would not contribute to the program funding, nor would benefitting properties exempt from property taxes such as churches, schools and non-profits. The revenue collected would then be added as a line item labeled Street Maintenance Program or something similar.

Attached as Figure 2 is a table listing several of the more common long-term street maintenance and reconstruction funding options being utilized by municipalities. Next to each option are listed the pros and cons commonly associated with each, both as related to taxpayers and the city. As demonstrated in the attached table, franchise fees appear to provide the greatest benefit with the least down-side for numerous reasons including their ability to provide a constant, dependable and renewable funding stream, and since provide a transparent funding source allowing taxpayers to better understand what they are paying and where it is going to. In addition, franchise fees can be collected from property renters as well as owners, and also from properties regardless of their tax status, which seems reasonable given such properties are often significant traffic generators.

Chapter 25 from the League of Minnesota Cities Handbook is also attached which explains in more detail the available financing options for city improvements projects.

In April, staff emailed a questionnaire to seven (7) other Anoka County cities asking for information on their current street maintenance and reconstruction program funding practices. Only 4 of the 7 cities responded. Their responses are listed below.
• Blaine utilizes special assessments to help pay for overlay and street reconstruction projects, as well as bonding, general levy funds, and MSA funds.
• Champlin utilizes special assessments to help pay for overlay and street reconstruction projects. They also use bonding, general levy funds, MSA funds, and franchise fees of $2.50 per month per each of 4 utilities, which are directed to their capital funds.
• Elk River no longer uses special assessments since adopting franchise fees this spring for their electric and gas utilities. Their fees vary by property classification. They also use MSA funds as available.
• Ham Lake - All funding for Ham Lake street rehabilitation projects are paid for from the Revolving Street Fund, which is an internal fund supported by the general tax levy. Ham Lake has not assessed benefitting parcels for rehabilitation projects for approximately 10 years.

Our current Municipal State Aid (MSA) allocation for street maintenance on MSA routes is $443,377 per year, and our construction/reconstruction allocation is $576,844 per year. That said, all MSA fund allocations in the foreseeable future will need to be applied towards debt from previous projects so the allocations will not be available to be applied to new projects for many years to come.

We therefore have an estimated $1.7 million annual shortfall for funding our SMP over the next 5 years, assuming of course that the Council continues to budget $500,000 annually through our general levy. The two most sustainable and likely long-term alternative funding options previously discussed include a general tax increase or implementation of a franchise fee. Both of these options, if implemented, would eliminate the need to specially assess costs directly to adjacent property owners using the 429 process. And while still widely used, special assessments have been contested by taxpayers more vigorously in recent years, resulting in significant project delays and/or cancellations which negatively impact the effectiveness of long-term street maintenance and reconstruction programs. Also, due to our Charter, the city of Ramsey faces particular hardships in applying special assessments due to the ability of taxpayers to more easily petition against street improvement projects.

State law provides cities the ability to impose franchise fees to utilities operating within the public right-of-way. This fee would be dedicated solely to help pay for the maintenance of existing city streets and would help eliminate the need to apply special assessments against property owners to help fund our SMP. Staff therefore recommends that Council authorize staff to begin preparing draft franchise fee ordinances to allow the city to collect fees from both electric and gas utilities. Staff would propose to charge equal percentages to each utility since there are approximately the same number of gas and electric customers city-wide. Franchise fee revenues, combined with our MSA allocations, the $500,000 currently being budgeted through the general fund, and our ability to continue bonding for projects, should allow us to fully fund our long term SMP for all existing city streets.

Attached as Figure 3 is a table prepared several years ago but which is still valid. The table shows the number of electric and gas customers throughout the city versus the revenues that could be collected based on varying monthly franchise fees. As can be seen, the monthly franchise fee would need to be around $5 each, or $10 per month per resident, to collect $1,000,000 in annual revenues. In order to collect $1,500,000 in franchise fees annually, the monthly fee would need to be over $7 each, or $14 per month per resident. This assumes that businesses would be charged the same amount. This is based on the past argument that businesses tend to operate along County and State highways, and therefore do not impact residential streets to the degree that residents do. However, many cities charge their businesses hundreds of dollars or more through their franchise fee ordinances, which would help to raise revenue by keeping residential rates lower. As noted above, the city of Champlin charges their utilities $2.50 per month, although they have 4 utilities so they raise $10 per month at that rate. Similarly, the city of Elk River charges their utilities $4.50 per month for residential rates, which raises $9 per month per resident in revenue.

Since several property owners are still paying special assessments on previous street improvement projects, staff would recommend that Council consider adopting a simple rebate program to ensure that residents and/or businesses are not asked to pay twice to fund our SMP. For example, while all properties with gas and electric service in the city would be charged a franchise fee on their bills, property owners still paying on a street assessment could receive an annual rebate of the franchise fees they paid during that year. Rebates could apply whether assessments were prepaid or paid annually, and could be offered through the end of the assessment period. Rental properties, which could also qualify for rebates, should be in the name of the property owner, not the tenants. To qualify for this rebate, the property owner would simply present copies of their gas and electric bills and be refunded the amount paid toward the franchise fee for that year.

If Council desires to move forward with adopting a franchise fee, staff would first seek to meet with utility company representatives while drafting franchise fee ordinances for each utility provider. Once the Ordinances are complete, Council would need to hold a Public Hearing prior to adopting the Ordinances. In addition, staff would recommend communicating with the public early and often throughout the process to ensure its success. In order to establish a franchise fee, a waiting period of at least 90 days is required following completion of the franchise fee Ordinances and the Public Hearing before invoicing can begin. Therefore, the earliest any property in the city with gas and/or electric service could be charged a franchise fee on their bill would likely be in January of 2014 or later.

Finance Director Lund will be in attendance and can provide more detail on some or all of the financing options if needed, especially as pertains to the 2014 budgeting process.

Staff recommends moving away from the use of special assessments as a funding source for our long-term street maintenance program, and instead utilizing franchise fees to supplement our MSA funds, general obligation debt, and general fund revenues to help fund our long-term street maintenance program well into the future. If the City Council directs staff to pursue the use of franchise fees, staff will prepare draft franchise fee Ordinances for each gas and electric utility utilizing public right of ways to conduct their business. These businesses include Anoka Electric, CenterPoint Energy, and Connexus Energy. As part of this process, staff will open a dialogue with each utility, understanding that private utilities are typically not proponents of the use of franchise fees, and that communicating to their customers that the franchise fee is being imposed by the city is critical to them. As such, we would work with each utility to assist them in drafting language to be added to their invoices to alert their customers to the fact that the franchise fees are a pass through expense initiated by the city to help pay for our long term street improvement program. The city of Elk River developed and published such literature when adopting their franchise fees to help their utility providers spread the word to their customers regarding the purpose and intent of the franchise fee, and to make sure their customers know the fee was initiated by the city to help pay for their street improvement projects. If Council so chooses, staff can prepare similar literature that could be mailed with our utility bills, posted to our web site, etc. to assist our local utility providers. Examples of Elk River’s literature will be available at the workshop Tuesday evening.

Staff recommends utilizing Franchise Fees to fund the city's long-term street maintenance and reconstruction program in the future. Although these fees are essentially taxes, the term franchise fee follows state statute language so staff recommends using the same language to avoid any confusion by the public.

Staff is requesting Council direction regarding their preferred funding options to help pay for the city's long-term street maintenance and reconstruction program. If franchise fees are to be pursued, staff requests Council direction on the monthly amount to be charged each utility, as well as a proposed sunset date for the ordinances. Most franchise fee Ordinances tend to have a 20 year sunset date, but in this case it might make sense to apply a 5 or 10 year sunset date to the Ordinances to align with our CIP. With this information in hand, staff can then begin developing the draft franchise fee Ordinances for each of the utilities, and can work with them to develop clear language for their use in communicating the purpose of the fee and the fact that it is being initiated by the city and not the utility themselves.