Public Hearing - Introduction of Franchise Fee Ordinances with Anoka Municipal Utility, CenterPoint Energy, and Connexus Energy

The Problem - Aging Streets
To date, maintenance of city streets has occurred on an “as-budgeted” basis, meaning pavement preservation treatments including crack sealing, sealcoating and overlaying of existing pavements were completed as the annual budget allowed.  Each year, city staff rates city streets using the Pavement Surface Evaluation and Rating (PASER) system, then prepares plans for that year’s Street Maintenance Program project, which is then bid and completed upon Council approval.  Unfortunately, not all streets that need pavement preservation treatments any given year, based on their rating, receive any, resulting in pavement that is aging faster than it would have if a routine street maintenance program been followed.  A routine maintenance program allows all streets to receive scheduled pavement preservation treatments, thereby maximizing the life of all city streets.  It should be noted that this is not an uncommon practice among cities with limited budgets, especially cities whose streets are relatively young and not in need of major reconstruction projects.  Such was the case with the City of Ramsey…until recently.
 
The City of Ramsey currently maintains over 174 miles of city streets with the oldest city streets being constructed in 1974.  Then during the 10 year period between 1976 and 1985, over 45% of the city’s streets were constructed.  The life expectancy of 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 pavement preservation treatments, is approximately 60 years.  However, if no pavement maintenance projects are completed over the life of a street, the life-expectancy is then less than 30 years.  Since most city streets in Ramsey have been maintained on an irregular basis, the anticipated life expectancy of our existing city streets should then lie somewhere between 30 and 60 years.
 
As part of our street maintenance program, city staff has been rating and evaluating the pavement condition of all city streets for many years.  Based on the overall mileage of streets, roughly 23.5% of city streets currently have a PASER rating between 0 and 6, whereas 76.5% are rated between 7 and 10.  This indicates that the city has maintained the majority of city streets to an average PASER rating of 6.5 or better to date, which is identified as one of the goals of the recently adopted Strategic Action Plan.  But when considering that over 45% of city streets are 30 to 40 years old, and when considering the age and PASER ratings of all other city streets (see attached maps), it is apparent that a long-term street maintenance program should be implemented to maximize the life expectancy of city streets, thereby avoiding the need to reconstruct 45% of city streets in a 10 year period which would place an unmanageable financial burden on the city.
 
Estimated Long-Term Street Maintenance Program Costs
 
Estimated costs for a long-term street maintenance program were calculated using 2013 unit bid prices received on projects that were bid in Ramsey and other nearby cities.  Costs assume a life-expectancy of 60 years for all city streets, which requires that the following pavement preservation treatments be applied on a regular basis per staff’s recommended long-term street maintenance program schedule as follows.  All streets would be crack sealed 3 years after initial construction, overlays, and reconstruction.  Concurrent crack sealing and seal coating operations would occur in years 6, 13, 26, 33, 46, and 53.  Overlay and edge milling projects would be performed in years 20 and 40.  And 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.
 
Based on staff’s recommended long-term street maintenance program, the estimated costs needed to regularly maintain all city streets over the next 5, 10 and 60 year periods were calculated and tabulated in Figure 1 (attached).  These costs assume all city streets will be maintained and reconstructed “as is” with no change to street components (curb and gutter, pavement material, utilities, etc.), lane widths, traffic control, or pedestrian facilities.

Long-Term Street Maintenance Program Funding Options
Funding source options for street maintenance projects have traditionally included the use of special assessments (sealcoats and overlays only), MSA annual allotments, GO bonds, and general levy budgeting. However, these traditional funding sources are becoming less and less reliable as funding sources for such projects.  This is primarily due to shrinking budgets, resulting in fewer dollars being budgeted annually for street maintenance projects, as well as greater public opposition in the form of public petitions being presented against such projects.  Because of the City Charter, rejecting a street maintenance project in Ramsey is relatively easy for homeowners to do, making it harder to apply special assessments, leading to significant project delays. Both these issues negatively impact the city’s ability to regularly and economically deliver street maintenance projects.
 
In 2013, our Municipal State Aid (MSA) allocation for street maintenance on MSA routes was $443,377 and our construction/reconstruction allocation was $576,844.  However, all MSA fund allocations over the next several years will be applied towards debt from previous projects so these funds are not currently available, but they will be at some point which could potentially be used to supplement franchise fee revenue in the future.
 
Ideally, the funding source used for the long-term street maintenance program would be reliable, providing a defined amount year after year to fund the program as needed, plus it would be a dedicated fund, preventing portions of it from being diverted to other uses.  In addition, an ideal funding source would be viewed by taxpayers as being reasonably beneficial, equitable and transparent to allow taxpayers to better understand what they are paying and where it is being spent.
 
New funding sources have therefore been researched. Such funding sources include the use of federal and state grants, Public-Private Partnerships, special legislation (such as Street Improvement Districts), and franchise fees.  Of these newer funding sources, only franchise fees can provide the reliable, dedicated funding source needed to ensure that streets maintenance projects can be completed on a regular schedule, thereby allowing the city to maintain city streets as economically as possible, and to ensure that all street can be maintained to an average PASER rating of 6.5 as identified in the city’s newly adopted Strategic Action Plan. In addition, franchise fees would be collected from property renters as well as owners, and also from tax-exempt properties, which seems to be a reasonable approach given such properties are often significant traffic generators.

State law provides cities the authority to impose franchise fees to utilities operating within the public right-of-way.  This fee can 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 long-term street maintenance program. Franchise fee revenues in the amount of $1,700,000 would be needed to fund the gap between the $500,000 that is budgeted through the general fund and the $2,202,376 needed annually over the next 5 years to fully fund the long term street maintenance program based on estimated costs. This would require a monthly fee of $8 per each electric and gas utility provider in Ramsey, which would equate to a $16 monthly fee for a resident using both electric and gas utilities.

By consensus, Council has directed that they would like to stop using special assessments in the future for funding a portion of the street maintenance program.  In the past, special assessments were levied against abutting property owners on sealcoat and overlay projects.  The amounts of the assessments varied from several hundred dollars to over seven thousand dollars.  In the future, this cost would climb substantially as the city starts to complete street reconstruction projects.  If the current assessment policy, which allows for assessments of 50% of the total project costs on overlay projects, were to be followed, assessments on reconstruction projects could cost tens of thousands of dollars.  This amount, which may not be defensible if challenged, would likely be unmanageable for many property owners, even if assessed over ten years.  Rental rates would likely be affected too as rental property owners would likely raise their rates to cover their assessments.
 
The adoption of utility franchise fees with our electric and gas utility providers (Anoka Electric, CenterPoint Energy, and Connexus Energy) would allow the city to charge these utilities for their use of public right-of-ways to conduct their business.  While these fees would be passed along to their customers, it would allow those paying the fee to budget for a relatively small monthly fee to help fund the street maintenance program.  
 
Council also made it clear by consensus that the following terms and conditions would need to be applied before a franchise fee program would be adopted.
• Ensure that all franchise fees collected are only spent on street maintenance program projects and not on other projects.
• Include 5 year sunset terms on all new Franchise Ordinances to allow a thorough review of revenues versus expenditures, and to consider other potential funding sources and make adjustments as desired or needed.  This would include MSA fund considerations.
• Charge each gas and electric utility a fixed franchise fee amount of $8 per month per account across commercial, industrial, and residential properties alike.
• Develop an equitable rebate program to prevent those currently paying an assessment levied with a street improvement project, or who paid their assessment up-front but would otherwise still be paying an assessment, from paying franchise fees on top of their assessment.

Franchise Fee Ordinance Adoption Process
On September 10^th Council ordered two Public Hearings for October 8^th, 2013.  The first Public Hearing is required to introduce Franchise Ordinances with Anoka Municipal Utility and Connexus Energy since the city’s existing franchise ordinance with these two companies expired on January 4^th, 2013.  Council therefore needs to adopt two new Franchise Ordinances with Anoka Municipal Utility and Connexus Energy prior to adopting three new Franchise Fee Ordinances with Anoka Municipal Utility, CenterPoint Energy, and Connexus Energy.  CenterPoint Energy’s existing Franchise Ordinance does not expire until 2023.
 
Once the Franchise Fee Ordinances are adopted by Council, published, and each utility is notified via certified mail that the ordinances were adopted, a waiting period of at least 90 days is required to allow the utility companies time to review and respond to the ordinances.  Since the utility companies provided the city with the draft ordinance language, staff is not anticipating any requested revisions.  Following the 90 day review period, the franchise fee ordinances become effective and the city can begin collecting franchise fees.  If the ordinances are adopted on October 22^nd, franchise fees could begin to be collected in February of 2014.

Notifications of the Public Hearing were posted in the Anoka County Union on September 27^th, as well as in the special October 2013 edition of the Ramsey Resident mailed on September 25^th.

Franchise fees, which cities are authorized by state statute to impose upon utilities operating within the public right-of-way, are fees charged to private utilities that benefit from using public right-of-ways to conduct their business. This fee is typically passed along to the consumer in the utility company’s invoices, along with a note stating that the fee is being imposed by the city.  If possible, we will work with the utility companies to make sure the note refers to the city’s long-term street maintenance program, although this will likely not be possible.  Again, per Council direction this fee would be dedicated solely to help pay for the maintenance of city streets and would eliminate the use of special assessments as long as the Franchise Agreements remain in force.

Franchise fees of $8 per month per each gas and electric utility serving commercial, industrial and residential properties throughout the city would generate approximately $1,700,000 in annual revenues to help pay for our long-term street maintenance program.

A public Open House was held on Tuesday, October 1^st.  It is estimated there were approximately 25 public attendees.  The most common comments received included concerns that the fees collected would be used for other projects, that some people can’t afford to pay $16 per month for franchise fees, that the distribution of cost is unfair, and that once the franchise fee program begins it will never end.  Other comments included why should someone who lives on a private street pay for public streets too, and people living on MSA streets should pay a different amount than those living on non-MSA streets. A more complete list of comments will be presented to Council prior to opening the Public Hearing.

The franchise fee proposal distributes an equal amount to each metered customer.  Residential and commercial properties are treated alike and charged the same fee.  The utility companies have indicated that they could accommodate a different residential and commercial rate if the Council wanted to pursue that option.  Generally, a different rate structure that charged some customers more, would mean some could pay less (or vice versa), if the same amount of revenue was targeted.  Notably, the utilities are unable to charge homes of different values, different rates.  Such a program would need to be handled via a City rebate program and the administrative costs would be high.  Consequently, this option is not recommended.

Staff recommends that Council introduce Ordinances #13-21, 13-22, and 13-23 and waive the City Charter requirement to read the ordinances aloud.  Staff met with gas and electric utilities and worked with them to prepare the draft Franchise Fee Ordinances attached so no objections from the utility companies are anticipated.

Staff recommends charging equal monthly fees to each utility since there are approximately the same number of gas and electric customers city-wide. 
 
Since numerous property owners are still paying special assessments on previous street improvement projects, staff recommends that Council adopt a rebate program where property owners who are currently paying an assessment for a previous street maintenance project, or who paid their assessment off early but would otherwise still be paying their assessment, receive an annual rebate at the end of the year in the amount of the franchise fees paid during that year.  However, this rebate program would only apply to those property owners whose assessments for the year are greater than the amount of the franchise fees paid during that year.  Rental properties, which would also qualify for rebates, must be in the name of the property owner, not the tenants.  To qualify for a rental rebate, the property owner must present copies of their gas and electric bills to be refunded the amount paid toward the franchise fee for that year.
 
If Council desires to move forward with adopting a franchise fee, staff recommends holding the second reading of the ordinances on October 22^nd, after which Council can adopt the ordinances if no further revisions are desired or requested.  However, if Council wishes to review additional information prior to holding the second reading of the ordinances, staff recommends continuing the Public Hearing on October 22^nd.   
 
Staff also recommends continued communications with the public to ensure that the purpose and expected outcome of the franchise fee is well communicated to the public. This is proposed to be done by posting additional literature on the city’s web site, and potentially including literature in utility billings.

Preparation of the draft ordinances was completed by City staff as part of normal staff duties.  The city attorney also reviewed the draft ordinances.

Conduct the Public Hearing and make a motion to waive the City Charter requirement to read the ordinances aloud.
 
Roll Call Vote:
 
Councilmember Johns
Councilmember Kuzma
Councilmember Tossey
Councilmember Backous
Councilmember LeTourneau
Councilmember Riley
Mayor Strommen