Discuss Comprehensive Utility Plan Updates

On August 23, 2011 staff met with the City Council in work session to review the City's 2011 development cost study.  This was a comprehensive review of where the City currently stands in relation to other municipalities with regard to development costs (utility trunk fees, building permit fees, escrows, etc.).  During that meeting utility rates were discussed; particularly how those rates are determined.  Rates are determined by taking a comprehensive look at the City's utility system, projecting future growth, and then determining the infrastructure needs to support such growth.  A plan is then developed that outlines potential timelines and costs for infrastructure improvements.  The ultimate costs to construct and maintain that utility system is then evaluated to determine the appropriate funding mechanism to distribute those costs to users and/or the development community.  Revisions to those rates are then adjusted annually, with the adoption of the annual rates and charges, and are based on the construction index related to inflation and construction costs.

On November 15, 2011 the topic of comprehensive utility plan updates, and corresponding rate studies, was discussed by the Public Works Committee.  This conversation was timely, in that the City Council wanted to understand how updates to these plans may impact adoption of the City's annual rates and charges.  The Council wanted to delay action on adopting rates and charges for 2012 until these utility plan updates were completed.  Since that time the 2012 rates and charges were adopted by the City Council in December, with the idea that the utility fees could be revised (if necessary) once the studies were updated and the results of the rate study completed.  On January 10, 2012 the City Council awarded contracts to Bolton & Menk and Landform to undertake this study, which was last completed in 2004.

The first order of business in advancing these plan updates is to review growth projections, which was the topic of conversation with the City Council on February 6, 2012.  Without first understanding the assumptions related to how the City intends to grow, updates to these plans are extremely difficult.  At that meeting Council directed staff to proceed with plan updates using the same assumptions from the existing (2004) comprehensive utility plans and 2030 Comprehensive Plan for the City; including growth, densities, and flow projections.

On March 27, 2012 City staff and our consultants were again in front of the City Council at work session to discuss the sanitary sewer system.  Direction from that meeting included maintaining a minimum fund balance equal to the average annual expenses over the study period, installation of a lift station to serve the Northeast Sewer Area (area near TH 47 and 167th Ave), and the creation of a residential equivalency factor for high density residential uses.  

The discussion for tonight's meeting will primarily focus on the water system.  Through the evaluation of this system we have carried forward the previous assumptions as directed by the Council with respect to growth projections, minimum fund balance, and use of a residential equivalency factor for high density residential development.  Bolton & Menk has analyzed the utility systems, consistent with this direction, and has developed a preliminary Capital Improvement Program (CIP) that evaluates future expenditures and projected revenues from user rates and development fees.

As previously stated, tonight we would like to focus the attention on discussion of the water supply and distribution system.  As the CIP and preliminary budgets were being prepared we followed the same assumptions as were included in the sanitary sewer analysis.  No acquisition costs are included for easement and/or right-of-way to install the required improvements; it is assumed they are part of a development scenario whereby the applicant would be responsible for all associated costs.  The operation and maintenance (O&M) expenses for the water system (with the exception of the water treatment plant - see below) will be funded with user rates, while system expansion will be funded with development/connection fees.  The City's current policy requires development to be responsible for all costs associated with the required utility extensions to serve their project; the City does not typically advance utility infrastructure expansion without an available funding source.

Finally, the current utility reimbursement agreement with 21st Century Bank related to the NW Sewer and Water Extension project was incorporated as well.  Under this agreement we are required to pay back utility connection charges as properties and/or developments tie into this system, which currently stands at approximately $5.3M in outstanding eligible connection charges.  The City is still able to offer fee credits for lateral extensions to serve the connecting properties, so the total eligible trunk fee reimbursements from a development would likely be reduced by the infrastructure costs to serve the development.  Based upon this information staff has factored in a $2M payback from the water utility through the year 2025.

Staff is seeking Council direction on a couple of key items so the water system CIP budget can be refined, and the determination of utility rates can be further analyzed (if necessary).  These issues center primarily on treatment and ultimate water source.

TREATMENT
Whether the decision is to utilize surface water or groundwater for the City's supply needs it is apparent that water treatment in some capacity will most likely be required in the future.  The City's current groundwater water supply exceeds secondary standards for iron and manganese content, and as more users are added to the system it is likely that complaints will increase and there will be a demand and expectation for improved water quality.  Therefore, staff feels it is imperative to plan for water treatment and include the associated costs in the water system plan.

Since there is a relatively low cost differential to construct a surface water treatment plant vs. a groundwater plant staff is proposing that a surface water treatment plant be included in the future plan.  A surface water treatment plant allows for greater flexibility in servicing future population demands, provides an infinite source, eliminates concerns with with respect to contamination and/or surface water connections within the aquifer, and potentially introduces additional funding sources if it were to be elevated to a regional supply concern.  Based upon previous Council discussions, and to remain conservative in our funding approach, we have proposed that this facility would be funded 80% by the City.

Also within this budgeting analysis we have compared the number of users that are projected to be on the municipal system at the time a treatment facility will be necessary, and factored the user rates from this serviced population into paying a portion of the treatment plant construction.  Based upon preliminary estimates it appears that approximately 50% of the 2030 MUSA service population will be connected to the water system at the time the plant will be necessary (approximately 2019).  Based upon this information staff is recommending an approximate 50-50 split as an equitable distribution of costs between user rates (primarily O&M costs) and development fees (primarily system expansions) to fund this future treatment facility.

SURFACE WATER VS. GROUNDWATER 
To meet the demands of the study period the City will need to install four more groundwater wells, at a capacity of 1,000 gpm each, to serve the 2030 MUSA population.  We currently have only two wells that meet this output requirement, so if it is the desire of the Council to continue utilizing groundwater sources only we should begin those investigations relatively soon to seek out locations and conduct test pumping.  Once locations are determined we would then have to factor all associated costs into the CIP budget, including acquisitions and required infrastructure to connect them to the existing treatment and distribute system.  Due to previously expressed supply concerns in the Franconia-Ironton-Galesville aquifer (the City's municipal water supply) from the Minnesota Department of Natural Resources, securing approval for additional wells could also be challenging.  While the City may be able to obtain the additional wells needed for growth, treatment would still most likely be required for the reasons referenced above.  Factoring all these items into account further reinforces staff's recommendation to plan for and partially fund (80%) a surface water treatment plant.

City consultants will again be in attendance to present the results of their evaluation and supporting information that has been developed to date.

Staff is looking for concurrence and direction from the Council on the assumptions used to formulate the comprehensive water system CIP budget, and associated rate and fee structures to fund the proposed improvements.  Further, staff is recommending:

1. Inclusion of a treatment plant for improved water quality, with an approximate 50-50 capital funding split between user rates and development fees.
2. The use of surface water as a municipal water source to supplement the current groundwater well sources.

If the Council is accepting of staff's proposal for the water supply and distribution system all that is remaining is to draft the final comprehensive utility plan reports and schedule for adoption at a regular City Council meeting in the near future.  Included in the Bolton & Menk presentation and supporting documentation for this meeting, will be a summary of impacts to all utility fees and rates based upon direction to date.

Funding for these comprehensive utility plan updates are being financed through the corresponding City enterprise funds.

Based upon discussion.