Approve Comprehensive Utility Reports; Sanitary Sewer and Water System Studies

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 of 2011, 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 was to review growth projections, which was the topic of conversation with the Council on February 6, 2012.  Without first understanding the assumptions related to how the City intends to grow, updates to these plans would be 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.  These assumptions basically equate to growth at a rate of 260 units per year, with densities ranging from 2.87 to 2.70 people per unit.

On March 27, 2012 City staff and our consultants were again in front of the 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.

On April 24, 2012 City staff and consultants met with Council in work session again to discuss the water system.  Direction from that meeting was to carry forward the previous assumptions, as approved by the Council, with respect to growth projections, minimum fund balance, and use of a residential equivalency factor for high density residential development.  Additional items discussed and approved at that meeting included the notion of one day treating the domestic water supply for iron and manganese (at a minimum), and planning for the use of surface water to supplement the system.

Twenty year Capital Improvement Programs (CIP) and preliminary budgets were being prepared for each utility report, following the direction and assumptions as approved by the Council.  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 each utility (with the exception of the water treatment plant - see below) are proposed to be funded with user rates, while system expansion is proposed to 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.

The current utility reimbursement agreement with 21st Century Bank, related to the NW Sewer and Water Extension project, has been incorporated into the budgets as well.  Under this agreement the City is 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, and the total amount of $112,000 from the sanitary sewer utility through the year 2025.

WATER TREATMENT
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 recommended (and Council concurred) that it is imperative to plan for water treatment and include the associated costs in the water system plan.

Since there was a relatively low cost differential to construct a surface water treatment plant vs. a groundwater plant staff proposed (and Council concurred) 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 Council discussions, and to remain conservative in our funding approach, it is proposed that this facility be funded 80% by the City.

Also within the budgeting analysis staff proposed (and Council concurred) that a portion of the water treatment facility should be funded by existing users, since they would also be realizing a benefit from improved water quality.  Bolton & Menk 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.  This analysis approximated that 50% of the 2030 MUSA service population will be connected to the water system at the time the plant will be necessary (approximately 2019), and therefore the water utility plan factors in 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.

It should also be noted that property acquisition may be required for constructing this facility, which costs are accounted for in the estimate to construct.  Two proposed locations for this facility are included in the plan; one being the original location as has been carried forward from the previous plan and located just south of fire station #1 on Armstrong Boulevard, and the other being the recently acquired property from the Legacy Christian Academy development on the southeast corner of Alpine drive and Puma Street.  Aside from the intake line from the Mississippi River to the facility, all the existing infrastructure to/from the municipal wells in the COR are located along Bunker Lake Boulevard and Armstrong Boulevard.  If it is unfeasible to acquire the land for site A (near fire station #1) the costs of infrastructure extensions to site B (Alpine/Puma) would be offset by the budgeted acquisition price of site A.  Decisions on acquisition should be considered in the near future, as it is estimated that this facility would be on-line by 2019 and it will take approximately two years to complete construction.  Preliminary design and planning, including acquisitions, is slated for as early as 2013.

UTILITY RATES
The main goal of the City Council in updating these comprehensive utility studies was to determine whether there was an opportunity to reduce development fees.  After careful analysis, and development of a budget that outlines all expenditures and revenues projected over the twenty year study period, it was concluded that development fees could indeed be reduced.

The water system report proposes to hold constant on base water user rates through 2013, and then calls for increases at a rate of 2.5% per year thereafter.  It also includes a decrease of $492 per connection in the Water Availability Charge (WAC) from 2012 to 2013, with 2.5% increase per year thereafter.  The trunk charge is also proposed to decrease by $668 per connection from 2012 to 2013, with a 2.5% increase per year thereafter.

The sanitary sewer report proposes to hold constant on base user rates through 2013, and then calls for increases at a rate of 2.5% per year thereafter.  It also includes a decrease of $172 per connection for residential connection charges from 2012 to 2013, with 2.5% increase per year thereafter.  The connection charge for commercial/industrial properties is also proposed to decrease by $516 per acre from 2012 to 2013, with a 2.5% increase per year thereafter.

Obviously the ebb and flow of development may impact these charges over the course of this planning period, so these fees will be evaluated annually as the City reviews its annual rates and charges.

As shown in the background section above, City staff and our consultant have developed these updated comprehensive utility plans by working closely with the City Council.  We believe these plans reflect the Council's original goal of looking for opportunities to reduce development fees.  In reviewing and preparing these plans a comprehensive analysis was completed to forecast future population growth, evaluate deficiencies in the existing systems, identify improvements that would be necessary to serve future populations, and develop a budget that would adequately finance the utility needs throughout the twenty year planning period.

Some minor text revisions are currently being completed on the reports, which should be finished in time for adoption at the meeting.  Staff recommends that the City Council adopt the 2012 comprehensive sanitary sewer and water system studies.

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