Management Report and Recommendations 12/31/1986

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City of Lino Lakes, Minnesota Management Report, Page 34 Payment for replacing contributed systems entirely through utility revenues may be financially burdensome for the Water and Sewer Fund and the users of such systems. Conversely, full assessment of replacement systems may not be prac- tical and may have statutory challenges (i.e., increase in value of property may not correlate to the assessment amount). An alternative method of financing the replacement of contributed systems is to assess a portion to the benefited property owners based on an established stan- dard life for the system. A system of assessing replacement systems at a pro- portionate rate compared to useful life may be the most practical method. If a system has an established useful life of 50 years and requires replacement after 30 years, the property owners would be assessed 60% of the cost of the replace- ment system. Any such policy must be scrutinized by legal counsel to improve the chance of prevailing in a contested assessment. The level of reserve balance to fund asset replacement is dependent upon the City's policy of funding the replacement of the various types of assets of the City. Asset replacements will not be entirely financed from reserve balances of the fund. Adequate reserves, however, allow the City options in dealing with annual outlays related to such asset replacements. 3. Emergency and /or unanticipated expenses. The nature of a City's utility systems is such that emergency expenditures are incurred frequently (i.e., major unan- ticipated repairs). Additionally, major expense categories can fluctuate signi- ficantly from year to year (i.e., MWCC, insurance, etc.). An adequate reserve structure allows the City to react to these fluctuations without severely disrupting the financial position of the fund. In summary user rates must be sufficient to cover operating expenses, plus meet the additional financial commitments of the City's Sewer and Water Enterprise Fund. These additional financial commitments are as follows: 1. Capital outlay and /or depreciation for the non - system fixed assets (i.e., machi- nery and equipment). 2. Future system improvements to be financed directly from user rates .(if any). 3. Debt payments (principal and interest) for a portion of the City's Sewer and Water Revenue Bond Issues which are used to finance portions of the City's water and sanitary sewer systems (i.e., water towers; wells; pumphouses; sanitary sewer interceptors and lift stations; and water and sewer overpass). 4. Reserve balances for the Sewer and Water Enterprise Fund at sufficient levels to meet current and future City policy. Definition of an "adequate" balance can only be determined through a more thorough study and by an understanding of the City Council's preference in dealing with the various areas discussed above.