#02 - Utility Financial Management Plan Updates

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STAFF REPORT DATE: December 10, 2024 TO: Mayor and Council FROM: Clarissa Hadler, Finance Director Nina Kraemer, Finance Coordinator AGENDA ITEM: Utility Financial Management Plan Updates BACKGROUND: First in 2016, again in 2020, and most recently in 2023 the city contracted with Northland Securities Inc to complete a long-range financial management plan for the water, sewer and storm water funds. This year, with the addition of a Finance Coordinator, we were able to bring that analysis in-house, with the assistance of the Northland model. ISSUE BEFORE THE CITY COUNCIL: 1) What should the utility rate increase be for 2025? DISCUSSION: The financial management plan is an important tool used to set rates and plan for future operations and investments in the utility funds. The plan incorporates the capital improvement projects from the 10-year CIP, an assumption on growth in customers and operations, financing strategies, and fund balance policy to arrive at the rates needed to support each utility fund. The assumptions utilized to draft this plan changed in a few ways since last year. We had to rework our development prediction model as the prior City Administrator had been the one to draft that in the past. Community Development Director Stopa and City Planner Jensen aided in the development of the current model, which is significantly more detailed than in years past. We believe our predictions in near-most- years are fairly accurate, as these are easier to gauge. Far-year are more difficult, and we’ve taken a more conservative approach in estimating those. Another assumption that needed to change was the number of new MPCA-funded connections. The MPCA has halted funding on water extensions paid via the 3M settlement funds, in favor of funding more treatment plants. This change significantly decreased revenues including connection fees and ongoing service charges, in both the water and sewer fund. The results of these changing assumptions are indicative of how highly subsidized our utility operations are by development. Projected revenues in all funds dropped significantly from the prior model when we remove the new connections from the MPCA-funded projects. The final assumption that has an immense impact on the water fund will be the operations and maintenance expenses of the planned treatment plants. The operations of these facilities are expected to almost double the operations expenses of the water fund as a whole. There is the possibility that those expenses will be covered by the MPCA via the 3M Settlement Funds or the 3M Consent Decree for a number of years, but that information will not be available for some time. For now, the utility model reflects a lack of that funding, as it is difficult even to determine the likelihood that it will occur. As we looked at these models, we contemplated what our goals were for the utility funds. Revenue