HomeMy WebLinkAbout#18 Lake Elmo Preliminary Final Draft 1JUNE2016City ofLake Elmo,MN
FinancialManagementPlan
for
Water, Sanitary Sewer,and
StormWaterFunds
2016REPORT
FINALDRAFTFOR DISTRIBUTION
ASOF JUNE 1, 2016
Northland Securities, Inc.
45 South 7th Street, Suite 2000
Minneapolis, MN 55402
(800) 851-2920
Member NASD and SIPC
i
Letter ofTransmittal
Executive Summary 1
Organization of the Report....................................................................................................................1
Study Approach..........................................................................................................................................1
Conclusions and Recommendations..................................................................................................2
Table A - Growth in Residential Equivalent Units.....................................................................3
Table B - Establishment of Utility Rates.......................................................................................4
Table C - Management of Cash Balances and Assets..............................................................4
Chart 1 -Year-end Cash Balances and Change in Cash Balances.......................................5
Background 6
Water..............................................................................................................................................................6
Sanitary Sewer............................................................................................................................................6
Storm Sewer.................................................................................................................................................6
Capital Improvement Plan 7
Capital Projects...........................................................................................................................................7
Source of Funding for Capital Projects...............................................................................................7
Debt Service.................................................................................................................................................7
Table D-1 - Capital Improvement PlanWater...................................................................................9
Table D-2 - Capital Improvement Plan Sanitary Sewer..............................................................10
Table D-3 - Capital Improvement Plan StormWater...................................................................11
Table E-1 - Debt (Bonds) Outstanding as ofYear End.................................................................12
Table E-2 - Annual Debt Service - Principal and Interest Payment on Bonds.....................13
Chart 2 - Estimated Debt Outstanding atYear End.....................................................................14
Chart 3 - Estimated Annual Debt Service........................................................................................15
Utility Rates 16
Key Factors.................................................................................................................................................16
Annual Operating Expenditures.........................................................................................................16
Metropolitan Council Environmental Services..............................................................................16
Annual Capital Expenditures...............................................................................................................17
Debt Service...............................................................................................................................................17
Growth in Customers..............................................................................................................................17
Table F - Growth Projections................................................................................................................18
Chart 4 - Sanitary Sewer REU Platted and Connected byYear................................................19
Chart 5 -Water REU Planned and Connected byYear................................................................19
Available Other Revenue Sources......................................................................................................20
Historical Utility Rates............................................................................................................................20
Future Utility Rates..................................................................................................................................20
ProjectedVolumes ofWater Sold and Sanitary Sewer Billed...................................................20
Table G -Water Fund - Fees and Charges and Customer Data................................................21
Contents
ii
Table H - Sanitary Sewer Fund - Fees and Charges and Customer Data..............................22
Table I - StormWater Fund - Fees and Charges and Customer Data.....................................23
Chart 6 - Estimated Annual Gallons ofWater Billed....................................................................24
Financial Plans 25
Key Assumptions......................................................................................................................................25
Water Fund.................................................................................................................................................26
Table J-1 - Pro Forma......................................................................................................................27
Table J-2 - Cash Balance................................................................................................................28
Table J-3 - Operating and Other Expenses.............................................................................29
Chart 7 -Year End Cash Balances...............................................................................................30
Chart 8 - Source and Use of Funds............................................................................................30
Sanitary Sewer Fund..............................................................................................................................31
Table K-1 - Pro Forma.....................................................................................................................32
Table K-2 - Cash Balance...............................................................................................................33
Table K-3 - Operating and Other Expenses............................................................................34
Chart 9 -Year End Cash Balances...............................................................................................35
Chart 10 - Source and Use of Funds..........................................................................................35
StormWater Fund....................................................................................................................................36
Table L-1 - Pro Forma......................................................................................................................37
Table L-2 - Cash Balance................................................................................................................38
Table L-3 - Operating and Other Expenses............................................................................39
Chart 11 -Year End Cash Balances............................................................................................40
Chart 12 - Source and Use of Funds..........................................................................................40
Appendix 41
Appendix A -Water Fund - Calculation of Net Capital Assets..................................................41
Appendix B - Sanitary Sewer Fund - Calculation of Net Capital Assets................................42
Appendix C - StormWater Fund - Calculation of Net Capital Assets.....................................43
Appendix D - Quarterly Residential and Commercial Utility Bills byYear...........................44
Appendix E - Chart 13 -Year End Cash Estimates by Fund........................................................45
Appendix F - Chart 14 -Year End Cash Compared to Outstanding Debt............................46
iii
1
Executive Summary
EXECUTIVE SUMMARY
This report was prepared by Northland Securities for the
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City of Lake Elmo’s enterprise funds, including the Water
Fund, the Sanitary Sewer Fund, and the StormWaterFund
(collectively,the“utilityfunds”)todeterminetheappropri-
ate fees and charges and other revenue needed to fund
operations through 2025.
The process involved the projection of revenues and ex-
penditures for the utility funds and included incorporat-
ing the City’s plans for capital improvements, and plans
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jected growth in customers.
Recommendations included in the report are based on
information provided to Northland Securities from City
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as prepared by Northland Securities and detailed in the
report.
To the extent the assumptions in the report change in
the months and years ahead, which they will, the City will
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from the study, an explanation of the organization of the
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Organization of Report
This report is organized into six sections:
1. Executive Summary provides information on the or-
ganization of the report, study approach, and conclu-
sions and recommendations.
2. Backgrounddiscussesthehistoricalcontext,including
growth and development of the community, and per-
formance of the utilities.
3. Capital Improvement Plan provides information on
the City’s plans for infrastructure improvements for
the utilities. This includes estimates on project costs
andsourcesoffundsto pay forthe improvements. In-
formation on debt service is also included.
4. Utility Rates provides current, and future projected
utility rates that will be necessary to maintain a posi-
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tionisprovidedintheAppendixofthisreportonwhat
proposedrateincreaseswillmeantocustomers ofthe
utility systems.
5. Financial Plans are provided for the Water Fund, Sani-
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plans provide both historical, current, and future pro-
jected sources and uses of funds and balance sheet
information. Financial plans take into account capital
improvement plans, debt service, and proposed rates.
6. Appendix provides information on calculation of
net assets and depreciation for the utility funds, and
change in cash balances.
Study Approach
The following steps were taken as part of the study:
• City provided information on the following:
-historical spending and revenues, and future capi-
tal improvement plans;
-projected growth in customer units from future
residential and commercial development; and
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2
Executive Summary
prehensive Annual Financial Reports as of Decem-
ber 31, 2015 was not yet available for the study.
• Information provided by the City was organized, ana-
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EFWFMPQFEUIFOEJòFSFOUTDFOBSJPTXFSFDPOTJEFSFE
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to determine impact on utility rates.
•$JUZTUBòPòFSFEJOQVUBOEGFFECBDLPOUIFBTTVNQ
tions and desired outcomes.
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tion to the City Council.
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not reviewed as part of this study:
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by the City on future growth was not reviewed.
• Analysis of the basis for the City’s determination of
current utility fees and charges was not reviewed.
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to theexisting customer tier structure for charging for
water and sanitary sewer services was not reviewed.
• NorthlanddidnotreviewanyCitypreparedproforma
as part of the study and we are not aware of how this
report may compare to any prior or current City pro
forma.
• The scope of the study did not include a review and
comparison of the City’s utility fees and charges to
other cities.
• The City was not able to provide volume data by tier.
Because historical volume data was not available for
review, the report makes certain assumptions for fu-
ture volume of water sold by tier.
Conclusions and Recommendations
The following conclusions and recommendations are of-
fered as a result of the study:
1. Growth in Customers (Residential Equivalent
Units)
To meet service demands from growth in customers,
the City is planning for capital improvement projects.
It needs to be emphasized that the scope, timing, and
cost of the capital improvement projects included in
this report are preliminary estimates. The City Engi-
neer provided a projection of improvement projects
with gross estimates for project costs to provide a
reasonable basis for the pro forma analysis included
in this report.The City will need to continue to review
and revise the capital improvement plan on an on-
going basis.
Timing for future projects will be driven by future de-
velopment. The planned improvements that are cur-
rently included in the capital improvement plan are
anticipated to be paid for through a combination of
issuance of debt, special assessments (pre-paid), and
cash.
Inadditiontotheimpactoffuturegrowthonthecapi-
tal improvement plan, the actual timing for the build
out of already approved housing development and
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estimatesforfuturerevenuesto theutilityfunds,from
both the collection of development fees and usage
fees.
Table A provides the estimated growth projections for
residential equivalent units (platted and connected).
5IFHSPXUIFTUJNBUFTXFSFQSFQBSFECZ$JUZTUBò
Table F on page 20 provides detailed information on
3
Executive Summary
the growth projections summarized in TableA. The as-
sumptions for growth in customers have an impact
on the establishment of future utility rates and the
resulting revenue and year-end cash projections for
the utility funds.The City should continue to carefully
monitor its assumptions for future growth in custom-
ers against actual development.
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shown in Table A because some customers will connect to either mu-
nicipal water or sanitary sewer, but not both.
2. Establishmentof UtilityRates
The report assumes a 1.0% annual increase in water
and sewer rates, beginning in year 2018. The annual
rateincreaseisassumedonthequarterlybasefeeand
usage fees only. The annual fee for storm water is as-
sumed to increase by $10.00 per year, beginning in
year2017.TheincreasesareneededtoensuretheCity
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overthelong-term.Thereisnoassumedchangetothe
developmentfees(connectionandavailablycharges).
TheCityshouldestablishannualuserratesconcurrent
with the development of the following year’s budget
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to maintain a long term, forward looking view for the
ongoingmanagementoftheutilityfundstoavoidpo-
tential adjustments to utility rates based on prior year
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UIFEJòFSFODFCFUXFFOQSPKFDUFEBOEBDUVBMHSPXUI
incustomers,unanticipatedcapitalfundingpressures,
and other unanticipated expense or revenue short-
falls.
There are no changes recommended at this time to
the City’s rate structure (i.e., volume tiers). As the City
gains more experience operating the expanded utili-
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City should evaluate whether the current rate struc-
ture is continuing to meet the City’s objectives.
An increase in revenue from growth in customers is
projected; revenue collection will come from platted
and connected units and customer usage of the sys-
tems.
TableB provides a summary of utility rates as assumed
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nancial results and growth in customer units will im-
pact the future utility rates that will be needed.
4
Executive Summary
It is important to note that beginning in year 2022,
boththeWater FundandSanitarySewer Fundwillbe-
gin to draw on projected cash balances to cover ex-
penses. Current projections suggest that the City may
need to consider rate increases beyond what is pres-
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will need to be monitored to determine what may be
necessary in the future years.
TableC provides a summary of the projected year-end
cash balances, combined net assets, and combined
cash as a percentage of combined net assets.Chart1,
on page 5,provides a summary of the total estimated
year end cash balances and annual change in cash
balances.
Note toTable B: Table B does not include all of the tier rates. See Table G,
Table H, andTable I for more information.
3. Managementof Cash BalancesandAssets
The assumed level of utility rates included in this re-
port, combined with the projected volume of water
sold and sanitary sewer billed, plus the projected rev-
enue to be collected from development charges, will
provide cash needed to operate the utilities, maintain
capital assets, and to pay debt service. The Financial
Plan Section of this report provides a break-down of
cash balances for each of the utility funds based on
the following: 1) cash available to cover at least six
months of anticipated operating expenses; 2) cash
availabletocoverthefollowingyear’scapitalimprove-
mentsthatareplannedtobefundedwithcash;and3)
cashavailabletocoverthefollowingyeardebtservice.
5
Executive Summary
Chart 1 shows that cash bal-
ances in the utility funds are
projected to increase over the
next several years as a result
of revenue collection from
development (availability and
connection charges).The cash
balances will begin to decline
as cash collected over the next
several years is then used to
pay debt service in the future
years.
Chart 14, on page 48 provides
a comparison of projected
year-end cash balances to pro-
jected year-end outstanding
debt obligations.
6
Background
BACKGROUND
The City of Lake Elmo is located on the eastern edge of
the Twin Cities metropolitan area. The City’s 2030 Com-
prehensive Plan forecasts and provides for approximately
eighttimesthegrowthinhouseholdsandpopulationdur-
ing the 2000-2030 planning period than was experienced
during the 1980-2000 period.
The City reports an estimated 2010 population of 8,069
and 2,774 households (2010 Census). Population is esti-
mated to increase to 10,500 by 2020 and households to
3,800 (source: Metropolitan Council’s System Statement
Dated September 17, 2015). The land area for the City en-
compasses approximately 15,250 acres.
The City’s 2030 Comprehensive Plan provides guidance
on the City’s plans for managing future demand for utility
infrastructure. The City is preparing to update to its Com-
prehensivePlan, theupdatedPlan willlikely haveimplica-
tions for the assumptions included in this report.
Water Utility
Lake Elmo owns, operates and maintains a municipal wa-
ter supply and distribution system. The City has a goal to
serve existing population desiring public water supply
while preparing the system to allow people to connect
as development occurs or existing areas request service.
This policy guides the City’s capital improvement plan-
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water system. Capital planning includes projects to cor-
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The City uses an enterprise fund to account for its wa-
ter operations. The net assets in the Water Fund totaled
$9,360,075 and cash balance was $617,655 as of Decem-
CFS
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for the City).
SanitarySewer Utility
PropertyownersintheCityareservedbyindividualsewer
systems or in limited areas by municipal sewer. Capital
planswillprovideforanincreaseinthenumberofproper-
ties to be served by municipal sewer and connection to
the RegionalSewerSystem. The Metropolitan Council En-
vironmentalServices (MCES)has extended regionalsewer
service to serve a greater area of the City.
The City uses an enterprise fund to account for its sew-
er operations. The net assets in the Sewer Fund totaled
$3,611,364 and cash balance was $60,592 as of December
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the City).
StormWater Utility
TheCityoperatesastormwaterutility. Thesystemofcon-
veyancesisownedandoperatedbytheCityanddesigned
for collecting or conveying storm water. The City collects
anannualfeefrompropertyownersthat isusedtopayfor
the cost of constructing and maintaining the system.
The City uses an enterprise fund to account for its storm
water operations. The net assets in the Storm Water Fund
totaled $1,095,528 and cash balance was $312,746 as of
%FDFN CFS
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statement for the City).
7
Capital Improvement
Plan andDebtService
CAPITALIMPROVEMENTPLANAND DEBT
SERVICE
Thisreportincludesacapitalimprovementplan(the“CIP”)
thatincludescapitalprojectsfundedfromutilityrevenues
and accounted for the in the utility funds.Table D, which
canbefoundbeginningonpage9,providesdetailsonthe
annual capital spending that is projected and included in
this report for each of the utility funds.
It is important to emphasize that the CIP included in this
report should be considered a working draft. The City
Engineer prepared the CIP included in this report. The
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provides a reasonable basis for the pro forma analysis in-
cluded in this report. But it is important to recognize that
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future, and the actual costs, may vary greatly from what is
included in this report.
Capital Projects
The projects included in the CIP include projects to ex-
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and sanitary sewer systems.The City is a developing com-
munity with utility expansion needs. Planned projects in-
clude expansion of the City’s water supply capacity and
distribution system. Sanitary sewer services have been
expandedthroughtheconstructionofconnections to the
Regional Sewer System.
As a developing community, the City’s capital improve-
ment plans focus on expansion and does not presently
include capital spending for maintenance of existing sys-
tems.ThiswillneedfutureconsiderationbytheCityasthe
communitydevelopsandinfrastructureagesandrequires
major maintenance and/or replacement.
StormWaterProjects
ItshouldbenotedthatforthestormwaterCIP,theCityEn-
gineerhasincludedprojectsforPhases2and3forregion-
al drainage improvements. The City Engineer has identi-
öFE UI FGPMMPX JOHJTTVFTGPSUI FTUPSN X BUFSVUJMJUZUI BUBSF
BOUJDJQBUFE UPCFBE E SFTTFE JOUI FOFYUöWFUPUFOZFBST
• Phase 2 Downtown Regional Drainage project
consisting of land acquisition (Shiltgen property
west of Lake Elmo Avenue and north of CSAH 14),
a storm water pond, and storm water diversion
QJQJOHUP4VOöTI -BLF
• Phase 3 Downtown Regional Drainage project
consisting of storm sewer piping south of CSAH
14nearHagbergs.Thepondingmaybedeveloper
paid, but for the purposes of this report it is as-
sumed to be paid from utility revenue.
• KraemerLakeFloodplainstudywillbeneededbe-
foredevelopmentcanoccurinI-94corridor,Phase
3 area (between Keats-Lake Elmo Avenue).
Source of Funding for Capital Projects
The source of funding for the planned capital projects
includes one of the following sources or a combination
thereof: fund balance (cash); bond proceeds; and special
assessments.
Debt Service
Planned funding for utility infrastructure projects antici-
patestheissuanceofdebttoundertakeplannedimprove-
ments and to manage annual fee increases.
TheprojectionsassumethattheCitywillissuegeneralob-
ligation bonds secured by revenues from the utility funds
8
Capital Improvement
Plan andDebtServiceto pay principal and interest. This approach provides the
lowestcostofdebt.Thesebondswillnotcountagainstthe
City’s debt limit.Debt management is an important factor
in the City’s ongoing capital improvements planning.
The estimates for debt service are based on bonds to be
paid over 15 years and level annual debt service.The esti-
mated interest rates used to calculate annual debt service
are generally based on today’s current rate environment.
5I FBDUVBMJOUFSFTUSBUFTX JMME FQFOE POöOBMTUSVDUVSFBOE
market conditions at time of issuance.
TablesE1andE2,beginningonpage12,providesinformationon
the City’s existing and projected future debt obligations
supported by the utility funds.
• Table E-1 includes information on projected debt
(bonds) outstanding as of year-end for each of the
utility funds.
• Table E-2 includes information on projected annual
debt service (principal and interest) payments for
each of the utility funds.
9
Capital Improvement
Plan andDebtService
10
Capital Improvement
Plan andDebtService
11
Capital Improvement
Plan andDebtService
12
Capital Improvement
Plan andDebtService
13
Capital Improvement
Plan andDebtService
14
Capital Improvement
Plan andDebtService
The annual debt outstand-
ing as of year-end shown in
Chart 2 includes G.O. revenue
bonds secured by water, sani-
tary sewer, and storm water
revenues.
The chart includes both exist-
ing debt and estimated debt
anticipated to be issued in
the future and paid from util-
ity revenues. Future bond is-
suance estimates are based
on the City’s capital improve-
ment plan.
Chart 2 includes debt sup-
portedbyutilityrevenueonly
and does not include existing
or future estimated debt that
is paidfromproperty tax levy.
15
Capital Improvement
Plan andDebtService
Theannualdebtservice(prin-
cipal and interest) shown in
Chart 3 includes G.O. revenue
bonds secured by water, sani-
tary sewer, and storm water
revenues.
The annual amounts include
bothexistingdebtservice(on
outstanding bonds) and esti-
mated debt service on bonds
anticipated to be issued in
the future and paid from util-
ity revenues. Future bond is-
suance estimates are based
on the City’s capital improve-
ment plan (seeTable D).
Chart 3 includes debt sup-
portedbyutilityrevenueonly
and does not include existing
or future estimated debt that
is paidfromproperty tax levy.
16
UtilityRates
UTILITYRATES
Key Factors
1SPKFDUJOHUI FVUJMJUZSBUFTOFDFTTBSZUPN BJOUBJOUI Fö
nancialstabilityoftheCity’sutilityoperationsrequiresde-
velopment and analysis of the following key factors:
• Estimates for future annual operating expenditures,
including personnel, materials and supplies, cost of
electricity, and other operating expenses. The City
contracted with TKDA Engineering Firm to perform a
reviewoftheCity’soperations.TheresultsoftheTKDA
revieware includedinthe futureannualoperatingex-
penditures included in this report.
• Metropolitan Council Environmental Service (MCES)
sewer fee charged to the City by the Metropolitan
Councilforregionalcollectionandtreatmentofwaste
water. This is an operating expense that the City does
not have control over.
• Annual capital expenditure to maintain and improve
the utility systems.
• Annual debt servicePOCPOE TJTTVFE UPöOBODFDBQJ
tal improvements.
• Growth in customers using and paying for the sys-
tems. This growth will provide additional revenue to
the systems at time of platting, connection, and on-
going usage, but will also create additional demand
for services.
• Available other revenue sources other than fees and
charges to users of the water and sanitary sewer ser-
vices.
Annual Operating Expenditures
Costs incurred in operating the utility systems, which are
used up in the period in which acquired, are recorded
as operating expenditures. Annual growth in operating
expenditures, not including the MCES charge, has been
modest.Itisanticipatedthatgrowthinfutureyearswillbe
2.0% annually.
The operating expense projections included in this report
were prepared by Bernie Bullert, fromTKDA.The City con-
tracted with TKDA to perform a review of the City’s op-
erations for the utility systems and to provide input into
future estimated capital improvement projects. TKDA will
provide the City with a report that explains the assump-
tions and other factors behind the operating expenses
that are included in the pro forma for each of the utility
funds.
Depreciation is reported as an operating expenditures
and is the process of allocating the costs of an asset over
its useful life in a systematic and rational manner. Depre-
ciation is projected to change with capital spending and
depreciation of both existing and future acquired assets.
The appendix to this report includes information on the
calculation of depreciation for this report.
MetropolitanCouncil Environmental
Services
TheMCESchargetocitiesforregionalcollectionandtreat-
ment has been volatile in recent years. MCES experienced
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opment during the recession which has caused a corre-
sponding decline in revenue collected by the Council for
Sewer Availability Charges (a one time fee for new con-
nections).Forprojectionpurposes,thestudyassumesthat
future charges paid to MCES for collection and treatment
17
UtilityRates
will increase by 5.0% annually. This is part of the annual
operating expense to the City’s Sewer Fund.
The City accounts for the collection and payment of the
MCES “Sewer Availability Charge” (SAC) through an ac-
counts payable account. Therefore the pro forma for the
sanitary sewer fund (see Table K-3, on page 34) does not in-
clude a separate revenue and expense line item for the
MCES SAC.
Annual Capital Expenditures
TheCIP anticipates paying for futurecapitalimprovement
project costs with a combination of revenue sources.
The City anticipates future development will provide the
neededrevenuetotheCityforpayingforutilityexpansion
through the collection of development fees (an availabil-
ity and a connection charge).
Paying for annual planned capital improvement projects
with cash may be a sound strategy depending on the de-
tails of the project. It avoids incurring annual interest ex-
pense. However, this strategy requires advance planning
and implementation of utility fees and charges that pro-
WJE FBE FRVBUFDBTI øPX
For large (non-routine) capital expenditures or unantici-
pated capital expenditures, the use of bonding to fund
capital minimizes annual rate increases that otherwise
wouldbenecessary.ItalsoallowstheCitytochargefuture
customers the cost of infrastructure with a longer useful
life, versus putting the entire burden on today’s custom-
ers. The CIP anticipates bonding for certain project costs.
The resulting annual debt service on the bonds is includ-
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Debt Service
Debt service in the Utility Funds is paid from revenue col-
lected from utility fees, availability and connection charg-
es, and special assessments. The CIP anticipates debt is-
suance to be supported by the revenues within the utility
funds.
"MMDVSSFOUBOE GVUVSFE FCUJTBDDPVOUFE GPSJOUI FöOBODJBM
plans that are included in this report. The estimated debt
serviceisbasedon15yearsbondspayableatcurrentmar-
ketinterestrates.Futureestimatedutilityfeesandcharges
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Growth in Customers
Growth in customers fromfuture landdevelopment is the
most important factor in determining the projections for
future utility rates. Build out of approved developments
will bring an increase in revenue to the City’s utility funds
through the collection of availability and connection
charges and fees collected for service and usage of the
systems. Availability charges and connection charges are
one time charges collected at the time of development
and connection to the system. Estimating the increase in
future customers from growth in residential and commer-
cial development is the most volatile factor in developing
öOBODJBMQSPKFDUJPOTGPSUI FVUJMJUZGVOE TTableFandChart4
andChart5,beginningonpage18,include information on the
assumed growth in residential equivalent units (“REU”)
fromfuturedevelopment.Theprojectedannualgrowthin
3&6TXBTFTUBCMJTIFECZ$JUZTUBòBOEQSPWJEFEUP/PSUI
land for this report.
The pace of future development will increase or decrease
projected revenues shown in this report and impact fu-
ture utility rates. For this reason it is critical that the City
18
UtilityRates
19
UtilityRates
The estimates for future
growth from development,
shown in residential equiva-
lentunitsinChart4andChart
XBTQSFQBSFECZ$JUZTUBò
The data was provided to
Northland Securities as an
input for the study and this
report.
The assumption on growth,
and annual units platted and
connected, is an important
input for projecting future
revenue for the utility funds.
Revenue from increased
residential equivalent units
comes from a one time pay-
ment of the City’s availabil-
ity charge and connection
charge and then from on-
going payment for use of
the systems. The availabil-
ity charge is paid at time of
platting and the connection
charge at time of connection.
20
UtilityRates
VQE BUFJUTöOBODJBMQMBOTCBTFE POBDUVBMHSPX UI
Available Other Revenues
There is limited other revenues that provide a source of
funding for utility services.The majority of the cost to op-
erateandmaintainthesystemispaidfromfeesandcharg-
es collected from those using the system. Other revenue
includes interest income on cash balances, special assess-
ments, grants, and rents.
Historical Utility Rates
Informationonhistoricalratesisprovidedin TableG,TableH,
andTableI,beginningonpage21, for each of the utility funds.
Ratesshownarebilledquarterly,withtheexceptionofthe
stormwaterfeewhichisbilledto customersreceivingthis
chargeonanannualbasis.TheCitychargesabasicservice
fee for water only.
Future Utility Rates
Informationonfutureprojectedutilityratesforyears2017
to2025isalsoincludedin TableG,TableH,andTableI,foreach
PGUI FVUJMJUZGVOE T5I FQSPKFDUFE GVUVSFSBUFTSFøFDUUI F
rates necessary to maintain adequate cash balance in the
utility funds. These rates applied against projected cus-
tomers and usage is used to calculate the annual estimat-
FE DI BSHFTGPSTFSWJDFTGFFTTI PX OJOUI FöOBODJBMQMBOT
(pro forma) for each utility fund.
The report assumes a 1.0% annual increase in water and
sewer rates, beginning in year 2018. The annual rate in-
crease is assumed on the quarterly base fee and usage
fees only. The annual fee for storm water is assumed to
increase by $10.00 per year, beginning in year 2017. As
stated, the increases are needed to ensure the City is able
UPNBJOUBJOTVóDJFOUDBTIJOUIFVUJMJUZGVOETPWFSUIF
long-term. There is no assumed change to the develop-
ment fees (connection and availably charges).
The validity of the tier structure the City uses for charging
customers for water, based on volume of water sold, was
not reviewed as part of this study. The current adopted
tier structure appears to be reasonable.
ProjectedVolumes ofWaterSoldand
Sanitary Sewer Billed
Annual estimated volume of water sold by tier and esti-
mated sanitary sewer billed by year is included in Table G
and Table H. The estimated gallons of water billed is sum-
marized in Chart6,onpage24.
The City was not able to provide information on histori-
calvolumesoldpertiersoassumptionsweremadeonthe
volumes sold per tier in order to prepare this report and
toprojectfuturerevenuesfrombillingofwaterusage.The
assumptions should be updated in the future as better is
available from the City’s billing system.
The report assumes average annual volume of 96,000 gal-
lonsperresidentialcustomer(or8,000gallonspermonth).
This volume is pro-rated across the City’s tier structure us-
ing estimated historical data (actual data was not avail-
able). For commercial customers, annual volume is cal-
culated based on prior year estimated volumes adjusted
by the percentage increase in commercial (and school)
customers.The report assumes annual sewer volume bill-
er per customer, for both residential and commercial, of
72,000 gallons (or 6,000 per month).
The assumptions for residential and commercial custom-
ersvolumeusageforbothwaterandsanitarysewerneeds
to be revisited and reviewed as better information be-
comes available fromtheCity’s utility billingsysteminthe
future and historical billing data becomes available.
21
UtilityRates
22
UtilityRates
23
UtilityRates
24
UtilityRates
The estimated annual gallons
of water billed is projected to
increase as more customers
connect to the water system.
This report assumes that the
average annual usage per
customer, for residential and
commercial, remains con-
stant.
25
FinancialPlans
FINANCIAL PLANS
#BTFE POI JTUPSJDBMöOBODJBMQFSGPSN BODF
QSPKFDUFE VUJM
ity rates andstructure, andanticipatedfuturecapitalproj-
FDUT
öOBODJBMQMBOT QSPGPSN B
I BWFCFFOQSFQBSFE GPS
each the utility funds.
KeyAssumptions
5I FöOBODJBMQMBOTGPSFBDI PGUI FVUJMJUZGVOE TX BTE FWFM
oped based on several key assumptions which are as fol-
lows:
• Operating expenditures, including personnel costs
and materials supplies and all other operating ex-
pense will increase by 2.0% annually along with other
adjustments as prepared by TKDA Engineering Firm.
The City contracted withTKDA to perform a review of
theCity’soperationsfortheutilitysystemsandtopro-
vide input into future estimated capital improvement
projects. TKDA is to present the City with a report
that will provide information on the assumptions and
other factors behind the operating expenses that are
included in the pro forma for each of the utility funds.
• Nochangeinexistingtierstructureforfeesandcharg-
es.
• Depreciation is estimated based on projected capital
improvements with new assets assumed to be depre-
ciated over a 40 year term. Information on calculation
of net capital assets, including depreciation is includ-
ed in the Appendix.
• Current capital improvement plan will be implement-
ed at estimated project costs and projected sources
of funding as included in this report. This includes an
increase in future debt service for payment on bonds
to be issued.
• Utility fees for use of the system are assumed to in-
crease by 1.0% annually for water and sanitary sewer
services, beginning in year 2018. The annual rate in-
creaseisassumedonthequarterlybasefeeandusage
fees only. The annual fee for storm water is assumed
toincreaseby$10.00peryear,beginninginyear2017.
• Connection and availability charges are assumed to
remain constant for years 2016-2025. Revenue from
these charges is used to pay for the system, including
the planned capital projects and related debt service.
• Theproposedfutureutilityfeesandchargesareshown
to be at a level that is adequate to maintain cash bal-
BODFTJOUIFGVOETTVóDJFOUUPDPWFSUIFGPMMPXJOH
1) six months of operating expenses; 2) the following
year’s capital improvements that are planned to be
fundedwithcash;and3)thefollowingyear’sdebtser-
vice.
26
FinancialPlans
WATER FUND
Fund Description
The Water Fund is used to account for the operating and
capital improvement costs of the water utility system.
Background
5I F8 BUFS'VOE JTJOTPVOE öOBODJBMDPOE JUJPO'VUVSFö
nancialperformance willbe impacted by the timing of fu-
ture development of land in the City and the timing of re-
ceipt of development fees (trunk line availability charges
and connection charges) that will support infrastructure
costs and receipt of charges for service for usage of the
system.
Source of Funds
There are two major source of funds for the Water Fund:
thecollectionofchargesforservicefees(basefeeandvol-
ume usage fees) and development fees collected at time
of platting and time of connection to the system. Future
revenue from charges for service fees will increase as the
number of customers increases over time and the volume
of water sold increases.
5I FöOBODJBMQMBOGPSUI F8 BUFS'VOE BTTVN FTOPDI BOHF
in the City’s existing rate structure and assumes rates in-
crease of 1.0% annually beginning in year 2018.
TheCitycollectsrevenuefromarentalfeeforaccesstothe
City’s water tower by communication companies.
InterestincomeisearnedonthecashbalanceintheWater
Fundthatisrecordedasrevenue.Theinvestmentearnings
rate is projected to be 0.5% for future years.
Special assessments levied for water infrastructure im-
provements is recorded as revenue in theWater Fund.
Use of Funds
The use of funds is to pay for the operation of the water
system, debt service expense, depreciation, and autho-
rized transfers to other funds that may occur from time to
time.
Operating expense line item details can be found in Table
J-3.
Debt service expense, which includes interest expense on
bonds, can be found in Table E-2. (Principal payments on
bonds supported by the Water Fund result in a reduction
of liability for the Fund.)
Depreciation expense details, including calculation of
projected net capital assets, can be found in AppendixA,.
Transfers
5I FöOBODJBMQMBOE PFTOPUBOUJDJQBUFBOZGVUVSFUSBOT
fers in or out of funds from the Water Fund to other city
funds. Presently the City does not charge the utility funds
for General Fund overhead but does charge the fund for
BENJOJTUSBUJWFTUBòUJNF
Balance SheetItems
5I FöOBODJBMQMBOJODMVE FTQSPKFDUFE BTTFUTBOE MJBCJMJUJFT
for the Water Fund, this includes projected annual year-
end cash balance.Table J-2 provides a detailed summary
on projected change in cash year by year.TheWater Fund
cash balance includes funds collected and recorded as
deferred revenue and funds held in escrow related to the
refunding of bonds.
WATERFUND
27
FinancialPlans
WATERFUND
28
FinancialPlans
WATERFUND
29
FinancialPlans
WATERFUND
30
FinancialPlans
Estimated year end cash bal-
ances are projected to in-
DSFBTFPWFSUI FOFYUöWFZFBST
and then will be spent down
as projects are implemented
and cash balances are drawn
down.
The source and use of funds
includes depreciation and
capital contributions. The dif-
ference between the annual
source and use of funds is the
change in net assets of the
fund.
WATERFUND
31
FinancialPlans
SANITARY SEWER FUND
Fund Description
TheSanitarySewerFundisusedtoaccountfortheoperat-
ing and capital improvement costs of the sanitary sewer
utility system.
Background
5I F4BOJUBSZ4FX FS'VOE JTJOTPVOE öOBODJBMDPOE JUJPO
'VUVSFöOBODJBMQFSGPSN BODFX JMMCFJN QBDUFE CZUI FUJN
ing of future development of land in the City and the tim-
ing of receipt of development fees (trunk line availability
charges and connection charges) that will support infra-
structurecostsandreceiptofchargesforserviceforusage
of the system.
Source of Funds
TherearetwomajorsourceoffundsfortheSanitarySewer
Fund: the collection of charges for service fees (base fee
and volume usage fees) and development fees collected
at time of platting and time of connection to the system.
Future revenue from charges for service fees will increase
as the number of customers increases over time and the
volume of water sold increases. Future development of
landthroughplattingwillresultinincreasedrevenuefrom
water availability and connection charges.
5I FöOBODJBMQMBOGPSUI F4BOJUBSZ4FX FS'VOE BTTVN FTOP
change in the City’s existing rate structure and assumes a
rate increase of 1.0% annually beginning in year 2018.
InterestincomeisearnedonthecashbalanceintheWater
Fundthatisrecordedasrevenue.Theinvestmentearnings
rate is projected to be 0.5% for future years.
Special assessments levied for sanitary sewer infrastruc-
SANITARYSEWER FUNDture improvements is recorded as revenue in the Sanitary
Sewer Fund.
Use of Funds
The use of funds is to pay for the operation of the sanitary
sewersystem,debtserviceexpense,depreciation,andau-
thorizedtransferstootherfundsthatmayoccurfromtime
to time.
Operating expense line item details can be found in Table
K-3.
Debt service expense, which includes interest expense on
bonds, can be found in Table E-2. (Principal payments on
bonds supported by the Sanitary Sewer Fund result in a
reduction of liability for the Fund.)
Depreciation expense details, including calculation of
projected net capital assets, can be found in AppendixB.
Transfers
5I FöOBODJBMQMBOE PFTOPUBOUJDJQBUFBOZGVUVSFUSBOTGFST
in or out of funds from the Sanitary Sewer Fund to other
city funds. Presently the City does not charge the util-
ity funds for General Fund overhead but does charge the
GVOEGPSBENJOJTUSBUJWFTUBòUJNF
Balance SheetItems
5I FöOBODJBMQMBOJODMVE FTQSPKFDUFE BTTFUTBOE MJBCJMJUJFT
for the Sanitary Sewer Fund, this includes projected an-
nual year-end cash balance.Table K-2 provides a detailed
summary on projected change in cash year by year.
32
FinancialPlans
SANITARYSEWER FUND
33
FinancialPlans
SANITARYSEWER FUND
34
FinancialPlans
SANITARYSEWER FUND
35
FinancialPlans
Estimated year end cash bal-
ances are projected to in-
crease annually between
years 2016 and 2025. This
is due the projected annual
revenue collection exceeding
the use.
The actual year-end cash bal-
ances will be impacted by
changes in planned capital
spending. As projects are
implemented, beyond what
is included in the draft CIP,
cash balances may be lower
than what is projected in this
report.
The source and use of funds
includes depreciation and
capital contributions. The dif-
ference between the annual
source and use of funds is the
change in net assets of the
GVOE5IFEJòFSFODFJTESJWFO
by the projected collection of
trunk line availability charges
in advance of further build-
out of the system.
SANITARYSEWER FUND
36
FinancialPlans
STORMWATERFUND
Fund Description
TheStormWaterFundisusedtoaccountfortheoperating
and capital improvement costs of the storm water utility
system.
Background
5I F4UPSN 8 BUFS'VOE JTJOTPVOE öOBODJBMDPOE JUJPO'V
UVSFöOBODJBMQFSGPSN BODFX JMMCFJN QBDUFE CZUI FUJN JOH
of future development oflandintheCity. Future develop-
ment will increasethe demands onthestormwaterutility
infrastructure and provide opportunity for increased rev-
enue to support the infrastructure and operation of the
system.
Source of Funds
There is one major source of funds for the Storm Water
'VOE
UI FDPMMFDUJPOPGBöYFE BOOVBMDI BSHFGPSTFSWJDF
fee. The City does not charge an availability fee for the
storm water utility system. Build out of the system has
been paid as part of the developer’s project costs.
Theannualfee,presentlyat$50.00,isassumedtoincrease
by $10.00 per year, beginning in 2017. This increase is
needed in order to maintain cash balance. Beginning in
2017,theCitywillbeginpayingdebtserviceonthebonds
JTTVFE JOUPöOBODFTUPSN X BUFSJN QSPWFN FOUT
Some cities choose to manage storm water utility fees
UI SPVHI öOBODJOHDFSUBJODBQJUBMJN QSPWFN FOUTX JUI UBY
levy, the City will have the ability in the future to consid-
er what costs, if any, of the storm water utility should be
spread over the cities entire tax base.
InterestincomeisearnedonthecashbalanceintheWater
Fundthatisrecordedasrevenue.Theinvestmentearnings
STORMWATERFUNDrate is projected to be 0.5% for future years.
Special assessments levied and recorded as revenue to
the StormWater Fund relate to unpaid utility bills and are
not related to project costs.
Use of Funds
The use of funds is to pay for the operation of the storm
water system, debt service expense, and depreciation, ex-
pense.
Operating expense line item details can be found in Table
L-3.
Debt service expense, which includes interest expense on
bonds, can be found in Table E-2. (Principal payments on
bonds supported by the Storm Water Fund result in a re-
duction of liability for the Fund.)
Depreciation expense details, including calculation of
projected net capital assets, can be found in AppendixC.
Transfers
5I FöOBODJBMQMBOE PFTOPUBOUJDJQBUFBOZGVUVSFUSBOTGFST
in or out of funds from the StormWater Fund to other city
funds. Presently the City does not charge the utility funds
for General Fund overhead but does charge the fund for
BENJOJTUSBUJWFTUBòUJNF
Balance SheetItems
5I FöOBODJBMQMBOJODMVE FTQSPKFDUFE BTTFUTBOE MJBCJMJUJFT
for the Storm Water Fund, this includes projected annual
year-end cash balance.Table L-2 provides a detailed sum-
mary on projected change in cash year by year.
37
FinancialPlans
STORMWATERFUND
38
FinancialPlans
STORMWATERFUND
39
FinancialPlans
STORMWATERFUND
40
FinancialPlans
Estimated year end cash bal-
ances are projected to de-
cline due to the increase in
debt service expense related
UPUI FöOBODJOHPGDBQJUBMJN
provement projects.Year-end
cashbalancesareexpectedto
recover due to the projected
increase in the annual storm
water fee (assumed to be $5
per year increase).
The actual year-end cash bal-
ances will be impacted by
changes in planned capital
spending. As projects are
implemented, beyond what
is included in the draft CIP,
cash balances may be lower
than what is projected in this
report.
The source and use of funds
includes depreciation. The
EJòFSFODFCFUXFFOUIFBO
nual source and use of funds
is the change in net assets of
the fund.
STORMWATERFUND
41
Appendix
42
Appendix
43
Appendix
44
Appendix
45
Appendix
The increase in estimated
year-end cash is due to the
collectionofchargesfromde-
velopment to pay for future
capital improvement proj-
ects, including debt service
JTTVFE UPöOBODFUI FQSPKFDUT
The estimated spend down
of cash is projected to occur
as projected development
units are realized and the col-
lection of development fees
begins to decline and debt
service payments are met.
For year by year explanation
of projected change in year-
end cash balances, see Table
J-2 on page 29 for the Water
Fund), Table K-2 on page 34
for the Sanitary Sewer Fund,
and Table L-2 on page 39 for
the StormWater Fund.
46
Appendix
AsnotedforChart13onpage
46, the increase in estimated
year-end cash is due to the
collectionofchargesfromde-
velopment to pay for future
capital improvement proj-
ects, including debt service
JTTVFE UPöOBODFUI FQSPKFDUT
The CIP anticipates the issu-
ance of debt in the future to
payforcapitalimprovements.
The projected future year-
end cash as percent of year-
end debt outstanding will
increase as cash increases
from the collection of devel-
opment charges. The cash
collected will be used to pay
future debt service.
Northland Securities, Inc.
45 South 7th Street, Suite 2000
Minneapolis, MN 55402
(800) 851-2920
Member NASD and SIPC