HomeMy WebLinkAbout#07 - Financial Management Plan for Utility FundsSTAFF REPORT
DATE: October 3, 2017
REGULAR
ITEM #7
NO ACTION REQUIRED
TO: City Council FROM: Brian A. Swanson – Finance Director AGENDA ITEM: Draft Financial Management Plan for Utility Funds
REVIEWED BY: Kristina Handt – City Administrator
BACKGROUND: The City retained the services of Northland Securities, Inc. to prepare an updated draft Financial Management Plan for Water, Sanitary Sewer and Storm Water Funds. The last iteration was presented to
the City Council on October 18, 2016, which included operational costs developed by TKDA that Northland Securities Inc. incorporated into the Financial Management Plan, presented by Ms. Tammy Omdal. The update presented to the City Council this evening builds upon those premises, and incorporates updated
information from the City’s utility billing system, 2016 Comprehensive Annual Financial Report (CAFR), 2017 Budget, proposed 2018-2022 Capital Improvement Plan, and updated utility connection estimates.
On September 21, 2017, Ms. Omdal of Northland Securities, Inc. presented the draft report to the Finance Committee, with both she and City staff available to answer any questions. Based on that meeting, an updated draft Financial Management Plan for Water, Sanitary Sewer and Storm Water Funds is being presented by Ms. Omdal to the City Council this evening for review and comment.
QUESTIONS BEFORE THE CITY COUNCIL:
1) Does the City Council have any questions regarding the process and information?2) Would the City Council like to have any adjustments made to the report?
DISCUSSION: Ms. Omdal will present information contained in the report, with both she and staff will be available to answer questions from the City Council.
FISCAL IMPACT: Timely and accurate information pertaining the Water, Sanitary Sewer and Storm Sewer Funds will allow the City Council to make informed decisions regarding utility rates, and the long-term sustainability impacts
of those rate adjustments.
RECOMMENDATION: None this evening, as this report is an information sharing for both the City Council and community.
ATTACHMENTS: 1)Draft Financial Management Plan for Water, Sanitary Sewer and Storm Water Funds
Northland Securities, Inc.45 South 7th Street, Suite 2000Minneapolis, MN 55402(800) 851-2920Member NASD and SIPC
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 - Annual Estimated Rate Increases.................................................................................3
Table B-1 - Utility Rates......................................................................................................................3
Table C-1 -Water Fund Operating Expenses and Unrestricted Cash................................4
Table C-2 - Sanitary Sewer Fund Operating Expenses and Unrestricted Cash..............5
Chart 1 -Year-end Cash Balances ..................................................................................................6
Background 7
Water..............................................................................................................................................................7
Sanitary Sewer............................................................................................................................................7
Storm Sewer.................................................................................................................................................7
Capital Improvement Plan 8
Capital Projects...........................................................................................................................................8
Source of Funding for Capital Projects...............................................................................................8
Debt Service.................................................................................................................................................8
Table D-1 - Capital Improvement PlanWater.................................................................................10
Table D-2 - Capital Improvement Plan Sanitary Sewer ..............................................................11
Table D-3 - Capital Improvement Plan StormWater...................................................................12
Chart 2 - Estimated Debt Outstanding atYear End.....................................................................13
Chart 3 - Estimated Annual Debt Service........................................................................................14
Utility Rates 15
Key Factors.................................................................................................................................................15
Annual Operating Expenditures.........................................................................................................15
Metropolitan Council Environmental Services..............................................................................15
Annual Capital Expenditures...............................................................................................................16
Debt Service...............................................................................................................................................16
Growth in Customers..............................................................................................................................16
Available Other Revenue Sources......................................................................................................16
Historical Utility Rates............................................................................................................................17
Future Utility Rates..................................................................................................................................17
EstimatedVolumes ofWater Sold and Sanitary Sewer Billed..................................................17
Table E - Growth Projections................................................................................................................18
Chart 4 - Sanitary Sewer REU Platted and Connected byYear ................................................19
Chart 5 -Water REU Planned and Connected byYear................................................................19
Table F -Water Fund - Fees and Charges and Customer Data.................................................20
Table G - Sanitary Sewer Fund - Fees and Charges and Customer Data..............................21
Table H - StormWater Fund - Fees and Charges and Customer Data...................................22
Chart 6 - EstimatedVolumes ofWater and Sanitary Sewer......................................................23
Financial Plans 24
Key Assumptions......................................................................................................................................24
Water Fund.................................................................................................................................................25
Table I-1 - Pro Forma.......................................................................................................................26
Table I-2 - Cash Balance.................................................................................................................27
Table I-3 - Operating and Other Expenses.............................................................................28
Chart 7 -Year End Cash Balances...............................................................................................29
Chart 8 - Source and Use of Funds............................................................................................29
Sanitary Sewer Fund..............................................................................................................................30
Table J-1 - Pro Forma......................................................................................................................31
Table J-2 - Cash Balance................................................................................................................32
Table J-3 - Operating and Other Expenses.............................................................................33
Chart 9 -Year End Cash Balances...............................................................................................34
Chart 10 - Source and Use of Funds..........................................................................................34
StormWater Fund....................................................................................................................................35
Table K-1 - Pro Forma.....................................................................................................................36
Table K-2 - Cash Balance...............................................................................................................37
Table K-3 - Operating and Other Expenses............................................................................38
Chart 11 -Year End Cash Balances............................................................................................39
Chart 12 - Source and Use of Funds..........................................................................................39
Appendix 40
Appendix A - Example Quarterly Utility Fees Payable by PropertyTypes...........................40
Appendix B - Chart 13 - Combined Utility Funds Restricted Cash and Debt......................41
This report was prepared by Northland Public Finance, a
division of Northland Securities, Inc., for the purpose of
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mo’s enterprise funds, including theWater Fund, the Sani-
tary Sewer Fund, and the StormWater Fund to determine
the appropriate fees and charges to fund the systems.
The process involved the projection of revenues and ex-
pendituresandincorporationoftheCity’splansforcapital
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projections along with estimated growth in customers.
Recommendationsincludedinthereportarebasedonin-
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City consultants and certain assumptions as prepared by
Northland 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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thestudy,anexplanationoftheorganizationofthereport
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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. Background discusses the historical context, includ-
ing growth and development of the community, and
performance of the utilities.
3. Capital Improvement Plan provides information on
the plans for infrastructure improvements for the
utilities. This includes estimates on project costs and
sources of funds to pay for the improvements. Infor-
mation on debt service is also included.
4. Utility Rates provides current, and future estimated
utility rates that will be necessary to maintain a posi-
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tion is provided in the Appendix for impact of rates
changes on customers.
5. Financial Plans are provided for the Water Fund, Sani-
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cial plans provide both historical, current, and future
sources and uses of funds and balance sheet infor-
mation. Financial plans take into account capital im-
provement plans, debt service, and proposed rates.
6. Appendix provides supplemental information to the
report.
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;
-estimated growth in customer units from residen-
tial and commercial development; and
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Comprehensive Annual Financial Reports as of De-
cember 31, 2016.
• Information provided by the City was organized, ana-
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utility rates.
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tions and desired outcomes.
• A draft of the report was prepared.
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not reviewed as part of this study:
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by the City on future estimated growth was not re-
viewed.
• Analysis of the basis for the City’s determination of
current utility fees and charges was not reviewed.
•5IFmOBODJBMJNQBDUPGQPUFOUJBMDIBOHFTUPUIFFYJTU
ing 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.
• TheCityisnotabletoprovidevolumedatabytier. Be-
cause historical volume data is not available, the re-
port makes certain assumptions for future volume of
water and sanitary sewer volume billed by tier and in
total. Changes to the assumption for average volume
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in the report.
Conclusions and Recommendations
The following conclusions and recommendations are of-
fered as a result of the study:
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 provid-
ed a projection of improvement projects with gross
estimatesforprojectcoststoprovideareasonableba-
sis for the pro forma analysis included in the report.
TheCitywillneedtocontinuetoreviewandrevisethe
capital improvement plans.
Timing for capital projects will be driven by develop-
ment. The planned improvements that are currently
included in the capital improvement plan are antici-
patedtobepaidthroughacombinationofissuanceof
debt, special assessments, grants, and cash.
Inadditiontotheimpactoffuturegrowthonthecapi-
tal improvement plan, the actual timing for the build
out of already approved housing development and
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estimates for future revenues.
TableA on page 3 provides a summary of the total esti-
mated growth for residential equivalent units (platted
and connected).The growth estimates were prepared
CZ$JUZTUBõTableEonpage18providesthedetailedin-
formation on the total estimated growth summarized
in Table A. The estimates for growth in customers has
an impact on the establishment of future utility rates
and the resulting revenue and year-end cash projec-
tions for the utility funds. The City should continue
to carefully monitor its estimates for future growth in
customers against actual development.
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showninTableAbecausesomecustomerswillconnecttoeithermunic-
ipal water or sanitary sewer, but not both.The sanitary sewer improve-
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The report assumes annual increases in the fees and
chargesforutilityservicesbeginninginyear2018.The
increasesareneededtoensuretheCityisabletomain-
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There is no change estimated in the fees charged for
development (connectionandavailably charges) only
to the base and usage fees for service.TableB provides
information on the annual estimated rate increases.
Table B-1 provides a summary of the utility rates as
included in the report for the next ten years. Actual
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Note toTable B-1: Table B-1 does not include all of the tier rates. SeeTables F-H
for more information.
year-end unrestricted cash balance and operating ex-
penses (not including depreciation) and unrestricted
cash as a percentage of operating expenses for the
Water Fund.TableC-2 on page 5 provides the same in-
formationfor the Sanitary Sewer Fund.Chart1 on page
6, providesa summary of thetotalestimated year end
cash balances by fund. It is estimated that in future
years the funds will begin to draw on overall cash bal-
ances to cover capital and debt service. 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.
the actual utility rate increases that may be needed.
TheCityshouldestablishannualuserratesconcurrent
with the development of the following year’s budget.
It is important to maintain a long term, forward look-
ing view for the ongoing management of the utility
funds to avoid potential adjustments to utility rates
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andactualgrowthincustomers,unanticipatedcapital
funding pressures, and other unanticipated expense
or revenue shortfalls.
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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UIF
City should evaluate whether the current rate struc-
ture is continuing to meet the City’s objectives.
Theutilityratesincludedinthisreport,combinedwith
the estimated volumes for water and sanitary sewer
plus the estimated revenue to be collected from de-
velopment charges, will provide cash needed to op-
erate 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) restricted
cash for planned capital; 2) restricted cash for debt
service/calling of bonds; and 3) unrestricted cash
available equivalent to 35-50% of anticipated operat-
ing expenses.
TableC-1 provides a summary of the estimated annual
Note to Table C-11: Amounts shown are estimates based on the assumptions
and information includedin the report.
Note to Table C-2: Amounts shown are estimates based on the assumptions
and information includedin the report.
Chart1 shows that cash bal-
ances in the utility funds are
estimated to remain stable,
with growth, over the next
several years.
The cash balances will begin to
decline as planned, as revenue
collected from development
(trunk line availability and con-
nections charges) is used to
pay down debt outstanding.
The increase in cash from 2016
actual to 2017 is due to the col-
lection of the approximate $3.4
million receivable from other
governments (state funding) in
2017 for capital improvements
made in 2016.
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 (
). 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 water
operations. The net position in the Water Fund totaled
$13,394,649 and cash balance $135,048 as of December
31, 2016.
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 extendedregionalsewer
service to serve a greater area of the City.
The City uses an enterprise fund to account for its sewer
operations. The net position in the Sewer Fund totaled
$5,570,928 and cash balance $2,606,515 as of December
31, 2016.
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 position in the Storm Water
Fund totaled $1,414,436 and cash balance $1,945,366 as
of December 31, 2016.
Thisreportincludesacapitalimprovementplan(the“CIP”)
thatincludescapitalprojectsfundedfromutilityrevenues
and accounted for the in the utility funds.TablesD-1through
D-3 beginningonpage10,providedetailsonplannedcap-
ital spending for each of the utilities.
It is important to emphasize that the CIP included in this
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costestimatesincludedforeachoftheprojectsprovidesa
reasonablebasisfortheproformaanalysisincludedinthis
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projectsthatmayactuallybeauthorizedinthefuture,and
the actual costs, may vary greatly fromwhat 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 tothe
Regional Sewer System.
As a developing community, the City’s capital improve-
ment plans focus on expansion and does not presently
include any material capital spending for maintenance of
existingsystems.Thiswillneedfutureconsiderationbythe
City as the community develops and infrastructure ages
and requires major maintenance and/or replacement.
StormWaterProjects
For the storm water system, it should be noted that the
CIPincludesprojects for Phases2 and3 forregionaldrain-
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following issues for the storm water utility that are antici-
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• 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
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• 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). The
City anticipates grant funds to pay for the study.
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; special as-
sessments; and/or grants.
Debt Service
Planned funding for utility infrastructure projects antici-
pates the issuance of debt to undertake certain planned
improvements and to manage annual fee increases.
TheprojectionsassumethattheCitywillissuegeneralob-
ligation bonds secured by revenues from the utility funds
to pay principal and interest. This approach provides the
lowest cost of debt. These bonds will not count against
the City’s debt limit. Debt management is an important
factor in ongoing capital improvements planning.
The estimates for debt service are based on bonds to
be paid over 15 years and level annual debt service. For
bonds supported by special assessments, the special as-
sessments are estimated to be payable over 20 years.
Theestimatedinterestrates usedto calculateannualdebt
service are generally based on today’s current rate envi-
SPONFOU5IFBDUVBMJOUFSFTUSBUFTXJMMEFQFOEPOmOBM
structure and market conditions at time of issuance.
Charts2 and 3 on pages 13 and 14, provide information on
the City’s existing and estimated future debt obligations
supportedbytheutilityfunds.Chart2 includesinformation
on estimated debt (bonds) outstanding as of year-end for
thecombinedutilityfunds.Chart3 includesinformationon
estimatedannualdebtservice(principalandinterest)pay-
ments for the combined utility funds.
The annual debt outstanding
as of year-end shown in Chart
2 includes general obliga-
tion revenue bonds secured
by water, sanitary sewer, and
storm water revenues. The
chart includes both existing
debt outstanding (as of Oc-
tober 2, 2017) and estimated
debt anticipated to be issued
in the future and paid from
utility revenues. Future bond
issuance estimates are based
on the City’s capital improve-
ment plan.
Chart2 includes debt support-
edbyutilityrevenueonlyand
does not include existing or
future estimated debt that is
paid from property tax levy.
Theannualdebtservice(prin-
cipal and interest) shown in
Chart 3 includes general ob-
ligation revenue bonds se-
cured by water, sanitary sew-
er, 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).
Chart3 includes debt support-
edbyutilityrevenueonlyand
does not include existing or
future estimated debt that is
paid from property tax levy.
Key Factors
1SPKFDUJOHUIFVUJMJUZSBUFTOFDFTTBSZUPNBJOUBJOUIFm
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 in 2016 to
perform a review of the City’s operations. The results
of the TKDA review serve as the basis for the future
annualoperatingexpendituresincludedinthisreport.
• 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. Future charges payable to the
MCES are calculated based on total estimated annual
sanitary sewer volume and the MCES current rate (as
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• Annual capital expenditure to maintain and improve
the utility systems.
• Annual debt servicePOCPOETJTTVFEUPmOBODFDBQJ
tal improvements.
• Growth in customers using and paying for the sys-
tems.Growthincustomerswillprovideadditionalrev-
enue 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 paid by customers of the utility systems.
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. It is anticipated that growth in future years will
beapproximately2.0%annually,withsomelimitedexcep-
tions.
The operating expense projections included in this report
are informed by the report prepared by TKDA, consultant
to the City. Depreciation is reported as an operating ex-
penditures and is the process of allocating the costs of
an asset over its useful life in a systematic and rational
manner. Depreciation is estimated to change with capital
spending anddepreciationofbothexistingandfutureac-
quired assets.
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
will increase by 5.5% 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. The operating expense report
for the Sanitary Sewer Fund (see TablesJ-1andJ-3 on pages
31 and 33 do not include a separate revenue andexpense
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 revenue
totheCityforpayingforutilityexpansionthroughthecol-
lection of development fees (an availability and a connec-
tion 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-
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For large (non-routine) capital expenditures or unantici-
pated capital expenditures, the use of bonding to fund
capital minimizes annual rate increases that otherwise
would be necessary. It also allows the City to charge fu-
ture customers the cost of infrastructure with a longer
useful life, versus putting the entire burden on today’s
customers.The CIP anticipates bonding.The resulting an-
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plans for the funds.
Debt Service
Debt service in the funds is paid from revenue collected
from utility fees, availability and connection charges, and
special assessments. The CIP anticipates debt issuance to
be supported by the revenues within the utility funds. All
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plans that are included in this report. The estimated debt
service on future bonds is based on 15 years and bonds
payable at current market interest rates. Future estimated
VUJMJUZGFFTBOEDIBSHFTSFnFDUUIFDPTUPGUIFFTUJNBUFE
increase for debt service.
Growth in Customers
Growth in customers from development is the most im-
portant factor in determining the projections for future
utilityrates.Buildoutofapproveddevelopmentswillbring
anincreaseinrevenuetotheutilityfundsthroughthecol-
lection of availability and connection charges and fees
collectedforserviceandusage ofthe systems. Availability
chargesandconnectionchargesareonetimechargescol-
lected at the time of development and connection to the
system. Estimating the increase in future customers is the
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for the utility funds.TableE on page 18 and Charts4and5on
page 19 include information on the estimated growth in
customers or residential equivalent units (“REU”) from de-
velopment. The estimated growth in REU’s was prepared
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The pace of growth in customers from development will
increase or decrease estimated revenues shown in this
report and impact future utility rates. For this reason it is
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tual growth.
Available Other Revenues
There is limited other revenue. The majority of the cost
to operate and maintain the system is paid from charges
collected from those using the system. Other revenue in-
cludes interest income, special assessments, and grants.
Historical Utility Rates
Information on historical rates is provided in Tables F-H
beginning on page 20 for each of the utility funds. Rates
shown are billed quarterly, with the exception of the
stormwaterfeewhichisbilledto customersreceivingthis
charge on an annual basis. Prior to 2017, the City charged
a basic service fee for water only.
Future Utility Rates
Information on estimated utility rates for years 2018 to
2026 is included in Tables G-H for each utility fund. The fu-
UVSFSBUFTSFnFDUUIFSBUFTOFDFTTBSZUPNBJOUBJOBEFRVBUF
cash balance in the utility funds. These rates applied
against estimated customers and usage is used to calcu-
late the annual estimated charges for services fees shown
JOUIFmOBODJBMQMBOT QSPGPSNB
GPSFBDIVUJMJUZGVOE
The report assumes a 3.0% annual increase in water rates
anda1.0%annualincreaseinandsewerratesbeginningin
2018.Theannualrateincreaseisassumedonthequarterly
basefeeandusagefees only.Theannualfeeforstormwa-
ter is assumed to increase by $5.00 per year beginning in
2017 and then by $10.00 per year beginning in 2021.The
increases are needed to ensure the City is able to main-
UBJOTVöDJFOUDBTIJOUIFVUJMJUZGVOETPWFSUIFMPOHUFSN
There is no estimated change to the rates charged for de-
velopment, the connection and availably charges.
The tier structure the City uses for charging customers for
water, based on volume of water sold, was not reviewed
aspartofthisstudy.Thecurrentadoptedtierstructureap-
pears to be reasonable.
The City changed the basis for charging sanitary sewer
customers in 2017. Residential customers are charged a
CBTFGFFGPSUIFmSTU
HBMMPOTPGTFXFSWPMVNFCJMMFE
per quarter andthen charged on a per 1,000 gallons basis
for volume billed above this usage.
EstimatedVolumesofWater Sold and
Sanitary Sewer Billed
Annual estimated volume of water sold by tier and esti-
mated sanitary sewer billed by year is included in Table F
andTableG beginning on page 20.The estimated gallons of
watersoldandsanitarysewerbilledissummarizedin Chart
6 on page 23.
The City was not able to provide information on histori-
calvolumesoldpertiersoassumptionsweremadeonthe
volumessoldpertierinordertopreparethisreportandto
project future revenues frombilling of water usage.
The report assumes average annual volume of just under
96,000 gallons per residential customer (or approximately
8,000 gallons per month).This volume is pro-rated across
theCity’stierstructureusingestimatedhistoricaldata(ac-
tual volume data is not available from the City). For com-
mercial customers, annual volume is calculated based on
prior year estimated volumes adjusted by the percentage
increase in commercial and school customers. The report
assumesannualsewervolumebillerpercustomerforboth
residentialandcommercialof48,000gallons(or4,000gal-
lons per month). The MCES reported total sewer volume
for the City of nearly 18 million gallons for year 2016.
The estimates for residential and commercial customers
volume usage for both water and sanitary sewer needs to
be revisited and reviewed as better information becomes
available from the City’s utility billing system.
The estimates for future
growth from development,
shown in residential equiva-
lent units in Chart4andChart5,
XBTQSFQBSFECZ$JUZTUBõ
The data was provided to
Northland as an input for the
study and this report.
Theestimatesforgrowth,and
annual units platted and con-
nected, is an important input
forestimatingfuturerevenue.
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.
The estimated annual gallons
of volume will increase as
more customers connect to
the water and sanitary sewer
systems.
This report assumes that the
average annual usage per
customer for residential and
commercial remains fairly
constant.
#BTFEPOIJTUPSJDBMmOBODJBMQFSGPSNBODF
FTUJNBUFEVUJM
JUZSBUFT
BOEGVUVSFDBQJUBMQSPKFDUT
mOBODJBMQMBOT QSP
forma) have been prepared for each the utility funds.
KeyAssumptions
5IFmOBODJBMQMBOTGPSFBDIVUJMJUZGVOETXBTEFWFMPQFE
based on several key assumptions which are as follows:
• Operating expenditures, including personnel costs
and materials supplies and all other operating ex-
pense will increase by approximately 2.0% annually
along with other adjustments as prepared by TKDA,
consultant to the City. The City contracted with TKDA
to perform a review of the City’s operations for the
utility systems and to provide input into future esti-
mated capital improvement projects.
• Nochangeinexistingtierstructureforfeesandcharg-
es.
• Depreciation is estimated based on estimated 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 estimated 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 for water and sanitary sewer services, begin-
ning inyear 2018, see TableBon page 3 forannualper-
centageincreasesforwaterandsewerfeesandthefee
adjustment for storm water. The annual rate increase
is assumed on the quarterly base fee and usage fees
only.The annual fee for storm water is assumed to in-
crease by $5.00 per year, beginning in year 2018.
• Connection and availability charges are assumed to
remain constant for years 2017-2026. Revenue from
these charges is used to pay for the system, including
the planned capital projects and related debt service.
• Theestimatedutilityfeesandchargesareshowntobe
at a level that is adequate to maintain cash balances
JOUIFGVOETTVöDJFOUUPDPWFSUIFGPMMPXJOHPWFSUIF
OFYUmWFZFBST
SFTUSJDUFEDBTIGPSQMBOOFEDBQJUBM
2) restricted cash for debt service/calling of bonds;
and 3) unrestricted cash available equivalent to 35-
50% of anticipated operating expenses.
Fund Description
The Water Fund is used to account for the operating and
capital improvement costs of the water utility system.
Background
5IF8BUFS'VOEJTJOTPVOEmOBODJBMDPOEJUJPO'VUVSF
mOBODJBMQFSGPSNBODFXJMMCFJNQBDUFECZUIFUJNJOHPG
development of land in the City and the timing of receipt
of development fees that will support debt service on the
infrastructure and receipt of charges for service for usage
of the system.
Source of Funds
There are two major source of funds: 1) collection of
charges for service fees (base fee and volume usage fees)
and 2) development fees collected at time of platting and
time of connection to the system. Revenue from charges
for service fees will increase as the number of customers
increases and the volume of water sold increases.
5IFmOBODJBMQMBOBTTVNFTOPDIBOHFJOUIF$JUZTFYJTUJOH
rate structure and assumes annual rates increase of 3.0%
beginning in year 2018. The City adopted reductions to
the2017feeschedule,comparedtoprioryear,resultingin
a need to plan for higher increase in the future.
Beginning in2017, the City is no longer depositing there-
ceipt of revenue from a rental fee for access to the City’s
water tower by communication companies to the Water
Fund, this represented about a $50,000 reduction in an-
nual revenue to theWater Fund.
Interest income earned on cash balance is recorded as
revenue. The investment earnings rate is estimated 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
TZTUFN
JOUFSFTUBOEmTDBMFYQFOTFPOEFCU
EFQSFDJBUJPO
and authorized transfers to other funds that may occur
from time to time. Principal payments on bonds sup-
ported by the Water Fund result in a reduction of liability
for the Fund. Operating expense line item details can be
found in TableI-3 on page 28.
Transfers
5IFmOBODJBMQMBOEPFTOPUBOUJDJQBUFBOZGVUVSFUSBOTGFST
in or out of funds fromtheWater Fund to other city funds.
Presently the City does not charge the utility funds for
General Fund overhead but does directly charge the fund
GPSBENJOJTUSBUJWFTUBõUJNF
Balance SheetItems
5IFmOBODJBMQMBOJODMVEFTFTUJNBUFEBTTFUTBOEMJBCJMJUJFT
this includes estimated annual year-end cash balance.
Table I-2 on page 27 provides a detailed summary on esti-
mated change in cash year by year.The City reported $3.4
million as receivable from other governments (the State
of Minnesota) at the end of 2016.This receivable was col-
lected in 2017 resulting an increase in cash balance.
Estimated year end cash bal-
ances are estimated to in-
DSFBTFPWFSUIFOFYUmWFZFBST
and then will be spent down
on debt service and capital
projects.
The source and use of funds
includes depreciation and
capital contributions. The dif-
ference between the annual
source and use of funds is the
change in net assets of the
GVOE5IFEJõFSFODFDPNFT
from the collection of devel-
opmentfees(sourceoffunds)
for payment of debt service
on outstanding bonds (liabil-
ity of the fund) and collection
of revenue for build-out of
the system.
Fund Description
TheSanitarySewerFundisusedtoaccountfortheoperat-
ing and capital improvement costs of the sanitary sewer
utility system.
Background
5IF4BOJUBSZ4FXFS'VOEJTJOTPVOEmOBODJBMDPOEJUJPO
'VUVSFmOBODJBMQFSGPSNBODFXJMMCFJNQBDUFECZUIFUJN
ing of future development of land and the timing of re-
ceipt of development fees (trunk line availability charges
and connection charges) that will support infrastructure
costs and receipt of charges for service for usage of the
system.
Source of Funds
There are two major source of funds: 1) collection of
charges for service fees (base fee and volume usage fees)
and 2) development fees collected at time of platting and
time of connection to the system. Revenue from charges
for service fees will increase as the number of customers
increases and the volume of water sold increases. Future
development of land through platting will result in in-
creased revenue from water availability and connection
charges.
5IFmOBODJBMQMBOBTTVNFTOPDIBOHFJOUIF$JUZTFYJTUJOH
rate structure and assumes a rate increase of 1.0% annu-
allybeginninginyear2018andthen2.0%annuallybegin-
ning in 2024.
Interest income is earned on cash balance is recorded as
revenue. The investment earnings rate is estimated to be
0.5% for future years.
Special assessments levied for sanitary sewer infrastruc-
ture 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
TFXFSTZTUFN
JOUFSFTUBOEmTDBMFYQFOTFPOEFCU
EFQSF
ciation, and authorized transfers to other funds that may
occur from time to time. Principal payments on bonds
supported by the Water Fund result in a reduction of li-
ability for the Fund. Operating expense line item details
can be found in TableJ-3 on page 33.
Transfers
5IFmOBODJBMQMBOEPFTOPUBOUJDJQBUFBOZGVUVSFUSBOTGFST
in or out of funds from the Sanitary Sewer Fund to other
city funds. Presently the City does not charge the utility
funds forGeneralFund overheadbut does directlycharge
UIFGVOEGPSBENJOJTUSBUJWFTUBõUJNF
Balance SheetItems
5IFmOBODJBMQMBOJODMVEFTFTUJNBUFEBTTFUTBOEMJBCJMJUJFT
for, this includes estimated annual year-end cash balance.
TableJ-2 on page 32 provides a detailed summary on esti-
mated change in cash year by year.
Estimated year end cash bal-
ance is estimated to increase
betweenyears2016and2020
due to development.
The actual year-end cash
balance will be impacted by
changes in planned capital
spending. As projects are im-
plemented, beyond what is
included in the CIP, cash bal-
ance may be lower than what
is estimated 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. The
EJõFSFODFDPNFTGSPNUIF
collection of development
fees (source of funds) for pay-
ment of debt service on out-
standing bonds (liability of
the fund) and collection of
revenue for build-out of the
system.
Fund Description
TheStormWaterFundisusedtoaccountfortheoperating
and capital improvement costs of the storm water utility
system.
Background
5IF4UPSN8BUFS'VOEJTJOTPVOEmOBODJBMDPOEJUJPO'V
UVSFmOBODJBMQFSGPSNBODFXJMMCFJNQBDUFECZUIFUJNJOH
of future development oflandinthe City. 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
5IFSFJTPOFNBKPSTPVSDFPGGVOE
UIFDPMMFDUJPOPGBmYFE
annual charge for service fee. The City does not charge
an availability fee for the storm water utility system. Build
out ofthe systemhas been paid as part of the developer’s
project costs.
Theannualfee,presentlyat$50.00,isassumedtoincrease
by $5.00 per year beginning in 2018 and then by $10.00
peryearbeginningin2021.An increaseisneededinorder
to maintain cash balance. Beginning in 2017, the City will
begin paying debt service on bonds issued in 2016.
Some cities choose to manage storm water utility fees
UISPVHImOBODJOHDFSUBJODBQJUBMJNQSPWFNFOUTXJUIUBY
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.
Interest incomeis earnedonthecashbalanceandrecord-
ed as revenue. The investment earnings rate is estimated
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
XBUFSTZTUFN
JOUFSFTUBOEmTDBMFYQFOTFPOEFCU
EFQSF
ciation, and authorized transfers to other funds that may
occur from time to time. Principal payments on bonds
supported by the Storm Water Fund result in a reduction
of liability for the Fund. Operating expense line item de-
tails can be found in TableK-3 on page 38.
Transfers
5IFmOBODJBMQMBOEPFTOPUBOUJDJQBUFBOZGVUVSFUSBOTGFST
in or out of funds fromthe StormWater Fund to other city
funds. Presently the City does not charge the utility funds
for General Fund overhead but does directly charge the
GVOEGPSBENJOJTUSBUJWFTUBõUJNF
Balance SheetItems
5IFmOBODJBMQMBOJODMVEFTFTUJNBUFEBTTFUTBOEMJBCJMJUJFT
for, this includes estimated annual year-end cash balance.
TableK-2 on page 37 provides a detailed summary on esti-
mated change in cash year by year.
Estimated year end cash bal-
ance is estimated to decline
due to the increase in debt
service expense. Cash bal-
ancesareexpectedtorecover
dueto theestimatedincrease
intheannualstormwaterfee.
The actual year-end cash
balance will be impacted by
changes in planned capital
spending. As projects are
implemented, beyond what
is included in the CIP, cash
balances may be lower than
what is estimated in this re-
port.
The source and use of funds
includes depreciation. The
EJõFSFODFCFUXFFOUIFBO
nual source and use of funds
is the change in net assets.
5IFEJõFSFODFDPNFTGSPN
the collection of charges and
payment of debt service on
outstanding bonds (liability
of the fund).
The increase in cash is due to
thecollectionofchargesfrom
development to pay for debt
JTTVFEUPmOBODFDBQJUBMJN
provement projects.
The CIP anticipates the is-
suance of additional debt
in the future to pay for capi-
tal improvements. Chart 13
includes both existing and
anticipated issuance of new
debt.
The estimated future re-
stricted cash balance for debt
service as a percent of year-
end debt outstanding will in-
crease as cash increases from
the collection of develop-
mentfees. Thecashcollected
will be used to pay future
debt service.
Northland Securities, Inc.45 South 7th Street, Suite 2000Minneapolis, MN 55402(800) 851-2920Member NASD and SIPC