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HomeMy WebLinkAboutBudget Advisory Commission - 07/27/2010 APPROVED MINUTES BUDGET ADVISORY COMMISSION MEETING TUESDAY,JULY 27, 2010 6:00 P.M., CITY CENTER 8080 Mitchell Road Eden Prairie, MN COMMISSION MEMBERS: Chair Don Uram, Vice-Chair Rick King; Commissioners: Annette Agner, Eapen Chacko, Jon Muilenburg, Richard Proops, Gwen Schultz CITY STAFF: Sue Kotchevar, Finance Manager; Tammy Wilson, Finance Supervisor; Gene Dietz, Public Works Director; Rick Wahlen, Public Works; Angie Perschnick, Recorder I. CALL TO ORDER/ROLL CALL Chair Uram called the meeting to order at 6:03 p.m. Vice-Chair King arrived at 6:10 p.m. Commissioners Muilenburg and Agner were absent from the meeting. II. MINUTES A. BAC MEETING HELD TUESDAY,JUNE 22—d, 2010 Chair Uram asked if there were any corrections or additions to the minutes, and there were none. MOTION: Schultz moved and Chacko seconded to approve the minutes from the June 22nd meeting. The minutes were approved 3-0-1 (Uram abstained since he was not at the meeting). III. UTILITY RATE STUDY Gene Dietz provided information relating to the Utility Rate Study recently completed. He mentioned that the BAC helped start the ball rolling on the study when it recommended increasing utility rates to cover replacement costs a year or two ago. Eden Prairie has previously been a community with a lot of growth and development,but now the City is moving towards stability and most development has already been completed. New sources of funding are needed for structural replacements that will be needed in the future. Last year there were six water main breaks in Eden Prairie and over 100 in Plymouth. As Eden Prairie's infrastructure continues to age, more and more repairs and replacements will be needed over time. Preventive maintenance can be done to prolong life expectancy,but the City still needs to plan for the significant costs of replacing utility systems in the future. Theory relating to life expectancy, managing systems, and rate structures provided the basis for most of the decision making. Since the City staff cannot Eden Prairie Budget Advisory Commission Minutes July 27, 2010 Page 2 actually see the water mains to evaluate their condition, they need to use a lot of theory to predict when replacement and maintenance activities will be needed. Significant increases in rates (around 10%) will be needed,but the costs for Eden Prairie residents and businesses will still be low compared to most other Cities in the metro area. Grant Meyer is the Operations Manager at Advanced Engineering and Environmental Services, Inc. (AEzS). His consulting firm led the Utility Rate Study and worked with City staff to model various funding options. Grant explained that 38% of the water utility system costs come from irrigation, and regular users are subsidizing irrigation users currently. Irrigation meters for businesses are charged at a higher rate,but other users pay the same amount for irrigation as for regular water uses. Residential users are limited to 36,000 gallons before their rates go up on additional water used. The peaking factor in Eden Prairie (the difference between the August water used vs. January water used) is higher than in many other cities. Eden Prairie has charged a surcharge on irrigation for twelve years. Schultz asked if separate metering is done for residential vs. commercial/industrial, and Dietz stated that separate meters are common in the commercial/industrial/multifamily buildings but quite rare in single family residential properties. To determine the recommended annual reinvestment amount for the City, the following factors were included in the study: asset inventory, replacement and rehabilitation costs, useful service life, age analysis, and adjustment factor(the percent of the system to replace each year). For water, the adjusted annual reinvestment cost is a little over$1.7 million. For sewer, the amount is $673,000. For storm drainage, the amount is over$1.2 million per year. Dietz noted that after two or three more wells are constructed, all costs will be replacement costs (vs. new costs). Storm sewer and drainage is still a growing area, and mandated changes are taking place over time. Eden Prairie is currently mandated (by the MPCA) to maintain our stormwater ponds at a cost of$900,000 annually to fit with Storm Water Best Management practices. Based on the study,recommended reserve amounts for the City are as follows: (1) Operating reserves, 90 days; (2) Bond reserve, equal to the next year's payment; (3) Capital reserve fund, equal to two years for water and sewer and equal to one year for storm drainage. King suggested that the City may not be underinvested generally,but utilities specifically seem to be underfunded. Dietz added that the major capital costs for utilities had three funding sources (related to new development), and two of these sources are now all drying up. New funding will be needed for maintenance and replacement. Chacko suggested the City may want to consider bonding in the current low rate environment to decrease load on the system and increase revenue; however, he noted this might be a tough sell. Rick Wahlen stated that there is a progressive plan to increase reserves over time. A 10% increase would only amount to about$2 per month on average for residents. Proops expressed that the City may not want money sitting in a bond reserve, and Grant Meyer explained that this would be a cash flow method where the City would pay itself first and only pay a year ahead of the flow or revenue. Eden Prairie Budget Advisory Commission Minutes July 27, 2010 Page 3 Projections included a baseline (do nothing) approach, which is not realistic and various rate adjustment options. Chacko asked if revenue could be compromised if the irrigation surcharge was increased too much too fast. Grant Meyer said the relationship between fees and water usage is slightly more elastic for irrigation than for regular use,but demand is fairly inelastic for regular water use. Dietz added that Eden Prairie is unique because we soften our water and only a few other cities do this; the process used is very expensive compared to most cities. The conclusion of the study is a recommendation for a block rate structure for all water usage combined, such as the following: lst 35,000 gallons costs $1.80 per unit Over 35,000 to 48,000 gallons costs $2.80 per unit Over 48,000 to 60,000 gallons costs $3.30 per unit Over 60,000 to 78,000 gallons costs $3.80 per unit Over 78,000 gallons costs $4.30 per unit Kotchevar noted this block rate structure is a more standard rate structure than Eden Prairie's current structure. Kotchevar confirmed that LOGIS could be programmed to charge rates with this type of block rate structure. Schultz asked if this rate structure would shift the burden toward residential vs. commercial/industrial users. Rick Wahlen said it does not; rather it shifts costs towards irrigation users. It was noted that Irrigation meters at companies and churches start at $2.80 per unit vs. $1.80 for regular use meters. Uram asked if the City would want to capture more non-irrigation revenue from large users (commercial, for example). Dietz said the City values its commercial/industrial users and does not want to penalize them. Their water usage is consistent, so the City can plan for it. What fluctuates and therefore causes challenges for the system is irrigation water. Dietz noted that Eden Prairie does not have any extremely high water users, with only a few big companies and churches are some of their largest users. The report addresses the pros and cons of billing monthly for water, although this would cost an extra $150,000. Kotchevar and Dietz explained that they are looking for the BAC's input at the meeting, and then the Utility Rate Study will be presented to the City Council in September, and a workshop setting will be used with City Council to discuss and make final decisions. Dietz noted that two-thirds of residential water users are within the 35,000 usage that will continue to be charged at the regular rate. The top tier(5h) for water represents 12% of residential users. Grant Meyer described the sewer analyses also. He found that water was subsidizing sewer usage to a small extent. He suggested increasing base amounts for sewer similar to what was recommended for water. The City needs to catch up funding for sewer projects. Dietz added that the City needs to look at increasing storm drainage rates since Eden Prairie Budget Advisory Commission Minutes July 27, 2010 Page 4 Eden Prairie is currently under state mandates that will require increased funding in this area and has spent down much of the healthy reserve the City had in the previous few years. Dietz noted the City is trying to capture only one year of reserve for storm drainage. If Eden Prairie were the only City to increase utility rates for 2011, the City would still be in the bottom 25th percentile in terms of utility rates. Chacko expressed discomfort with building up a large reserve fund for projects. The spending for water is around $1 million annually now, and it is expected to be around $1.7 million in the future. Kotchevar noted that utility operations are independent in terms of funding (no money transfers for general operations go towards supporting utilities, or vice versa). Dietz said the City is likely to continue to adjust rates over time rather than making significant adjustments right away. Theory (not experience) suggests that the need to raise rates significantly is a realistic future for Eden Prairie. Rick Wahlen noted that many of his peers in other cities are fighting a battle for funding infrastructure because those cities did not plan ahead as Eden Prairie is trying to do. King said that he supports a block structure, and the top rate (for the 5th tier) is not too high. King suggested the City staff play with the numbers but not make too significant of increases too quickly. King supported money going into reserve, but he is not sure if the projected amounts will be too much or not enough. Overall King favored this recommendation. It was noted that the Conservation Commission may be included for feedback also. There may not be enough time available to implement the new rates for January 1, 2011, but rather they plan to wait until April or September 2011 for implementation. However, it will be important to have significant notice to the public about a rate change prior to the commencement of the irrigation season. Proops stated he would like to make a motion for the BAC to forward a recommendation to City Council that the BAC has reviewed the report and has a few comments on it. Proops added to his motion that the BAC endorses the report. Proops said the BAC has no interest in going into all the details of the Utility Rate Study report. He suggested an article in Life in the Prairie explaining what the BAC has done and why. Also, Proops would recommend reviewing further whether reserves are too conservative. For discussion purposes, King seconded Proops' motion. King suggested the BAC table the motion and then review the study between now and the next meeting. Then the BAC can write a cover recommendation to forward to the City Council after the next BAC meeting. Chacko agreed that the report contained a lot of information to absorb. He would like to understand it more before endorsing it and would like to take more time with it between now and the next BAC meeting. MOTION: The motion for the BAC to endorse the Utility Rate Study failed 1-4 with Proops favoring it and all other Commissioners opposing it. Proops noted that the City Council will discuss the 2011 budget on August 17th and the next BAC meeting is after that. Kotchevar noted that November is when the BAC meets Eden Prairie Budget Advisory Commission Minutes July 27, 2010 Page 5 with City Council for a joint meeting (typically on the 3rd Tuesday of November). The BAC has time between now and November to formulate budget recommendations. MOTION: Schultz moved to bring the Utility Rate Study discussion back to the next BAC meeting. At that time, official BAC recommendations and endorsements can be decided upon. King seconded the motion, and the motion passed 5-0. IV. 2011 OPERATING BUDGET There are no other BAC meetings scheduled until after August 17'h. Schultz noted that it would be good to have Muilenburg and Agner here for the discussion. King said his priorities have not changed from the list previously put together by the BAC, including topics of storm water, assessing, duty crew, and City comparisons. Proops stated that he has recommendations for the 2011 budget at this point, including a 0% increase over the 2010 budget. Proops handed out a memo from himself to the BAC (dated July 25, 2010) with his comments and recommendations relating to the 2011 operating budget. Proops recommended reducing the costs of many programs by specific amounts to reach a budget equal to the 2010 budget, and the total reductions he recommended amounted to $1.47 million. Uram asked Kotchevar if staff has been given direction regarding the 2011 budget. Kotchevar said there have not been changes since the budget that was put in effect in 2009 for 2011. There is a 2.8% overall increase in Kotchevar's information included for 2011. MOTION: King made a motion to transmit a statement to the City Council before the August 17th meeting stating a recommendation that the 2011 budget be flat year over year from the 2010 budget(taking into account the already budgeted wage increases). Chacko seconded the motion, and the motion carried 5-0. Proops expressed concern that the City cannot leave the budget flat with increases in medical costs. King suggested that City staff could take steps to reduce other expenses to keep the budget flat for 2011. Ultimately the City Council gives the City staff direction. Kotchevar passed out the Community Center report from Jay Lotthammer, and fees will be raised January 1 at the Community Center. The next BAC meeting will be on August 24t. V. ADJOURNMENT King moved and Schultz seconded the motion to adjourn. The meeting adjourned at approximately 8:45 p.m.