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A. Utility Rate Update CITY OF CHANHASSEN 7700 Market Boulevard PO Box 147 Chanhasserl, M~J 55317 Administration P~lone 952 227 1100 Fax 952 227 1110 Building Inspections Pr10ne 952 227 1180 Fax 952 227 1190 Engineering Phone 952 227 1160 Fax 952 227 1170 Finance Phone 952 227 1140 Fax 9522271110 Park & Recreation Phone 952 227 1120 Fax 952 227 1110 RecreatlOiI Center 2310 Coulter Boulevard Phone 952 227 1400 Fax 9522271404 Planning & Natural Resources Phone 952 227 1130 Fax 952 227 1110 Public Works 1591 Park Road Phone 952 227 1300 Fax 952227 1310 Senior Center Phone 952 227 1125 Fax 952 227 1110 Web Site www CI c~lanhassen mn us A ~~. MEMORANDUM TO: Mayor and City Council FROM: Greg Sticha, Finance Director (7 DA TE: O\':~,y. .. ,) November 27,2006 SUBJ: Utility Rate Study BACKGROUND On an annual basis, Ehlers & Associates, the city's financial advisors, study our current utility fees and future projects to determine if these charges are appropriate for planned expansion, reconstruction, and maintenance of our water, sanitary sewer, and storm water systems. Jessica Cook from Ehlers and Associates will be presenting the results of their study at Monday night's work session. In addition, staff is including a spreadsheet analysis of the current rate structure based on this year's rate study compared to last year's rate study. RECOMMENDA TION Staff recommends that council follow the proposed rate increases as recommended by our financial advisors in the following attachments. Staff will be coming back to Council in December with rate increase ordinances to become effecti ve January 1, 2007. ATTACHMENTS 1. Spreadsheet comparing 2005 rate study versus 2006 rate study. 2. Executive Summary of Water & Sewer rates. 3. Executive Summary of Storm Water rates. The City of Chanhassen' A growing community with clean lakes quality scrlools, a charming downtown, thrlvlilQ buslrlesses, winding trails and beautiful parks A great place to live, work, arid play F\GregS\Rate Study\Utihty Study memoll-06.doc Type Water user Water connection Sewer User Sewer Connection Storm fee Storm water Qual Storm water Qty I ncrease needed for 2007 Rates 2005 Rate Study 2006 rate Study 8.000/0 8.000/0 5.000/0 10.000/0 5.000/0 5.500/0 8.000/0 6.000/0 4.000/0 4.000/0 20.000/0 20.000/0 5.000/0 7.000/0 Increase needed for 2008 Beyond Rates 2005 Rate Study 2006 rate Study 5.000/0 5.500/0 5.000/0 7.000/0 5.000/0 5.500/0 0.000/0 6.000/0 4.000/0 4.000/0 20.000/0 20.000/0 5.000/0 7.000/0 8 EHLERS & ASSOCIATES INC o :E 1&1 :E To: Honorable Mayor and Council members From: Jessica Cook and Mark Ruff Subject: Updated Water and Sewer Rate Study Date: November 20, 2006 The City has requested that Ehlers & Associates update the water and sewer rate study as part of planning for the City's new water treatment system and capital improvement plan. The 2006 update incorporates the City engineer's estimate of future capital improvements for the water utility system through 2020 and estimates about the pace of development. The initial water rate study was completed in 2003 in anticipation of financing and constructing the east water treatment plant. The study has been updated each year to account for changes in capital costs, and development patterns. This year the analysis of the sanitary sewer fund also reflects the negotiated agreement with the Met Council to remediate inflow and infiltration. Assumptions and User Fees Following is a chart that summarizes the significant assumptions in the update. Water Utili Sanitar Sewer Utili Growth The amount of residential development has been scaled back by 1,300 units to reflect the slowing real estate market. Residential- 2,300 new units through 2018; 50 units per year thereafter Commercial - 4 new customers per year through 2011, 2 new customers per year 2012-2013, and none thereafter. Same growth assumptions as water fund. J. 3060 Centre Pointe Drive Roseville, MN 55113-1105 (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com Water Utility Sanitary Sewer Utility Water Treatment plants are anticipated to Not Applicable Treatment be completed in 2006 and 2014. Plant Estimated cost for Plant II - $11,000,000 in today's dollars. Other Capital Averages $1,245,000 per year for Averages almost $690,000 per year Improvements water trunk lines, wells, water in today's dollars. towers, new and replaced water Includes $700,000 for public works main, painting water towers, etc. facility in 2008, a $1.5 million lift Costs are inflated 50/0 annually station in 2010, and improvements to reduce inflow and infiltration required by the Met Council. Costs are inflated 50/0 annually Allocation of Both treatment plants will serve Capital improvements needed to Capital existing and future users. The serve new development, including Expenses capital cost of each plant is split: an expanded public works facility Between Plant I - 65% hook-up fees and a new lift station, are paid by Current and 350/0 user charges hook-up fees. Future Users Plant II - 20% hook-up fees Replacement and maintenance of the 80% user charges existing system is paid by user charges. The other capital improvements are paid by hook-up fees if they are needed to expand the system to serve new development. Operating Expenses increase 31 % in 2007 to City expenses increase 3% annually. Expenses operate the new treatment plant, and MCES Fees increase 6% annually, 3% annually thereafter. and constitute almost 75% of total Expenses increase $250,000 in sewer operating costs. 2014 to operate the west treatment plant. Cash Balances The trunk fund should accumulate a The trunk fund should accumulate a cash balance prior to 2014 to pay cash balance prior to 2018, when for the proposed water tower, new infrastructure is anticipated. treatment plant, and new wells. The minimum recommended The minimum recommended cash operating cash balance is equal to six balance in the operating fund is months of annual operating expense. $4,000,000 Cash balances are In 2016, that is expected to be available to accommodate $2,000,000. fluctuations in revenue depending on the weather, and to fund capital improvements. See Exhibits C and D See Exhibits E and F J, 3060 Centre Pointe Drive Roseville, MN 55113-1105 (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com Funding Replacement Reserves User Rates and Monthly Bill (for an average family that uses 9,000 gallons per month) Hook-up Fees 3060 Centre Pointe Drive Roseville, MN 55113-1105 Water Utility The recommended minimum cash balances fund an operating reserve equal to 6 months of operating expense plus 15% of depreciation. Ideally, a City would fully fund depreciation in its utility funds. However, when a City is growing and investing in new infrastructure it can be cost prohibitive to customers to simultaneous build the system and fund its replacement. Year % Increase A VI!. Bill Actllals: 2005 5.5% 2006 7.0% Proposed: 2007 8.0% 2008 5.5% 2009 5.5% 2010 5.5% 2011 5.5% 2012 5.5% 2013 5.50/0 2014 5.5% $13.66 $14.61 $15.78 $16.65 $17.57 $18.53 $19.55 $20.63 $21.76 $22.96 The proposed 2007 rate increase is the same as was projected last year. 10% increase in hook -up fee in 2006. Annual increases 7% thereafter. I Sanitary Sewer Utility The recommended minimum cash balances fund an operating reserve, but do not fund depreciation. In the past, the City Council has decided that it will finance the replacement of major utility systems when they become necessary. Year % In crease A VI!. Bill Actllals: 2005 5.0% 2006 8.0% Proposed: 2007 5.5% 2008 5.5% 2009 5.5% 2010 5.5% 2011 5.5% 2012 5.5% 2013 5.5% 2014 5.50/0 $18.14 $18.61 $19.63 $20.71 $21.85 $23.05 $24.32 $25.66 $27.07 $28.65 The sewer fund has been operating at a loss. The proposed rate increases will get operations "in the black" by 2009. The proposed 2007 rate increase is the same as was projected last year. 8% increase in 2006. Annual increases 6% thereafter. J. (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com Utility customers typically regard their fee increases for water and sewer in total. The attached Exhibit A shows the projected combined increase in utility fees and hook-up fees charges needed to maintain minimum cash balances. Hook-up fees are paid at the time a builder or homeowner pulls a building permit. Attached is a chart (Exhibit B) that shows Chanhassen's water and sanitary sewer hook- up fees as compared to other developing cities. Findings The recommended connection fees for 2007 are higher than previously anticipated for three reasons: 1) Capital costs have increased for the sewer system, with the expectation of a new lift station in 2010 and the negotiated 1&1 settlement with the Metropolitan Council. 2) The cost of water main replacement between 2007 and 2011 is higher than previous proj ections. 3) Most significantly, a slow-down in the housing market has caused the planning staff to reduce the total number of new units by 1,300 over the next 15 years. However, planning staff does not anticipate a decline in the acres that will be platted. We expect that developers will continue to plat property, requiring the City to install infrastructure to serve it, but the pace of development will slow and the development will be less dense than previously anticipated, with more single family homes and less attached units. While capital improvements have been postponed to reflect the slowed development, the cost of the west treatment plant and wells remains the same, regardless of the anticipated reduction in total units. As a result of slower growth, the cash balance for the water connection fund (Exhibit D) is expected to be depleted after 2022, and the water operating fund is expected to run annual deficits beginning in 2016, when operating expenses for the second treatment plant begin. Since the real estate market is likely to recover, we are not recommending higher rate increases in 2007 to deal with these future deficits. However, future rate increases may need to be higher than currently proj ected if the real estate market remains depressed. Recommendation #1: Continue to update the rate study every 2-3 years to monitor trends and adj ust rates accordingly. As mentioned above, if growth continues to slow, capi tal improvements may need to be deferred or future rate increases may need to be higher than proj ected in this study. Recommendation #2: Consider implementing an area charge for the water and sewer trunk systems. The area charges are collected at the time of platting, and are charged on the basis of acreage, rather than units. By spreading the infrastructure cost between area charges and hook-up fees, the City is buffered from declines in the marketplace. J. 3060 Centre Pointe Drive Roseville, MN 55113-1105 (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com Exhibit A City of Chanhassen Projected Water and Sewer Bills 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Averaael Quarterlv Residential Bill Assumes quarterly use of 27,000 gallons water and 18,000 gallons sewer Sewer 4680 4914 51 60 5572 5879 6202 6543 6903 72 83 7684 81 06 8552 9022 9519 Water 3550 3904 4099 4384 4735 4996 5270 5560 5866 6189 6529 6888 7267 7667 Tom I 82.30 88.18 92.59 99.57 106.14 111.98 118.14 124.63 131.49 138.n 146.35 154.40 162.89 171.85 Combined Fee Increase 7.1% 5.0% 7.5% 6.6% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Sanmle Bill for Lower Water User Assumes quarterly use of 12,000 gallons water and 9,000 gallons sewer Sewer 2340 2457 2580 2786 2939 31 01 3272 3452 3642 3842 4053 4276 4511 4759 Water 1560 1704 1788 1913 2066 21 80 2300 2426 2560 2700 2849 3006 31 71 33.45 Tom I 39.00 41.61 43.68 46.99 50.06 52.81 55.71 58.78 62.01 65.42 69.02 72.82 76.82 81.05 Combined Fee Increase 6.7% 5.0% 7.6% 6.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Hook-UD Fees Per Unit Met Council SAC Fee 1,275 1,350 1 ,450 1,550 1,650 1,750 1,850 1,950 2,050 2,150 2,250 2,350 2,450 2,550 City Sewer Hook-up Fee 1 ,458 1 ,458 1,458 1,575 1,669 1,769 1,875 1,988 2,107 2,234 2,368 2,510 2,660 2,820 City Water Hook-up Fee 1,876 2,814 2,955 4,077 4,485 4,799 5,135 5,495 5,879 6,291 6,731 7,202 7,7 06 8,246 Toml 4,609 5,622 5,863 7,202 7,804 8,318 8,861 9,433 10,036 10,674 11,349 12,062 12,817 13,616 Pen:ent Increase 22.0% 4.3% 22.8% 8A% 6.6% 6.5% 6.5% 6A% 6A% 6.3% 6.3% 6.3% 6.2% Total Water and Sewer Cash Balances 11,002,705 9,309,412 10,252,705 9,571,509 8,945,764 10,309,533 11,750,724 12,562,832 13,246,689 13,742,664 13,170,772 Exhibit B Fee Comparison for Single Family Lot Water and Sanitary Sewer Utility Infrastructure Fees Assumes development density of 3 units per developable acre Sewer Water Connection Connection Area Charge Area Charge TOTAL City Fees Fees Water Main San. Sewer Andover 777 2,754 826 460 4,816 2006 to to 1,224 5,263 Carver 2,553 3,808 none none 6,361 2006 ($1,550 deducted to be equivalent to cities in MCES system.) Chanhassen 2006 1,575 4,077 none none 5,652 Proposed Chanhassen 1,669 4,485 6,154 2007 Chaska 253 3,179 522 334 4,288 2006 Farmington 2,420 2,140 1,900-3,100 1 ,930 5,836 - 6,236 2006 depending on area Inver Grove Heights 2,415 2,275 3,000 3,000 6,690 2006 Medina 1,687 3,938 none none 5,625 2006 Proposed 1,771 4,689 none none 6,460 Medina (assumes 50/0 2007 increase) Depends on District Depends on District 4,984 Savage 1,687 2,250 1,047-1,673 993 - 1,490 to 2006 5,427 o o o o o o f'-.. o o o o o o <.0 o o o o o o LO o o o o o o ~ o o o o o o M o o o o o o N o o o o o o ~ Q) U c: CU - CU m -'= f/) CU U C) c: u:C ...... c: :oW .- -C -'= c: >< ::s WLL C) c: .- ...... CU ... Q) c.. o ... Q) ...... 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Back!!round There are three components to the City's storm water system and fee structure: The storm water utility fee is a quarterly fee intended to pay for the maintenance of the storm water system once it has been constructed. The fee was increased by 50% in 2006 after not being increased for several years prior to that. The 2006 rate increase still kept the quarterly rate competitive with comparable communities. The water quality fee and water quantity fees are area charges assessed against developable acreage at the time the land is platted. These fees can be thought of as the "ponding" and "piping" fees. The water quality fee ("ponding") pays for land and installation costs for storm water ponding. A developer who ponds on-site is given a credit equal to 50% of the fee. The water quantity fee ("piping") pays for the storm water pipes and outlets. Developers receive a credit if they already have an outlet structure on the property. Both water quality and quantity fee have been increased based on the construction price index, and are calculated based on the run-off generated by the development use. J. 3060 Centre Pointe Drive Roseville, MN 55113-1105 (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com Assumotions Below is a chart that summarizes the significant assumptions used in the study. Growth The amount of residential development has been scaled back by 1,300 units to reflect the slowing real estate market. Residential- 2,300 new units through 2018; 50 units per year thereafter Commercial - 4 new customers per year through 2011, 2 new customers per year 2012-2013, and none thereafter. Same growth assumptions as used for water and sanitary sewer studies. Capital The study used the City's capital improvement plan for 2007-2011, Improvements including $200,000 for the public facility expansion in 2008 and $700,000 for Lyman Boulevard improvements in 2009. Beginning in 2012, improvements average $872,000 per year (in today's dollars) for SWMP implementation, land acquisition, and street improvement projects. Costs are inflated 50/0 annually, including land acquisition. Operating Expenses increase 3% annually. Expenses Cash Balances The purpose of the cash balance is to allow the City to fund improvements on a "pay-as-you-go" basis, reserving the use of debt for major improvements. The current cash balance is approximately $4 million. The minimum recommended cash balance is $2,000,000. See Exhibit B. Findin!!s Exhibit A is a chart that shows the projected rate increases. The projected 2006 increase for Chanhassen's stormwater utility would raise the fee 4% from $7.50 to $7.80 per quarter. The 2006 North Central Utility Rate Survey indicates that the quarterly fees for the metro area suburbs range from $3.00 in Eden Prairie to $18.00 in Prior Lake, and the median quarterly fee is $10.50. Water Quality and Quantity Fees are projected to increase 20% and 7% respectively in 2007. Keep in mind that most developers only experience half of the rate increase for the water quality fee because of the credit for on-site ponding. Therefore, the estimated combined 2007 increase for a given developer will be 9.8% after ponding credits are applied. J. 3060 Centre Pointe Drive Roseville, MN 55113-1105 (651) 697-8546 Fax: (651) 697-8555 jcook@ehlers-inc.com http://www.ehlers-inc.com m >< 2: C'" ::+ )> fJ) c ~ A) n _C'D g':E O'A) ~ s- ~ .., ~c: ~ pot. 0.= ;~ 0'"," ~C'DO o C'D _. ::s en pot. en .... '< ;: ~ a "OfJ)O o -. :T ::s ::s A) 9: ~ ::s ::s C'D :T (Q "'" A) &>> A) en a3~ o=::s c'< ~::o !oC'D .!!!.en a: C'D ::s pot. ~ m>-I ?:~~?:~~ >0 !a::JO 5 i 3' ~ i ::J~.....::JCD..... c: '"0 CD c: '"0 CD ~i a~~ ~CD"'~CD'" C'D -. ~ _...., 0-...., 0 -:l o.::JCD ::J Q) c::: ::J Q) c::: 5'< )>~&>> o 0 Q) 0 0 Q) mCDgmCD~ ca" ::JCDn D) . ::JD):r U) '-< U) ." em&>> ~ . !!oleO CD ." CD CD -. 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