OPENING: Mayor Hellar called the special workshop of the city council to order on Wednesday, September 30, 2009, at 5:30 p.m. in the council chambers at City Hall, 1123 Lake.
ROLL CALL: Council members Newton, Snedden, Logan, and O’Hara were present.
Councilman Boge arrived at 5:40 p.m. Councilman Reuter was absent.
WATER AND SEWER RATES AND NEW USER FACILITY FEES – WORKSHOP
Public Works Director Kody Van Dyk explained that, based on the discussion at the August 27, 2009, workshop, Tom Gould of HDR Engineering, Inc., will provide several options for the rates this evening. Tom Gould noted that the revenues received in the utility have to cover all the operating and capital costs associated with the utilities. He reviewed the summary of the water revenue requirements that demonstrates that the total revenue is approximately $3 million per year, which is paid primarily through user rates, and the application of funds are operation and maintenance expenses, taxes/transfer payments, capital improvement funded from rates, and the net debt service. He noted there was a balance of funds in 2008/2009 of 11%, but, in future years, the deficiency percentage of rates increases. He said there is the assumption that the bond would pass, and there will be a debt service payment associated with it. The amount of the bond is $12 million, with a total cost of the project in the amount of $17 million. There’s an assumption the State will help pay for the project, with 1/3 paid from a grant. The rates would need to go up 34% in order to cover the debt service payment by 2013/2014. He noted that a 25% adjustment could cover the debt service payment from 2009 to 2012.
He reviewed the sewer revenue requirements with a projection of a new sewage treatment facility. He said the recommended transition of the water rates would be an adjustment of 15% in 2009/2010, 9% in 2010/11, and 2% adjustment from 2011 to 2014. He said, currently, a resident pays an average of $25.32 per month for a minimum of 6,000 gallons, and, with a 15% adjustment, it would increase at $3.80 per month, on average. He said there would be consideration of the level of adjustment and the time period to make the adjustments. He suggested looking at a three year study period. If the bond fails, there wouldn’t be a debt service payment and no need to adjust the rates. The questions were more complicated, as there is concern about running out of capacity at the water treatment plant. The city could implement a moratorium for new connections as one option. Kody Van Dyk estimated a moratorium could happen soon because it depends on snowfall or watershed runoff. He said the city has been fortunate to have had heavy snowfall the last two winters in order to meet the demands. He explained that regulations don’t enter into the decision, but capacity does.
Tom Gould said there is a question whether the city could issue a bond and how they would pay for the needed improvements. He explained the city would need to adjust their rates to save enough money to pay for the improvements in cash. The city could pay cash for the improvements by having a 15% adjustment to the rates that would provide an additional $1 million per year, but the city could consider greater than a 15% increase to have $2 million in revenue per year, which would require an increase of $.54 per day added to a customer’s bill. If the bond passes, there would be an additional $.20 per day on the bill over the life of the bond. It’s the citizens’ expectations to have clean, reliable, and sufficient water resources. If the city continues to allow new connections, then they should consider water restrictions. A new water treatment plant was needed to meet everyone’s needs and expansion needs. He concluded if the city borrowed the funds, there would be a lower cost for the citizens. If the bond passes, a $5.1 million grant will be available for the city, but it won’t be available in eight years when the city decides to build the plant. He suggested the city should consider building the plant today for $11.1 million dollars out of their own pocket and getting a grant, or they can save the money over time, but the plant will cost more than $11.1 million. It would be much better, from the citizen’s perspective, to pass the bond in order to get the grant than try to save the funds.
He reviewed options for the transition of sewer rates, with a proposed rate adjustment of 15% for 2009 through 2011 and 10% adjustment for 2012 through 2014 with the need to raise the rates 30% for the sewer utility to break even. There is a current deficiency of 30% with minimum reserves. He provided another option of a 20% adjustment for 2009/2010. He said the second option would provide more funds up front and wouldn’t take as much reserves. The city doesn’t have the flexibility for sewer because they currently don’t have a lot in reserves. Kody Van Dyk added the city is making up the shortfall of $600,000 from new user fees. Mr. Gould explained to Councilman Snedden that the city is utilizing reserves on an annual basis because, when the city developed the rates previously, the projected average has been less over the past five years because people’s consumption habits have changed slightly over time. He explained to Mayor Hellar that the sewer bill is a function of water usage and creates a cap based on the maximum bill based on the sewer usage.
He provided an overview of the water rate designs, which assumes a 15% overall adjustment, focus on customer classes of service, focus on conservation for rate design, and final rate designs reflecting council direction on water rate adjustments. He explained single family options are based on meter size and volumetric rates. The purpose is to move to individual classes of service. In order to look at conservation rates, the city should consider adjusting the amount of volume. Option 2 sets the meter charge at the minimum bill and option 3 sets the volume charge at the first 3,000 gallons in order to create incentives for people to use water efficiently and could provide a concept for conservation rate design. He explained to Councilwoman Logan that all options are designed to collect the same amount of money, with larger users seeing an increase in their bill. He based his proposal off recent consumption data. He stated he could alter the options provided and could develop a different option at the council’s direction. Kody Van Dyk noted it is not unusual to have customers who are billed for 50,000 gallons usage.
He noted, currently, multi-family rates are similar to single family rates. He explained the reason the city wouldn’t be implementing an inverted block rate structure for multi-family is because it’s difficult to charge based on the number of living units. He explained the first option would be status quo with a 15% adjustment and option 2 would have a uniform rate structure. Multi-family class is slightly different from single family as it doesn’t have the same irrigation and outdoor needs and would provide examples of irrigation rates for multi-family and commercial. He explained option 3 would be based on seasonal rates, but this would be a challenge for multi-family as there would be no control over tenant consumption patterns. He responded to Councilwoman Newton that the city could bill by the unit based on a single family based rate and that a multi-family master meter would fall under the multi-family rate. Kody Van Dyk said, currently, the city does not make the distinction between single family and multi-family for water.
Tom Gould reviewed the proposed commercial customer rates with status quo with a 15% adjustment, a varied rate structure, and seasonal rate structure, which is similar to multi-family. He stated it was challenging to design a tiered rate structure for commercial because there are varied levels of consumption and different patterns of usage. He felt it necessary to be consistent to carry the same logic with multi-family and commercial. He said commercial can be based on the minimum charge or based on volume base. Councilwoman Logan asked what category of rates city departments would fall under and the impact of their budgets based on the proposed rate structures. Kody Van Dyk said the Parks Department would use the irrigation rates.
Mr. Gould reviewed the industrial rates and pointed out option 2 is less than the commercial rates, which is why there was a separate rate for industrial customers. He said this is also covered in option 3. He explained, when conducting the cost of service study, he reviews individual customers and their average use, with commercial having a peak in the summer time. Industrial customers don’t have a greater irrigation need. Mr. Van Dyk explained the decision whether a business is commercial or industrial is a decision made by the Finance Department and is based on sewage discharges. Mr. Gould further explained an ordinance defines who falls under what category.
He reviewed the large user rates, with option 1 having a 15% adjustment and option 2 a higher meter charge, but there is not a huge difference between these two options. He pointed out all the rates he has shown this evening are inside city rates but that the rate for outside rates will be 25% larger. He explained to Councilwoman Logan that the study is based on cost of service. He stated that the study conducted in 2005 was the justification between owners versus non-owners. He said the inside city customers are the owners of the system who are entitled to a fair return on the investment they make by providing water to those customers outside the city. He pointed out there would be a cost differential for those who are outside the city versus those who are inside the city. Councilwoman Logan asked if the city can charge for geographic base rates for new user facility fees. Mr. Gould replied that the rates are ownership of the system and costs associated with it, with new user facility fees (NUFFs) based on capacity and value of capacity. He said geographic NUFFs can be challenging because you’re selling capacity as opposed to the ownership and a fair return on the investment. He explained it’s up to the inside city customers to pay the difference between what the city collects from the total revenue requirement and what is collected from outside city customers.
He suggested the city consider having meters for irrigation that could create incentives for efficient use. He suggested, when implementing an irrigation rate, to consider option 1, which is status quo, or option 2, which has a uniform rate. He noted that irrigation is seasonal, with the rate higher in the summer months, and could apply to separate metered irrigation for customers. There needs to be a balance between conservation incentives versus what’s appropriate for customers. Conservation rates are based primarily in Western United States. He pointed out that the bill matters, not the structure. A good option for residential would be to impose seasonal rates in order to be more conservative. He suggested following single family option 3 in order to keep the price down to address low income issues but that this should be a policy issue. The most equitable way to try to assess the fees would be based on the capacity of the meter. He explained that, if the city was concerned with low income issues, they could follow option 3 rate structure or could follow seasonal rate structure, with an essential needs component during the summer months. He preferred single family option 3, as it addresses conservation and provides the needs for low income. He felt a seasonal rate would also be a good rate to follow. Councilman O’Hara asked if the seasonal rate structure is based on the number of gallons, whether the rate was high enough, and whether there were enough number of tiers for conservation. Mr. Gould responded that when there are more tiers, it becomes more complicated and that it was important customers understand how they’re billed.
Councilman Snedden liked the seasonal option, as it encourages people to conserve consumption. Mr. Gould replied to Councilwoman Newton that the definition of costs is associated with operating the system and costs of service are associated with serving residential, commercial and large users, and he looks at the fixed and variable charges. He said if it’s legally challenged as to whether the city has cost fixed rates, there could be broad discretion on how the city establishes their rates, and it can take into account things other than cost of service, such as trading off conservation for the cost based aspect of the rates. The city needs to stay within the cost of the utility and can charge increased rates for conservation but needs to collect the same amount of money as the revenue requirement. A basic principle as to how rates are established is in the American Water Works Association Manual. He explained to Councilwoman Newton that facilities are charged based on the peak use compared to the average use, which would have a different per unit cost.
Councilwoman Logan asked what the average residential bill is between November and May. She felt that was a basis for establishing the base rate, then adding the seasonal difference in order to encourage conservation for single family residents. Councilman Snedden concurred. Mr. Gould referred to single family option 2, which follows this concept. He explained that, on average, 6,000 gallons is winter use and 6,000 to 20,000 gallons is for summer time/outdoor use. He stated he could provide an example of seasonal use for single family residential. He said the reasons for seasonal rates for multi-family are that he’s making the assumption there is an outdoor component for multi-family dwellings and to provide incentives for water conservation. Councilman Boge asked if the city should eliminate irrigation meters. Mr. Gould replied that the city should have meters for outdoor use in order to have an irrigation rate. He said irrigation is where more inefficient use occurs, with the greatest opportunity to create savings.
Mr. Gould explained the sewer rate design is based on water consumption. The sewer rate options for single family and multi-family are created by a billing cap for the average user in the winter, and the bill can be no greater than the cap in the summer. He said option 1 is status quo at a 15% adjustment, and option 2 has a higher fixed charge. He suggested, instead of making single family and multi-family similar, to set the minimum at 80% of single family residential, which creates more equity in terms of the minimum bill. He explained the water utility is based on the capacity of the meter. He noted there is a different base charge and different block sizes for multi-family under option 2. Councilwoman Newton disagreed with an 80% difference and suggested it should be the same. Councilwoman Logan wondered if there would be some disconnect with the water master plan. He then reviewed the proposed commercial customer rates for commercial grease and non-grease producers.
Mr. Gould explained that, in order to move forward with the rate design, he needed city council policy direction as well as overall rate adjustments for water and sewer, number of years for transition, and preferred rate design options. He felt having a three year period would be beneficial. In case the bond passed, the water treatment plant would be built and would have a better understanding on waste water expansions. He responded to Councilwoman Logan that if the bond didn’t pass, no increase in the rates would be needed, but if the city needed to expand the water treatment plant in the future, the adjustments would need an even larger increase in order to meet the projected costs. Councilwoman Logan preferred a three year rate structure and requested two different figures based on whether or not the bond passes in order to save funds at a rate of $2 million per year. Councilwoman Newton wasn’t willing to take specific action until after the results of the bond election. Mr. Gould said the intent is to narrow down what the options would look like and then come back after the election. Councilman Boge agreed that council should wait until after the bond election results. He was disgusted with the proposed 15% rate adjustment because businesses are in financial difficulty based on the current economic climate and suggested looking at the system for deficiencies. Mr. Gould suggested making a decision on both the water and sewer rate adjustments together. He said it’s the city’s obligation to make sure there is sufficient capacity in their water system for new hookups, but, in order to do that, the city would have financial obligation to make sure the rates are at a sufficient level to ensure payment of the debt. If the city didn’t want to raise their rates at this time, there would be policy implications.
Mayor Hellar said the city could provide water bond education in the newspaper but that the city didn’t have the funds to pay for the advertisement and no longer has the ability to provide the education in the city newsletters, as this expense was not budgeted in for the 2009/2010 year. She urged those who would be impacted by this issue, particularly those in the construction business, to educate the public. Tom Gould said he would come back later with discussion on what the cost base for NUFFs should be. He said the city council has the discretion of establishing a cost base level at something less, and if they establish it at less, then there would be cost sharing between current and new customers. He stated that if the bond fails and if the city imposes the 15% adjustment, included would be the $1 million that won’t be making a debt service payment. He explained if the city wanted to collect $2 million per year to accumulate funds, there is already $1 million built in with the 15% adjustment with the need of an additional 40% adjustment on top of the 15% adjustment with the assumption the city would have the funds to build a facility within 8 years. He pointed out the city could receive a $5.1 million grant with an increase of approximately $14 per month on the utility bill in order to collect the $2 million per year. Councilwoman Logan suggested that if the bond passes, Mr. Gould provide the rates reflecting how the city collects the funds and if the city doesn’t, then the council needs to decide whether or not to do anything. Mr. Gould gave an assignment to city council to review the rate designs and policy questions provided so that, at the next meeting, a decision can be made on the options provided.
ADJOURNMENT The special workshop adjourned at 8:10 p.m.
Gretchen A. Hellar, Mayor
ATTEST: Maree Peck, City Clerk
