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Utility Rate Study; Harkess/StadlerCITY OF HOPKINS FINANCE/PUBLIC WORKS DEPARTMENTS MEMORANDUM Date: January 12, 2016 To: Mayor & City Council From: Christine Harkess, Finance Director Steve Stadler, Public Works Director Subject: Utility Rate Study Staff has been working with Ehlers on evaluating our water and sewer rates to better position the utility funds for operational, capital and to determine long-term debt service requirements. We looked at consumption, the revenues generated and the impact on the funds when customers leave for the winter and generate no usage. Costs continue to accrue even when customers are not generating usage and we need to address those fixed costs. We also evaluated the new requirements for conservation pricing that is often done with tiered rates. The DNR recommends certain percentage differences between the tiered rates to encourage water conservation. Staff worked with Ehlers to determine average usage of our customers to figure out why our utility funds continue to be financially challenged. The attached power point slides describes the challenges and recommends a new rate structure. We will discuss this in depth at the upcoming council work session. Utility Rate Analysis Water, Sanitary Sewer and Storm Water Stacie Kvilvang –Ehlers January 12, 2016 Utility Funds •They are Enterprise Funds 1.Should pay for Capital Outlays Operations Depreciation; and Debt 2.Should be “flush” with cash 3.Have a minimum of: 3 months of operations (not including depreciation) Following year’s bond/debt payments Funding for capital equipment Utility Funds •Adequate revenue and cash balances in utility funds are important: 1.Maintain the City’s AA+ rating 2.Avoid sudden rate increases in the future 3.Water and Sewer have insufficient cash balances What Did We Look At •Utility CIP’s, including equipment •Operations •Current and future debt payments •Usage by users •Revenues Key Findings –2016 Water Rates Water Rates • 1.Usage assumptions are not aligned with actual usage patterns 7,000 gallons •Rates were based on an average single family use of per month 3,000 gallons Actual average single family use is per month •Propose use of tiers based upon actual usage patterns 2.A flat rate is necessary •To provide funding for a portion of fixed costs •To provide a financial buffer for wet weather years 3.Continued pressure on cash balances •Due to on-going utility improvements as part of road reconstruction projects $17.5M •estimated over from 2016-2026 Take Away •: 1.Revenues have been declining and future capital is driving future rate increases Key Findings –2016 Sewer Rates Sewer Rates • 1.Past rate increases have not kept pace with the financial needs of the Fund 2.Continued pressure on cash balances •Due to on-going utility improvements as part of road reconstruction projects $9.6M •estimated from 2016-2026 •5%-6% annual increases in MCES (Met Council) sewer charges over next 5 years Take Away: • 1.Insufficient cash balances, future capital needs and MCES cost increases are driving future rate increases Water Usage Patterns Prop Prop Prop Tier 1 Tier 2 Tier 3 •Recommended tiers shown by the dark blue line Stacie’s Usage Stacie’s Usage Water Usage Patterns •Proposed Tiers 1.Tier One up to 3,000 –usage gallons per month 39% •This captures of single family use 2.Tier Two 3,000 and 5,000 –usage between gallons per month 33% •An additional of single family users fall in this range 3.Tier Three over 5,000 –usage gallons per month 28% •Accounts for the remaining of single family users Water Usage Patterns •Balances usage revenue and usages by user type іğƷĻƩіğƷĻƩ ƭĻƩǤƦĻƭĻķƭğŭĻwĻǝ {źƓŭƌĻCğƒźƌǤwĻƭźķĻƓƷźğƌЋА͵ВБіЋА͵ВБі aǒƌƷźCğƒźƌǤwĻƭźķĻƓƷźğƌЍЌ͵ЊЍіЍЊ͵ЎЏі /ƚƒƒĻƩĭźğƌЋЌ͵ЋЋіЋЍ͵ЍАі LƩƩźŭğƷźƚƓЎ͵ЏЎіЎ͵ВВі •One user type isn’t substantially subsidizing another user type Water CIP City of Hopkins Water System Capital Improvement Program Projects20162017201820192020202120222023202420252026 CAPITAL EQUIPMENT Vehicles and equipment35,00026,800 PROJECTS Street improvements1,000,0001,500,000700,0001,250,0001,500,0001,500,0001,500,0001,500,0001,500,0001,500,0001,500,000 Public Works building/garage upgrades80,00010,000 Eighth Ave artery project165,00018,000 St Louis Park emergency connection211,000 Blake Rd corridor improvements500,000500,000 Blake water tank rehab340,000 Moline water tank rehab650,000 TOTAL (2015 Dollars)2,105,0001,691,8001,411,0001,768,0001,510,0001,500,0001,500,0001,500,0001,500,0001,500,0001,500,00017,485,800 Water Capital Improvements •2016 Projects –Street reconstruction improvements –St Louis Park Emergency Connection –Blake tank rehab –Moline tank rehab –Capital equipment Total $2,105,000 – •2017-2026 Improvements –Annual street reconstruction –Public Works Building improvements –Blake Road corridor improvements •Total CIP 2016-2026 Estimated $17.5 Million (doesn’t include inflation in costs) – •Cash balances are insufficient to fund this level of capital and operations Proposed 2016 Water Rates Monthly Water Rates CurrentProposed Rates 201520162017201820192020 Flat Rates Residential - '5/8" Meter2.252.392.532.682.84 Residential - 1" Meter2.252.392.532.682.84 Apt/Commercial - 1 1/2" to 2" Meter4.504.775.065.365.68 Apt/Commercial - 3" Meter6.757.167.588.048.52 Apt/Commercial - 4" Meter9.009.5410.1110.7211.36 13.5014.3115.1716.0817.04 Apt/Commercial - 6" Meter Residential and Multi Family 2.18 All usage 0 - 3,000 gallons2.302.442.582.742.90 3,001 - 5,000 gallons2.652.812.983.163.35 Over 5,000 gallons3.053.233.433.633.85 Commercial All usage2.18 0-10,000 gallons2.202.332.472.622.78 10,001 -20,000 gallons2.532.682.843.013.19 Over 20,000 gallons2.913.083.273.473.67 Irrigation All usage2.602.752.923.093.283.47 Water Fund Cash Balances Water Fund Capital Cash Reserves 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 20152016201720182019202020212022202320242025 Target Cash BalanceActual Cash Balance Sewer CIP City of Hopkins Sanitary Sewer System Capital Improvement Program Projects20162017201820192020202120222023202420252026 CAPITAL EQUIPMENT Telephone system6,800 Truck33,60040,300 Jet vactor350,000 Generator26,40023,000 PROJECTS Street improvements600,000500,000500,000500,000750,000750,000750,000750,000750,000750,000750,000 Public Works building/garage upgrades80,00018,00010,000 Eighth Ave artery project100,000 Lift station #4160,000 Lift station #7750,000 Blake Rd corridor improvements375,000375,000 Total CIP (2015 Dollars)713,6001,726,400875,0001,053,000760,000750,000773,000756,800790,300750,000750,0009,698,100 Sanitary Sewer Capital •2016 Projects –Street Improvements –Capital equipment Total $713,600 – •2017-2025 Improvements –Annual street reconstruction –Public Works Building improvements –Lift Station #4 –Lift Station #7 –Blake Road corridor improvements •Total CIP 2016-2026 Estimated $9.6M – •Cash balances are insufficient to fund this level of capital and operations Sanitary Sewer Rates •MCES disposal charges increased for 2016 by 10% Usage rates fund these charges •Projections assume an annual 5%-6% increase in MCES charges for the next five year Monthly Sewer Rates CurrentProposed Rates 201520162017201820192020 Usage Rate 4.305.385.706.046.406.79 Impact on Sewer Fund Utility Bill for Average Customer- Residential Impact Analysis on Rate Payers CurrentProposed Monthly Bills, Usage and Fixed Fee 201520162017201820192020 Single Family Residential Property (Low User) Water (3,000 gallons)$ 6.54$ 10.289.70$ 11.55 $ 9.15$ $ 10.90 Sewer (3,000 gallons) 12.90 20.36 16.13 17.09 18.1219.21 Total Monthly Utility Bill$ 19.4428.40$ 31.91 $ 25.28$ 26.79$ $ 30.10 $ Increase/(Decrease) 5.84 1.81 1 .52 1 .61 1.70 Single Family Residential Property (Median User) Water (8,800 gallons)$ 19.1829.26$ 32.87 $ 26.04$ 27.60$ $ 31.01 Sewer (4,800 gallons) 20.64 32.57 25.80 27.35 28.9930.73 Total Monthly Utility Bill$ 39.8258.25$ 65.45 $ 51.84$ 54.95$ $ 61.74 $ Increase/(Decrease) 12.02 3.70 3 .11 3 .30 3.49 Single Family Residential Property (High User) Water (36,000 gallons)78.48$ 137.61 $ $ 109.00$ 115.54$ 122.47$ 129.82 Sewer (5,800 gallons) 24.94 39.36 31.18 33.05 35.0337.13 Total Monthly Utility Bill$ 176.97 $ 103.42$ 140.18$ 148.59$ 157.50$ 166.95 $ Increase/(Decrease) 36.76 10.02 8 .41 8 .92 9.45 Utility Bill for Average Customer- Commercial Impact Analysis on Rate Payers CurrentProposed Monthly Bills, Usage and Fixed Fee 201520162017201820192020 Commercial Property (Low User with a 1" meter) Water (3,000 gallons)$ 6.54$ 8.85$ 9.38$ 10.549.94$ $ 11.17 Sewer (3,000 gallons) 12.90 20.36 16.13 17.09 18.12 19.21 Total Monthly Utility Bill$ $ 31.53 $ 19.44$ 24.98$ 26.47$ 28.0629.75 $ Increase/(Decrease) 5.54 1.78 1 .50 1 .59 1.68 Commercial Property (High User with a 2" meter) Water (35,000 gallons)$113.67$ 120.49 $ 76.30$ 95.44$ 101.17$ 107.24 Sewer (35,000 gallons) 199.41211.38 237.50 150.50 188.13 224.06 Total Monthly Utility Bill$337.73$ 358.00 $ 226.80$ 283.57$ 300.58$ 318.62 $ Increase/(Decrease) 56.77 20.26 17.01 18.03 19.12 Community Comparison 2016 Water Charges Assuming 3,000 Gallons per Month for Residential Users $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- City of Eden Prairie-ActualCity of Edina-ProposedCity of Hopkins ProposedCity of Minnetonka ActualCity of St Louis ParkCity of Golden Valley 2016201620162016Actual 2016Actual 2016 BaseVolume Community Comparison 2016 Sewer Charges Assuming 3,000 Gallons per Month for Residential Users $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 City of Eden Prairie-ActualCity of Edina-ProposedCity of Hopkins ProposedCity of Minnetonka ActualCity of St Louis Park ActualCity of Golden Valley Actual 201620162016201620162016 BaseVolume Summary •City needs to increase utility rates to Reflect actual usage of consumers Provide a tier system to align usage with fees charged Assist in paying for required capital and operational needs of the systems •Tried to impose rate increases that would be palatable, while providing necessary dollars for each Fund Higher increase in first year Annual increases thereafter are lower and relatively the same/flat Recommendation •Water Fund 1.City needs to implement flat fee/rate to pay for base needs of system 2.City needs to implement tier system to provide “fairness” in usage 3.City needs to annually increase rates to keep up with capital needs of system •Sewer Fund 1.City needs to adopt 2016 increase and annually increase rates to keep up with MCES increases and capital needs of system •Update the utility rate study every couple of years