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01/01/2010-CC-Agenda Packet-Work SessionAGENDA CITY COUNCIL WORK SESSION MONDAY, NOVEMBER 1, 2010 6:00 PM 502 ELM STREET 1. Call Meeting to Order. 2. Review and Discuss Utility Fees and Other Proposed Fee Schedule Changes. 3. Presentation and Discussion on Report From the City Manager on Residential Property Tax Revenue Versus Cost of Service. 4. Update on Sports Park. 5. Overview of Items on Regular Agenda. 6. Adjournment. I, the undersigned authority, do hereby certify that this Notice of Meeting was posted on the bulletin board, at the City Hall of the City of Sanger, Texas, a place convenient and readily accessible to thv general public at all times, and said notice was posted on the following date and time: at-,' rJ .m. and shall remain posted until meeting is adjourned. Tami Taber, City of SangE This notice board on This facility is wheelchair accessible and accessible parking spaces are available. Requests for accommodations or interpretive services must be made 48 hours prior to this meeting. Please contact the City Secretary's office at (940) 458-7930 for further information. 2Ulu WASTEWATER RATE STUDY MICHAEL BRICE, CITY MANAGER JUNE, 2010 Background In the summer of 2008 staff began the process of studying the water and wastewater utility rates. However, when the economy crashed in the last quarter of 2008, the rate study was suspended. Staff began working on the rate study again in May of 2009 and proposed modest increases in the water and wastewater rates for fiscal year 2010. This resulted in an actual increase of about 7% on average. Those increases were approved by the Council and went into effect in October of 2009. It was discussed during last year's budget process that rates would need to be studied and increases made annually for the next several years. This is because the current water rates do not generate sufficient funds to cover operating expenses and bond payments. The difference is being supplemented by electric revenues. Wastewater barely breaks even at the current rates. The need to generate additional revenue for the future wastewater plant, and service that future debt, means that those rates need to increase as well. It is imperative that we reach utility rates that will eliminate this deficit and start building reserves we can use to build the new wastewater plant. However, staff does not believe that we should do so with a dramatic increase in one year. Rather, rate increases should be spread out over several years to keep from impacting customers too severely. Enterprise Utilities Enterprise utilities are business type activities and are intended to generate revenues in excess of costs. These excess revenues can then be used for capital improvements and to supplement the general fund, helping to reduce the tax burden. Unfortunately, neither the water nor wastewater utilities generate excess funds of any consequence (See Chart A). In fact, after adding in debt service, water currently operates at a large deficit. (Both water and wastewater were operating at a deficit before last year's increase.) This has occurred because our operating expenses have increased annually and so has the debt service without any corresponding increase in utility rates. Fortunately for us, we have had the Electric Utility to make up for the losses in the other two. On the face of it, this might not seem to be a big deal since the Enterprise Fund as a whole generates a healthy fund balance. However, it is a concern for bond purchasers when new revenue bonds are sold for improvements. They wonder how the new bonds can be paid back for water and wastewater improvements if they are already operating in the red. As you know we recently locked in our wholesale electric rate until May of 2014. While other expenses for the electric utility will continue to rise, locking in the electric rate means that no significant increases should be needed in electric rates for some time. This gives us the opportunity to increase water and wastewater rates to get them operating in the black without hitting our customers with a major increase in electric as well. 2 Chart A Enterprise Fund Performance Without Rate Increase REVENUES VS EXPENSES NO RATE INCREASE zoso-zois Proposed Water Wastewater Electric Non -Departmental $ 37,333•00 $ 37I00 $ 37,333•00 Mayor & Council $ 13,445•00 $ 13,445•00 $ 11445.00 Administration $ 56,752.00 $ 56,752.00 $ 56,752.00 PW Admin $ 28,786.00 $ 28,786.00 $ 28,786.00 Data Processing $ 92,836.00 $ 92,836.00 $ 92,836.00 Vehicle Maintenance $ 21,515,00 $ 21615.00 $ 21,515.00 Water $ 892,927.00 Wastewater $ 569,965,00 Electric $ 6,410,623.00 Total Operation Cost $ 1,143,594•00 $ 820,632.00 $ 6,661,290.00 Total Capital Cost $ 458,361.00 $ 139,278•oo $ 419,739•00 Projected Revenue $ 1,245,333•00 $ 1,045,333•00 $ 7,795,333•00 Revenue over (under) $ (356,622.00) $ 85,423.00 $ 714,304.00 Balance $ 443.105.00 Even with the proposed rate increase the water utility will continue to operate at a deficit next year. Wastewater will operate with a small projected revenue surplus. (See Chart B). Again, the goal is not to completely eliminate the deficit and begin generating additional revenue this year, but to do so over a period of years to lessen the impact on our customers. Eliminating the deficit in water in one year would require a 33% rate increase. Obviously, that is not acceptable. 3 Chart B Enterprise Fund Performance with Rate Increase REVENUES VS EXPENSES WITH RATE INCREASE Zoio-loss Proposed Water Wastewater Electric Non -Departmental 37,333.00 $ 371333400 371333A00 Mayor & Council $ 13,445,00 $ 13,445,00 $ 13,445,00 Administration $ 56,752.00 $ 56,752.00 $ 56,752.00 PW Admin $ 28,786.00 $ 28,786.00 $ 28,786.00 Data Processing $ 92,836.00 $ 92,836.00 $ 92,836.00 Vehicle Maintenance $ 21,515.00 $ 21,515.00 $ 21,515.00 Water $ 892,927.00 Wastewater $ 569,965.00 Electric $ 6,410,623.00 Total Operation Cost $ 1,143,59400 $ 820,632.00 $ 6,661,290.00 Total Capital Cost $ 458,361.00 $ 139,278.00 $ 419,739.00 Projected Revenue Revenue over (under) Balance $ 1,329,33300 $ 1,115,33300 $ 7,795,33300 $ (272,622.00) $ 155,423,00 $ 714,304.00 $ 597.105.00 Why are these rate increases needed? There are only two ways to eliminate the deficit, raise revenues or cut expenditures. We have trimmed expenditures signcantly, especially in the administrative and support areas. Simply put, there is not much left to cut. Any further cuts will either come from the elimination of capital projects and/or cutting employee wages and benefits. So, in the short term, rate increases are needed to get the utilities, especially water, operating in the black. In the long term, rate increases are needed to fund future capital improvements. The City's infrastructure grows older every day and requires continuous maintenance and repair. Replacing old water and wastewater lines is expensive but is also necessary. The Comprehensive Water and Wastewater Plan recently completed by KSA has identified those needs. Implementing impact fees will help pay for these needs but rate increases need to provide a revenue stream for these improvements as well. 0 On the wastewater side we also need to be building toward a rate that helps to pay for the new wastewater plant. The annual debt payment on the new wastewater plant will be more than $1,000,000 a year. If we tried to fund that debt through rates alone we would have to double the current wastewater rate. While multiple revenue sources will be needed to pay this debt, wastewater revenues must be sufficient to pay a large portion of the debt. We need to raise the rate gradually to lessen the impact on our customers and avoid a sticker shock rate increase in the future. This provides us an opportunity to start saving excess wastewater revenues now to go toward the future plant. Staff is proposing that, if rates are increased as proposed, 10% of wastewater revenue be transferred into the wastewater Capital Improvement Fund next year. This should generate around $100,000 for the year. On the water side, as our demand increases, we will have to start purchasing more of our water supply from Upper Trinity Regional Water District. (Trinity is proposing a 5% increase in their rates for next year. This has already been built into the preliminary budget.) This will increase the cost per gallon necessitating higher rates to cover the increased cost. We must also begin generating sufficient revenues to fund improvements to existing infrastructure. In the past we have funded infrastructure improvements primarily through the sale of bonds (See appendix A for current debt service schedule.) Because these improvements are so expensive bonds have been the only option. We are now reaching a point where we should fund some infrastructure improvements on a pay as you go basis. Funding improvements on a pay as you go basis is far less expensive in the long run and frees up money that would have been spent on interest for other improvements. This is not to say that we will not sell bonds to fund large infrastructure improvements in the future. The point is we need to generate sufficient revenues over and above operating and debt service costs to fund some infrastructure improvements each year. Proposed Rate Increase for Fiscal Year 2011 Beginning October 1, 2010 staff is proposing an increase of approximately 10% across the board iIt water and wastewater rates. The only exception is on the residential base rates. The residential base rate is only increasing 6%. This is being done to lessen the impact on residential customers as a whole and low volume water users in particular. This rate increase is already reflected in the proposed budget. Not increasing the rates will mean not starting the 10% wastewater savings toward the new plant. It would also mean falling further behind on getting water in the black and keeping wastewater out of the red. Staff has chosen to present a modest increase that allows us to continue the current level of operations and begin saving some money for future improvements. However, this is dependent on a multi -year strategy of gradual rate increases. 5 Chart C Proposed Water Rate Increases RATE Current ArProposed WATER $ 16.00 10/1/2010 Residential Base 10014999 gallons 500044,999 gallons $17.00 $ $ 2.85 US $ 2.60 $ 2.85 15,000-290999 $ 3.35 $ 3.70 30,000+ Gallons $ 4.30 $ 4.75 Commercial Base $ 20.00 $22.00 1001=4999 gallons $ 3.05 $ 3.35 500044,999 gallons $ 3.30 $ 3.65 15,000-29,999 $ 3.60 $ 3.95 30,000+ Gallons $ 4.40 $ 4.85 _Chart D Proposed WASTEWATER Residential Base Wastewater Rate Increases _ Proposed $ 17.00 $ 18.00 Per 1000 gallons $ 2.25 $ 2.50 109000+ $ 2.50 $ 2.75 Maximum $ 45.00 $ 50.00 Commercial Base 3/4" Meter $ 24.00 $ 26.50 1" Meter $ 26.50 $ 29.15 11/2" Meter $ 30.00 $33.00 2" Meter $ 36.50 $ 40.15 3" Meter $ 45.00 $49.50 4" Meter $ 83.50 $91.85 per 1000 gallons $ 2.25 $ 2.50 100000+ $ 2.50 $ 2075 What will be the impact on the customer? In these tough economic times any increase is painful. However, as stated above, gradual increases over the next few years are a necessity. The chart below reflects the economic impact on the "Average" Customer. As you can see, because we did not raise the base rate by 10% that actual increase for residential customers is approximately 7%. Chart I: Impact of New Rate on the Residential Customer Impact Current Proposed % Change $ Change Residential Water Residential customers using: 4000 gallons a month $ 23.80 $ 25.55 7% $ 1.75 Wastewater Residential customers using: 4000 gallons a month $ 23.75 $ 25.50 7% $ 1.75 The impact on commercial customers will be slightly higher due to raising their base rate by a larger percentage. Because commercial customers place a higher demand on the system they should be paying a higher rate than residential customers. Chart F Impact of New Rate on Commercial Customers Commercial Current Proposed % Change $ Change Water Commercial customers using: 5000 gallons a month 15,000 gallons a month Wastewater 1" meter Commercial customers using: 5000 gallons a month $ 65.20 $ 71.80 10% $ $ 35.50 $ 39.15 10% 3.20 6.60 15,000 gallons a month $ 58.00 $ 65.40 1170 $ 7.40 As you can see, these monthly increases are fairly small. Again, easing the rates up each year will help spread the burden to our customers as opposed to one huge increase. How will our new rates compare to others? There will always be cities with rates that are higher or lower than ours. Comparing rates to other cities is difficult for several reasons. For example, comparing rates to Denton or Dallas is unrealistic because of their ratio of commercial customers to residential customers. In those cities commercial customers pay a much larger proportion of revenues than do residential customers. Another problem is that rates are driven by costs. In rapidly growing cities rates tend to be higher because they are paying for large improvements to their systems. In cities that are not experiencing much growth, rates tend to be lower because few expensive improvements are being made. 7 The chart below compares our new rate to several small to mid size cities in the area. These cities are primarily bedroom communities with a high proportion of residential customers. Bolivar water has also been included for comparison purposes. As you can see, our new rates are still lower than the average for these cities. Again, there are cities with lower rates than ours, but our rates are still on the low side in comparison. Corinth $ 20.00 $ 2.57 $ 4.58 $ 6.57 $ 27.71 $ 23.27 $ 4.60 Bolivar WSC $ 28.50 $ 2.75 $ 3.75 $ 4.25 $41.25 Krum $ 15.00 $ 165 $ 4.15 $ 4.65 $25.95 $ 31.00 $ 2.44 Decatur $ 16.75 $ 1.75 $ 155 $ 4.08 $22.00 $ 16.50 - $ 2.19 Little Elm $ 15.84 $ 3.65 $ 4.54 $ 5.69 $26.79 $ 22.90 $ 3.51 Pilot Point $ 18.00 $ 2.30 $ 3.10 $ 3.60 $28.80 $ 18.00 $ 2.80 Roanoke $ 17.50 $ 2.22 $ - 2.77 $ 3.33 $27.49 $ 14.50 $ 2.99 As you can see, there is a large variation in the rates and how they are structured. The new rates are below the average for the most part. These rates are provided more for reference purposes and not to justify a rate increase. The goal of any city should be to keep the rates as low as possible and still provide for sufficient revenues to cover operating costs, debt service and capital improvements. Summary This rate study clearly shows the need for increased utility rates for both water and wastewater. A multi -year strategy focusing on modest rate increases will lessen the impact on customers in any one year. The rate increase proposed this year is not enough to bring the water utility into the black. However, it is another step in that direction. The rate increase will also allow us to start saving for the new wastewater plant and establishing a rate structure to pay for the debt service on the new plant. Staff strongly recommends the proposed rate increase be implemented on October 1, 2010 and thanks you for your careful consideration of this matter.