10.02 2017 Capital Improvements/Utility Rate Analysis Report

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2032 At this point, the plan calls for the major reconstruction of Patriot Avenue with an estimated cost of $2,500,000. The City intends to use cash to pay for the project for fund 402 (the replenished funds for the internal loans issued in 2018 described above). The impact of taking on all of these projects as described will result in the following impacts:  Tax rates will elevate: The City will need to increase its tax rate to cover the debt obligations. The model projects the tax levy to jump to nearly 66% in 2020 before decreasing in the following years and stabilizing back at 56% in the closing years of this plan.  Water and Sewer rate increases are necessary: Sewer rate adjustments might not be necessary, but advised nonetheless. It is always best to stay “ahead of the game” when it comes to Enterprise Funds. Perhaps a 1% annual increase in Sewer rates would be appropriate. Water rates are a bit more complicated due to the need to develop “conservation rates” in order to comply with new rules regarding demand reduction measures. See our specific recommendations for water rates later in this report.  Debt levels remain low: Due to the fact that a significant portion of project costs will be funded by internal loans (cash provided by County payments for road turn-backs), the City’s official debt ratios will remain low (we are contemplating actual General Obligation Bonds for only a fraction of the identified costs). We don’t anticipate any adverse effects on the City’s credit rating due to the proposed projects.  Long term costs will increase slightly: Long term taxes and utility costs for a typical resident are expected to rise only slightly, and at a lower pace than the historic rate of inflation. At stated earlier, the City of Pequot Lakes is positioned very well strategically to take on new projects. Water Rate Recommendations (See Tab 4 for specific rate recommendations) All public water suppliers in Minnesota that serve more than 1,000 people must have a water supply plan approved by the Department of Natural Resources (DNR). Water supply plans must be updated and submitted to the DNR for approval every ten years. This requirement, in place since the 1990s, is designed to encourage communities to deal proactively with providing sustainable drinking water for citizens, businesses, and industry. As part of the planning process, we focused on water rates that assist the City in meeting the DNR mandates for demand reduction measures in a water supply plan. The DNR and communities are responsible for implementing demand reduction/water conservation measures. Tiered rate structures meet the intent of the demand reduction law. Specifically, we’ve developed a tiered rate system so that volumetric charges go up as usage levels go up. There is a 50% bump from tier one to tier two, and a 25% bump from there to tier 3 and then again to tier 4. For residential, it is also important to note that we advise removing gallons allowed in the base rate. This is, again, to comply with DNR’s required demand reduction measures. However, to offset the resulting increase in monthly bills for most users we are recommending a 60% reduction in the base rate. The combined impact of this results in a monthly water bill increase of about $3 for a typical household. For commercial and multi-family, we recommend continuing the practice of providing up to 5,000 gallons with the base rate. When we removed this allocation of gallons, fees became excessive for commercial and multi-family, roughly 40-60% increase in 2018. We feel business routinely practice conservation, by being driven by the bottom line so are inherently trying to conserve. In order to assist in the funding of projects described earlier, we are also recommending a 3% annual increase in water rates commencing in 2019.