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City of Two Harbors <br />Water and Wastewater Rate Analysis <br />Executive Summary <br />June 27, 2011 <br />Introduction <br />Financial Planning <br />The City of Two Harbors has requested Ehlers to complete a utility rate analysis to review water and <br />wastewater rates for 2011 and beyond. <br />The water and wastewater utilities have established rates that are adequate to meet operating expenses. In <br />addition, the wastewater fund is financially healthy and has established solid cash reserves. The water <br />fund is facing new financial pressure as a result of significant upgrades to the water infrastructure in 2010. <br />In 2011 and 2012 the City is considering purchasing and installing water meters, and an upgrade to the <br />water treatment plant is planned in 2013. These capital costs have been paid for over the last two years <br />by transferring in property tax and sales tax revenue. The City has identified the need to increase water <br />rates in advance of the 2013 plant upgrade. In addition, the City has the opportunity to reduce tax levies <br />and make the water fund more financially self - sufficient. <br />Water Utility <br />The City of Two Harbors owns and operates the water utility that serves its residents and businesses. The <br />utility's financial activity is accounted for in the City's Water Fund. By looking at the fund as a whole, <br />we can see key features of the utility operations. <br />Operating costs are the single biggest expense of the water utility, followed closely by capital and debt <br />expenditures. As a rule, utilities are capital intensive operations. Operating costs account for 45% of the <br />total utility expenses. Capital costs and principal and interest on outstanding debt issued to finance <br />capital projects accounts for 44 %, and depreciation for 11% of total expenses. Consistent with most <br />Minnesota communities, the City does not fully fund depreciation. <br />The break -down of current water utility costs is shown in the chart on the following page. <br />EHLERS <br />LEADERS IN PUBLIC FINANCE <br />Minnesota <br />Offices also in Wisconsin and 111nols <br />www.chlci-s- inc,corn <br />phone 651 -697 -6500 3060 Centre Pointe Drive <br />fax 651- 697 -8555 Roseville, MN 55113-1122 <br />Lou free 800- 552.1171 <br />