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2011 Projected Water Costs <br />a Operating <br />Depreciation <br />o Capital and Debt <br />In 2010, the City of Two Harbors made a substantial investment in its water system and financed <br />approximately $5 million in capital projects. The first debt payments started in 2011. A $2.2 million <br />water plant upgrade is planned in 2013 and is expected to be financed through the State of Minnesota <br />Public Facility Authority. <br />The City charges for water usage on a flat rate depending on number of people in a home. Currently, the -1 <br />City does not meter usage for its residential users. Most commercial entities are metered and are charged <br />a fixed rate for the first 2,000 gallons of usage and then a flat rate per thousand gallons above 2,000 <br />gallons. For the purposes of this study, Ehlers maintained the existing rate structure. <br />The City has not raised water rates since 2008. Ehlers is recommending that the City implement rate <br />increases in 2012 and annually thereafter. This will allow the City to collect adequate revenues and to <br />provide for operating expenses, debt obligations and future scheduled capital improvements. <br />Historically, the City of Two Harbors has used a mix of water rates, property taxes, and sales tax revenue <br />to fund the water and sewer utility operations. One thing to keep in mind is that when the City has <br />obtained water loans from the Public Facilities Authority (PFA). The PFA loans are technically general <br />obligation water revenue bonds and bond covenants require utility revenues to be adequate to pay all debt <br />associated with the utility. The City may wish to discuss this provision with bond counsel. <br />Proposed Water Rates <br />This report proposes, for the City Council's consideration, a simple rate increase for 2012 in order to <br />generate sufficient revenues to operate the utilities, make annual debt payments, and upgrade the plant in <br />2013. <br />This report proposes a 6.75% rate increase for flat rates and usage rates for 2012. As was stated above, <br />operating revenues have not kept pace with capital expenses. In the past, transfers in have been required <br />for adequate cash flow. Additionally, the City hasn't raised water and wastewater rates since 2008 and <br />revenues have been flat in 2009 and 2010. Rate increases are necessary in order to provide cash flow for <br />