09.02 - Utility Rate Study Proposals

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• Comply with the new State law requiring water conservation rates. Financing Improvements — How Much Debt is Prudent? Cities in Minnesota are limited by State statutes in issuance of debt only as it relates to purely tax - supported obligations. These obligations are usually for city halls, public works, public safety, libraries, equipment or streets where no assessments are levied. General obligation ( "G.O. ") bonds supported primarily by taxes, and annual appropriation lease revenue bonds of more than $1,000,000 supported by taxes, are subject to a limit of 3% of taxable market value. Two Harbors has a market value of $227,158,400 so the maximum amount of debt paid by taxes is $6.8M. Currently the City has no debt outstanding that counts against the 3% limit. Debt for sewer, water and electric purposes or revenue debt is not subject to the debt limit, even if the general obligation pledge backs the sewer or water debt. The limit on debt is then a function of the market. In today's public market, a bond rating is more important than ever if a city is planning to issue more than $1M. Rating agencies use certain factors in determining a rating, one of which is debt levels. Cities in Minnesota in the "A" range of a rating have an average debt burden of approximately $3,000 per capita and approximately 6% of market value. This would put Two Harbors in the $11,000,000 to $13,000,000 range of total debt. Currently Two Harbors has $5,353,095 of debt outstanding through the PFA and this report shows another $2,200,000 of debt to be issued for the water treatment plant replacement within the next few years. Rating agencies would count this debt in the debt burden calculations as long as taxes or sales taxes are used to help support the utility. If the debt is self - sufficient and paid from user fees, the rating agencies typically do not count utility debt in the ratios. The study assumes that the City will finance major utility improvements in order to keep cash balances relatively steady from year to year. This study is not a debt plan. In practice, the City staff will continue to use the rate study's financing plan as a guide and, in consultation with its independent financial advisor, consider when and how much debt to incur in any given year. Summary Ehlers is recommending a multi - pronged approach to maintain the financial health of the City's utilities. Consider the proposed changes in the rates for water and proposed inflationary increase for wastewater rates for 2012. 2. Reduce the amount of property and sales tax revenues transferred to the water fund. 3. Eliminate the transfer of property taxes to the wastewater in 2012 or beyond. 4. After water meters have been installed and used for a period of time, the City may wish to consider adopting rates based on usage and/or a conservation water rate structure. The City's utility fluids continue to be well managed, and the City's utility rates will remain competitive in the region if the proposed changes are adopted.