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ARDEN HILLS CITY COUNCIL WORK SESSION - MAY 19, 2008 2 Mr. North reported that with the sanitary sewer, the trend shows revenues increasing at less than half the rate of expenditures on an annual basis. He indicated a goal of utility rates would be to maintain adequate cash balances for cash flow contingencies needs, in addition the establishment of reasonable rates for the users, along with covering the costs of water consumption. Mr. North indicated going forward the City would need $2.2 million for CIP expenditures over the next 10 years. He noted that the study included road work with construction rates inflating 30/0 annually with operating costs inflating 50/0 annually. Discussion ensued regarding the utility rate study. Mayor Harpstead questioned the inflation assumptions with the construction rate lower than the operating inflation rate. He indicated it was his understanding that construction rates were higher than operating expenses, due to material costs at this time. Elizabeth Diaz, Ehlers & Associates, interjected stating these numbers were fairly conservative estimates on construction costs noting they may be a tad higher but may balance out. Mayor Harpstead asked if revenue inflation was included in these estimates for reasonable price Increases. Ms. Diaz stated several factors were included in the model, the first being the operating revenue with the second being all the other revenues. She indicated this study was on the conservative side of things, by withholding the interest revenue to structure the rates in order to provide for cash flow, cash reserves and capital improvements. Councilmember Holden noted 2007 was a drought year and asked if this was a good year from which to pull usage rates. Ms. Diaz noted 2004 and 2007 were both drought years. She indicated, however, that her firm based their numbers on the 2007 usage levels, which may be higher than past years. Mayor Harpstead questioned what would happen to the analysis if the citizens greatly reduced their consumption of water. Ms. Diaz stated there were assumptions attached to the model, one being a 1 00/0 decrease in water usage, indicating this would correlate to a $40,000-50,000 decrease in revenues. Mr. North added that the assumptions may be off, but give a general roadmap for the future. He continued with the Utility Rate Study explaining three different options for the residential rates. Mr. North indicated Option I was status quo, with Options II and III including rate tiering. Mr. North indicated with Option I there was a need for rate increases in 2009. He stated the water side would be increased 60/0 with the sewer usage rates going up 180/0 annually. Mr. North reviewed the quarterly water charges for 2008 with the Council noting how these rates would change with the proposed rate increases.