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Page 2 of 13 Staff’s analysis included a review of the following: 30 31  Fixed costs including personnel, supplies and maintenance, and depreciation. 32  Variable costs including the purchase of water from the City of St. Paul, water treatment costs 33 paid to the Metropolitan Council, and recycling contractor costs. 34  Capital replacement costs. 35  Customer counts and consumption patterns, rate structure, and rates. 36 37 A summary of each operating division is included below. 38 39 Water Operations 40 The City’s water operation provides City customers with safe potable water, as well as on-demand water 41 pressure sufficient to meet the City’s fire protecti on needs. The following tabl e provides a summary of the 42 2012 and 2013 (Proposed) Budget: 43 44 2012 2013 $ Incr. (Decrease) % Incr. (Decrease) Personnel $ 581,600 $ 595,845 Supplies & Materials 74,100 76,325 Other Services & Charges 582,050 584,270 Water Purchases 4,600,000 5,000,000 Depreciation / Capital 1,165,000 1,585,000 Total $ 7,002,750 $ 7,841,440 $ 838,690 12.0 % 45 The single largest operating cost for th e water operation is the purchase of wholesale water from the City of 46 St. Paul. For 2013, the budgeted amount has been increased given the rate increase imposed by St. Paul as 47 well as the uncertainty of future wholesale water rates. The City of St. Paul is currently undertaking a Cost 48 of Service study to determine what changes might be need ed in their rate structure. The City expects to 49 enter into discussions with th e City of St. Paul early next year to review the cost sharing formula outlined in 50 the current contract. 51 52 The City also expects to have moderate increases in personnel and supply-related costs, leading to an 53 overall budget increase of 12.0%. The impact on the wate r rates will also be affected by these and other 54 factors. 55 56 As noted previously on several occasions, the City’s long-term capital financing program has been 57 significantly underfunded for many years. The Water F und has been reliant on internal borrowings from 58 the Sanitary Sewer Fund to provide for capital needs dur ing the past several years. The 20-Year CIP calls 59 for an average capital replacement need of $1.1 million annually. In contrast, current water rates only 60 provide $700,000 annually. 61 62 Based on a recommendation of the CIP Task Force, the City Council agreed in 2011 to adopt a base rate 63 increase of approximately 60% to alleviate the fundi ng gap. The increase was to be phased in over two 64 years beginning in 2012. For 2013, the increase is exp ected to generate an additional $400,000 annually. 65 The base rate would need to be indexed for future inflationary impacts. 66 67 It is further recommended that the usage rate be incr eased by approximately 2.5% to offset the increase in 68 water purchase and other operating costs. 69