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Attachment A Memo To: Public Works, Environment & Transportation Commission From: Michelle Pietrick, Finance Director Date: October 27, 2020 Re: Review the 2021 Proposed Utility Rates Background Unlike many city services that are supported by property taxes, our utility or enterprise operations are funded primarily by user fees and are operated as separate, stand-alone functions. Over the past several months, city staff has been reviewing the City's utility operations to determine what customer rate adjustments are necessary for 2021. The City engaged Ehlers to perform a comprehensive utility rate study of the Water and Storm Drainage Funds based on the cash situations in these two funds. Operational Review Water Fund Operations At December 31, 2019, the Water Fund had to internally borrow $1,234,554 from other funds to eliminate the cash deficit. This fund has had a steadily declining cash balance for the past four years. Staff identified that the rate setting formula was changed in 2014 which unfortunately has an error when converting the water purchased from St. Paul from cubic feet to the Roseville system which is billed in gallon units. In addition, the capital projects done for the water system have exceed the averages used in the formula We engaged Ehlers to perform a utility study on this fund, attached is a copy of the Ehlers power point that was presented to the Council on October 19u'. Commission members are encouraged to view this meeting for details on the rate structure and the council comments. Ehlers presented two separate options, both introduce new water usage tier rates for Residential, Commercial and Apartment properties. Both options realign who pays for water versus who uses water to provide more equity and the definition of fixed costs versus variable costs adheres to the industry standards. Option 2 provides for an average of capital costs to be included in the fixed costs, which is more in line with our current structure. Option 1 would put the average capital costs on the usage/variable side of the rates. The City Council is looking for input on these two options. Storm Drainage Operations The City provides for the management of storm water drainage to prevent flooding and pollution control, as well as the street sweeping program. The cash balance in this fund had been steadily declining so this fund was included in the utility rate study done by Ehlers. The study showed that the current rate structure is equitable and needs a steady increase of 4% for the next four years to build up some reserves to pay for the capital needs in this fund. After four years, the rate increases will level off to about 1% annually thereafter. Staff will continue to monitor this fund and the needed capital proj ects. Page 1 of 4