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REQUEST FOR COUNCIL ACTION Date:October 19, 2020 Item No.: 7.a Department Approval City Manager Approval Item Description: Ehlers Utility Rate Study for Water and Storm Drainage Utility Funds 1 B ACKGROUND 2 The Water Utility Fund has had a steadily declining cash balance for the past four years. In 2015 the City 3 Council authorized a permanent cash transfer of $2.5 million from the StormDrainage fund. This was 4 necessary as there were two large capital projects internally financed - refurbishment of the water tower 5 and accelerated roll-out of the Automated Meter Reading project. The water utility rate setting was done 6 by the Finance Director and in 2014 the formula was changed. Unfortunately the new formula had an 7 error when converting the water purchased from St. Paul from cubic feet to the Roseville system which 8 is billed in gallon units. In addition, the capital projects done for the water system have exceeded the 9 averages used in the formula. At December 31, 2019, the Water Fund had to internally borrow 10 $1,234,554 from other funds to eliminate the cash deficit. The rate study proposed to make this a formal 11 loan which would be repaid over the next five years. 12 13 Ehlers performed a comprehensive utility rate study of the Water and Storm Drainage Funds. The cash 14 flow modeling was used for the discussion on the 2021-2040 Capital Improvement Plan at the July 20, 15 2020 council meeting was the first step in the utility rate study. Ehlers has been working on the actual th 16 rate modeling and will be presenting their analysis at the October 19 City Council meeting. 17 18 In order to put the Water Fund back on the correct path, there are a number of options that the council 19 should consider. The first would be to address the capital needs in the next three years and how those 20 projects will be financed. There is $2.5 million programmed over the next three years, including the final 21 phase of the booster station rehabilitation. Staff recommends issuing a revenue bond to finance capital 22 projects over the next few years. Based on the current environment, we should be able to get low interest 23 rates on this debt issue which would allow for an infusion of cash to pay for the capital projects. 24 25 Historically, the City’s rate structure has been unique to Roseville and our definitions of fixed and 26 variable costs do not align with the recommendations from the American Water Works Association 27 (AWWA). The current rate structure is not producing sufficient revenues to cover both operations and 28 capital infrastructure needs as demonstrated by the current cash deficit. While there have been a number 29 of reasons for this as mentioned above, it is now time to look at restructuring the rates to provide a 30 financial model that will put the Water Fund in a better financial situation. Ehlers will be presenting two 31 options for a new rate structure that provides equitable rates based on usage between residential, 32 commercial and apartment accounts and is in alignment with the AWWA recommendations. Staff 33 supports either of the options that Ehlers will present as it provides equity among users, adheres to state 34 regulations regarding conservation rates, and gets the water fund on track to cover all operating and 35 capital costs and builds towards a minimum working capital threshold. There are bestpractices regarding Page 1 of 2