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The Council is reminded that the Water Fund is in a relatively weak financial position compared to other utility funds and even the City's General Fund. Above-inflation increases in water rates will be needed for the foreseeable future to improve this condition. Sanitarv Sewer Operations: The City maintains a sanitary sewer collection system to ensure the general public's health and general welfare. The single largest operating cost to the sanitary sewer operation is the treatment costs paid to the Metropolitan Council Environmental Services Division (MCES). The MCES has notified us that our treatment costs are expected to increase by approximately 3% in 2006. In addition, the City's internal operating costs are expected to increase by approximately 1% reflecting slightly lower planned capital replacements from the previous year. Unlike the Water Fund, the Sanitary Sewer Fund is in a relatively strong financial position which will somewhat offset some of the operating cost increases. Storm Water Drainage Operations: The City provides for the management of storm water drainage to prevent flooding and pollution control, as well as street sweeping and the leaf pickup program. The storm sewer costs are expected to somewhat higher than in previous years, due to the planned replacement of Stormwater systems. In an effort to ensure adequate funds are on hand for these replacements as well as other operating costs, an increase in the rates will be needed. Recycling Operations: The recycling operation provides for the contracted curbside recycling pickup throughout the City. The primary operating cost is the amounts paid for a contractor to pickup recycling materials. The 2006 contract will allow recycling rates to remain at their 2005 levels, and should limit the increase for 2007 to a less-than-inflation amount. Recommendation After reviewing the needs of the various enterprise-type operations and the current rate structure, Staff feels a rate adjustment is warranted. This is based on the following: 1) The City will realize a 3% increase from various service providers including the City of St. Paul, and MCES 2) The City is projecting a 3% increase in City-controlled operating costs 3) Substantial capital replacement costs will be incurred in the next several years that will require both the use of existing reserves, as well as planned rate increases 4) The City has fixed costs that it must recoup independent of the amount of citywide usage 5) The City has typically applied rate adjustments on an equal percentage basis across various property types After a brief discussion, the Council agreed to accept Staffs recommendation. A resolution to adopt the recommended rates is attached. Council Action Requested Adopt the attached Resolution establishing the 2006 Utility Rates.