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Sanitary 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 4% in 2004. In addition, the City's own operating costs are expected to increase by approximately 5%. Unlilce the Water Fund, the Sanitary Sewer Fund has a strong reserve level that can be used to offset some of these 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 picicup program. The storm sewer operating costs are expected to decrease substantially in 2004. A number of capital improvements were completed in 2003 which included the replacement of storm water mains and Stormwater Phase TT improvements. Some of these capital replacements are scheduled to continue in 2004, but to a lesser degree. Nearly $1.5 million in existing cash reserves will be used to fund projects in '03-'04. This will leave the fund with a reserve of approximately $500,000. Given the size and cost of these projects in 2003 and 2004, and the substantial draw-down of reserves, it is suggested that an increase in rates be implemented to keep operations adequately funded. Recycling Operations: The recycling operation provides for the contracted curbside recycling picicup throughout the City. The primary operating cost is the amounts paid for a contractor to picicup recycling materials. Per the City's contract with the Recycling Hauler, a rate increase of 2% is being suggested. 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 2-5% increase from various service providers including the City of St. Paul, MCES, and Waste Management. 2) The City is projecting a 5°/o 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. Based on these reasons, Staff is recommending the following rate adjustments as shown in the tables below: