3.8 Utility Rate StudyOtsegFo
MINNESOTA
DEPARTMENT INFORMATION
Request for
City Council Action
ORIGINATING DEPARTMENT
REQUESTOR:
MEETING DATE:
Utilities
Utility Manager Neidermeier
March 23, 2020
PRESENTER(s)
REVIEWED BY:
ITEM #:
Consent
City Administrator/Finance Director Flaherty
3.8
STRATEGIC VISION
MEETS:
THE CITY OF OTSEGO:
X
Is a strong organization that is committed to leading the community through innovative
communication.
Has proactively expanded infrastructure to responsibly provide core services.
Is committed to delivery of quality emergency service responsive to community needs and
expectations in a cost-effective manner.
Is a social community with diverse housing, service options, and employment opportunities.
Is a distinctive, connected community known for its beauty and natural surroundings.
AGENDA ITEM DETAILS
RECOMMENDATION:
City Staff recommends City Council acceptance of a proposal to conduct a Utility Rate Study.
ARE YOU SEEKING APPROVAL OF A CONTRACT?
IS A PUBLIC HEARING REQUIRED?
No
No
BACKGROUND/JUSTIFICATION:
The 2020 Utility budget included funding for a rate study to evaluate the primary funding sources of the
Water and Sanitary Sewer utility funds. This formal rate study will help ensure that the City's rate structure
is properly designed to meet the future operating, capital and debt service needs. The City last conducted a
rate study in 2012.
City staff defined a specific scope of services, and then requested and received two proposals to conduct a
rate study in accordance with said scope of services. The proposals were received from: 1) Ehlers, and 2)
AE2S Nexus.
A review of the proposals was conducted as part of a special meeting on March 9, 2020 with direction from
the City Council to accept the proposal from Ehlers. Since that time, City staff has worked with Ehlers to
amend the original proposal to include additional considerations to the Sanitary Sewer services provided to
the City of Dayton.
The rate study is currently estimated to take approximately 14 weeks to complete, so as to be available for
2021 budget considerations.
SUPPORTING DOCUMENTS ATTACHED:
• Ehlers Proposal
• Amendment
POSSIBLE MOTION
PLEASE WORD MOTION AS YOU WOULD LIKE IT TO APPEAR IN THE MINUTES:
Motion to accept the proposal and respective amendment from Ehlers to provide a utility rate study in the
amount of $31,500.
BUDGET INFORMATION
FUNDING:
BUDGETED:
Fund #601— Water Utility
Fund #602 —Sanitary Sewer Utility
Yes, the combined utility fund budgets included a
total budget of $27,500.
FEBRUARY 10, 2020
PROPOSAL TO PROVIDE A UTILITY RATE STUDY TO:
The City of Otsego,
Minnesota
I s
NEHLERS
LEADERS IN PUBLIC FINANCE
Ehlers
N21W23350 Ridgeview Parkway West, Suite 100
Waukesha, Wisconsin
Municipal Advisor Registration Number: K0165
SEC CIK Number: 0001604197
ehlers-inc.com
EHLERS ADVISOR:
Nick Anhut, CIPMA
Senior Municipal Advisor
nanhut@ehlers-inc.com
651-697-8507
COVER LETTER
SECTION A: FIRM QUALIFICATIONS & PROFILE
FIRM QUALIFICATIONS 4
FIRM OVERVIEW 4
RELEVANT PROJECT EXPERIENCE 5
KEY PERSONNEL & ORGANIZATIONAL STRUCTURE 5
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
PROJECT APPROACH 7
WORK PLAN 8
PROJECT SCHEDULE 10
PROJECT COST 10
REFERENCES 11
APPENDIX A: MATERIALS TO BE PROVIDED BY THE CITY 12
NOTE: This is an interactive document. The table of contents and orange text are hyperlinked to
corresponding sections. When your cursor changes to a hand while scrolling over the table of
contents section headings, press your "control' button on your keyboard, then click with your
mouse and you'll jump to that section within the document.
February 10, 2020
Adam Flaherty, City Administrator
City of Otsego
13400 - 90th Street NE
Otsego, MN 55330
RE: City of Otsego Utility Rate Study
Dear Mr. Flaherty,
�EHLERS
LEADERS IN PUBLIC FINANCE
Thank you for the opportunity to provide a proposal to undertake a Utility Rate Study for the City
of Otsego. We are deeply appreciative of our prior work with the City and hope our past efforts
and this proposal demonstrate our team's collective qualifications to deliver the City's requested
scope of services - and to surpass your expectations for quality and value.
We believe the following factors set us apart from competing firms:
In -House Expertise. We have extensive experience conducting utility rate studies across
Minnesota. We assist cities to develop rate structures and development fees that work for their
community and address their unique needs. In the past five years we have completed over 80
studies aimed to provide each city the tools to make informed decisions for their utilities. The
implemented changes position these cities to ensure their fixed costs are covered, resources are
built for future capital needs and rates are easy to understand and administer.
Our Approach. We understand the multiple interests the City must balance when setting rates.
Our specialists have city finance experience and approach the study from the perspective of
minimizing impacts to residents, maximizing the health and flexibility of each fund and
providing ease of administration and communication to the public.
Our Promise. Utilities are challenged to achieve and maintain the right balance of providing
superior service while keeping costs reasonable. The primary goal of a rate study is to provide
just and equitable water and sewer rates balanced with a long-term financial plan for the utility's
operations, capital needs and required reserves. Our proposed study will provide a platform to
confidently make rate -setting decisions while also positioning the City to manage future
challenges.
You should expect your consultant to evaluate the full range of options and help the City
implement rates that meet your objectives. We propose to provide ongoing dialogue and idea
sharing, independent analysis, presentation of customized options for your unique
circumstances and a competitive, value -oriented fee structure.
Respectfully submitted,
�J�
Nick Anhut, CIPMA
Senior Municipal Advisor
nanhut@ehlers-inc.com
651-697-8507
FREERSUtility Rate Study Proposal to the City of Otsego, Minnesota
LEADERS ua PUBLIC FINANCE Submitted by Ehlers - Februrary 10, 2020
SECTION A: FIRM QUALIFICATIONS & PROFILE
Firm Qualifications
Ehlers will provide the City of Otsego with a solution that incorporates a strong financial planning
perspective, ensuring recommended rates meet the City's long-term goals and financial needs. The
rate study will result in:
» Options & recommendations for water & sewer rate designs through 2030
» A rate design that is easy to administer and understood by the public
» Recommendations for appropriate cash balances & a strategy for maintaining reserves
» A comparison of fees to other cities
» A funding plan for future capital projects
» A flexible planning tool that helps the City respond to changing circumstances & assumptions
about capital investments, funding options, shifts in customer usage & development patterns
Firm Overview
BUILDING COMMUNITIES. IT'S WHAT WE DO.
Pioneers in public finance since 1955, Ehlers helps public sector clients build outstanding places to
live, work, learn and play by delivering focused, fully integrated municipal financial advisory
services.
We build strong, long-lasting client relationships - working directly and collaboratively with your
staff - to complete projects and drive initiatives forward.
We leverage decades of industry experience, deep market and community knowledge and our
unique team -based approach to successfully guide clients through all facets of public finance.
Ehlers' services include:
Financial
Management
Planning
Strategic Planning
Research, Analysis &
Studies
Policy Development
Projection Modeling
Utility Rate Analysis
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ono
Debt Economic Investments
Issuance & Development & & Treasury
Management Redevelopment Management
Competitive, TIF/Special District Policy Development &
Negotiated & Private Creation & Evaluation
Placement Management Strategy Creation &
Specialized Feasibility & Cash Implementation
Instruments Flow Analysis Reporting
Credit Rating Reviews Developer Selection Cash Flow Analysis &
Continuing & Negotiation Reporting
Disclosures Planning & Project Treasury Management
Paying Agent Services Management Consulting
Compliance Policies Arbitrage Consulting
EHLERSUtility Rate Study Proposal to the City of Otsego, Minnesota 4
■ LEADERS IN PUBLIC riunr:ce submitted by Ehlers - Februrary 10, 2020
SECTION A: FIRM QUALIFICATIONS & PROFILE
We serve more than 1,500 public sector clients across 5 states, representing their interests alone.
We do not represent underwriters, developers, investors or the private sector.
Relevant Project Experience
Ehlers brings strong experience throughout Minnesota and the country, developing long-term,
sustainable plans to pay for utility operating and capital costs, now and in the future. Ehlers has
completed water and sewer utility rate studies in the following Minnesota communities:
Arden Hills
Fridley
Richfield
Brooklyn Park
Hastings
Robbinsdale
Champlin
Hopkins
South St. Paul
Chanhassen
Newport
St. Louis Park
Edina
Osseo
Zumbrota
Several of these projects are highlighted in our References.
Key Personnel & Organizational Structure
ADVISOR
Nick Anhut, CIPMA
Senior Municipal Advisor
Project Lead
PROJECT SUPPORT
Jeanne Vogt
Senior Financial Specialist
Project Manager
Megan Sandell
Financial Specialist
Rate Analyst
Proposed team biographies follow and are linked to each of their full resumes on our website.
Utility Rate Study Proposal to the City of Otsego, Minnesota 5
e%.EHLERS
ouSubmitted by Ehlers - Februrary 10, 2020
SECTION A: FIRM QUALIFICATIONS & PROFILE
Nick Anhut, CIPMA
Senior Municipal Advisor
Nick joined Ehlers in 2012 ascending to the role of Senior Municipal Advisor by
building hands on experience advising dozens of Minnesota cities and counties. He
works to design, negotiate and communicate innovative solutions to meet clients'
capital and development financing needs. Prior to joining Ehlers, Nick completed his
Master of Public Policy degree and amassed strong local government experience
working for Carver County, Minnesota. He also served seven years active duty in the
U. S. Army as an Aviation Officer. Nick has also developed a thorough understanding
of rating agencies' credit analysis methodologies and our clients rely on him to
identify future fiscal risks and guide them through the rating process.
Jeanne Vogt
Senior Financial Specialist
Jeanne works on our Minnesota City Team. She partners with Minnesota cities,
townships, counties, public utilities and special districts to develop and implement
long-term financial planning, particularly in the area of sewer and water rates
studies. Prior to joining Ehlers in 2008, she worked for more than a decade as an
Accountant for Ramsey County and as Finance Director for the City of Vadnais
Heights. Our clients benefit from Jeannes expertise in the area of property tax
policy, fiscal disparities, tax increment financing and TIF reporting.
Megan Sandell
Financial Specialist
Megan supports local governments in Minnesota through long-term financial
planning and development financing. Her planning work with utilities helps
communities establish rate structures to fit thier unique needs. Megan's career at
Ehlers started in 2015 as Paying Agent Administrator and Bond Sale Coordinator.
Previously, Megan worked at Piper Jaffray within the Fixed Income Sales and
Trading Division.
EHLERSUtility Rate Study Proposal to the City of Otsego, Minnesota 6
LEAOEr s na PUBLIC I°INANCE Submitted by Ehlers - Februrary 10, 2020
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
Project Approach
Utility rates structures have an impact on several different aspects of the City's financial system.
We approach our studies and the potential impacts as follows:
USERS
/RATE PAYERS
ADMININSTRATION
FUND /STAFF
We also take complex data and modeling and break it down into a straight -forward format for the
City Council to make informed decisions and communicate the rates to the general public. We
work as a team with staff and consultants so all aspects of the utilities are considered and factored
into the rates.
Understanding of Specific Challenges Facing the Utilities
Based on our existing relationship with the City of Otsego and review of your utility ordinances,
financial statements, budget and Capital Improvement Plan (CIP), we understand many issues the
City would like to address with this rate study:
1. Funding the CIP
Both the water and the sewer fund have healthy cash balances; however, the City is
experiencing growth that is driving the need for additional capital investment. The water CIP
calls for an average capital expenditure of almost $2 million per year (with an additional $24
million expected for future well houses) while in 2018 the water rates and connection fees
provided roughly $1 million in net cash available for capital outlay. The sewer fund generated
$1.8 million in annual net cash available in 2018 to contribute toward funding proposed sewer
10-year CIP projects totaling $41.8 million. Through an evaluation of the rate structure,
development fees and prudent use of debt and rate adjustments, the rate study will provide a
financial plan for meeting the water and sewer utilities' capital needs.
2. Managing Growth & Development Fees
Much of the City's CIP is driven by the need to serve a growing community. We will
incorporate growth estimates into our rate study and recommend development fees that
balance the need to be competitive with desire to have growth pay its own way.
3. Competitiveness
We recognize the City's goal to be economically competitive and relatively affordable with its
utility rates. We do not recommend that rates be set based on what your "neighbors" charge
as every city pays for their utilities differently. That needs to be considered in the analysis. For
benchmarking purposes only, we will graphically compare a sample utility bill for Otsego's
Utility Rate Study Proposal to the City of Otsego, Minnesota
ek.-EHLERS ouSubmitted by Ehlers - Februrary 10, 2020
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
existing and proposed rates to comparable and neighboring communities. Similarly, we will
provide a comparison for development fees of three sample developments.
4, Connection Fees & Area Charges
There are statutory limits and competitive pressures dictating what the City can charge for
utility connections. Our rate study will ensure the City's connection fees are defensible, just
and equitable and appropriately fund growth -related infrastructure.
Work Plan
Ehlers proposes the following steps to meet the City's goals:
Step 1: Discuss City objectives for the study
At our initial meeting, Ehlers will work with staff ensuring we fully understand the Utilities'
financial situation, including outstanding and planned debt issuance, the City's short and
long-term goals, political and administrative concerns and future estimates of new
commercial and residential growth.
Step 2: Gather data from City staff
Rate studies are a team effort. Ehlers will work with you ensuring we receive the required
data. For a listing of materials to be provided by the City, please see Appendix A.
Step 3: Complete a review of the City's Capital Improvement Plan
We will use information from City staff and consulting engineers to compile a detailed CIP for
the Utilities. We ensure all related costs, including equipment, vehicles, road reconstruction
and capital improvement projects are included in the Capital Improvement Plan.
Step 4: Complete rate study & financial plan
This step will focus on providing up to two options for water and sewer rates for residential,
commercial and irrigation customers. Ehlers will:
Create a pro forma cash flow statement for water and sewer showing projected usage,
total operating revenue and total expenses. This will also include operations and
maintenance costs, depreciation, department servicing, net operating income, capital
improvements and debt to test adequacy of existing and proposed rates.
Step S: Revise the existing rate structure to meet the City's goals &
provide equity between user classes
We will review the existing rate structure and recommend changes (if necessary) so the
amount of revenue generated by each user class is proportionate to its usage.
» Perform analysis of fixed and operating costs of the system with comparison to base
charges/replacement charges and consumption revenues. Recommend adjustments as
necessary to ensure certain fixed costs of the system are paid for, regardless of usage.
g`EHLERS Utility Rate Study Proposal to the City of Otsego, Minnesota e
LEADERS ua PUBLIC FinA1,10E Submitted by Ehlers - Februrary 10, 2020
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
Review existing tier breaks for all customer types based on 12 months of detailed
customer usage data and recommend adjustments as needed.
Deliverable: Up to two options for new rate structures, if necessary. Each scenario will be
"revenue neutral," meaning each will generate the same amount of revenue but may vary
between customer classes. We will also provide sample rate impacts, including those for City
Council members and any staff if requested, for each structure to help evaluate the
acceptability of the proposed structures.
Step 6: Review of existing water & sewer connection fees & area charges
Working with staff, we will identify past and future capital improvements related to
redevelopment and growth, which may be paid for with connection fees and area charges.
For each utility, we will determine the appropriate level of connection fees to reimburse the
City over time for growth related expenditures, such as trunk oversizing, treatment
expansions, new wells and storage and lift stations.
Deliverable: Recommendation for new rates for connection fees and availability charges, if
necessary. We will also provide a comparison of development fees paid for three sample
developments (single family, multifamily and commercial/industrial property) for the City of
Otsego and up to five neighboring or comparable communities.
Step 7: Identify appropriate reserve amounts & financing needs, if any
In this step, we will identify:
The use of debt versus cash to pay for future capital improvements
Minimum cash balance for the utility funds & level of depreciation to fund
Address other City identified issues
Deliverable: We will recommend target cash reserves and graphically represent the projected
cashflow versus target cashflow. Proposed bonding (if any) will be built into the cashflow
projection.
Step 8: Quality Assurance
The rate study will undergo a formal quality control review by another Senior Financial
Specialist at Ehlers who specializes in rate studies.
Step 9: Provide a comparison of utility rates in equivalent communities
The survey will compare utility fees charged for a single-family home in Otsego with fees
charged by up to five comparable and/or neighboring communities.
Deliverable: A graphic representation of an Otsego resident's current and proposed bill along
with up to five comparison communities' sample bills.
g%�EHLERS Utility Rate Study Proposal to the City of Otsego, Minnesota 9
LEADERS H PUBLIC FINANCE Submitted by Ehlers - Februrary 10, 2020
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
Step 10: Recommendations
The rate analysis will provide two options for the water and sewer funds. They may vary in the
timing of capital improvements and differing rate structures or development fees depending
on what the City wants to explore. Recommendations will be customized for Otsego,
addressing rate structures, annual adjustments to rates, cash balance policies, water
conservation measures and the timing of capital improvements.
Step 11: Presentation to Council & the Community
The rate analysis will include up to two presentations at City Council workshops or meetings
with a presentation summary of the work completed and recommendations. The
presentations will synthesize the rate study into easy -to -understand graphics and talking
points.
Deliverable: Council presentations
As Ehlers receives direction from staff and Council, our methods will adjust as needed. We will
respond to the City's priorities and concerns without incurring unnecessary steps or cost.
Project Schedule
Ehlers is available to start work on the utility rate study immediately. The Utility Rate Study can be
completed within 14 weeks, depending on Council workshop and meeting schedules.
Project Cost
Ehlers will perform the Utility Rate Study for the following cost:
Sewer $12,500
Water $15,000
TOTAL $27,500
Ehlers will invoice monthly for work completed in the prior month. Work in addition to the scope
outlined (such as additional Council meetings) will be billed at a rate of $250 per hour. Ehlers is
committed to delivering value in our work.
If additional options beyond the prosposed scope are requested, we will work with staff to provide
a good faith cost estimate prior to commencing work.
e%.EHLERS
Utility Rate Study Proposal to the City of Otsego, Minnesota 10
LEADERS ua Pu6uC FINANCE Submitted by Ehlers - Februrary 10, 2020
SECTION B: PROJECT APPROACH, WORK PLAN, COST & REFERENCES
References
Greg Sticha Todd Gerhardt
Finance Manager City Manager
952-227-1149 952-227-1119
gsticha@ci.chanhassen.mn.us tgerhardt@ci.chanhassen.mn.us
Services include: Water, Sewer & Stormwater Utility Rate Study
Julie Flaten
Administrative Services Director
651-480-2355
jflaten@hastingsmn.gov
Services include: Water & Sewer Utility Rate Study
Shelly Peterson
Finance Director
763-421-8100
speterson@ci.champlin.mn.us
Services include: Water & Sewer Utility Rate Study
g%�.EHLERS Utility Rate Study Proposal to the City of Otsego, Minnesota
LEADERS IN PUBLIC FINANCE Submitted by Ehlers - Februrary 10, 2020
APPENDIX A: MATERIALS TO BE PROVIDED BY THE CITY
Appendix A: Materials to be Provided by the City
» Detailed usage data for the previous 12 months for each utility, data should include:
• Account numbers, customer name, customer type, meter size, number of units (apts),
irrigation/deduct meter designation and water only/sewer only designation
• Water & sewer consumption by customer, by billing period
• Amount charged by utility, by customer, by billing period
• Excel preferred
» Projected growth estimates for next 10 years
» Five - 10 year Capital Improvement Plan for all Utilities
» Minnesota DNR reports on water pumped & billed for last three (3) years
» Financial statements for most recent year, plus three years prior
» 2019 preliminary trial balances
» 2020 budgets
» Debt repayment schedules for all existing debt supported by the utility funds
» Current year fee schedule & utility billing system information necessary to analyze billing data
» City ordinances pertaining to rate -setting for all utilities
» Other information as necessary
Ehlers has some of this information already on file and will obtain some from the City's website.
FREERSUtility Rate Study Proposal to the City of Otsego, Minnesota 12
Jg'*."-�eaoerzs na vueuc Fua�.:ac6 Submitted by Ehlers - Februrary 10, 2020
E%iEHLERS
ft LEADFRS IN PUBLIC FINANCE
March 18, 2020
Adam Flaherty, City Administrator
City of Otsego
13400 - 90th Street NE
Otsego, MN SS330
RE: City of Otsego Utility Rate Study Amended Proposal
Dear Mr. Flaherty,
Thank you for working with Ehlers to undertake a Utility Rate Study for the City of
Otsego. We understand that the scope of work for the sewer utility portion of the
Rate Study has expanded to support the renegotiation of the Sewer Use Agreement
between the Cities of Otsego and Dayton.
Ehlers will amend its proposed work plan to develop a wholesale sewer rate for the
City of Dayton and development fees applicable to properties within Dayton.
Steps 3 through 6 of the Work Plan will be amended as follows (amended text is in
orange):
Step 3; Complete a review of the City's Capital improvement
Plan
We will use information from City staff and consulting engineers to compile a
detailed CIP for the Utilities. We ensure all related costs, including equipment,
vehicles, road reconstruction and capital improvement projects are included in
the Capital Improvement Plan.
In addition, for the Sewer Fund, we will work with City staff and consulting
engineers to allocate the relevant capital costs between the City of Otsego and
the City of Dayton according to volume discharge and the treatment plant
capacity to be designated to each community.
Step 4: Complete rate study & financial plan
This step will focus on providing up to two options for water and sewer rates
for residential, commercial and irrigation customers. Ehlers will:
» Create a pro forma cash flow statement for the water fund and sewer
showing projected usage, total operating revenue and total expenses. For
the sewer fund, the pro forma cash flow will include total wholesale and
retail operating revenues and total expenses. This will also include
operations and maintenance costs, depreciation, department servicing, net
operating income, capital improvements and debt to test adequacy of
existing and proposed rates.
Step 5: Revise the existing rate structure to meet the City's
goals & provide equity between user classes and wholesale
and retail customers
We will review the existing rate structure and recommend changes (if
necessary) so that:
Wholesale sewer rates charged to the City of Dayton recover costs
appropriately allocated to it, including the capital and operating costs for
the wastewater treatment plant and main collector line
» The amount of water and sewer revenue generated by each user class in
the City of Otsego is proportionate to its usage
» Perform analysis of fixed and operating costs of the system with
comparison to base charges/replacement charges and consumption
revenues. Recommend adjustments as necessary to ensure certain fixed
costs of the system are paid for, regardless of usage.
» Review existing water tier breaks for all customer types based on 12
months of detailed customer usage data and recommend adjustments as
needed.
Deliverable:
» Up to two options for new retail rate structures for water and sewer, if
necessary. Each scenario will be "revenue neutral," meaning each will
generate the same amount of revenue but may vary between customer
classes. We will also provide sample rate impacts, including those for City
Council members and any staff if requested, for each structure to help
evaluate the acceptability of the proposed structures.
One wholesale sewer rate option for the City of Dayton
Step 6: Review of existing water & sewer connection fees &
area charges
Working with staff, we will identify past and future capital improvements
related to redevelopment and growth, which may be paid for with connection
fees and area charges. In addition, we will identify the portion of those
improvements needed to serve the City of Dayton. For each utility, we will
determine the appropriate level of connection fees to reimburse the City over
time for growth related expenditures, such as trunk oversizing, treatment
expansions, new wells and storage and lift stations. Appropriate development
fees will also be established for property within the City of Dayton to recover
any expansion costs associated with receiving that City's effluent into the
plant.
0
Deliverable: Recommendation for new rates for water and sewer connection
fees and availability charges for Otsego and sewer fees for the portion of
Dayton served by Otsego. We will also provide a comparison of Otsego
development fees paid for three sample developments (single family,
multifamily and commercial/industrial property) for the City of Otsego and up
to five neighboring or comparable communities.
Project Cost Amendment
Ehlers will assist the City with establishing fair and equitable wholesale sewer rates
and sewer development fees for properties within the City of Dayton for the
additional cost of $4,000.
We appreciate the opportunity to work together on this project.
Respectfully submitted,
Nick Anhut, CIPMA
Senior Municipal Advisor
nanhut@ehlers-inc.com
651-697-8507
3