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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 III I� nnn �••F�IJ aoo 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