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ITEM 1 Utility budget and CIPNor OtATe F OMINNA MEMORANDUM TO: Mayor and City Council FROM: Lori Johnson, City Administrator DATE: October 21, 2015 SUBJECT: Utility Budgets and CIP Attached are the proposed Water and Wastewater Fund operating budgets and CIP requests. At Monday's meeting, we will go through the information in detail and answer questions. There are several items, however, that I want to highlight in preparation for our discussion. Operating Budget: User Rates and SAC/WAC Fees You will notice in reviewing the 2016 revenue projections that no rate increases were included. This approach was taken so that you can clearly see the operating balance before a rate adjustment is made. The rate study completed in 2012 and presented to the Council in January 2013 included proposed user rate and WAC/SAC adjustments beginning in 2013 through 2027, the last year included in the study. The Council approved the proposed rate increases for 2013- 2015. It is understood that it is incredibly difficult to project out beyond a few years; hence, annual evaluation based on actual activity is required to readjust the rates. Since the adoption of the rate study, the development climate has changed significantly and actual development has far outpaced projections. The development projections in the study were intentionally conservative; it is better to reap the gains of development than to be struggling to fund shortfalls. Actual WAC and SAC collections in particular have eased concern about meeting future debt obligations; the influx of significant revenue in the last three years has had a drastic impact on the financial status of these funds. Another change is the increase in planned capital expenditures to address capacity issues of both the water and wastewater systems. Finance Director Adam Flaherty will be reviewing the operating and debt service financial data again and updating the rate study later this year when year-end projects can be made with more accuracy. (The extraordinary costs associated with odor mitigation will be treated as one-time expenses rather than an ongoing operating expense.) Following that review, user rate and connection/availability charge adjustments will be recommended. The intent will remain consistent with past practice that incremental annual rate increases are better than sporadic high rate increases. Staff Request We have previously discussed staffing levels of the Utility Department and deliberated when the demands of operating a growing utility system would require an additional employee. Part of that decision must take into account the non -urgent but important tasks that current employees are unable to complete because other items take priority. Those undone tasks may not be easily apparent now, but may be later when delayed maintenance and upkeep cause additional costs or inefficiencies result. When the City took over operations in July 2013, staffing was intentionally kept to a minimum for several reasons: It was difficult to determine exactly how many contract staff hours were dedicated to Otsego under the prior contract. Time and experience operating the department in house were important to help determine the number of employees needed and the type of skills/licenses required of those employees to operate both the water and wastewater utilities. Finally, it is easier to staff up than to eliminate a position later. Now that the City has operated the facilities for two full years, it is easier to quantify staff needs. Identified justification for adding a utility operator includes: Increases in utility connections, wastewater flow and water consumption; New infrastructure including hydrants, manholes, valves, sewer lines and pumps all which require ongoing maintenance; Additional testing and regulatory requirements placed on the City by the MPCA under the City's renewed permits; Additional preventative and corrective maintenance and upkeep required due to typical facility/equipment wear and tear now that the facilities are no longer new; New programs such as the FOG program; And, the upcoming operation of another well and a second clarifier at the west facility both required to meet increasing capacity demands. The strong development activity in the past three years compounds pressure on existing staff to operate a growing, complex utility system. These new requirements and capacity driven demands on top of the growing list of non -urgent but important tasks that are not being done lead to the conclusion that an operator should be added in 2016. It is also important to note that the utility staff now completes hydrant flushing and sanitary sewer cleaning without the assistance of the Street Department. This change is very beneficial to the Street Department particularly when the full crew is required for a street or storm water project. In addition to the transition stated above between the two departments, beginning with the 2014-2015 snow season, at least one utility employee was dedicated to assisting with snow removal. At least one, if not more, will be required for the 2015-2016 snow season unless the City receives several qualified seasonal applications soon. Currently, after assigning all streets and parks employees and one utility employee, there are two plow routes unfilled. Usually, seasonal employees would be used to fill the gaps; however, this year there are no applicants for the seasonal plowing position to fill these routes. The position openings have been advertised for several weeks with no applications received. If the Utility Department fills in for 2 seasonal employees, which is the plan at this point, the Utility Department staff is reduced by half during snow events/snow season. In 2015, the Council authorized hiring an intern/part time utility employee for approximately 400 hours to meet the increasing workload. That position is slated to end in November. Although the draft 2016 budget distributed with this memo includes only a part time seasonal position, staffs recommendation is that the part time position becomes a full time operator position in 2016. The current part time employee has a class D operator's license, and Utility Manager Kurt Neidermeier is recommending that this employee be promoted to fill the full time position if authorized by the City Council. Additionally, Street Operations Manager Kevin Lamson, Parks and Recreation Director Ross Demant, Kurt Neidermeier, and I met to discuss solutions to the pending snow removal operator shortfall, and together we determined that filling this position in November is the recommended solution. For many reasons, utilizing full- time employees that are familiar with City streets is far preferable to employing seasonal snowplow operators. Even if the Council approves this recommendation, one plow route will remain unfilled. Therefore, the ad for seasonal drivers will remain open until all routes are filled and adequate back up is in place. West Wastewater Treatment Facility Project: Council Acceptance of Design The project schedule calls for preliminary engineering to be completed by October 2015. The project is on schedule and at the October 20 Public Works Subcommittee meeting Scott Schaefer, AE2S, reviewed two design options and bid alternatives. Copies of his documents outlining the options proposed are attached. The engineers recommend option one, Drop Pipe Diffusers with Shear Tubes with the bid alternates as noted. At the Public Works Subcommittee meeting, it was clear that this was the best option thus there was little debate over which design to recommend to the Council. The project schedule calls for the Council to confirm design acceptance before moving to the next step, which is drafting plans and specifications in preparation of bidding the project. If the Council would like Mr. Schaefer to attend the November 9 Council meeting to review the options and recommendation before accepting the recommended option, he is available to attend. If the Council is comfortable accepting the Public Works Subcommittee recommendation, a resolution to authorize plans and specifications will be on the November 9 agenda. Financing Additionally, the financing source/method for this project will need Council at least initial approval before authorizing the project. Preliminary review of financing options indicates that financing the project internally is feasible and preferable. A final recommendation, however, will be made in at the time bids are opened and the actual construction costs are available. Wastewater System Master Plan The 2016 CIP includes funds for a utility master plan to evaluate the City's wastewater system and future capacity requirements from a long- term perspective. The Public Works Subcommittee discussed the merits and timing of this study and after discussion agreed there is 91 a need for that long-term plan to ensure the City is equipped and able to provide efficient and effective utility service in the future and to guarantee available system capacity as the City grows. Subsequently, Scott Schaefer submitted a City of Otsego Wastewater System Master Planning scope and estimated budget range, a copy of which is attached. As you can see, this study relies on assistance from the City Engineer and City Planner and those costs are not included in the attached budget estimate. The master planning study, if approved, will not begin until late 2016 after the current west WWTF project is substantially complete. 0