HomeMy WebLinkAboutItem 3 bi.pdfSpringsted Incorporated
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Saint Paul, MN 55101-2887
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MEMORANDUM
TO:Dennis Feller, City of Lakeville
FROM:Nick Dragisich, Springsted
Matt Stark, Springsted
DATE:November 8, 2013
SUBJECT:Water and Sewer Fund Analysis
Earlier this year, the City of Lakeville engaged Springsted to conduct an analysis and review of the financial
performance of the City’s Water and Sewer Funds, and to recommend rate adjustments necessary for each Fund to
maintain revenues sufficient to meet operating costs, capital outlays and maintenance, debt service coverage, and
cash reserves. This memorandum presents our findings and recommendations.
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Our analysis began with a look at each Fund’s recent financial performance, paying particular attention to income
levels and cash reserves. In the water fund income and net income have been consistently negative since 2009.
Cash accumulated to a level of approximately $5.9 million in 2009 as a result of high consumption due to prevailing
weather conditions. Balances have decreased in the ensuing years to approximately $3.2 million at the end of 2013
as result of investment in water main replacements and major maintenance projects.
In the Sewer Fund, operating and net income have also been consistently negative, though cash levels have been
more stable, varying in the range of $2.7 million to $2.8 million between 2009 and 2012. Cash levels are projected to
decline slightly to $2.6 million at the end of 2013.
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Inour projections of future performance, we used a number of assumption based on discussions with the City,
coupled with our professional experience. For the Water Fund, these assumptions included:
New residential accounts and Tier 1 consumption would grow at 2% annually.
Tier 2 and 3 consumption would grow 1% annually.
Commercial accounts and consumption would grow at 1% annually.
Miscellaneous revenues would increase by 0.25% each year.
Personnel costs would increase 2.3% per year.
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 2
Commodities costs would rise by 3% annually.
Contractual services costs would rise by 2% per year.
Cash balances in the Fund would earn 0.73% each year.
For our Sewer Fund projections, our assumptions were as follows:
Accounts and usage would grow as per Water.
Personnel and contractual service costs would increase consistent with Water.
Commodities costs for Sewer would grow at 5% annually.
Charges from MCES would increase 6.8% per year.
Interest earnings of 0.73% on fund balances.
For each Fund, we assumed that capital expenditures would be made consistent with the City’s capital improvement
plan.Capital spending from each Fund fluctuates from year to year, as can be seen in the chartbelow. In general
terms, over the course of the planning period, the Water Fund averages $2.1 million in annual capital outlays, and the
Sewer Fund averages $578,000 per year.A detailed list of capital projects and costs for both Funds is attached as
part of this memorandum.
Annual Capital Spending
$4,000
$3,000
$2,000
$1,000
$0
20132014201520162017201820192020202120222023
SewerWater
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Using recent performance and current budgets as a baseline, we projected the financial performance of each Fund
assuming that rates remained unchanged.Without rate adjustments, both Funds would run out of cash resources
between 2017 and 2021. For this reason,rateincreases in future years willbe required.The extent of these rate
increases is based onthe amount of revenue needed by each Fund to coverits operating and maintenance costs,
capital improvementand replacement costs, and debt service costs for any debt issued to finance capital
improvements, while maintainingan adequate level of cash reserves.
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 3
With the understanding that rate increases would be necessary, we looked at the magnitude and timing of rate
increases that would be required for each of the Funds. Initially, we modeledthe financial performance of the Funds
if each paid for its capital improvements out of cash reserves. This would require 42.6% increase in water ratesin
2014 and 2015. These increases, which would be necessary to keep the Water Fund solvent in those years,would
also resulted in large cash surpluses in future years. In the Sewer Fund this would require 10.5% rate increases in
2014 through 2016. In order to smooth out the cash flows in the Water Fund, some capital expenditure will need to
be financed by long-term borrowing. We looked at two basic scenarios for the Funds: one with minimal debt
financing, and one with more significant borrowing.
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In our first scenario, we triedto keep debt financing of capital projects to a bare minimum in each Fund. For the
Water Fund, we required borrowing in four years, for a total of $6.2million in debt financing. For the Sewer Fund, we
projected no borrowing at all. The timing and amount of debt is as follows:
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2014$ 1,700,000$ -
2015$ 2,261,794$ -
2016$ -$ -
2017$ 1,240,547$ -
2018$ 1,000,000$ -
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In order to cover operating and capital expenses, while maintaining sufficient cash reserves, we project the following
rate increases would be required for each Fund:
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20147.50%10.50%
20157.50%10.50%
20167.50%10.50%
20177.25%0.00%
20187.25%0.00%
20197.25%0.00%
20207.25%0.00%
For the Water Fund, annual rate increases of 7.5% through 2016, and 7.25%from 2017 through 2020, will allow the
Fund to maintain its minimum recommended cash reserves throughoutthe course of the planning period.
Additionally, these increases will return the Fund to positive net income by 2020.Projected cash balances in the
Water Fund are shown in the chart below.
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 4
Projected Cash Balance -Water
$4,000
$3,000
$2,000
$1,000
$0
2014201520162017201820192020202120222023
Cash BalanceMinimum Reserve
For the Sewer Fund, the rate increases are steeper, but fewer in number. Increases of 10.5% in 2014, 2015, and
2016 are required to keep the Sewer Fund from falling below the minimum recommended cash reserve. These rate
increases are driven in large part by the anticipated 6.8% annual increases in the Metropolitan Council Environmental
Services (M.C.E.S.)Charges. The combination of these rate increases is sufficient to bring the Fund into positive net
income in 2016, but it falls back into negative net income immediately thereafter, as flat rates after 2017 are not
enough to keep up with expected increase in M.C.E.S charges in addition toinflation in other operating costs. Cash
reserves are maintained in the medium term due to the fact that depreciation is accounted for as an operating
expense, but this expense is not reflected in cash balances.The projected cash balances in theSewer Fund are
shown in the chart below.
Projected Cash Balance -Sewer
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2014201520162017201820192020202120222023
Cash BalanceMinimum Reserve
In terms of quarterly bills, the effect of the increases on water and sewer rates would cause the utility bill for an
average residential customer to rise from its current level of $82.36 per quarter to a level of $108.55per quarter in
2016. From there, the average billwould continue to rise until it reached $116.13in 2020, at which point it would level
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 5
off.Quarterly bills for other customerswould rise similarly. Sample bills for a variety of users are attached as part of
this memo.
Residential -18,000 gallons
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$-
2013201420152016201720182019202020212022
Water - BaseWater - VolumeWater - Testing FeeSewer - BaseSewer - Volume
A comparison of Lakeville’s water rates to those of neighboring communities shows that Lakeville’s rates are
significantly lower than its peers at present; projected rate increases would close the gap to some extent, though
projections anticipate Lakeville’s rates would still be the lowest of the comparison group.Our projections assume
that other communities will raise water rates by 3% annually.These are shown in the chart below.
Quarterly Bills -Residential Water
$70.00
$60.00
$50.00
Apple Valley
Bloomington
$40.00
Burnsville
Eagan
Farmington
$30.00
Inver Grove Heights
Lakeville
Rosemount
$20.00
$10.00
$-
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 6
Sewer rates for Lakeville are currently close to the average of its peer cities; rate increases would put Lakeville
higher than these other communities, though they would catch up in later years, when Lakeville’s rates are projected
to remain flat. For purposes of our projections, we assume that sewer rates in neighboring communities will rise by
5%; this is higher than our projected water rate increases, due to anticipated annual increases in M.C.E.S.charges
all communities will incur. These are shown in the chart below.
Quarterly Bills -Residential Sewer
$100.00
$90.00
$80.00
Apple Valley
Bloomington
Burnsville
$70.00
Eagan
Farmington
Inver Grove Heights
Lakeville
$60.00
Rosemount
$50.00
$40.00
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In our second scenario, we projectedadditional debt financing of capital projects in order to minimize rate increases
while maintainingsufficient cash levels in each Fund. This enablesthe Funds to remainon schedule with their
capital improvement programs.
Under this scenario, we projectedfour series of debt financing, with the first in 2014 and the last in 2022. The debt
issued would total $15.8million for the Water Fundand $2.2 million for the Sewer Fund. The specific years and
amounts are shown in the following table:
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2014$ 4,210,981$ 675,000
2016$ 4,122,039$ 1,052,000
2019$ 4,500,000$ -
2022$ 3,000,000$ 500,000
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In order to cover operating and capital expenses, while maintaining sufficient cash reserves, we project the following
rate increases would be required for each Fund:
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 7
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20144.25%6.35%
20154.25%6.35%
20164.25%6.35%
20174.25%6.00%
20184.25%2.90%
20194.25%2.90%
20204.25%2.90%
20214.25%2.90%
20224.25%2.50%
20234.25%2.50%
The Water Fund recommended annual rate increases of 4.25%arerequired to maintain minimum recommended
levels ofcash reserves.These increases are projected to reduce the deficit in the Fund’s net income from
approximately ($1.2million)in 2014to approximately ($34,284) in 2023.Projected cash reserves for the Water Fund
are shown in the chart below.
Cash Balance -Water
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2014201520162017201820192020202120222023
Cash BalanceMinimum Reserve
We have recommended sanitary sewer rate increases of 6.35%required in 2014, 2015, and 2016, followed by a
6.0% increase in 2017.For the years 2018-2021, our projected rate increases are 2.9%, falling to 2.5% thereafter.
These recommended rate increases, like those recommended for the Water Fund, are required to maintain minimum
recommended levels of cash reserves. Projected cash reserves for the Sewer Fund are shown in the chart below.
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 8
Cash Balance -Sewer
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2014201520162017201820192020202120222023
Cash BalanceMinimum Reserve
Under this scenario, the average quarterly water and sewer bill for a residential customerwould rise steadily from its
current level of $82.36 per quarter to a level of $119.73per quarter in 2022as shown in the chart below.
Residential -18,000 gallons
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$-
2013201420152016201720182019202020212022
Water - BaseWater - VolumeWater - Testing FeeSewer - BaseSewer - Volume
The average quarterlywater and sewerbill in 2016 under this scenario would be $97.42, as compared to $108.55in
the earlier scenario.
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 9
Comparing Lakeville’s rates to those of surrounding communities under this scenario, we see that water rates remain
well below those of the other cities. Sewer rates are projected to rise to a level approximately equal to those of Inver
Grove Heights, which is currently the highest of the group.These are shown in the charts below.As before, we
assume for the purposes of our projections that other cities will raise water rates at 3% annually, and sewer rates at
5%.
Quarterly Bill -Residential Water
$70.00
$60.00
$50.00
Apple Valley
Bloomington
$40.00
Burnsville
Eagan
Farmington
$30.00
Inver Grove Heights
Lakeville
Rosemount
$20.00
$10.00
$-
2013201420152016201720182019202020212022
Quarterly Bill -Residential Sewer
$120.00
$110.00
$100.00
Apple Valley
$90.00
Bloomington
Burnsville
Eagan
$80.00
Farmington
Inver Grove Heights
$70.00
Lakeville
Rosemount
$60.00
$50.00
$40.00
2013201420152016201720182019202020212022
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 10
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Ourprojectedfuture financial performance of the Water and Sewer Funds incorporating anticipating increases in
operations and maintenanceexpenses and the City’s capital improvementprogram shows that rate increases are
need in each fund. The rate increases we have recommended based on Scenario Two will provide sufficient
revenues to adequately fund water and sewer operations and capital costs and provide an adequate level of cash
reserves while minimizing the impact on rates to the greatest extent possible. This scenario recommended a
balanced approach to financing needed capital assets incorporating both debt and cash to minimize the rate
increases needed. The recommended rate increases for the Water Fund were 4.25% each year while those for the
Sewer Utility were 6.35% in 2014 through 2016, 6.00% in 2017 then declining to 2.90% in the period 2018 –2021
and further declining to 2.50% in 2022 and 2023 as shown in the table below.
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20144.25%6.35%
20154.25%6.35%
20164.25%6.35%
20174.25%6.00%
20184.25%2.90%
20194.25%2.90%
20204.25%2.90%
20214.25%2.90%
20224.25%2.50%
20234.25%2.50%
These recommendations are based on information provided to us by the City of Lakeville. The City will need to
monitor the performance of the Water and SewerUtilitiesand make any necessary adjustments based upon actual
performance and on the actual construction costs of the anticipated capital improvements.
We would also point out that we have not included a sensitivity analysis for projected capital improvement costs. A
sensitivity analysis would evaluate the utilityrate impacts of actual construction improvements costs being more or
less than projected costs.However, itis important to recognize that the actual cost of capital improvements may be
greater than those projected which would impact projected rate increases. This difference can arise because the
capital improvement plan is generally developed based on preliminary information and current construction costs.
Costs can change as the projects get more clearly defined and construction costs at the time of the actual
construction vary from those at the time of planning.
Annual Capital Outlays - Water and Sewer
YearProjectDeptCostYearProjectDeptCost
2013Well RehabWater60,0002013#18 Lift Station RehabSewer35,000
2013Water Meter ReplacementWater64,2002013#22 Lift Station RehabSewer15,000
2013WTFWater71,5002013#3 Lift Station RehabSewer48,000
2013EquipmentWater131,1932013I&I RepairsSewer50,000
2013Water Main Replace - Clays AcresWater2,474,0002013Misc EquipmentSewer94,903
2013Sanitary Sewer Rehabilitation Proj 13-02Sewer128,300
2013Total - Water2,800,8932013Total - Sewer371,203
2014Water TowerWater10,0002014#11 Lift Station RehabSewer40,000
2014WTFWater27,0002014#19 Lift Station RehabSewer35,000
2014Well RehabWater60,0002014#5 Lift Station RehabSewer48,000
2014EquipmentWater67,7402014I/I ImprovementsSewer177,000
2014Water Main ReplacementsWater1,949,1872014Misc EquipmentSewer290,609
2014Water Meter ReplacementWater375,9702014Sanitary Sewer Rehabilitation Proj 14-02Sewer175,000
2014Total - Water2,489,8972014Total - Sewer765,609
2015Well RehabWater60,0002015#12 Lift Station RehabSewer35,000
2015EquipmentWater118,5492015#13 Lift Station RehabSewer35,000
2015Water Main ReplacementsWater2,261,7942015#6 Lift Station RehabSewer175,000
2015Water Meter ReplacementWater422,0902015I&I RepairsSewer77,000
2015WTFWater661,0002015I/I ImprovementsSewer100,000
2015Misc EquipmentSewer118,549
2015Total - Water3,523,4332015Total - Sewer540,549
2016EquipmentWater27,1072016EquipmentSewer26,116
2016Tower and Reservoir PaintingWater45,0002016I/I ImprovementsSewer100,000
2016Well RehabWater60,0002016Lift Station RehabSewer835,000
2016Water Meter ReplacementWater190,9072016Sewer VactorSewer440,000
2016Water Main ReplacementsWater1,186,9342016Total - Sewer1,401,116
2016Total - Water1,509,948
2017EquipmentSewer86,777
2017Tower and Reservoir PaintingWater40,0002017GrindersSewer60,000
2017EquipmentWater86,7772017I/I ImprovementsSewer100,000
2017Well RehabWater120,0002017Lift Station RehabSewer35,000
2017Water Meter ReplacementWater199,330
2017Water Main ReplacementsWater1,440,547
2017Total - Water1,886,6542017Total - Sewer281,777
2018EquipmentWater86,3422018EquipmentSewer86,342
2018WellsWater165,0002018I/I ImprovementsSewer100,000
2018Water Meter ReplacementWater201,2742018Lift Station RehabSewer50,000
2018Water Main ReplacementsWater1,494,558
2018Total - Water1,947,1742018Total - Sewer236,342
2019EquipmentWater61,0692019EquipmentSewer61,069
2019WellsWater120,0002019I/I ImprovementsSewer100,000
2019Water Meter ReplacementsWater208,7112019Lift Station RehabSewer15,000
2019Water Main ReplacementsWater1,500,000
2019Total - Water1,889,7802019Total - Sewer176,069
City of Lakeville, MN
Water and Sewer Fund Analysis
Page 12
Annual Capital Outlays - Water and Sewer
2020EquipmentWater49,7282020EquipmentSewer317,172
2020WellsWater120,0002020I/I ImprovementsSewer100,000
2020Water Meter ReplacementsWater210,8082020Lift Station RehabSewer200,000
2020Water Main ReplacementsWater1,500,000
2020Total - Water1,880,5362020Total - Sewer617,172
2021EquipmentWater11,2582021EquipmentSewer11,258
2021WellsWater120,0002021I/I ImprovementsSewer100,000
2021Water Meter ReplacementsWater214,809
2021Water Main ReplacementsWater1,500,000
2021Total - Water1,846,0672021Total - Sewer111,258
2022WellsWater60,0002022EquipmentSewer556,003
2022EquipmentWater179,6002022I/I ImprovementsSewer100,000
2022Water Meter ReplacementsWater218,902
2022Water Main ReplacementsWater1,500,000
2022Total - Water1,958,5022022Total - Sewer656,003
2023EquipmentWater10,0002023EquipmentSewer10,000
2023WellsWater120,0002023I/I ImprovementsSewer100,000
2023Water Meter ReplacementsWater219,902
2023Water Main ReplacementsWater1,500,000
2023Total - Water1,849,9022023Total - Sewer110,000
Annual Capital Spending
$4,000
$3,000
$2,000
$1,000
$0
20132014201520162017201820192020202120222023
SewerWater