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AGENDA ITEM Prepared By: RJO Reviewed By: RJO Approved By: RJO 1. Purpose. The purpose of this action item is to approve the 2019 water rates. 2. Background. The City updates its utility rates annually. Fees for Sewer, Storm Water and Recycling were previously set when the 2019 City Fee Schedule was approved on December 10th 2018. Staff has been working establishing water rates for that will provide for long-term sustainability for the Water Fund. The rates are being proposed with an emphasis on a user sustained system that will not require bond sales (borrowing) or special assessments for infrastructure maintenance and replacement. The following factors have been considered in the rate proposal: • Emphasis on self-sustainability • Institution of Best Practices Establish 25% Operating Reserve Establish 25% Capital Reserve • Elimination of borrowing and special assessments • Age of the distribution system • Elimination of Lease Revenue • Increased Administration Charge Prior to a rate Study and the establishment of a tiered water rate schedule in 2009, the water rates were increased based an inflation factor of approximately 3% and depreciation was not factored into the setting of rates. After 2009, the rates were increased with a portion of the depreciation included in the rates. Infrastructure replacement anticipated as part of the 2009 rate study were to be funded in part by issuing bonds (debt). In recent years, the rates have been being set with the idea that depreciation would be fully covered by the water rates. By fully covering depreciation, the fund will accumulate money that can be used for future capital needs. The 2019 (and future) rates that are being proposed are sufficient to create two reserve accounts. The first is a working capital reserve that would be set at 25% of operating expenses. This is an identified “Best Practice” of the Governmental Finance Officers Association (GASB). The reserve will help guarantee adequate cash reserves in the Water Fund. The other is capital reserve fund that will be set at 25% of capital expenditures. This reserve is designed to provide the additional funds required above the historical costs recovered through depreciation. This is needed because depreciation is based on historical costs and not the actual replacement costs of the infrastructure. Without the capital reserve, the City will require additional funding sources for infrastructure replacement. In the past, this has been Special Assessments, or issuing debt (bonding). The rates being proposed are designed to avoid both the need to issue more debt and to avoid using special assessments to fund infrastructure replacement. The cash reserves will be phased in over the next three years. The water system in the Navarre area was developed in the 1970’s and is approaching 50 years old. Current estimates indicate that 60% of the distribution lines in the Navarre system will require replacement through 2045. Within the next five years (2020 – 2025) it is estimated that a total of Item No.: 11 Date: March 11, 2019 Item Description: Adopt 2019 Water Rates Presenter: Ron Olson, Finance Director Agenda Section: Finance Director’s Report