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5.a1 Big Marine Sewer Utility Budget Report 12-15-2021 2022 Draft Utilities Budget Final Report Big Marine Sewer Utility Presented December 15, 2021 DRAFT UTILITIES BUDGET Page 1 of 8 What is the purpose of this report? The Big Marine Sewer Utility, owned and operated by the City of Scandia, operates two community septic systems, the Bliss Wastewater Treatment Plant (Collector) and the Anderson-Erickson Treatment Plant (WWTP) or Collector. Both systems are community septic systems that treat wastewater from user’s homes starting at the holding tank to finally discharging into drainfields at the treatment sites. The treated effluent is returned into the water table. This report is intended to both present the Utility’s 2022 Budget and to educate the public and decision makers on pressing improvement needs and suggested financial strategies to address them. What does the Bliss sewage treatment system entail and how is it designed to operate? The facility serves approximately 80 households within a defined service area that predominantly services the Bliss Addition Neighborhood, but not the entirety of it. The facility processes around 7,000 gallons/day in winter and over 11,000 gallons/day in wet summer months. The total designed capacity is said to be 19,800 gallons per day. The 2040 Comprehensive Plan suggests that the system could be potentially used to support greater residential densities and mixed-use commercial activity in the future. However, there are significant barriers to this that would require us to take this into consideration. First, the system’s current capacity would require more land and space to produce capacities. Second, the current zoning density requirements preclude such developments from occurring until appropriate service capacity is introduced. Both the Plan and the Development still currently limit density to four buildable lots over a 40-acre area. Add financial limitations and the lack of political will, change is not likely to be anytime soon. New ordinance controls and thoughtful zoning decisions will be the most effective tool to keep this facility capacity compliant. What does the Bliss Wastewater Treatment Nitrate Upgrade and & Primary Lift Station Rehab Project entail, and why do we need to invest in it? Earlier this year, the City Council approved a request to the State of Minnesota to obtain state bonding grant assistance to help cover half of the total project cost of a major upgrade of the Bliss Wastewater Treatment System on the west side of Big Marine Lake. The estimated $1.43 million dollar project includes rehabilitation of the system's main lift station** (at approx. $430k), AKA Lift Station #2, and, most significantly, the introduction of digester systems for the treatment and reduction of nitrate nitrogen**, as part an unfunded state mandate (at approx. $1 mil). The timing and extent of this project is not exactly ideal for our small utility of just around 111 customers between both systems. Given utility rates have not been historically set with consideration of major long-range infrastructural costs, the utility is currently underprepared for major infrastructural improvements such a recent unfunded state mandate to introduce nitrate treatment at Bliss WWTP. The cash balance needed to cover a cost of this nature is not in the fund. At mid-year the fund had $64,942.59, which is less than 90% of the cost of the mandated nitrate project. Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 2 of 8 However, the Big Marine Utility's outlook is not completely disparaging. Besides the hopeful prospect of grant for 50% of the project through the State's bonding program, the City has also received federal aid that is eligible for use on this upcoming major project. Earlier this year, the City accepted American Rescue Plan Act (ARPA) funds that, due to its limited permitted uses, are most practically limited for use on improvements to sewer utility infrastructure and broadband expansion. The City Council has yet to make a determination on the allocation of these funds. As a result, this year's new utility rate study has gone through several revisions to accommodate the funding scenarios based on the receipt of outside funds. We also want to assemble an argument from the Sewer Committee to support receipt of ARPA funds. My hope is that we can at least set forth a recommendation this evening. As a contingency to assure we make the project construction deadline in the spring of 2025, we have also prepared an application to have the Bliss project added to the State's Project Priority List (PPL) through the Public Facilities Authority (PFA). This request is critical both for the credibility of our state bonding request and obtaining eligibility for possible forgivable loans for this project. (Of which, based on the ranking that the State places on our project, the nitrate project could potentially receive as much as 80% loan forgiveness for the nitrate treatment component. (Upgrades to other infrastructure only qualify for low interest loans.) Here is a time line of action that has been laid out for this project: · Dec 2021 - Submit PPL application and scoring worksheet to MN Pollution Control Agency (MPCA) · Sept 2022 - We are required to submit a report based on our compliance track under the permit’s mandate. · Dec 2021 to March 4, 2022 - We will need to submit a “draft” Facilities Plan (FP) to MPCA. (The draft plan work has been mostly completed as part of the renewal of the operator permit for the facility.) Feedback is provided back to the City and Bolton & Mink as to any desired adjustment or information for inclusion. · June 3, 2022 - Submit request for placement on the Intended Use Plan (IUP) (This identifies projects and activities that the PFA intends to fund from the Clean Water Revolving Fund (CWRF) during the state fiscal year, which runs July 1 to June 30. · June 30, 2022 - Preliminary approval of Facilities Plan by MPCA. · Month of July 2022 - We then become eligible to submit our Point Source Implementation Grant (PSIG) application to PFA. · Then in Late September 2023 – the 2024 IUP and PSIG list adopted (starts 6-month P&S clock) and we can submit engineered Plans and Specifications (P&S) and our loan application. Seeking other grant funding from the state for this project, and future ones will be the most practical way to improve our utilities without overly burdening our users. Even though the process remains highly competitive, qualifying for state grant funding still presents prospects for potential grants and loan forgiveness. In addition, the New federal Build Back Better legislation has the potential to introduce more funding for these types of projects. It includes a provision in which 49% of allocations will be intended to be offered in the form of grants and forgivable loans. The caveat for obtaining such financing is that it may take years past to obtain a funding award. Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 3 of 8 That is why ARPA funds and state bonding, which have no waiting lists, to close our funding shortfall without significantly adversely affecting users or the utility’s cash position. Can the City consider Special Assessments for the Bliss WWTP-Lift Station Project and Other Future Projects? Yes. The City can, at least partially finance this project through property assessment as both the WWTP and lift station are statutorily eligible (Mn § 429.021). (Coincidentally, the statute also suggests that the special assessment process can be utilized for internet expansion, as well.) Special assessments can be a dependable source of revenue to cover project costs, a means to avoid taking on additional debt, and most importantly, it helps distribute the cost of the benefit directly to benefactors. This financing mechanism may be best suited for service mains and tank replacements, though. Consideration of special assessments may be worth investigating, but I am not confident that it will yield the share of revenue we need to bring the utility into a financially stable condition. It also fails to help ease the financial impacts on utility users. The following are a few important points that should be considered with regard to assessments: · It is likely virtually impossible to assess 100% of the cost short of receiving waiver agreements from all affected property owners. It is more likely that only a portion may be eligible. The State Supreme Court has developed a “special benefit test” for special assessments, which implies that the cost of the improvement must not exceed the benefit to affected property owners. Benefits are considered based on the estimated impact to market value. In general, there are two ways communities have approached this test and successfully avoided legal challenges to the Minnesota Property Tax Court: o The first option is to assess only a smaller portion of effective owners in a uniform fashion. This often weakens instances of challenges, but the key is that the assessment needs to be at least within the projected market value of the benefit. o The second and more reliable method of limiting challenges is to hire a licensed appraiser to value the effect of improvements on benefiting properties. The challenge can be that such appraisals can be tricky when valuations need be made on improvements that do not directly abut or encroach on property. The quality of the appraisal will need to be able to stand on its own merits, as legal challenges can often include a counter appraisal. The only times I have seen an appraiser willing to make such a valuation is when they can actually identify valuations that were done for similar type improvements. · Consider asking yourself these questions…if an upgrade was made to the community wastewater treatment system that served your home, how much more would you expect a buyer to offer by way of value? How much more would you be willing except for such an enhancement? These questions are what are at the center of an appraisal. Given it is difficult for most any average person to come up with a value for this on their own, it stresses the challenges faced by this approach. This is why assessments are often applied to more directly tangible improvements that serve a home directly, like utility service mains and street frontages which have more outwardly tangible impacts to the property. Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 4 of 8 · The City’s Liability Insurance through LMCIT does not cover the costs of litigation that seeks only to reduce or invalidate a special assessment. The cost of this defense will fall directly on the Utility and the City. · Besides possible appraisal costs, there will be costs to computation and the initial administration and formulation of the special assessments. These costs may be negligible, but it’s worth the City consulting a financial advisor to see if it would be worthwhile to include assessments within this project’s financing when considering all of the variables before committing to it. It may also be helpful to get the City’s Engineer’s impressions on the practicality of developing an assessment that could stand up to community challenge, as they often perform assessment computations. · Assessment for the Bliss Project will require being limited to customers served by that system, which would more fairly distribute the benefit to the 80 affected properties. Distributing the cost fully over the affected property owners at the full cost of $1.43 Million would be $17,875 per property. Applying only 20% of that cost would be $3,575 for $286,000. So, not taking into account any of the unknown implementation costs, this may be a viable option to offset a portion of the financial impact. This may reduce the likelihood of a challenge, but again, it does not place us in the free and clear way to quantify a market value. · Assessments do require a funding contingency plan if a challenge is successfully made if part or all of the cost is overturned. Thoughtful consideration of payback terms and the setting of interest rates for assessments should also be made. The maximum 30-year payback would NOT be conducive to the utility’s cashflow or the timing of other projects under its capital plan. Additionally, interest rates should reflect the interest on the direct project’s debt or interest rates the city would have received in its normal investment process. This is where consulting an advisor could be helpful. · Given the utility’s limited cash balance, the timing of payment will necessitate temporarily drawing on City cash reserves (fund balance) between funds to cover immediate short-term project costs. Prolonged payback of a significant amount of funds will require interfund loans or debt service financing. This is important to consider when weighing the term of assessment. How should we approach project funding? What every financing option that is ultimately selected will require coordination with grant deadlines and the end of next year’s legislative session. If we do ultimately receive a bonding request for 2023, our next attempt should be to get ranked for an award on the PPL in advance of our project completion deadline. The costs that are being incurred now should have been collected in the rates leading up to today. Given the City is responsible for the operation of this utility, it is actively working to obtain relief for utility users that does not draw upon the property taxes of those who do not use this system. To that end, the city is actively seeking grant opportunities that can help reduce impacts including applying for direct state bonding requests to potentially cover half of the Bliss Project’s cost. The project will likely be funded through a combination of utility rates, state and/or federal funding, and debt service financing. Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 5 of 8 The allocation of ARPA funds could relieve an even more substantial step closer to the financial position it should be in far less time and with less burdensome impacts on users by way of rate increases or special assessments. Alternative funding scenarios in this budget suggest the benefits to this approach. What does the Anderson-Erikson sewage treatment system entail and how is it designed to operate? The Anderson-Erickson System, which serves 33 homes on the eastside of lake as part of the Big Marine Lake Utility, is also in need of significant capital investment. Although the issues remain only at emergent levels, it should not to be ignored. The system is not triggering any compliance issues as of yet with either the state or Washington County, there is still a reasonable likelihood that issues may come on the horizon. In wet summer months, the facility has exceeded daily permitted flows in multiple events. Regardless of these constantly obvious operational issues, there have been no changes to the treatment design since construction. The maximum treatment design of 6,700 gallons/day was originally intended to serve only 15 properties of which many served as seasonal residences. Since the system was built, the neighborhood has undergone a significant transformation. Many seasonal cabins are now in year-round use, and many of them have been replaced and/or enlarged that have dramatically impacted service demand. The system officially serves 33 properties. Given sump pump inspections and smoke tests have failed to identify point sources of illegal discharges or inflow-infiltration (I&I), a facility plan is the logical next step. Avoiding system overloading is critical because it can risk system failure and costly replacement and relocation costs. It is highly recommended to build out capacity to the point where the system can serve the properties within its service area and have the capacity to handle the I&I that we are unable to mitigate. Upgrading the system to provide services at the level of Bliss will come with greater cost and more operational challenges under a state permit, which would likely include a requirement to introduce nitrogen and phosphorus treatment processes similar to that of Bliss. New legislative limits in the City Code will go a long way to protect this system from failure, but it will not be enough. Capacity improvements will be necessary to prevent system overloading and more legislative control on development will be required to prevent development with service demand levels harmful to the system, and in turn, the other properties served. Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 6 of 8 20212022202320242025202620272028202920302031% Change in Rates10.00%10.00%10.00%15.50%15.50%15.50%15.50%15.50%15.50%15.50%Base ChargeAnnual897.56 987.32 1,086.05 1,194.65 1,379.82 1,593.70 1,840.72 2,126.03 2,455.57 2,836.18 3,275.79 Quarterly224.39 246.83 271.51 298.66 344.96 398.42 460.18 531.51 613.89 709.04 818.95 IncreaseAnnual89.76 98.73 108.60 185.17 213.87 247.02 285.31 329.53 380.61 439.61 Quarterly22.44 24.68 27.15 46.29 53.47 61.76 71.33 82.38 95.15 109.90 Energy Adj ChargeAnnual8.00 8.80 9.68 10.65 12.30 14.20 16.41 18.95 21.89 25.28 29.20 Quarterly2.00 2.20 2.42 2.66 3.07 3.55 4.10 4.74 5.47 6.32 7.30 Projected Revenue99,629.16 109,592.08 120,551.28 132,606.41 153,160.41 176,900.27 204,319.81 235,989.38 272,567.74 314,815.73 363,612.17 Average $ Yearly Increase over 10 Yrs.:$237.82Rates are applied over a total of 111 users of which Bliss has 79 and Anderson Erikson Has 32.Total Sewer Fee Over 10 Yrs.:$19,673.37Current Est. for Private Drainfield Replacement:$17k-$20kFund 602 Big Marine Sewer Scenario B -State Bonding and ARPA ReceivedWhat are the forecasted and proposed rates for the Big Marine Sewer Utility? Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 7 of 8 This year’s budget proposal introduces a rate structure that is predicated on the allocation of the funds that have been distributed to the City as part of the American Rescue Plan Act (ARPA), but the expectation that state bond grant financing does not materialize. Please review the following supporting documentation for this proposal including the Capital Improvement Plan, Cash Flow Summary, and the line-item budget labeled “Proposed”. Scenario B in the budget packet suggests how budgeting should be approached if both state and ARPA funds are awarded. It was prepared as a template for budget and rates in the event of these conditions. The scenario includes estimated rates, a capital improvement plan, and cash flow summary. Scenario C assumes the state bond grant will be awarded but not funds from the ARPA. It may be used a template under these conditions. It includes estimated rates, a capital improvement plan, and cash flow summary. Scenario D assumes that there will be no financial assistance. It includes estimated rates, a capital improvement plan, and cash flow summary. How do each of these rate forecasts compare to one another? Cost Comparisons Budget Proposal - Include ARPA but Plan for No State Aid Average $ Yearly Increase over 10 Yrs.: 237.82253 Total Sewer Fee Over 10 Yrs.: $19,673.37 Current Est. for Private Drainfield Replacement: $17k-$20k Scenario B- Full Funding Average $ Yearly Increase over 10 Yrs.: $143.05 Total Sewer Fee Over 10 Yrs.: $16,632.83 Current Est. for Private Drainfield Replacement: $17k-$20k Scenario C- No ARPA but awarded State Aid Average $ Yearly Increase over 10 Yrs.: $337.06 Total Sewer Fee Over 10 Yrs.: $28,697.36 Current Est. for Private Drainfield Replacement: $17k-$20k Scenario D- No Grant Aids Average $ Yearly Increase over 10 Yrs.: $378.49 Total Sewer Fee Over 10 Yrs.: $30,453.94 Current Est. for Private Drainfield Replacement: $17k-$20k Presented 12/15/2021 DRAFT UTILITIES BUDGET Page 8 of 8 Please let me know if you have any questions. Sincerely, Ken Cammilleri Administrator City of Scandia *The Bliss WWTP is mandated to make treatment plant upgrades that include anaerobic digesters as a condition of the facility's operating permit which has been exceed 10 milligrams per liter parts per million (ppm) at one of the facility's test wells, which is now the state's new limit. The excessive result was further investigated by testing of surrounding private wells. The results of these inquiries have confirmed that there is currently no threat to nearby wells or the drinking water they produce. **Rehabilitation of Bliss' Main Lift Station (#2) was included in that state request to help the utility obtain grant money toward this substantial cost. It can and will likely be delayed as needed should outside funding sources not come through.