Mn Legislature Covenes February 12th

It seems like each year the city of Becker and other communities that host power plants are involved with legislative concerns about taxation. This coming session is no different in that tax rates on utility property is still the concern it was last year. With the governors veto of the tax bill we lost the relief we had worked so hard on to solve our concerns.

So where does this put us? A little history first. The Mn Department of Revenue has implemented a rule change to adjust the way power plants are valued. This change resulted in a decrease of approximately 15% of the taxable property in the city. In implementing this change the rule provided for a phasing of the “loss” in value over a short period of time. A 20% reduction in power plant value was applied for taxes payable in 2008. In 2009 we’ll see the reduction at 50% and with taxes payable in 2010 the entire reduction is implemented. Using the tax rate and values of 2007 this means a loss of about $750,000 in taxes paid to the city by the utilities when fully implemented in 2010. Keep in mind they see a reduction in county and school taxes as well.

A two prong approach was accomplished to address this issue. The first involved a contingency plan to address the possible short fall in tax revenues. The second was legislative relief moving the tax rate on electric generation property from 2.0% to 3.0%. Making that change would negate the rule change to the extend that the loss in value with be picked up by a higher taxable value so essentially the same amount of taxes would be paid.

A bill was drafted in both the Senate and House to address the concerns of lost value on utility property as a result of this rule change. The bill dealt with both electric generation and pipeline taxes. The bills were passed by both groups and made it through to the final tax bill but as said previously was vetoed by the governor primarily for other reasons.

So we’re back working the bills that were developed last session and trying to get some relief from the rule change. This session could go well or not. We have the same group to deal with but we’re one year later. Has the issue changed in peoples minds? Certainly the rate from 2.0% to 3.0% will be an issue. We have already seen a small decrease in value which would be difficult to assume will be made up. You as tax payers in Becker continue to have a job to do in talking with your legislators. They need to address this issue with a helpful change in tax rates for utility property. This issue is very important for the city as well as other utility cities so please take the time to do what you can.

I will address this and the contingency plan in future entries.

Survey

Each year the Becker Chamber of Commerce sponsors the Becker Expo. This event gives the community a chance to get together and showcase businesses and organizations that serve our community. This event is usually attended by a great number of people and has been a success from the start.

The City of Becker has participated in this event annually. Periodically we have done surveys to better understand the views of residents of the community. In the past we have asked about what businesses the community would like to have and be used by the residents. In part this has helped the city establish the clinic, the grocery store, and a fast food establishment. Other entries such as a bowling alley have been listed and will hopefully get accomplished in the coming year.

This year we will again have a city survey. Here too we are no different in asking this question of what businesses are wanted and needed within our community. But we also are interested in knowing some additional information about residents to assist us with Economic Development pursuits. Things like how far do you travel to work, gives us an idea of the work force available within the community. Knowing this may assist us in locating new companies who will create job opportunities within our community.

One area of concern has been that of a Railroad Quiet Zone. What this is is the ability to create a corridor where the train doesn’t have to blow its whistles. Creating a zone requires a formal study of the circumstances concerning individual crossings and analyzing the safety at each. Generally if a quiet zone is to be established certain requirements need to be met. These include cross arms and sometimes median islands or 4 cross arm gates rather than the general practice of 2. The use of whistles greatly improves safety at crossings but some people and businesses feel them a nuisance. Having a better feel from the public about the issue of railroad whistle noise will help us gauge how to think about this issue.

Responses to our survey will be posted on the web site in the near future so when the curiosity of knowing how it comes out strikes you, check it out. Thank you for your participation as our intention is to create a better Becker.

We got them all

In my last entry I discussed the need for another bond to finance the wastewater treatment facility. The additional costs were prompted largely by the additional treatment we’ll be providing on wastewater which produces a cleaner effluent.

In doing a bond sale there are a number of steps involved. Some regard legal requirements and some involve providing the market place with information about the city and its finances. An Official Statement is prepared which is similar to a prospectus for a corporation. This document provides disclosure on the status of the prospective bonds among other things. Things like taxable or tax exempt bonds and bank qualified bonds or not are discussed. These items affect the interest rate that will be offered by bidders of the bond offering.

Another area that affects the interest rate is that of the rating of the bond. This is done by an outside firm to determine the degree of credit risk of the bond. It generally refers to the ability of the issuing agency to repay the bond. The cities finances play into this as well as the tax capacity of the city. The higher the rating, the less the risk and the lower the interest rate bid on the bond. If you have a good rating the interest rate is less than if you have a lower rating. With this issue we were again given a rating of A3 which is a very good rating for a city our size. It is also referred to as investment grade which means that most financial institutions can carry this within their investment portfolio.

Lastly rates are determined by the market, and the implicit timing of the market. The market, as I think we all know, rises and falls with the economy. Generally speaking when stocks are down bonds become more desirable and when stocks are good bonds become less desirable. People generally gravitate to the investment vehicle that provides the best rate of return while preserving the initial investment amounts balancing the risk reward in investing.

In planning for this bond sale we had the opportunity to determine when would be the best time of the year for a sale. We looked at historical trends and felt January would a god time to look for lower interest rates. We scheduled the bond sale to take place on January 15^th. We went to the market expecting 3-4 bids and an estimated aggregate rate of 4.15% on the bonds. It is difficult to know why bidders do what they do but the city received 6 bids on our bonds. The low bid from United Banker’s Bank came in at a true interest cost of 3.565%. This is 58.5 basis points under the estimate. A truly excellent bid! The result of this is an interest savings of roughly $7,000 per year. Not bad!

Sometimes you get lucky. Sometimes you plan effectively. Sometimes the market plays your way. In this instance I think we got them all.

Expensive Infrastructure

Wastewater treatment plants are probably the most expensive items a city deals with. These involve a great deal of equipment and structures to effectively treat wastewater to meet the stringent requirements of Minnesota Pollution Control Agency. These requirements keep our receiving waters clean.

Financing the Becker Wastewater Treatment Facility wasn’t as simple as selling bonds and applying debt service but we did do that as well. The city had taken steps to provide for these types of structures by anticipating some of the costs. We also used other funds that were available for use in lowering the debt necessary to finance the facility.

Outside of debt service the next largest funding source are SAC funds. SAC is short for Sewer Availability Charge. The city uses a system of determining the residential equivalent(s) for each intended use of the sewer system. One household is considered a residential equivalent. Presently the SAC change for a residential equivalent in Becker is set at $4000. This fee is paid at the time a building permit is issued and represents the new homeowners share of the costs for a wastewater treatment facility. $835,000 of SAC funds were used to reduce the amount of debt needed in building the present facility. SAC funds will also be used on an annual basis to write down the levy requirements on the bonds sold to finance the facility.

Other funds were used to lower the bond (loan) amount. Unspent construction funds on an earlier wastewater project were used to provide $243,000 of the project costs. $75,000 of sewer use funds were used. The project provided for the elimination of a lift station and as such some trunk funds were used in the amount of $365,000. A portion of the project involved upgrades of the industrial sewer portion of the plant. The industrial portion of the project upgrade was estimated to cost $1,282,871. Industrial user fees to cover the cost of capital were used to cover this cost. Two other funding sources were taped for an additional $1,000,000. These funds were set aside for future needs.

The remaining costs were bonded for. As we set out to accomplish the project we were faced with the question of tertiary treatment. This is a final cleanup of wastewater to bring the discharge pollutants to a very low level. Making the choice to move ahead with this was a responsible choice for the environment but added about $1.7 million in additional costs. These costs were not initially bonded for so additional debt service will be accomplished with a bond sale on January 15^th. The good news with this is the annual debt service was anticipated and already part of the city levy.

Overall the wastewater treatment facility will serve approximately 3500 residential equivalents of users. Additional expansion to the plant has not been anticipated until 2020, so we will be set for many years to come. With an overall cost of roughly $14.7 million dollars we can’t afford these types of improvements too often.

Budget Process

One of the final actions taken by the city before the end of the year is that of setting the levy for city taxes to be paid in 2008. In getting to this end a number of actions and activities occurred before a final number was arrived at.

The budget process starts in June typically, this year we started in May, with copies of the financial statements being sent to department heads for them to consider their needs for the coming year. The reason we started in May this year was help us all better understand the budget process and the impact of the Department of Revenue rule change which changes the way power plants are valued for purposes of taxation. That being said the rule change will be phased in over a period of three years, the first resulting in a reduction of value equal to reduction in taxes to be paid by Xcel to the city proposed at $145,000. When the numbers were finally calculated the loss in taxable value of all utility property was $546,206. All utilities will pay an estimated $120,459 less in 2008 than they did in 2007 towards city taxes.

Working through the budget process the council was asked to consider a number of things. Obviously we needed to consider the decrease in tax capacity. We considered budget “growth”. We worked through the contingency plan and identified what items were suitable for consideration in this budget cycle. The plan has identified both revenues increases and expenditure decreases. The council also considered basically 3 budgets from each department. There was a zero based budget, a small increase budget, and a perceived needs budget.

With the wealth of information it took some time to wade through all the factors. It was felt the contingency plan should be reviewed by departments and changes made to reduce operating expenses or increase revenues. Both of these were recommended. It was also felt it difficult to provide for no growth in the expenditure side of the budget. With these considerations the budgets from each department were assembled into a preliminary budget and the impact in terms of tax rate was developed. After some minor changes this became the preliminary budget and associated levy request.

Within Minnesota we’re required to certify a preliminary levy by 15 September. The preliminary levy becomes the cap, or the most that we could levy. From that date until the final levy the city has the opportunity to adjust the levy downward as the budget is better refined and costs become known. With the understanding the budget gets started in May or June the actual expenditures for the majority of the year are unknown at that time. Having the benefit of actual expenditures of 10 months helps with the assessment process in making final cuts.

The Truth in Taxation hearing is held during the first meeting in December. At this time proposed final adjustments to the levy are made. This year we were able to cut an additional $96,581 from that of the preliminary levy. In the end our levy was $49,837 less that that for 2007. Unfortunately with the reduction in Tax Capacity, due to the rule change, the tax rate will increase slightly for 2008.

As we consider the 2009 budget we’ll again need to consider the same factors we did for the 2008 budget period. The need for fiscal prudence continues as we face challenges of tax base and operational expense. Some changes may be made to the process but I think you can agree the budget process involves more than one may think.

Trunk Charges

As a city grows, it develops needs to expand its infrastructure to meet the needs of added population. We may start with new subdivisions but they require the support of wastewater treatment facilities, wells, water towers, lift stations and other trunk facilities to provide the public improvements we all expect to have in a city.

Financing these types of facilities can be challenging and also can be handled by a number of different approaches. Each one has its pros and cons depending on how you look at them and whether you are a developer or not. In Becker we have chosen a number of different approaches to address the costs for infrastructure with charges and fees that support their establishment and replacement. Some infrastructure is supported by taxes, but most are not. They are largely supported by some form of user fees.

One of these mechanisms is that of Trunk Charges. Through a study of the infrastructure needs for water, sewer, and storm sewer the city looked at the need for trunk facilities that would be needed to serve the community when fully developed. Trunk facilities are the wells, water towers, lift stations, and over sized water and sewer mains as examples. They are primarily items we all need for the properly functioning systems we use, but serve the whole rather than individual households. Once we quantified the needs of these types of systems we attached price tags to them, looked at the comprehensive land use plan to ascertain densities of development and determined the “price” for trunk facilities of water, sewer and storm sewer. This becomes a fee a developer pays to the city for developing in the city. This charge is based on a per acre cost for the amount of land developed. In exchange the city pays for and installs these trunk facilities that provide development with the needed public improvements.

In managing this system a few things stand out as concerns. One involves the time of development. The city council in controlling trunk facilities controls the extent of development through capacity in the trunk facilities developed. They also control the timing of construction of these facilities. If a developer wants to move ahead of the city with development and the city doesn’t have the resources to install it, the developer can install these trunk facilities at his expense. This comes with a few provisions. The council needs to be agreeable to the situation, the developer pays all costs associated with the trunk facility that meets our expectations and the developer is not given credit for the trunk facility he installs. He is still expected to pay the city for the trunk costs associated with his development.

One of the cons to this approach is that of cash flow. Essentially the city has to finance the establishment of a trunk facility prior to development taking place. As such, early on there are expenses without cash support. In the middle term cash flow seems to meet needs. As the city becomes more fully developed, cash flow becomes less of an issue. In recognizing that problem a slow and deliberate approach is utilized in managing growth.

There are other methods Becker uses to recover costs which I’ll address another time. Keeping finances in perspective helps in managing growth and its consequences. In the end, maintaining control is in everyone’s best interests.

The Bottom Line at Pebble Creek

Each year the city council sets rates for Pebble Creek Golf Course, this year being no different. The discussion however this year centered around a change that would make the course profitable. Pebble Creek has not made a profit since 2001. There are a number of reasons for the change, most notably that of an increase in golf courses but also a declining number of players.

Pebble Creek continues to be a fabulous golf course in excellent condition. The goals of the council continue to be to maintain the course to that extent but also to bring the charges in line with the costs of running the facility. Steps have been taken to reduce the maintenance budget this coming year by 5-6%. This is on the heads of a reduction in maintenance expenses over the past couple of years.

Looking at balancing the budget, revenues were looked at along with the mix of play between season pass holders and green fee paying customers. It was noted that 75% of the play on weekends was played by season pass holders. With weekend play being the premium time, this is when the course needs a stronger mix of green fee paying customers to generate revenues.

Another factor in dealing with revenues is the cost for a season pass. With many members playing a large number of rounds of golf their cost per round was very low in comparison to green fee rates. This is the advantage of a season pass but the benefit to Pebble Creek was felt to be inadequate in terms of the price paid for a season pass. Making an adjustment to these rates was needed to meet the revenue requirements of the facility along with a rate that was fair and comparable to other area golf courses.

In reviewing these factors and accomplishing a business plan to address expenses and revenue needs a partial change in direction was needed. What was proposed and accepted by council is one season pass rate of $1200. This is an increase of slightly over $200 for non-residents but a large increase for residents of a little more than $500. We recognize that some members will not participate at that rate but part of the goal is to see more green fee paying customers. Freeing up playing time during prime times in the weekend is a benefit with the change of player mix.

The bottom line is we need to change the bottom line and we felt making these changes will improve the finances of Pebble Creek. Without these, the fund balance for golf will run in deficient. The city no longer has an option to keep rates as low as they have been but rather run the course as a business while maintaining a positive cash flow.