City Council - Workshop Meetings

City Council Workshop Meeting Ash North and South Conference Rooms April 19 | 6:30 p.m. This City Council Workshop meeting is taking place virtually and at Woodbury City Hall in the Ash North and South Conference Room. Members of the public may attend the meeting in person and may also join the meeting using a computer, tablet or smartphone and accessing the virtual meeting link at woodburymn.gov/VirtualMeetings Watch the Live Meeting Public comments will be accepted during the meeting both in person and virtually. Virtual questions should be submitted via the online Q&A feature within the virtual meeting link. Questions regarding the meeting will be also taken between the hours of 8:00 a.m. to 4:30 p.m. at 651-714-3524 or at council@woodburymn.gov. Questions received after 4:30 p.m. will be responded to in the next three to seven business days. Please note that all agenda times are estimates. 6:00 p.m. Dinner – Ash North and South Conference Rooms Workshop Agenda 6:30 p.m. 1. Drinking Water Strategic Initiative: Water Treatment Implementation 23-92 7:45 p.m. 2. Break 7:55 p.m. 3. Drinking Water Strategic Initiative: Water Treatment Implementation (Cont’d.) 8:45 p.m. 4. Administrator Comments and Updates1 8:50 p.m. 5. Mayor and City Council Comments and Commission Liaison Updates1 8:55 p.m. 6. Adjournment 1 Items under comments and updates are intended to be informational or of brief inquiry. More substantial discussion of matters under comments and updates should be scheduled for a future agenda. The City of Woodbury is subject to Title II of the Americans with Disabilities Act which prohibits discrimination on the basis of disability by public entities. The City is committed to full implementation of the Act to our services, programs, and activities. Information regarding the provision of the Americans with Disabilities Act is available from the City Administrator's office at (651) 714-3523. Auxiliary aids for disabled persons are available upon request at least 72 hours in advance of an event. Please call the ADA Coordinator, Clinton P. Gridley, at (651) 714-3523 (TDD (651) 714-3568)) to make arrangements.  1 City of Woodbury, Minnesota Office of City Administrator Council Workshop Letter 23-92 April 19, 2023 To: The Honorable Mayor and Members of the City Council From: Clinton P. Gridley, City Administrator Subject: Drinking Water Strategic Initiative: Water Treatment Implementation Summary Following Council approval of design contracts and associated Minnesota Pollution Control Agency grants at the February 8, March 22, and April 12, 2023, meetings, City staff and consultants are moving ahead with the design of the City’s permanent water treatment plant, associated infrastructure, and additional temporary treatment capacity as the highest priority. Currently in process is 100 percent design of the water treatment facility, 100 percent design of the well manifold pipe project, 30 percent design of associated system wide raw and distribution pipeline projects, design and construction of temporary water treatment at three well sites, and additional design unification services for up to 30 percent of the pipeline projects. At the April 19 workshop meeting, the following will be discussed: • The impact of the March 14, 2023, Environmental Protection Agency (EPA) release of proposed maximum contaminant levels for PFOA and PFOS and pending release of Minnesota Department of Health (MDH) health standards for PFAS compounds. • Contingency planning for interim water capacity, between now and the permanent treatment plant completion: o Additional temporary treatment on three wells o Recommended revised lawn and watering policy • Project funding status, including: o Funding gap update between state grants and possible city-funded project elements o Status of the water rate study o Recommended revised Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Staff will also provide a project timeline update, review project risks and vulnerabilities, and provide an update on the topic of the White Bear Lake lawsuit pending legislation. Council Workshop Letter 23-92 April 19, 2023 Page 2 Recommendation Staff requests Council concurrence on the following policy revisions: • Lawn and Landscape Watering Policy – limit irrigation to two times per week based on zones, and one time per week (Fridays) for commercial property o Recommendation from the Parks and Natural Resources Commission; approved April 4, 2023 • Revised Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy o Recommendation from the Audit and Investment Commission; approved March 24, 2023 Governance Mode • Fiduciary - Stewardship of tangible assets, oversees operations and ensures efficient and appropriate use of resources, legal compliance, and fiscal accountability. • Generative - identifying key questions, anticipating future challenges, framing of issues, and development of options. Fiscal Implications Lawn and Landscaping Watering Policy revisions: This proposed policy change has been identified as the most capital cost-effective action with the largest positive impact on water use, appropriation permit management, and immediate mitigation of PFAS in the municipal water system. However, a potential reduction in revenue is likely, due to a projected reduction of water consumption for irrigation. Fiscal implications will be monitored, and rates would need to accommodate revenue loss. In the long term, capital infrastructure saving may be identified if capacity needs are reduced. Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy revisions: Analysis of fiscal implications will be ongoing throughout the rate model process. Fiscal impact will be partly dictated by funding decisions and funding sources for water treatment system infrastructure. The policy as established will provide for annual recommendations by staff to the City Council for utility rates. Policy Aligns with the 2019-2021 Strategic Initiative 19-01, Ensure Long-term Drinking Water Sustainability and 2022-2024 Strategic Initiative 22-01 Drinking Water Treatment Implementation. Public Process Due to the extensive length of public process items associated with these topics, only 2023 process are noted below. A list of previous public process can be found in past year’s Council Workshop letters. Council Workshop Letter 23-92 April 19, 2023 Page 3 • February 8, 2023, Council Resolution Authorizing Acceptance of City of Woodbury Water Treatment Plant Design and Partial Pipeline Design Grant from MPCA in the amount of $12,500,000 and Approval of Budget Amendment to the Water and Sewer Utility Fund • March 22, 2023, Council Resolution Authorizing Acceptance of City of Woodbury Water Treatment Plant and Pipeline Design Project Grant Amendment #1, from Minnesota Pollution Control Agency in the Amount of $3,888,543 and Approval of Budget Amendment to the Water and Sewer Utility Fund. • April 12, 2023, Council Resolutions Authorizing the Mayor and City Administrator to Execute a Letter of Engagement with Advanced Engineering and Environmental Services, LLC (AE2S) as the City’s Consultant and Engineering Firm for Wellhead Temporary Water Treatment • April 12, 2023, Council Resolution Authorizing Acceptance of City of Woodbury Wellhead Temporary Water Treatment Grant Amendment from Minnesota Pollution Control Agency and approval of Budget Amendment to the Water Sewer Utility Fund Background EPA Proposed MCLs for PFOA and PFAS On March 14, 2023, the EPA proposed to set MCLs of 4 parts per trillion (ppt) PFOA and PFOS, levels at which they can be reliably measured. The proposed standards will go through public comment period and likely be finalized end of 2023/early 2024 and its anticipated municipalities will have three to five years to comply. However, as a result of the EPA’s announcement, the city expects the MDH – the agency that monitors and enforces standards on Woodbury drinking water – to release new, more stringent statewide health standard for PFAS sometime in 2023. Those new health standards will have an impact on how staff operate the Woodbury municipal water system. With the EPA proposed MCLs and anticipated MDH health standards later this year, an additional eight wells may receive health advisories. As we have throughout this project, staff are working as diligently as possible to expedite the completion of the long-term municipal water treatment project. This project is being completed in a complex environment of changing health standards, extensive regulatory review of the system design with accompanying use of 3M settlement proceeds, and outside factors and risks such as the court-ordered protections of White Bear Lake on the east metro area. Contingency planning options were presented at the November 16, 2022, workshop, including additional temporary treatment, watering restrictions, operationally manage wells to limit us of contaminated wells, modeling of additional tower for storage, review phasing of development, education and communications, and conservation measures. An update of strategies for ensuring water quality to the highest possible standard will be reviewed and Council will be asked to consider a recommended change to the Lawn and Landscape Watering Policy. Recommended Revisions to the Lawn and Landscape Watering Policy Woodbury’s current Lawn and Landscape Watering Policy was last updated in 2022. This policy emphasizes the protection of groundwater resources (Woodbury’s municipal source water) by encouraging efficiency and conservation of the groundwater resource by regulating lawn and landscaping watering. The policy also supports the management and prevention of excessive water demand on the municipal water system. Council Workshop Letter 23-92 April 19, 2023 Page 4 Summer 2021 was the region’s 34th driest on record (from 152 years of National Weather Service data), which resulted in higher-than-normal water consumption. The State of Minnesota Department of Natural Resources required drought phase restrictions, which led the city to implement Level 2 restrictions (trash day plus one weekend day) on July 27th, 2021. With implementation of Level 2 restrictions, total monthly water use dropped from approximately 511 million gallons in July to 359 million gallons in August, saving between 120 and 150 million gallons of water. The restrictions seemed palatable for Woodbury residents and for the most part achieved the intended goals: reduced overall water use and limited the system peak daily demand volumes. Staff’s observations over the 2021 summer season led to several conclusions: • Level 2 restrictions stressed peak demand due to the trash day boundaries creating areas of unequal water use; this was remedied after modeling the city's water system, and an introduction to the revised two day per week schedule will be widely communicated to the community (2022 update)." • Green infrastructure did well with only two days per week watering. This conclusion is also widely supported by staff research, experts, and the City’s historic message that grass only needs one inch of water per week to stay healthy, including precipitation and irrigation. • Residents were mostly supportive of the change vocally and in their action to support reduced water usage. Attached is the new level two watering restrictions map which was informed by the 2021 season and adopted in the Spring 2022. The Parks and Natural Resources Commission reviewed the following options and recommended the policy revisions found in Option 2: Option 1- Be reactive to weather, climate, and PFAS operational impacts: Implement increased watering restrictions pursuant to the existing Lawn and Landscape Watering Policy as warranted. Option 2- Be proactive to weather, climate and PFAS operational impacts: Adopt a Council resolution which amends the Lawn and Landscape Watering Policy to implement two days per week for residential and one day per week for commercial, industrial, and institutional watering restrictions with the commitment to review the restrictions one year following the completion of the permanent Woodbury Water Treatment Plant. Recommended Revisions to the Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy The city has been working with a consultant, Carollo, to assist with the complex water rate analysis. The city has taken the approach of having Carollo build a comprehensive model, which scenarios can then be added for analysis if directed by the City Council. As part of the comprehensive model being built, the Audit and Investment Commission reviewed recommended changes to the CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy. Council Workshop Letter 23-92 April 19, 2023 Page 5 Key considerations include the fact that significant infrastructure and associated debt will be added to the City’s water system as we proceed with constructing a permanent water treatment plant. The city may need to shift from a mostly pay-as-you-go community to managing appropriate levels of debt to support the Woodbury water capital replacement system. Attached is the Commission memo provided to the Audit and Investment Commission, which details the changes staff recommended to the Commission. The Commission fully supported the changes attached to this workshop letter. Written By: Mary Hurliman, Public Works Director Jim Westerman, Assistant Public Works Director Approved Through: Clinton P. Gridley, City Administrator Attachments: 1. CD-ENGPW-4.4 Lawn and Landscape Watering Policy 2. Level Two Watering Restrictions Map 3. CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy 4. Audit and Investment Commission March 24, 2023, memo: Water and Sanitary Sewer Utility Capital Asset and Funding and Reserve Policy  Adopted: 07-18-07 Number: CD-ENGPW-4.4 Revised: 10-30-18, 06- 15-22, xx-xx-xx Mayor: City Administrator: COUNCIL DIRECTIVE For: Public Works Department Recommended from Parks and Natural Resources Commission Subject: Lawn and Landscape Watering Policy (approved 04/04/23) PURPOSE It is the purpose of this policy to protect groundwater resources, prevent excessive water demand, encourage water efficiency and conservation, and support municipal water system operations by regulating lawn and landscape watering. This policy is authorized under Woodbury City Code 23-20, Emergency Water Conservation. This policy covers all water services, all private wells within the City that do not hold a water appropriations permit from the State of Minnesota, and irrigation systems partly or solely served by a water reuse system. This policy regulates lawn and landscape watering only; other outdoor water uses including, but not limited to, car washing and filling of swimming pools are not included in this policy. Hand watering from single-family rain barrels, when filled by rainfall, is exempt from this policy. POLICY Level 1- Watering Policy ▪ Level 1 policy is in effect year-round. ▪ Lawn and landscape watering is regulated with an odd/even system according to the last number of the property address. Addresses ending in an odd number may irrigate on odd numbered days and addresses ending in an even number may irrigate on even numbered days. The City will assign odd or even days to complexes with multiple units on one irrigation system. Complexes must follow odd/even watering based on their assigned day. ▪ The city will regulate lawn and landscape watering for residential properties and homeowner associations to their designated watering zone day and one corresponding weekend day for two day a week irrigation. ▪ The weekend day is assigned as follows: ▪ For Watering Zones A and B, the weekend watering day will be Saturday. ▪ For Watering Zones C and D, the weekend watering day will be Sunday. Council Directive CD-ENGPW-4.4 Lawn and Landscape Watering Policy ▪ Complexes with multiple units on one irrigation system are permitted to irrigate based on their location within the Watering Zone Map, including their corresponding weekend day. ▪ For non-residential irrigation systems, lawn and landscape watering is permitted on Friday only. Non-residential is defined as places to shop, places to work, schools, and churches, and the like. ▪ Watering is not permitted between noon and 5 p.m. ▪ All irrigation systems must be in compliance with City Code 23-36, Lawn and Landscape Irrigation Systems and any future updates. ▪ The watering of shrubs, flowers, or other landscaping vegetation when done by hand is permitted at any time. This includes using a hose, watering can, or similar implement. ▪ Watering permits can be obtained for watering new sod, seed, or landscaping for 14 consecutive days. The permit must be visible in a window. Permittees must follow the noon to 5 p.m. watering ban. ▪ Irrigation systems that have been activated due to a power outage will be excused when the owner provides the City with printed verification of the power outage from the electric company. ▪ Athletic fields, golf courses, commercial nurseries, and agricultural and horticultural businesses that operate under a State of Minnesota appropriation permit will be exempt from this policy. These users are encouraged to employ water conservation practices to the extent possible. ▪ Athletic fields connected to the municipal system are exempt from Level 1 and 2 of this policy. ▪ The watering policy above remains in effect unless stated otherwise. Level 2 Watering Restrictions The following restrictions are imposed at 90 percent water production firm capacity. The following restrictions may also be imposed in response to the Minnesota DNR placing the city in drought phase designations. ▪ The city will restrict lawn and landscape watering to residential and homeowner association watering on their designated watering zone day and one associated weekend day. . ▪ The weekend day is assigned as follows: ▪ For Watering Zones A and B, the weekend watering day will be Saturday. ▪ For Watering Zones C and D, the weekend watering day will be Sunday. Council Directive CD-ENGPW-4.4 Lawn and Landscape Watering Policy ▪ Complexes with multiple units on one irrigation system are permitted to irrigate based on their location within the Watering Zone Map, including one weekend day. ▪ For non-residential irrigation systems, lawn and landscape watering is permitted on Friday only. Non-residential is defined as places to shop, places to work, schools, and churches. ▪ Watering permits may be obtained under Level 2 with verification of need by city staff. Previously obtained permits are void unless deemed necessary by city staff. Staff will provide guidance to maximize conservation for any permit granted during Level 2 restrictions. Level 2 watering restrictions are imposed at 93 percent water production firm capacity. The following restrictions may also be imposed in response to the Minnesota DNR placing the city in drought phase designations. ▪ A total lawn and landscape watering ban, including hand watering, will be implemented. ▪ Athletic fields that receive water from the municipal water system must follow Level 2 watering restrictions. ▪ Watering permits cannot be obtained under Level 2. All previously obtained permits are void under Level 2 watering restrictions. Council Directive CD-ENGPW-4.4 Lawn and Landscape Watering Policy Level 3 Watering Restrictions Level 3 watering restrictions will occur at 93 percent water production firm capacity. The following restrictions may also be imposed in response to the Minnesota DNR placing the city in drought phase designations. ▪ A total lawn and landscape watering ban, including hand watering, will be implemented. ▪ Athletic fields that receive water from the municipal water system must follow Level 3 watering restrictions. ▪ Watering permits cannot be obtained under Level 3. All previously obtained permits are void under Level 3 watering restrictions. Minnesota Department of Natural Resources Drought Phase The Minnesota Department of Natural Resources maintains a statewide drought plan with five different drought phase levels. The drought phases require public water suppliers to follow conservation guidance as follows: ▪ Non-Drought Phase - Minimize water supply system losses and improve water use efficiency. ▪ Drought Watch Phase - Provide conservation information and request customers to implement voluntary measures to reduce water use. ▪ Drought Warning Phase - Implement water use reduction actions with a goal of reducing water use to 50% above January levels. ▪ Restrictive Phase - Implement water use reduction actions with a goal of reducing water use to 25% above January levels. ▪ Emergency Phase - Implement mandatory water use reduction actions with a goal of reducing water use to January levels. The City of Woodbury will react accordingly when drought phases are issued by the Minnesota DNR. This may include implementation of Level 2 and Level 3 restrictions to reduce water use.  Adopted: 2/26/14 Number: CD-FIN-5.10 Revised: _____ Mayor: City Administrator: COUNCIL DIRECTIVE For: Finance Recommendation from Audit & Investment Commission Subject: Water and Sanitary Sewer Utility Capital (approved 3/24/23) Asset Funding and Reserve Policy PURPOSE The purpose of this policy is to minimize the overall cost to the citizens of Woodbury for the operations of the water and sanitary sewer systems, and as a result, there are periods when a significant reserve balance may be present in the Water and Sanitary Sewer Utility Fund. Given the growth patterns of Woodbury and the life cycle of utility infrastructure, significant reserve balances are intentional and necessary in order to achieve the low cost objective. Positive reserve balances provide interest free funding capacity and a buffer against major uncertainty that is present in the life cycle assumptions of the utility infrastructure as well as uncertainties related to future water availability concerns. This policy establishes a framework for the capital asset funding approach and reserve balances of the Water and Sanitary Sewer Utility Fund. The Water and Sanitary Sewer Utility is an enterprise fund that accounts for specific services funded directly by fees and charges to City water and sanitary sewer customers. The fund is intended to be self-supporting and separate from other governmental funds. POLICY CONSIDERATIONS A. The reserve balance is defined as the difference between cash and investments minus current liabilities not including the current portion of bonds payable. B. The Chief Financial OfficerCity Administrator and Budget Manager Finance Director, as part of the annual budget process, shall prepare an analysis of the reserve balances as defined by this policy. C. The City Council will direct any changes to the assigned reserve amounts. This policy reflects the intended use of those funds and the policies of the City Council. CAPITAL ASSET FUNDING AND RESERVE BALANCE POLICY The Water and Sanitary Sewer Utility Fund target reserve levels are listed below: 1. Operations or Working Capital Reserve: CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Council Directive CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Page 2 of 3 This reserve provides working capital for the day-to-day operations and absorbs fluctuations in the cash balances. The operating reserve will be funded at a target level equal to 90 days of operating expenses from the following year’s adopted budget for the Water and Sanitary Sewer Utility Fund. Operating expenses are defined as personnel services, operating expenses and transfers to the General Fund. 2. Revenue Stabilization Reserve: This reserve provides a revenue source during revenue shortfalls that result from lower than expected customer consumption. The revenue stabilization reserve will be funded at a target level equal to 7.520% of the following years’s water and sewer revenue budget. 3. Debt Service Reserve: This reserve provides a means of protecting against the risk of nonpayment of debt. The City will maintain this reserve to be in compliance with the existing bond covenants at the time the annual budget and rate setting process begins. The debt service reserve will be funded at a target level equal to the following years principal and interest amount. The reserve calculation will include debt supported by the Water and Sanitary Sewer Utility Fund and accounted for through transfers to other funds. 4. Renewal and Replacement (Capital Asset) Reserve: The utilities physical assets represent a long-term investment and service commitment. The long- term horizon extends beyond the window of the near-term five year capital improvement plan, including projects that are not yet identified. All of the system or infrastructure assets that comprise the existing system represent a liability as they will eventually need to be replaced or rehabilitated. This liability grows continuously as construction costs increase over time and the system expands as the City grows. The purpose of this policy is to establish a reinvestment approach that provides a predictable and stable source of funding for renewal and replacement of capital assets. Target Funding Approach - This approach establishes a specific dollar amount of funding to be budgeted annually. The annual target amount is based on the renewal and replacement estimate from the latest third-party user rate analysis. This approach uses the pay-as-you go strategy for system renewal and replacement needs including equipment and rolling stock. Each budget year, a specific dollar will be budgeted and funded through the utility’s rate structure. Theoretically the utility will generate enough surplus cash to fully fund the utility’s long-term system and capital needs. The target funding amount per the latest third-party analysis is included as Attachment 1. Depreciation Funding Approach - This approach sets aside cash in the amount equal to the City’s annual depreciation. The annual depreciation is on capital assets with an initial cost consistent with City capitalization policy and an estimated useful life more than one year. This approach uses the pay-as-you go strategy for system renewal and replacement needs including equipment and rolling stock. Each budget year, a specific dollar amount will be budgeted for one year’s worth of CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Council Directive CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Page 3 of 3 depreciation and funded through the utility’s rate structure. The goal being the utility will generate enough surplus cash to fully fund the utility’s long-term system and capital needs. Debt Utilization and Considerations - Debt may be utilized to mitigate the effects offund large capital projects. The use of debt will be evaluated when the project cannot be financed using the depreciation target funding approach and the reserve balance drawdown would compromise the long-term financial capacity of the system renewal and replacement reserve. This policy will confine the use of long-term borrowing to capital improvements, equipment or projects that have a life greater than 15 years and a minimum cost greater than five million dollars. Debt may not be used to fund ongoing utility operations and maintenance costs that cannot be capitalized. Renewal and Replacement (Capital Asset) Reserve – This reserve balance will be the residual balance after the calculation of all other reserve requirements as listed above are met. This reserve may be used in combination with the issuance of debt to fund large capital projects or unexpected emergencies. Reserve Replenishment RESERVE REPLENISHMENT The four reserves will be reviewed and recalibrated through the normal annual budget and rate- setting process. Since expenses typically increase over time, the target depreciation funding amount will should also increase proportionally with increases in expenses meaning that rates would incorporate small annual increments of additions to the target depreciation funding amount. Adopted by the Woodbury City Council on February 26, 2014 – Resolution No. 14- Update adopted by the Woodbury City Council on __________ - Resolution No. ____ CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy  City of Woodbury, Minnesota Audit and Investment Commission March 24, 2023 To: City of Woodbury Audit and Investment Commission From: Jason Schirmacher, CFO/Controller Subject: Review of CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy Summary At the October and November meetings in 2022, Public Works Director Mary Hurliman introduced the Commission to the history of PFAS in the community, the State’s settlement, the resulting conceptual drinking water supply plan (CDWSP) and the City’s steps taken to this point and future plans to address PFAS, through water treatment.1 This content was intended to provide the necessary context to further review and analyze an ongoing water rate analysis and associated policy questions. The City has been working with a consultant, Carollo, to assist with the complex water rate analysis. Carollo reviewed Woodbury’s current rate structure and provide an overview of the financial needs of the Woodbury water system, irrespective of PFAS and treatment at the November meeting. The City has taken an approach of having Carollo build a comprehensive model, which scenarios can then be added for analysis if directed by the City Council. The Audit and Investment Commission will be asked to continue to provide guidance and analysis specific to utility rates at future meetings. However, as part of the comprehensive model being built, a recommendation from the Commission on an essential Council Directive (policy) is requested. The Commission had been previously provided CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy. Attached is a staff recommended red- lined version of the policy for Commission review and ultimately recommendation to the City Council. Key considerations include the fact that significant infrastructure and associated debt is being added to the City’s water system as we proceed with constructing a water treatment plant. The City will also likely be shifting from a mostly pay-as-you-go community to needing to manage debt to support the Woodbury water system. An update from previous meetings is that the City Council has provided clarity that water softening will not be included in the treatment plant, which had a significant capital component affecting our analysis and model. Provided in the Background are further details on staff’s recommended changes to the policy as provided. Also attached is the 2023 Budget for the Water and Sewer Utility Fund for reference. 1 See https://www.woodburymn.gov/321/Addressing-PFAS-in-Groundwater for further and the latest information. Audit and Investment Commission March 24, 2023 Page 2 Recommendation Commissioners are asked to review and provide comments on the provided red-lined policy and advise staff of any additional information that can be provided to assist. Staff will be seeking the Commission’s recommendation on the policy to the City Council. Should the Commission be ready to provide that recommendation at this meeting, then a motion would be requested. If not, a further meeting will be scheduled to address the Commission’s comments. Fiscal Implications Fiscal implications will be an ongoing analysis throughout the rate model process and will be partly dictated by final funding decisions on and funding sources for the required water treatment system infrastructure. The policy as provided will provide for the annual recommendations by staff to the City Council for rates. Policy Consistent with Council Strategic Initiative – Drinking Water – Water Treatment Implementation. Background Staff has recommended several changes to CD-FIN-5.10 Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy as well as several components not to change. Provided are further details on recommendation in an effort to maximize our meeting time.  Operations or Working Capital Reserve: Staff recommends the continued policy of a target level equal to 90 days of operating expenses. GFOA recommends a target working reserve for operating expenses of between 45 to 90 days. The Water and Sewer function only has one fund that it operates in unlike some functions that operate in the General Fund and may also have Special Revenue and Capital funds supporting its operations. For this reason, staff did not recommend a reduced target level. Staff also did not recommend a change due to current quarterly billing cycles and cash flow implications.  Revenue Stabilization Reserve: Staff recommends a change from 20% of the following year’s water revenue to 7.5% of the following year’s water and sewer revenue. As the rate model was being developed by Carollo, it was evident that the water function revenues are subsidizing the sewer function. Therefore, the model has been developed to try to balance out each function within the fund so that each is generating enough revenue to support its specific needs. With this approach, it was then recommended that the revenue stabilization reserve should then draw off each function’s revenue generation instead of just water’s. Audit and Investment Commission March 24, 2023 Page 3  Renewal and Replacement (Capital Asset) Reserve: Staff has recommended a change from a target funding approach to a depreciation funding approach. There are several positive features of this approach:  It is an easily identifiable target each year. The City has a fixed asset system which can easily produce the depreciation for the year being budgeted for and that depreciation amount is easily included into the rate model to help determine what rates will be needed to fund the operations and the reserve targets.  The target funding approach that is in the current policy identified a specific dollar amount to fund each year for replacements. The issue is that amount had to be reevaluated each year to account for the additional capital assets being added by our developing community. The depreciation funding approach updates itself by the work the Finance Division already does, as new capital assets are added to the system. Approach is therefore easier to maintain and clearer.  In City developer agreements, the developer is responsible for infrastructure needs including streets, water, sewer, storm water, etc. Although the City doesn’t fund these capital asset initially, the City does take possession of those assets upon completion and is responsible for their repair, maintenance and eventual replacement. The other funding models, such as the target approach in the existing policy or using the Capital Improvement Plan (CIP) doesn’t fully consider these assets and eventual replacements because the City doesn’t have these assets identified in those approaches. In the depreciation funding approach, the developer funded assets are recorded as contributed assets at the time we take possession and are added to the City’s fixed asset software and depreciated. This automatically brings these assets into the replacement funding target by work the Finance Division already does.  Options Considered, Not Recommended: Staff considered using the CIP for the funding goals, however this approach was problematic. The CIP is not a consistent amount each year, so an average needs to be used (5-10 years) which is difficult to then work into the rate model. The CIP approach also takes more analytical work because the CIP is a mix of replacement of assets and new assets. The new asset construction could use the reserve as a funding source, but only if it’s a smaller project that wouldn’t deplete the reserve which was built up for replacement. The CIP approach doesn’t factor in the replacement of developer contributed assets because those replacements wouldn’t show until they’re in the CIP plan for replacement giving up the opportunity to build up funds for their replacement over time. Another consideration staff reviewed was use of a gross margin or margin percentage. This method would not be feasible or recommended for the Renewal and Replacement (Capital Asset) Reserve, Debt Service Reserve or the Operations or Working Capital Reserve. While it could potentially be considered for the Revenue Stabilization Reserve, that reserve is solely focused on revenue shortfalls from potential lower customer consumption and doesn’t take into consideration expenses, which the margin approach would. Determining what the margin percentage should be (i.e. 20%, 30%) would need to be continually reviewed and reevaluated adding instability to the model process. Audit and Investment Commission March 24, 2023 Page 4 Overall, a gross margin approach is a more broad brush analytic that isn’t as targeted to achieving the goals for each reserve and was therefore not recommended.  Prioritization of Funding Reserves: In the rate model projecting out future rate increases with future CIP activity, there are years where we will and will not be able to fully fund all four reserve types. For this reason, staff made the recommendation that funding 100% of the annual deprecation would be our capital replacement funding goal, but also putting into the policy that the capital replacement reserve would be the last priority after the other three reserve’s annual funding goals have been met. We will know the annual depreciation amount funding goal during the annual budget and rate setting process allowing for staff to make the determination on how much we can reasonably raise rates to fund all four reserve types 100%. The capital replacement reserve is the last priority in the policy as it can potentially be “underfunded” each year because debt issuance is always a funding option for capital asset replacement. For the other three reserves in the policy, we would never want to issue debt for the purposes of those reserves, therefore making them a higher priority for funding annually. At the meeting, staff will provide a further thorough review of proposed changes and recommendations. Written By: Jason Schirmacher, CFO/Controller Approved Through: Angela Gorall, Assistant City Administrator Attachments: 1. Water and Sanitary Sewer Utility Capital Asset Funding and Reserve Policy (CD-FIN-5.10), Staff Red-Lined 2. 2023 Budget for Water and Sewer Utility Fund