1. Metropolitan Council Environmental Services A Clean Water Agency 2010 Budget and Rates Preliminary Info Jason Willett, MCES Finance Director Presented to the Environment Committee May 12, 2009

2. 2 Budget Calendar April-May: Budget & Rate Issues Discussion Today: Preliminary Budget & Rate Information May 26:Proposed Budget & Rates to EC June 18-30: Customer/stakeholder meetings July: Council adoption of 2010 rates Sept.–Oct.: ES Capital Budget/CIP finalization December: Budget adoption (part of Unified Budget)

3. 3 Today’s Discussion 2010 preliminary base budget 2010 preliminary rates (for base budget) Impact of recession on SAC fund and rates Identified budget options: — Use of operating reserves — Less Pay-as-You-Go (PAYG) — Reserve capacity methodology improvements

4. 4 Base Budget Highlights No operating reserves used PAYG of $7 million No reserve capacity methodology changes SAC reserve fund will drop below its established minimum balance (under all scenarios)

5. 5 Base Budget Highlights Debt Service reduced by capital project cost reductions; the six-year CIP was reduced from $918 million to $789 million — Deferred major growth projects: – Blue Lake expansion – New Hastings plant, and Northeast and Northwest interceptors — Delayed other growth projects by about one year — $8-$10 million ARRA grants projected — Includes use of some excess Debt Service Reserve

6. 6 Base Budget Highlights Labor: — No wage rate raises (except contractual) — FTEs not increased — Reduction of budget for overtime — Labor vacancy assumption of $2 million — 10% health care cost increase

7. 7 2010 Budgeted FTEs Treatment Services 405 GM Office21 EQA 119 Interceptor Services78 Technical Services 84 Temporary Ops Trainees -12 Total 695

8. 8 FTEs: 12-Year History

9. 9 Base Budget Highlights Electrical costs reduction for conservation Reduction in fuel cost adjustment for electricity $500K reduction of interdivisional charges from Central Services Includes water supply funding from State

10. 10 2010 Base Budget: Revenue/Sources (7 million PAYG) Revenue/Sources Budget Percent (in millions) 2009 2010 Change SAC Transfer 37.9 38.4 1.3 Industry-specific charges 10.0 9.6 -4.0 Other 3.5 3.6 2.9 Subtotal Revenue 51.4 51.7 0.6 Revenue from MWC 161.3 167.3 3.7 TOTAL Revenue 212.7 219.1 3.0

11. 11 2010 Base Budget: Expenses/Uses Expense/Uses Budget Percent (in millions) 2009 2010 Change Debt Service 90.5 92.1 1.8 MCES Labor 59.3 60.3 1.7 Non-Labor 48.3 49.3 2.1 Interdivisional 10.6 10.4 -1.9 PAYG 5.0 7.0 40.0 TOTAL Expenses 213.7 219.1 2.5 SURPLUS (DEFICIT) -1.0 0.0

12. 12 Projected Debt Service Debt assumptions: Most recent capital spending projection (dated 5/5/09): Council bonds @ 5%, PFA loans @ 3.5% ($50M/yr with $80M in 2009), $7M PAYG in 2010 increasing $2M/yr thereafter. Debt Service Use of D/S Reserve Budget Debt Service Percent Increase 201092.5(.4)92.11.8 201194.7(.4)94.32.3 201298.6(.4)98.24.2 2013107.1 9.1 2014114.8 7.2 ($s in millions)

13. 13 Preliminary 2010 Rates and Charges 20092010 Percent Change Municipal Wastewater Charges ($s in M)$161.32*$167.353.7 Service Availability Charge (per unit)$2,000**$2,20010.0 Industrial Strength Charge (TSS $/lb.)$.152$.1605.3 Standard Load Charge (per 1,000 gal.)$42.71$48.9714.6 Holding Tank Load Charge (per 1K gal.)$2.41$3.02***25.0 Portable Toilet Waste Rate (per 1K gal.)$55.68$62.4812.2 Collar County Load Charge (per 1K gal.)$52.71$58.9711.9 Industrial Load Charge (TSS $/lb.)$.311$.3244.2 Industrial Permit Fees Varies by user type 6.7 *Equals $1.82 per thousand gallons **Does not meet policy minimum ***Assumes cap on annual increase Base Budget

14. 14 Service Availability Charge Economic effect of recession on SAC: — 2008 SAC units of 10,470 was the lowest since SAC program inception in 1973 — In 2010, the SAC reserve fund is projected to drop below the minimum balance (Council policy 3-2-5); may occur in 2009 — A $200 increase is proposed for 2010 if no improvements are made to reserve capacity methodology

15. 15 5-Year SAC Units Paid SAC Fund: Used for reserve capacity portion of capital costs (M.S. 473.517(3)) Note: 2009 is estimated.

16. 16 SAC Reserve $ in Millions Year-end SAC Fund Balance Minimum Balance Actual Results Projections 2007 20082009 2010 Balance at Year-End $72.2 $55.8$36.0 $25.0 Minimum Balance by Policy $38.4 $43.8$37.4 $38.6 Minimum Balance Policy Requirement = the average required SAC transfer projected for the next five years.

17. 17 SAC Changes/Improvements Base: — Council approval will be sought to allow SAC reserve fund to drop below established minimum — SAC credit change expected to increase number of units paid by about 2,000 RECs per year (included in base) — Add-on Service Charges shifted to SAC fund — Delayed spending on certain capital projects to reduce debt service and the corresponding SAC transfer Options: — Methodology improvements in plant and interceptor capacity measurement — Legislation to shift some SAC costs to Municipal Wastewater Charges

18. 18 2,000* 1,000 Flat at 10,000 Annual SAC Rate increases under different recovery scenarios**: * This is used in MCES projections (8,000 SAC units projected in 2009 increased 2,000/yr to a plateau of 18,000 in 2013). **All scenarios incorporate an expected increase of about 2,000 units/yr due to the credit system changes. 2010 10% 13%25% 2011 9% 11%20% 2012 8% 12%20% 2013 10% 11%18% 2014 10% 10%18% 2015 10% 10%18% Service Availability Charge

19. 19 Strength Charges Paid by connected industries for wastewater strength in excess of domestic waste Total suspended solids (TSS) over 250 mg/liter Chemical oxygen demand (COD) over 500 mg/liter 2009Proposed 2010 Increase* Excess TSS: $.152/lb. $.160/lb. 5.3% Excess COD:$.076/lb. $.080/lb. 5.3% * Treatment works O&M increased 4.3% combined with a 1.2% decrease in the 10-year average flow.

20. 20 Load Charges Paid by haulers that discharge truckloads of wastewater into our system (includes volume, strength and facilities components) (per thousand gallons)20092010 Percent Increase Standard Load Charge$42.71$48.9714.6 Holding Tank Load Charge2.413.02**25.0 Portable Toilet Waste Rate55.6862.4812.2 Collar County Load Charge52.7158.9711.9 Industrial Load Charge (TSS)*.311.3244.2 *COD component of Industrial Load Charge is 50% of TSS component. ** Assumes a 25% annual cap on the rate increase.

21. 21 Facilities Component Adopted by Council in July 2004 Includes capital and operating costs for sites that are completed and in use before new rates become effective Capital calculated as the annual debt service on costs divided by prior 5-year average annual gallons hauled (to get a rate per 1,000 gallons) In 2010 this component increases from $3.37 to $7.98 per 1,000 gallons due to completion of the Metro Plant disposal site (cost $4.3 million) Paid by haulers to reimburse MCES for capital costs to upgrade and consolidate disposal sites

22. 22 Metro Plant Disposal Site

23. 23 Metro Plant Disposal Site

24. 24 Metro Plant Disposal Site

25. 25 Metro Plant Disposal Site

26. 26 Rate with 25% annual increases 2008 $1.93 2009 2.41 2010 3.02If the whole facilities component 2011 3.77is included in the Holding Tank Load 2012 4.71Charge, the 2010 rate would be 2013 5.89$9.78 2014 7.36 2015 9.20 2016 9.78 Should the increase be capped as it was in 2009? Holding Tank Load Charge

27. 27 2010 Fees Quarterly Reporters$4,675–5,600 Semi-annual Reporters$ 950–3,700 Annual Reporters$ 600–950 Liquid Waste Haulers$ 600–950 Special Discharge$ 600–950 Permit fees increase 6.7% from 2009 (MWC increase plus 3% add-on to phase up to cost of service) Using Base Budget: Industrial Discharge Permit Fees

28. 28 Identified Budget Options 1.Reduce PAYG 2.Use some excess operating reserves 3.Modify reserve capacity; computation method: Plants Interceptors

29. 29 Option 1: Reduce PAYG Rationale for $2 million/year increase to pay for rehabilitation projects: — Ongoing expenses of maintaining system — More predictable than growth or quality improvements — About 40% of capital expenses are for rehab projects (about $50-$75 million per year)

30. 30 Option 1: PAYG Factors Pros: — Avoided interest expense — Adds flexibility into Annual Budget — Positive factor for bond rating Cons: — Higher MW Charges during transition — Equity claim: debt financing better matches payments and future beneficiaries of the system — Opportunity cost

31. 31 Option 1: PAYG Impacts Higher Municipal Wastewater Charges (MWC); more than 20 years before the reduction in annual debt service would offset the increased MWC Annual debt service, debt outstanding and the ration of debt service to total expenses would decrease Note: $7 million of PAYG is included in 2010 Base Budget

32. 32 With no PAYG in 2010 & forward PAYG Outstanding Debt millions With $2M/yr PAYG increases (Projected)

33. 33 Debt Service/Annual Budget Debt Service as a Percent of Annual Budget* *Assumes the O&M portion of the budget increases 3% per year; includes portion of Debt Service paid by SAC transfer. With PAYG (increased $2m/year) With no PAYG in 2010 & forward

34. 34 Option 2: Use of Reserves Operating Reserve Balance (in millions) Reserve Balance at end of 2008 $21.5 2009 Projection:Budgeted use1.0 Contingency use0-2 Surplus/DeficitTBD Estimated balance at end of 2009: 18.5-20.5 Target Balance: 10% of 2010 Operating expenses* 12.0 Excess Available: $6.5-$8.5 *Council policy 3-8

35. 35 Option 3: Modify Reserve Capacity Using a reduced Reserve Capacity number reduces the SAC Transfer (SAC Fund $s  Wastewater Fund) — SAC rate increase can be less or the SAC reserve fund balance higher — Municipal Wastewater Charge increase must make up the difference

36. 36 Option 3: Modify Reserve Capacity Plants: — The reserve capacity calculation currently separates the capacity of liquids treatment (131BG) and solids treatment (126BG); the lower number could be used for “plant” capacity Consistent with M.S. 473.517 subdivision 3 language

37. 37 Option 3: Modify Reserve Capacity Interceptors: — Capacity currently used to calculate reserve capacity is 249.7BG, based on a minimum peak flow factor of 1.5:1 — No authoritative source of peaking factors — Used capacity includes capacity for peaking (non-excessive) — If a peak flow factor of 1.7:1 is used, interceptor capacity changes to 228BG Reserve Used

38. 38 Option 3: Modify Reserve Capacity No Changes One Change* Both Changed* SAC Rates (urban) with capacity changes: *If plant capacity or interceptor capacity is independently changed, as both plant and interceptor changes have about the same impact. Note: Rural Growth Centers will have separate and higher SAC rates. 2010 2,200 2,1002,100 2011 2,400 2,2502,200 2012 2,600 2,4502,350 2013 2,800 2,6502,550 2014 3,000 2,9002,800 2015 3,200 3,1503,050

39. 39 Rate Impact of Choices Base Case Options*: $5M PAYG $3M PAYG Modify plant capacity Reduce interceptor capacity to 228BG Use $2M of reserves MWCSAC 3.7% 10.0% 2.5% no impact 1.3% no impact 4.7% 5.0%** 4.5% 5.0%** 2.5% no impact Rate Increase from 2009 to 2010: *Any combination is available. Bond Rating Impact neutral mildly negative neutral mildly negative

40. 40 Customer Budget Meetings Brookview Community Center, Golden Valley — Thursday, June 11, 2009 — 9:30–11:30 a.m. League of Minnesota Cities (plus Metro Plant tour), St. Paul — Tuesday, June 16, 2009 — 9:30–11:30 a.m.

41. 41 Questions, Concerns