Rate Increase Explanation

2021 RATE INCREASE EXPLANATION

On December 7th 2020, the Orono City Council approved the 2021 Budget and Fee Schedule.  The Fee Schedule included increases in the City’s utility rates.  The rate increases are as follows: 10% to tiered Water rates, 10% to Sewer, 1% to Stormwater, and 8% to Recycling. These increases are needed for a variety of reasons which includes the implementation of best practices and the City’s goal to be able to fund infrastructure needs through utility rates rather than through special assessments and borrowing. 

The best practices include maintaining a 25% operating reserve and a 25% capital reserve.  The operating reserves are meant to ensure that the Utility has at least three months of operating cash on hand.  These reserves are necessary to ensure that utility operations can continue in case there is a significant disruption in cash flow. 

The 25% capital reserve is needed to normalize expenses related to infrastructure maintenance.  Many of the City’s water and sewer mains were installed in the 1960’s and 70’s.  This infrastructure now requires major maintenance and in some cases replacement.  In the past, the City relied on special assessments and the sale of bonds to fund major infrastructure projects.  Special assessments have proven to be very unpopular with property owners and commonly range from $10,000 to $25,000 per property. 

Selling bonds to fund an infrastructure improvement may eliminate the need for a special assessment, but does add significant interest expenses to projects.  For example, the City will pay $165,000 of interest on outstanding bonds in 2021.   The bond payments (including the additional interest) are paid through utility rates.  By adding interest, relying on bond sales will result in higher rates over time.  So the painful rate increases being taken now will actually keep future rates lower. The creation of a long-term rate structure is as follows:Since City property taxes do not fund utility services, those costs must be recovered through monthly utility fees to residential and commercial properties within the City. The 2021 rate adjustments are based on a rate study analysis to ensure that each utility customer pays their proportionate share of the costs to provide services.

In addition to the above factors, each utility has other pressures on rates:

 Water 

The water fund has historically been operating at a loss. Cash flow needs were being artificially maintained by the use of revenue from leases with telecommunication antennas on the water towers. These funds are now being used to fund city road projects. In order to achieve operating profit in the water fund, rates need to be increased.

Sewer 

In recent years the sewer fund has mostly operated at a loss. Non-operating revenues (Special Assessments) have consistently offset the losses. However, these special assessments will be paid off over the next few years and the funding will need to be recovered by rates.

By far, the expenditure item that is driving the needed rate increases are charges payable to the Metropolitan Council. These charges have increased from $394,529.76 in 2016 to $700,600 in 2021. This is an increase of 78% in only five years. The increase from 2020 to 2021 alone totals $81,200.

Storm Water 

Stormwater fees provide the resources necessary to achieve the city’s surface water quality goals and meet regulatory requirements.   The City of Orono highly values the natural resources within its jurisdiction and seeks to protect surface and groundwater storage systems, correct flooding and water quality problems, prevent erosion into surface waters, promote groundwater recharge, enhance wildlife habitats and water recreational facilities, and improve the water quality of all water resources.    As a matter of practice, the city works to incorporate stormwater improvements into other infrastructure projects such as roads, parks and utilities whenever possible.   

In 2020, rates saw a significant increase of 90%, which have helped stabilize the rate structure so future rates are expected to be minimal with 2021 at only a 1% increase.

Recycling 

The City’s contract for recycling services increase of 8% allows the City to cover 25% operational reserve and the 4% increase in expenditures per the recycling contract. 

Information on the utility rate study can be found below. If you have any additional questions about the rate changes, please contact: 

Questions on the City's Capital Improvement Plan and 2021 Budget can be directed to the Finance Department at oronofinance@ci.orono.mn.us.

Additional Resources