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Highway 93 South Utility Extension11 City of Kalispell f a a Post Office Box 1997 - Kalispell, Montana 59903-1997 -Telephone (406) 758-7000 Fax - (406) 758-775$ REPORT TO: Honorable Mayor and City Council FROM: Chris Kukulski, City Manager SUBJECT: Municipal Water and Sewer Utility Extension to Four Corners MEETING DATE: May 19, 2003 BACKGROUND: The first formal action taken by the City dealing with the extension of utilities south to four corners was taken on April 21, 1997. A motion to award a $121,000 contract to Forsgren Associates and Carver Engineering was passed by the Council (see attached minutes 4/21/97). This contract was amended to include redesign work required by MDT inspired changes that relocated the water mains. To date $129,490 has been spent by the City on this project. This does not include all of the hours our staff have spent working on this project over the past six years. Attached are copies of Resolution 4564 and Ordinance 1316. Both actions specifically deal with extending utilities south to four corners. Even though the City had incurred cost for this project ($121,000 Forsgren bid) the State would not begin incurring costs for a project that included the City's utility extensions until they received concrete assurances that the City components of the project was officially a go. On July 10, 2000 the City Council passed Resolution 4564. Section I - That the City Council hereby commits the City of Kalispell to funding the extension of municipal water and sewer utilities South from the City limits to Four Corners during the reconstruction of U.S. Highway 93 South. Based on the commitment of Resolution 4564 the State began working directly with Forsgren (Forsgren also holds the design contract for the highway project) on integrating the utility project into the overall reconstruction of US — 93. The State has been purchasing right-of-way and has designed their project being assured that the City is its partner. Specifically a minimum of four properties along the utility route will be connected to city services by the State because their septic systems are being displaced by the highway project. This commitment by the City has most definitely affected the State's negotiations with property owners for compensation as a result of the construction project as well as the design and location of all other private and public utilities (gas, electric, telephone etc.). In addition to the motion awarding the design bid and the Resolution committing to the State that the project will be built, the City Council adopted Ordinance 1316 on June 21, 1999. Ordinance 1316 was written and approved for the sole purpose of; "setting forth a method and formula for the recovery of costs associated with the extension of water and sanitary sewer and sanitary sewer lift station facilities from property anticipated to be benefited via their installation. " This ordinance established a program for applying a surcharge to be added to the City's regular utility connection fees. This formula has been used repeatedly to advise the State in their negotiations with property owners who will eventually need access to City utilities once their existing systems have been displaced by highway construction. Affected property owners will receive a cash settlement from the State to pay the City's fees at the time of connection. This critical project is essential to improving south Kalispell. The project ensures that future urban development to the south is placed on city utilities within the city of Kalispell rather than septic systems in the county. The project has been in the planning stages for over six years and the City is obligated to build the project. Both the State of Montana and the City have already incurred a considerable amount of cost in the pre -construction stages of this project. Also attached is a letter from Tom Gould, Vice president of EES regarding the issue of "Back -Bone" utility extensions and how they are funded within the utility industry. In speaking with the Department of Transportation I believe that not only will the city compromise its working relationship with the State but will expose the City to a sizable liability from a failure to follow through with the project. RECOMMENDATION: The City Council re -affirm the action of previous Councils to extend water and sewer utilities in conjunction with the US 93 highway improvement project FISCAL EFFECTS: The cost for the project is estimated to be $2,644,730. The project is included within the City's 2002 Facility Plan with financing as recommended in the 2003 Rate Study and analysis. Respectfully submitted, Chris A. Kukulski, City Manager Report Compiled: May 19, 2003 r, 1026 1026 The motion carried with Donahue, Kennedy and Rauthe voting against and Collins, Nystul, Larson, Granmo voting in favor. The twice amended motion carried upon roll call vote with Collins, Granmo, Kennedy, Larson, Nystul and Rauthe voting in favor and Donahue voting against. Since amended there will be a second reading at the next regular meeting. Sykes' Sewer and Water Bill Postponed from April 7, 1997 meeting to this date. Krepps recommended to reimburse Syke's as per the City legal rules and regulations. If new precedent is set, there may be a need to re -analyze the policies. The responsibility for the private system changes are shared by the private owner and their plumber. No notification to the City was made until October, 1996. Nystul moved that a refund for the water and sewer be made of all but the minimum billing that is appropriate for the size of meter that was in there and realizing the minimums changed with our rates during that time. The motion was seconded. Donahue moved to amend that compensation be based on the bi-monthly charge of $365.46 rather than the other 3 different charges which are higher than that so that will reduce the total amount to be paid by $100 or more. The amendment died for lack of a second. Granmo moved to amend to withhold only the minimums for the water system. The motion was seconded. The amendment failed with a vote with Collins and Granmo voting in , favor and Kennedy, Larson, Nystul, Donahue and Rauthe voting against. Larson spoke against the motion and Rauthe spoke in favor. The motion carried with a vote with Kennedy and Larson voting against and Collins, Granmo, Nystul, Donahue and Rauthe voting in favor. Moved From Consent Agenda E. Award Bid -Highway 93 South Sewer and Water Bids were received from Forsgren Association and Carver Engineering, Morrison & Maeirle, Billmayer and WMW-Whitefish for the Highway 93 South Water and Sanitary Sewer Improvements project. Asst. Engineer John Wilson recommended the award to Forsgren Association and Carver Engineering in the amount of $121,000. There was discussion. Nystul moved the approval of the bid award to Forsgren Association and Carver Engineering in the amount of $121,000. The motion was seconded. The motion carried upon vote. Kennedy requested a budget schedule. FOR YOUR INFORMATION Next Work Session April 28, 1997 7:00 P.M. Next Regular Meeting May 5, 1997 7:00 P.M. Airport Advisory & Authority Meeting After May 5 Regular Meeting RFQ Discussion -Airport Master Plan RESOLUTION NO. 4564 A RESOLUTION COMMITTING THE CITY OF KALISPELL TO FUNDING THE EXTENSION OF MUNICIPAL WATER AND SEWER UTILITIES FROM THE CITY LIMITS TO FOUR CORNERS DURING THE RECONSTRUCTION OF U.S. HIGHWAY 93 SOUTH. WHEREAS, the State of Montana, Department of Transportation, will be reconstructing U.S. Highway 93 South from Seventh Street within the City limits to an area commonly known as Four Corners in the near future, and WHEREAS, a portion of that reconstruction area, from the City limits to Four Corners, is not currently served by City water and sanitary sewer utilities, and WHEREAS, the estimated cost of extending municipal water and sanitary sewer utilities to the area is estimated to be $2,335,000, and WHEREAS, during reconstruction is the most desirous time to extend the municipal utilities needed to Four Corners in order' to take advantage of the reconstruction of U.S. Highway 93 South reconstruction. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF KALISPELL, AS FOLLOWS: SECTION I. That the City Council hereby commits the City of Kalispell to funding the extension of municipal water and sanitary sewer utilities South from the City limits to Four Corners during the reconstruction of U.S. Highway 93 South. SECTION 11. That the State of Montana, Department of Transportation must request annexation of U.S. Highway 93 from the City limits to Four Corners prior to the completion of construction. SECTION III. This Resolution shall become effective immediately upon its passage by the City Council. PASSED AND APPROVED BY THE CITY COUNCIL AND SIGNED BY THE MAYOR OF THE CITY OF KALISPELL, MONTANA, THIS 10TH DAY OF JULY, 2000. W0 m.F-•Bahar*i Wm. E. Boharski Mayor Attest: 'Zz�-� — Theresa White City Clerk ORDINANCE NO. 1316 AN ORDINANCE ESTABLISHING A PROGRAM TO RECOVER UTILITY COSTS ASSOCIATED WITH THE INSTALLATION OF MUNICIPAL UTILITIES IN CONNECTION WITH THE RECONSTRUCTION OF U.S. HIGHWAY # 93 SOUTH. WHEREAS, the State of Montana, Department of Transportation, anticipates reconstructing U.S. Highway # 93 from Seventh Street within the City limits to an area commonly known as Four Corners in the year 2000 or 2001, and WHEREAS, MDOT and the City of Kalispell have agreed in principal to a cost sharing program for the installation of water, sanitary sewer and a sanitary sewer lift station upgrade from the current City limits to the Four Corners area, and WHEREAS, the area potentially benefitted by the extension of said utilities lies outside the boundaries of the City and potentially benefitted property has not paid any of the capitalization cost of the existing water delivery or sewer collection and treatment facilities, and WHEREAS, the costs for the installation of these new utilities is estimated to be $1,874,500.00, and WHEREAS, existing city policy contains no method by which the City can recover the cost of utilities extended to an area not within the boundaries of the City, and WHEREAS, city policy does anticipate that, prior to the delivery of utility services to areas outside the City, benefitted property would petition for annexation to the City, and WHEREAS, the city Council has determined that the best interests of City utility customers would be served by establishing an ordinance setting forth a method and formula for the recovery of costs associated with the extension of water, sanitary sewer and sanitary sewer lift station facilities from property anticipated to be benefitted via their installation. NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF KALISPELL, AS FOLLOWS: H;\attsec\wp\ord\US93costrecovery V SECTION-1. That the costs of water, sanitary sewer, and sanitary sewer lift station installation associated with the U.S. Highway #93 reconstruction shall be recovered from each parcel of property benefitted from said utility extension, at the time of its connection, based upon the following formula: 1. 45% of the total cost shall be recovered from the property owners connecting to said utilities based upon that part of the whole cost which their property's area bears to the area of the service area of 7,977,219 square feet; and 2. 45% of the total cost shall be recovered from the property owners connecting to said utilities by use of a surcharge on the established connection fee, at the time of connection, such surcharge shall be an additional 35% of the connection fee for water service, and an additional 37% of the connection fee for sewer service, of the respective connection fees then in effect; and 3. 10% of the total cost shall be recovered from the property owners connecting to said utilities based upon that part of the whole cost which the frontage of their property on US 93 bears to the lineal feet within the service area of 10,722 lineal feet. SECTION II.s- Determination as to the total cost of the cost installation of the water, sanitary sewer utility and sanitary sewer lift station shall be based upon the successful bidder's final installed price, together with reasonable engineering costs, of said improvements as calculated by the Department of Public Works. SECTION III. Funds received as part of the cost recovery program herein authorized shall be deposited in the respective funds from which they were H;\attsec\wp\ord\US93costrecovery I ___j dedicated to pay for the utility improvements in proportion to the total of those dedicated from each fund. PASSED AND APPROVED BY THE CITY COUNCIL P4D SIGNED BY THE MAYOR OF THE CITY OF KALISPELL, MONTANA, THISOZ/!", �� DAY OF DUNE, 1999. Attest: Theresa White City Clerk H;\attsec\wp\ord\US93costrecovery I I - Wm. E. Boharskl"'- Mayor ` NVATERJSEWER UTILITY SERVICE AREA 9 A .a n �.. ;" Y•.� "/ wr u'u�u u'uf ul`.�wlw 79 '•' wi 1K. 1{ wura � PROPOSED NEW ts� w--- GRAVITY EXTENSION �•• I I N OF MONK LINE i • ]ua• Y,a. f t ' may" ;) `w.. i ¢ a t ycv y i 20 47 N EW 6°/• u'+ ?, w e xa "'--'--------j I FORCE MAIN; `� ��. _ N��� '�7, i--•p— LOT! 6 aw.n I rca rtt _- ----------------------- .ta • a , t i 71u •m.. 1 xa. NEW 6° GRAVtTY SEWER COLLECTION MAINS BOTH , SIDES OF HIGHWAY i 1 yy LDT 7 i r. . >a � >o. ¢ � • pU r � a � 1 LOT 8 1A Ulf I us \ t tttc y" ! sou awa I 1 u i I t• t. � { 1. t of -- Y iava; ! mwf �� ��,�, APPROXIMATE � i•a•! taw: ,,,, , a SERVICE AREA , FISHESUBDIVISION R ' t]N +xM6 CY / NEW SEWAGE BOtJNDAR`! LIFT STATION 1"-•� 1 ' � a tt o�t• y 1 1 � `-- � aust.•tesx � G , 1 TH +--------------------- 1 l„— op t , 1 v ] e ' t. a loom 1 .. L.,r•� r 4+. May 16, 2003 Mr. James C. Hansz, P.E. City of Kalispell 312 First Avenue East Kalispell, Montana 59903-1997 Subject: Development and Financing of Utility Infrastructure EES Project #3-02-252 Dear Jim: The City Council is in the process of reviewing the proposed rate adjustments for the water, sewer and storm water utility. EES has developed financial plans and recommended rate adjustments for each of the utilities to support the City's adopted Water, Sewer and Storm Drainage Facility Plan, as prepared by HDR Engineering, Inc. Included within the Facility Plan were a substantial number of growth or capacity related projects. The City Council is reviewing the issue of whether the growth/capacity related improvements should be fully funded up -front by developers. This letter is intended to provide our opinion of the typical financing approaches used by municipal utilities to fund growth related infrastructure. It is important to understand in this discussion that EES is not taking a position on the appropriateness of constructing any of the projects contained in the City's Facility Plan. Rather, we are simply trying to provide our perspective of typical industry practices as it relates to the financing of those projects. Most utilities plan and construct their system to accommodate expanding capacity requirements. Failure to have sufficient capacity available on the system leads to building moratoriums. In the past, EES has worked with a very small number of clients that were in this position. In those rare instances, the utilities were unable to obtain additional water supply resources to support new development. Therefore, the vast majority of utilities plan and construct capacity related infrastructure, well in advance of developer connections, to accommodate future growth. The important issue is how these capacity expansions and extensions are financed and paid for. The first distinction that EES makes is that capital projects may be divided between "on -site" and "backbone" infrastructure improvements. An example of an on -site project is the development of a subdivision. Utilities typically require the developer to provide and finance the infrastructure, within the development site, to support that specific development. As you move away from the development, "backbone" infrastructure provides the facilities necessary to deliver or meet the customer's commodity requirements. For a water utility, the backbone infrastructure includes the supply, treatment, storage and major transmission and distribution Mr. James C. Hansz, P.E. May 16, 2003 Page 2 lines of the system. For the wastewater utility, the "backbone" infrastructure includes the wastewater treatment facilities and major interceptors and collection lines of the system. "Backbone" infrastructure is typically developed by the utility in advance of on -site development connections, and developers are not expected to fully fund in advance the "backbone" improvements. The purpose of system development charges is to "reimburse" the existing customers for the investment made in those "backbone" improvements (i.e. capacity). The key reason that "backbone" improvements are constructed and financed in this manner is that these improvements are typically large expansions of capacity, such that it supports large increments of growth on the system. As an example, the wastewater treatment plant is expanded in this manner. Therefore, it would be impractical to expand the wastewater treatment plant to accommodate the expanded capacity requirements of a new development with 10 homes. Instead, a wastewater treatment plant is, for example, expanded in increments to support 1,000 new homes. At the same time, it would also seem difficult to have a group of developers "band together" at one time, to finance an expansion of the plant to support capacity requirements over the next five to ten years. System development charges solve that dilemma, and reimburse the existing rate payers for the investment in excess capacity that they have made. The City Council has noted that the implementation strategy associated with the City's Growth Policy requires developers to install infrastructure needed to serve their development. This statement, taken to the extreme would require the developer to install sufficient facilities from source of supply to the customer's tap within a development. Therefore, the key question that arises from the City's policy statement is whether this requires the developer to install the "backbone" infrastructure to serve a new development (e.g. expand the City's water supply and wastewater treatment plant). Based upon our very limited knowledge of the policy and how it was developed, EES would likely conclude that was not the intent of the City's policy. Rather, the policy, in our opinion, was intended to mirror the traditional utility financing approach of the developer installing the "on -site" infrastructure needed to serve their development, with the City constructing and financing the "backbone" infrastructure, and being reimbursed via an SDC. In some cases, developers may be required to pay for extensions of mains beyond the subdivision that serves only their needs. As an example, a developer may request service which requires the extension of a main past a number of vacant parcels. The City may require the developer to pay for that entire extension, and then through a "latecomer or reimbursement agreement" the developer is reimbursed for the excess capacity built into that extension as the other parcels connect to that specific distribution main. In this example, the developer does assume the risk associated with the extension of the distribution main and whether additional parties will eventually connect to that specific main. In our opinion, the typical application of this approach is entirely different than the City's planned Highway 93 South project. In summary, the financing approach proposed by EES for the City is commonly used by water, sewer and storm sewer utilities across the U.S. If it were not the financing approach commonly used, and developers were required to install all infrastructure needed to serve their development, Mr. James C. Hansz, P.E. May 16, 2003 Page 3 then logically, there wouldn't be the need for system development charges. Given that the vast majority of utilities have system development charges, we can only conclude that the utility finances and constructs the "backbone" infrastructure and provides excess capacity in that system in anticipation of development. Our final observation is that within the internal discussion at the City Council level, it appears that there is not disagreement about the general financing approach outlined above and utilized within the rate study. Rather, from our perspective, there appears to be two associated issues directly connected with the above discussion that is driving the Council's concerns. The first issue is whether certain specific projects are, or should be considered, "on -site" or "back -bone" improvements. In other words, within the rate study, has the City included projects as "back- bone" infrastructure that more appropriately should be financed up -front by the developer (i.e. on -site improvements)? Specifically, this discussion appears to be focused on the Highway 93 South project. Simply stated, in our opinion, the Highway 93 South project appears to be a "back -bone" project, and financed by the City, with reimbursement via SDC's.. Having said that, the second issue that appears to be driving the City Council's concern is whether it is "prudent" for the City to construct the Highway 93 South project and extend services to that area. The answer to that question is a policy decision of the City Council and EES does not have an opinion regarding the appropriateness of constructing that project. However, I will share my perspective about the extension of utility services that I have gained from working with numerous other municipal entities. I have seen instances of utility services extended to outlying areas for a variety of justifiable reasons. Among these reasons may be growth management and the encouragement of development in certain areas and minimization of urban sprawl, minimizing the use of septic tanks and individual water wells, environmental considerations, encouragement of economic development, and health/safety issues (e.g. fire protection). I hope that this brief letter has helped to explain the typical financing approach that is used to meet the capacity requirements of water, sewer and storm sewer utilities. Should you have any questions about this letter, please do not hesitate to call me. Sincerely, ECONOMIC AND ENGINEERING SERVICES, INC. Thomas E. Gould Vice President TEG:smn