## Richfield City Council Agenda March 24, 2026 -- 5:00 PM ## Richfield Municipal Center ## Bartholomew Conference Room ## 6700 Portland Avenue South 1. Call to Order ## 2. Item Discussion a. Utility Rate Study and Financial Analysis for Infrastructure Renewal Planning 3. Adjournment Auxiliary aids for individuals with disabilities are available upon request. Requests must be made at least 96 hours in advance to the City Clerk at 612-861-9739. Includes Materials - Materials relating to these agenda items can be found in the Council Chambers Agenda Packet book located by the entrance. The complete Council Agenda Packet is available electronically on the City of Richfield website. Page 1 of 51 ## City Council Meeting 3/24/2026 ## Agenda Section: Item Discussion Agenda Item: 2.a. ## Report Prepared By: ## Scott Kulzer, Senior Analyst ## Department Director: ## Kristin Asher, Public Works Director ## Item for Consideration: ## Utility Rate Study and Financial Analysis for Infrastructure Renewal Planning ## EXECUTIVE SUMMARY In Spring 2025, Public Works undertook a utility rate study and financial analysis of capital project funding strategies with engineering firm HDR, Inc. At its most basic level, the project sought to determine if revenues (utility rates) were sufficient to fund routine operation and maintenance of the utility systems while also reserving funding for system renewal via capital projects. The study and analysis are nearing completion and staff from Public Works and HDR, Inc., will present the findings and recommendations from the effort and are seeking City Council feedback. ## RECOMMENDED ACTION Provide direction on the proposed utility rate policies, structure, and financial strategies. ## HISTORICAL CONTEXT • Utility rates are adjusted annually alongside the adoption of the annual budget in December. • Rate adjustments typically reflect increases to keep up with inflation. • Since the Covid-19 pandemic, pricing for routine services, chemicals, and infrastructure investment has increased dramatically. • Oftentimes, staff will recommend rate increases that exceed inflation when needed and where possible based on internal analysis. • The last formal utility rate study done for Richfield utilities was in 2017. ## EQUITABLE OR STRATEGIC CONSIDERATIONS OR IMPACTS Strategic Considerations: A thorough review of utility rates and financial strategies of the utility system works toward the following Strategic Plan Outcomes: • Financial capacity to deliver essential services; • Operational capability to deliver essential services; • Maintain Richfield as an affordable place to live; • City infrastructure supports service needs; • Sustainable infrastructure financing; and Page 2 of 51 • Equity-based framework is applied to decision-making. Equity Considerations: Maintaining utility affordability and not overburdening residents who are struggling to afford their routine expenses is a key consideration in this discussion. The Utility Rate Affordability Study completed in 2023 helps to inform this discussion and is reflected in some of the recommendations contained in this utility rate study. ## POLICIES (RESOLUTIONS, ORDINANCES, REGULATIONS, STATUTES, ETC.) • Utility rates are adjusted annually by City Council alongside the adoption of the annual budget in December. • Some of the recommendations in this utility rate study may require further City Council action in order to implement. ## CRITICAL TIMING ISSUES The 2026 Revised/2027 Proposed budget cycle kicks off in approximately 6 weeks and direction related to the proposed utility rate changes is needed as soon as possible. ## FINANCIAL IMPACT • There is no direct financial impact as a result of this work session meeting. • Financial impacts will be solidified once direction is given and staff moves any rate increases or financial policy changes through the budget and approval process. ## LEGAL CONSIDERATIONS • None at this time. ## ALTERNATIVE RECOMMENDATION(S) None. ## ATTACHMENTS 1. City of Richfield - Rate and Financial Analysis for Renewal Planning Presentation Page 3 of 51 © HDR 2024, all rights reserved. ## City of Richfield ## Rate and Financial Analysis ## for Infrastructure Renewal Planning March 24, 2026 © HDR 2024, all rights reserved. Page 4 of 51 Purpose of the Presentation • Provide a summary of the preliminary rate analyses • Gain Council input and feedback • Financial policies • Renewal and replacement funding approach • Overall rate revenue adjustment for each utility • Discuss next steps of study 2 Page 5 of 51 ## Study Challenges • Upcoming water, sewer, and stormwater infrastructure system renewal and replacement needs • Renewal and replacement funding sources undefined at this time • Study begins to provide funding for future replacement • Challenge not specific to the City • Unique to the City is majority of infrastructure put in place in same time period • Adequately funding ongoing capital infrastructure improvements • Balancing customer bill impacts while maintaining prudent financial metrics (i.e., financial policies) 3 Page 6 of 51 ## Agenda ## 1.0Rate Study Introduction ## 2.0Financial Policies Overview and Discussion ## 3.0Renewal and Replacement Policy Discussion ## 4.0Preliminary Rate Study Results 5.0Summary and Next Steps 4 Page 7 of 51 1.0 ## Rate Study Introduction 5 Page 8 of 51 ## Purpose of a Rate Study • Provide sufficient revenue to operate and maintain the City’s water, sewer, and stormwater infrastructure • Develop cost-based water, sewer, and stormwater rates • Reflect prudent financial planning criteria • Prudent funding of annual O&M expenses • Meet target minimum reserve balances • Adequately fund identified capital improvement and replacement needs • Develop the study using generally accepted methodologies tailored to the City’s system and customer characteristics 6 Page 9 of 51 ## Rate Study Overview •Revenue Requirement ## Rate Design Design rates to meet the revenue needs and cost of service while reflecting the City’s rate design goals and objectives ## Revenue Requirement Compares the revenue of the utility to the expenses to evaluate the level of overall rates 7 Page 10 of 51 2.0 ## Financial Policies Overview and Discussion 8 Page 11 of 51 ## Financial Policies Overview • Reserves are reviewed on an individual utility basis • Provides strong message to outside financial community (e.g., bond rating agencies) • Financial policy goals and objectives • Maintain sufficient operating reserves for day-to -day cash flow requirements • Maintain sufficient capital and other reserves to minimize short- term and long-term borrowing for capital projects • Fund capital projects in a prudent and least cost manner • Provide rate stability • Reserves established for different purposes and thus have different minimum and target balance amounts 1.Reserve Levels 2.Renewal and ## Replacement Funding 3.Debt Issuance and ## Management ## 4.Debt Service Coverage 5.Rate and Fee Setting ## Approach 9 Page 12 of 51 ## Financial Policies for Reserves ## Operating Reserve Operating reserve provides support for both O&M and capital expenses • Minimum – 90 days or 25% of annual O&M expenses for each utility • Target – 180 days or 50% of annual O&M expenses for each utility ## Asset Replacement Reserve • Target – Equivalent to the escalated value of the fully depreciated assets divided by the number of years in the evaluation period less debt funding assumptions (no minimum and only to be used for utility infrastructure replacement) 10 Page 13 of 51 3.0 ## Renewal and Replacement Policy Discussion 11 Page 14 of 51 ## Renewal and Replacement Policy • Purpose is to adequately fund the maintenance and replacement of existing infrastructure through user rates on an on-going basis • Renewal and replacement funding approach for each utility based on the value of the existing system replacement costs ## Proposed Renewal and Replacement Policy • Minimum – Fund an amount equal to annual (1.0x) depreciation expense for each utility • Target – 2.0 - 2.5x annual depreciation expense for each utility or the identified renewal and replacement needs for each utility over a multi-year period (5 or 10 years) 12 Page 15 of 51 ## Renewal and Replacement Analysis • Multiple methods available for evaluating and determining the appropriate level of replacement funding • Asset replacement/condition assessment program • Based on current useful life and replacement timing • Based on total years useful • Majority of City’s water, sewer and stormwater assets are fully depreciated • Significant infrastructure put in place around 1960 • Capital plan includes some renewal and replacement projects • Purpose of analysis is to identify total target funding levels • Analysis for each utility based on replacement cost (in 2025 dollars) divided by total years useful for each asset • Provides an annual benchmark funding level 13 Page 16 of 51 Rate funded capital dependent on proposed annual rate adjustments Assumes 4.0% inflation 14 Page 17 of 51 Rate funded capital dependent on proposed annual rate adjustments Assumes 4.0% inflation 15 Page 18 of 51 Rate funded capital dependent on proposed annual rate adjustments Assumes 4.0% inflation 16 Page 19 of 51 4.0 ## Preliminary Rate Study Results 17 Page 20 of 51 ## Revenue Requirement Key Assumptions • Revenues independently calculated based on the specific customer characteristics of each utility • O&M expenses based on FY 2025 and FY 2026 budgets for each utility • Projected through FY 2035 based on annual inflationary factors (~4% annually) • Capital funding plan addresses system improvement needs for each utility • Funding of capital improvement through rates on on-going basis (rate funded capital) • Current analysis does not include funding of future renewal and replacement projects or renewal and replacement reserves • Some renewal and replacement projects addressed in City’s current CIP for each utility 18 Page 21 of 51 19 Page 22 of 51 20 Page 23 of 51 Reserve levels are dependent on proposed annual rate adjustments 21 Page 24 of 51 22 Page 25 of 51 23 Page 26 of 51 Reserve levels are dependent on proposed annual rate adjustments 24 Page 27 of 51 25 Page 28 of 51 26 Page 29 of 51 Reserve levels are dependent on proposed annual rate adjustments 27 Page 30 of 51 ## Summary of the Revenue Requirement Analyses • Rate revenue adjustments are necessary to support annual O&M expenses and prudently fund system improvements and replacements • Current analysis does not include funding of future renewal and replacement projects or renewal and replacement reserves • Some renewal and replacement projects addressed in City’s current CIP for each utility • Developed a system rate revenue transition plan for each utility Rate Transition PlansFY 2027FY 2028FY 2029FY 2030FY 2031 ## Water Rate Adj. 16.5%15.0%10.0%5.0%5.0% ## Water Qtr $ Change$12.34$13.07$10.02$5.51$5.79 ## Sewer Rate Adj.9.0%7.0%7.0%4.0%4.0% ## Sewer Qtr $ Change$4.11$3.49$3.73$2.28$2.37 ## Stormwater Rate Adj. 17.0%17.0%17.0%17.0%10.0% ## Stormwater Qtr $ Change$4.49$5.26$6.15$7.20$4.95 28 Page 31 of 51 Assumes 11,000 gallons quarterly of water usage, 3/4” meter and winter rate (when applicable) 29 Page 32 of 51 Assumes a monthly winter water average of 2,333 gallons and 3/4” meter (when applicable) 30 Page 33 of 51 Assumes one residential equivalent factor (REU), equal to one-fifth acre 31 Page 34 of 51 Assumes 11,000 gallons quarterly of water usage, 7,000 gallons quarterly for sewer (minimum bill) and one-fifth acre or 1 REF for stormwater 32 Page 35 of 51 Reflect the findings of the revenue requirement Meet the rate design goals and objectives of the ## City Produce sufficient revenues to meet the target revenues of each utility Are cost-based ## Rate Design Analysis Overview 33 Page 36 of 51 ## Common Rate Setting Goals and Objectives ## Revenue Sufficiency and Stability Easy to Understand (Customer) Easy to Administer (City) ## Affordability ## Efficient Use of the Resource Equitable and Non-Discriminating (Cost-Based) 34 Page 37 of 51 ## Present Rate Schedules ## Water Rates ## Administrative Charge ($/Qtr)$10.00 Consumption Charge ($/1,000 gal) ## Minnesota State Testing Fee (Annual)$15.22 ## Residential 0 – 15,000 $5.54 15,001 – 25,0006.66 25,001+8.00 ## Residential Irrigation ## All Consumption$8.00 Apartment (Multi-Family) ## All Consumption$5.54 ## Commercial ## All Consumption$5.54 ## Commercial Irrigation ## All Consumption$8.00 ## Sewer Rates ## Minimum Charge ($/Qtr)$45.71 Sewer Usage ($/1,000 gal) 0 – 7,000$0.00 7,001+6.53 ## Stormwater Rate ## Stormwater Rate ($/REF/Qtr)$26.44 35 Page 38 of 51 ## Rate Design Alternatives ## Water •Status Quo – adjusts all water rates by system rate adjustments, updates administrative charge to base charge •Alternative 1 – addition of water debt service charge ## Sewer •Status Quo – adjusts all sewer rates by system rate adjustments, no rate structure changes •Alternative 1 – addition of sewer debt service charge •Alternative 2 – addition of sewer debt service charge and updates sewer minimum charge usage from 7,000 gallons quarterly to 5,000 gallons quarterly ## Stormwater •Status Quo – adjusts all stormwater rates by system rate adjustments, no rate structure changes •Alternative 1 – addition of stormwater debt service charge 36 Page 39 of 51 ## Debt Service Charge WaterFY 2027FY 2028FY 2029FY 2030FY 2031 ## Total Annual Debt Service $1,568,548 $1,274,075$1,457,284 $1,463,059$1,458,346 ## Percentage of Debt25%60%65%85%100% ## Debt Service Charge$9.07$17.69$21.92$28.78$33.75 SewerFY 2027FY 2028FY 2029FY 2030FY 2031 ## Total Annual Debt Service $96,627$95,571$94,208$98,562$97,285 ## Percentage of Debt100%100%100%100%100% ## Debt Service Charge$2.24$2.22$2.19$2.29$2.26 StormwaterFY 2027FY 2028FY 2029FY 2030FY 2031 ## Total Annual Debt Service $703,860$933,332$2,050,292$2,049,415$2,055,535 ## Percentage of Debt100%100%75%100%100% ## Debt Service Charge$7.32$9.71$16.00$21.33$21.39 37 Page 40 of 51 ## Proposed Water Rate Designs – Status Quo Status QuoPresent RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Administrative Charge ($ / Qtr) ## Administrative Charge$10.00N/AN/AN/AN/AN/A ## Base Charge ($ / Qtr) ## Base ChargeN/A$11.65$13.40$14.74$15.48$16.25 Residential Consumption Charge ($ / 1,000 gal) 0 – 15,000 $5.54$6.47$7.44$8.18$8.59$9.02 15,001 – 25,0006.667.758.919.8010.2910.80 25,001+8.009.3210.7211.7912.3813.00 Residential Irrigation Consumption Charge ($ / 1,000 gal) ## All Consumption$8.00$9.32$10.72$11.79$12.38$13.00 Apartment (Multi-Family) Consumption Charge ($ / 1,000 gal) ## All Consumption$5.54$6.47$7.44$8.18$8.59$9.02 Commercial Consumption Charge ($ / 1,000 gal) ## All Consumption$5.54$6.47$7.44$8.18$8.59$9.02 Commercial Irrigation Consumption Charge ($ / 1,000 gal) ## All Consumption$8.00$9.32$10.72$11.79$12.38$13.00 38 Page 41 of 51 ## Proposed Water Rate Designs – Alternative AlternativePresent RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Administrative Charge ($ / Qtr) ## Administrative Charge$10.00N/AN/AN/AN/AN/A ## Base Charge ($ / Qtr) ## Base ChargeN/A$12.00$12.35$12.70$13.10$13.50 ## Debt Service Charge ($ / Qtr) ## Debt Service ChargeN/A$9.07$17.69$21.92$28.78$33.75 Residential Consumption Charge ($ / 1,000 gal) 0 – 15,000 $5.54$5.94$6.36$6.92$7.00$7.19 15,001 – 25,0006.667.137.958.658.758.99 25,001+8.008.5811.1312.1112.2512.58 Residential Irrigation Consumption Charge ($ / 1,000 gal) ## All Consumption$8.00$8.58$11.13$12.11$12.25$12.58 Apartment (Multi-Family) Consumption Charge ($ / 1,000 gal) ## All Consumption$5.54$5.94$6.36$6.92$7.00$7.19 Commercial Consumption Charge ($ / 1,000 gal) ## All Consumption$5.54$5.94$6.36$6.92$7.00$7.19 Commercial Irrigation Consumption Charge ($ / 1,000 gal) ## All Consumption$8.00$8.58$11.13$12.11$12.25$12.58 39 Page 42 of 51 40 Page 43 of 51 ## Proposed Sewer Rate Designs – Status Quo/Alternative 1 Status QuoPresent RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Minimum Charge ($ / Qtr) ## Minimum Charge$45.71$49.82$53.31$57.04$59.32$61.69 Sewer Usage ($ / 1,000 gal) 0 – 7,000$0.00$0.00$0.00$0.00$0.00$0.00 7,001+6.537.127.628.158.488.82 Alternative 1Present RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Minimum Charge ($ / Qtr) ## Minimum Charge$45.71$49.00$52.43$56.10$58.34$60.67 ## Debt Service Charge ($ / Qtr) ## Debt Service ChargeN/A$2.24$2.22$2.19$2.29$2.26 Sewer Usage ($ / 1,000 gal) 0 – 7,000$0.00$0.00$0.00$0.00$0.00$0.00 7,001+6.537.007.658.128.458.80 41 Page 44 of 51 Alternative 2Present RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Minimum Charge ($ / Qtr) ## Minimum Charge$45.71$36.05$38.57$41.27$42.92$44.64 ## Debt Service Charge ($ / Qtr) ## Debt Service ChargeN/A$2.24$2.22$2.19$2.29$2.26 Sewer Usage ($ / 1,000 gal) ## 0 – 7,000$0.00N/AN/AN/AN/AN/A ## 7,001+6.53N/AN/AN/AN/AN/A ## 0 – 5,000N/A$0.00$0.00$0.00$0.00$0.00 ## 5,001+N/A7.217.888.368.709.05 ## Proposed Sewer Rate Designs – Alternative 2 42 Page 45 of 51 43 Page 46 of 51 ## Proposed Stormwater Rate Designs Status QuoPresent RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Stormwater Service Charge ($ / REF /Qtr) ## Rate Per Equivalent Unit $26.44$30.94$36.20$42.35$49.55$54.51 Alternative 1Present RatesFY 2027FY 2028FY 2029FY 2030FY 2031 ## Stormwater Service Charge ($ / REF /Qtr) ## Rate Per Equivalent Unit$26.44$23.60$26.11$26.27$28.55$33.47 ## Debt Service Charge ($ / Qtr) ## Debt Service ChargeN/A$7.32$9.71$16.00$21.33$21.39 44 Page 47 of 51 45 Page 48 of 51 Summary of the Study • Proposed rate adjustments reflect the prudent funding of operating and capital expenses • Begins a rate transition to adequately fund ongoing and upcoming renewal and replacement needs • Does not establish a renewal and replacement reserve • Proposed rate alternatives provide revenue based on study assumptions • Status quo maintains current rate structure • Alternatives provide method to identify specific ongoing costs (i.e., debt) • Analysis reflects industry standard methodologies and policies and the City’s specific and unique system and customer characteristics 46 Page 49 of 51 ## Summary • Council feedback and input • Financial policies • Renewal and replacement policies and approach • Overall rate transition plans to maintain system integrity ## Next Steps • Finalize analysis based on Council feedback and input • Develop written documentation • Present final study recommendations 47 Page 50 of 51 ## Discussion 48 Page 51 of 51