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11-09-21 CCM Workshop (Enterprise Funds)HUTCHINSON CITY COUNCIL REVIEW OF 2022 ENTERPRISE FUND BUDGETS MINUTES TUESDAY, NOVEMBER 9, 2021, AT 4:00 PM CITY CENTER — COUNCIL CHAMBERS 1. Call to Order Mayor Forcier called the workshop to order at 4:00 p.m. Members present included Chad Czmowski, Pat May, Mary Christensen and Dave Sebesta. Others present were: Matt Jaunich, City Administrator; Marc Sebora, City Attorney; Kent Exner, City Engineer; Andy Reid, Finance Director; Andy Kosek, Creekside Manager; Candice Woods, Liquor Hutch Manager; Tim Gratke, Water/Wastewater Manager REVIEW OF 2022 ENTERPRISE FUND BUDGETS Matt Jaunich, City Administrator, spoke before the Council. Mr. Jaunich noted that a review of the following budgets will be held at today's workshop: Liquor Hutch, Creekside, Refuse/Garbage, Water/Wastewater/Storm Water. In addition, there will be a review of the local sales tax option and the enterprise fund transfers to the general fund. Lastly, an update will be given on the 2022 budget and tax levy and CIP. 2. Liquor Hutch Budget Matt Jaunich, City Administrator, presented before the Council. Mr. Jaunich reviewed the proposed budget for 2022 which sees a total revenue increase of 9%. Mr. Jaunich noted that from 2007 to 2019, total sales have increased at an average annual rate of 2.8% and the customer count has increased by an average annual rate of 1.4%. In 202, sales increased by 20.4% and customer counts increased 3.5%. It is estimated that 2021 sales will be down by 4% compared to 2020, but up 15.6% from 2019 sales. Proposed expenses for 2022 have increased 8.6%. The 2022 budgeted capital item is a placeholder for future upgrades. The last debt service payment occurred in 2020. The budget includes a proposed transfer to the general fund of $550,000. Mr. Jaunich also provided a 10-year liquor fund forecast. Candice Woods, Manager, presented before the Council. Ms. Woods explained changes to promotions at the store — such as removing the "Ad Match Monday" program effective January 1, 2022. No other programs are changing. Creekside Budget Mr. Jaunich explained that Creekside's 2022 production model includes an 8.4% increase in total bagged sales and a 150.4% increase in bulk sales. The large increase in bulk sales is due to no bitcon sales in 2021. Total expenses are budgeted at an increase of 1.13% and total revenue is budgeted at a 18.2% increase. The transfer to the general fund is budgeted at $110,000, the same as 2021. The ending cash balance for Creekside is budgeted at $2,370,509. Mr. Jaunich also provided a 10-year compost fund forecast. Refuse/Garbage Budget Mr. Jaunich noted that the refuse/garbage budget sees an increase in revenue of 2.9% from 2021. The residential rates have held flat with no rate increase since 2008. Expenses for the refuse/garbage budget will see an increase of 18.3% for 2022. There is a $55,000 transfer that goes out to the tree disease infestation/mitigation fund. The capital outlay assumption for 2022 is based on planned improvements to the source separated operating model. This was originally planned in 2021, but was put on hold due to permitting delays with the MPCA. The model has higher costs due to inflation. Mr. Jaunich provided a 10-year refuse fund forecast. Water Fund Budget Mr. Jaunich explained that the Water Fund budget shows a 1.4% increase in total revenue for 2022. There will be no rate increase in 2022 and hasn't been since 2011. Water fund expenses are budgeted at a 0.3% increase. Transfer to the general fund will remain at $70,000 for 2022. The ending cash balance for the water fund budget is budgeted at $2,220,057. Mr. Jaunich provided a 10-year water fund forecast. Kent Exner, City Engineer, spoke about capital items included in the water fund budget. Wastewater Fund Budget Mr. Jaunich explained that the wastewater fund budget sees a 0.2% increase in revenues for 2022. There will be no rate increases in 2022 and there haven't been since 2011. Total expenses have a budgeted decrease of 17.6%. The wastewater fund budget has an ending cash balance budgeted at $5,369,744. Mr. Jaunich provided a 10-year wastewater fund forecast. Local Option Sales Tax Mr. Jaunich reviewed the local option sales tax program and the purpose of it which is dedicated solely to retiring the debt in water and sewer funds. Mr. Jaunich provided quick facts in reference to local option sales tax, which included: local sales tax on a $100 purchase amounts to $.050; local sales tax is applicable to the same retail purchases, subject to Minnesota sales tax; sale of vehicles by dealers are exempt and instead are subject to an excise fee of $20 per vehicle sold; local sales tax is applicable to any sale made within city limits as determined by the last four digits of your zip code; point of possession determines taxability; purchases item/service received/performed within city limits is subject to the local sales tax; purchased items/service is received/performed outside city limits ex exempt from local sales tax; organizations exempt from paying state sales tax are also exempt from the local sales tax. Mr. Jaunich also reviewed other nearby cities with local sales tax. Mr. Jaunich explained that early retirement of debt is an option if cash reserves are sufficient. While the main purpose of the tax is to retire existing debt, it also allows the City to build healthy cash reserves to help with annual street projects with water & sewer infrastructure improvements, improvements that may be needed in each facility, other projects that create efficiencies and stable water/sewer rates. Mr. Jaunich reviewed the outstanding debt. Stormwater Fund Budget Mr. Jaunich explained that total revenue in the stormwater fund budget is seeing an increase of 3.1%. There is a planned rate increase of 3% over nine classifications. Expenses are budgeted at a 27.6% decrease. City's leaf vacuuming program is accounted for in this fund and street sweeping is also funded by this account. The ending cash balance in the stormwater fund is budgeted at $749,092 for 2022. Mr. Jaunich provided a 10-year stormwater fund forecast. Lastly, Mr. Jaunich provided an overview on enterprise fund transfers to the general fund. Mr. Jaunich noted that the liquor fund continues to do really well. There are no rate changes for garbage, water and sewer users. There is a slight rate increase in the stormwater fees. The enterprise fund transfers into the general fund account for 5.8% of general fund revenue. Cash balances continue to remain healthy. Capital needs are starting to increase in the Creekside/Water/Sewer funds. In addition, regulatory agencies may impact future needs. Mr. Jaunich provided an update on the general fund budget. Mr. Jaunich noted that there have been no changes made to the preliminary budget, tax levy and CIP from September where the proposal was a 7.0% tax levy increase. The wage study was just completed. He is meeting with directors over the next two weeks to discuss department budgets. Mr. Jaunich plans on updating the Council in two weeks. Ideas continue to come in for use of the ARP funds. Mr. Jaunich did provide an updated levy assumption related to the new police facility. He noted that the September debt plan assumed structuring the 2022 police facility debt with larger principal payments in the early years, essentially replacing the principal payments on the existing debt that the City paid off in August 2021. The benefit to this structure is lower debt levies in the later years of the debt plan. The negative is a significant increase in the 2022 debt levy (16.2%) and overall City tax levy (7%). The City can structure the final 2022 debt to place less principal repayments in the first few years of the 2022 police facility debt which will soften the increase to the 2022 debt levy (6.7%) and overall City tax levy (4.5%) but will increase the debt levies in later years. The City can also use additional cash reserves to buy down the new police facility debt. Options include the Community Improvement Fund, General Fund Reserves, Capital Projects Fund and the federal ARPA funds. The updated debt levy assumption includes structuring the 2022 new debt to reduce the principal payments in the first few years and spread across the remaining debt term. It also assumes using $1,000,000 of City reserves to lessen the debt burden throughout the new police debt term. The proceeds from the sale of the existing police facility and EEOC can be used to further reduce future debt tax levies by placing those proceeds in the debt service fund. This has not been factored into the debt plan at this point. Any impact would likely affect the levy years occurring after 2023. The updated levy assumption would increase the overall tax levy by 4.5% which is a 2.6% reduction as proposed in September. The Council had favorable comments on the proposed levy assumption and the adjustment to the debt structure for the new police facility. 3. Adjournment Motion by May, second by Sebesta, to adjourn the workshop at 5:10 p.m. Motion carried unanimously. ATTEST: Gary T. Forcier Mayor Matthew Jaunich City Administrator