Funding of sewer systems is far more complicated than most people assume. I think the common belief is that we charge a user fee and that covers all the costs. The user fee approach generally only covers operations. Operations include running the system with man power, electricity, and repair and maintenance. There are two other generally accepted charges that are used by cities to pay for sewer systems but first we’ll talk about how the system operates.
As you know there are pipes that run in the ground for the collection system. These pipes are sloped to allow gravity to run wastewater to lift stations. They pump the wastewater to a higher level in the collection system to again run by gravity to the next lift or to the wastewater treatment facility. Lift stations have force mains associated with them as well.
These collection systems are funded, in part, by assessments for the pipe that runs along properties and a portion of the lift stations needed to serve an area. The other portion of the lift stations not assessed is paid by trunk fees. Trunk fees also pay for force mains, over sizing of sewer lines and for future improvements to the wastewater treatment plant.
The collections of trunk fees occur with every new or expanded building that uses the sewer system. The theory here is you are using the collection and treatment system and you should pay your associated costs in that system. Much like expanding a home with additional bedrooms you are required to have additional capacity in your septic system and drain field. The city installed and prepaid for this equipment and wants the users of the system to pay their fair share of the costs.
The method of determining the impact is through an “Equivalent Residential Unit” or ERU. There are established standards in use to determine what constitutes a residential unit for other types of uses. So uses such as gas stations, restaurants or any other non-residential use requires the calculation of equivalents to determine the number of ERU’s and trunk charge. Trunk charges are generally paid at the time a building permit is issued or when a use is connected to the sewer. Almost all cities use a form of this to address costs for sewer. In Breezy Point the present trunk charge per unit is $4,838.20.
Occasionally cities will use a tax levy to pay for wastewater given the high costs of treatment facilities. This is not the preferred method of payment as users of the system should pay the costs of the system. In Breezy Point there are no tax dollars supporting the sewer system. Only sewer users pay for sewer through the charges of line assessments, trunk charges and user fees.
Thursday, August 26, 2010
Friday, August 13, 2010
Paying off the TIF
The use of Tax Increment Financing (TIF) is something that is done throughout Minnesota and other states to spur economic development. TIF stands for Tax Increment Financing. TIF is a means of capturing taxes to offset costs associated with development. There are a number of types of TIF’s.
How this works is a developer generally starts out with a property that is undeveloped. The property is then developed and the city captures the difference in taxes between the vacant undeveloped property and the developed property. That’s the increment. This increment is then used to write down costs of the development.
To accomplish this, the city is obligated to write a plan which includes both a development district (physical area) and a development plan. The plan includes what is going to happen in terms of development and what were the expected revenues (taxes) that will be created as a result. A public hearing is held prior to the adoption and notice is given to the school district and county. The plan captures their taxes in addition to the city’s. Setting this all up generally involves the use of a public finance consultant and sometimes a bond attorney. Establishing these documents and going through the process generates some expenses.
When you consider financing options, two approaches exist. One involves the bonding for the improvements the city will participate in and doing the construction. Construction can occur through the developer or through city efforts. So in this approach, the city bonds for costs to be incurred and then collects the increment and uses it to pay off the bonds.
The second approach is a pay as you go. What this means is the developer pays all costs associated with the development, which he’ll get reimbursed from the TIF. The city pays the developer the increments received as we collect them on an annual basis.
In either approach a development agreement is needed which specifies what conditions each party will observe. In many communities a developer is required to pay for all out of pocket expenses the city experiences. Some communities rely on the increment to reimburse itself for prepaid expenses. This was the situation with the TIF district the city recently decertified. The district was then decertified as the developer did not live up to his obligations. The city was then left with prepaid expenses that were not reimbursed.
We wanted to satisfy our books by removing the fund that supports this district. We did this with a transfer from the general fund to the TIF Fund. The fund will no longer show a negative balance so it can be removed from our accounting. The unfortunate part of this is the city chose to reimburse itself with an increment rather than demand upfront payments of costs associated with the development. This was a decision that didn’t pan out as expected but we’ll know better if there is a next time.
How this works is a developer generally starts out with a property that is undeveloped. The property is then developed and the city captures the difference in taxes between the vacant undeveloped property and the developed property. That’s the increment. This increment is then used to write down costs of the development.
To accomplish this, the city is obligated to write a plan which includes both a development district (physical area) and a development plan. The plan includes what is going to happen in terms of development and what were the expected revenues (taxes) that will be created as a result. A public hearing is held prior to the adoption and notice is given to the school district and county. The plan captures their taxes in addition to the city’s. Setting this all up generally involves the use of a public finance consultant and sometimes a bond attorney. Establishing these documents and going through the process generates some expenses.
When you consider financing options, two approaches exist. One involves the bonding for the improvements the city will participate in and doing the construction. Construction can occur through the developer or through city efforts. So in this approach, the city bonds for costs to be incurred and then collects the increment and uses it to pay off the bonds.
The second approach is a pay as you go. What this means is the developer pays all costs associated with the development, which he’ll get reimbursed from the TIF. The city pays the developer the increments received as we collect them on an annual basis.
In either approach a development agreement is needed which specifies what conditions each party will observe. In many communities a developer is required to pay for all out of pocket expenses the city experiences. Some communities rely on the increment to reimburse itself for prepaid expenses. This was the situation with the TIF district the city recently decertified. The district was then decertified as the developer did not live up to his obligations. The city was then left with prepaid expenses that were not reimbursed.
We wanted to satisfy our books by removing the fund that supports this district. We did this with a transfer from the general fund to the TIF Fund. The fund will no longer show a negative balance so it can be removed from our accounting. The unfortunate part of this is the city chose to reimburse itself with an increment rather than demand upfront payments of costs associated with the development. This was a decision that didn’t pan out as expected but we’ll know better if there is a next time.
Friday, August 6, 2010
A Different Arena
I know most of you have heard of Annexation. This is where a city brings property from a township into a city and expands the boundaries. If you’re from Breezy Point you have probably heard about Detachment. This is somewhat the opposite. A property owner petitions the state to remove their property from a city.
The statute that addresses this is a very brief one. This statute is a poorly written and accomplishes its goals but fails to address numerous concerns. I think the issue that generates the most concern is that of the lack of local control in the process. Here a property owner petitions the state and only the city and property owner are involved. There is no notice to the receiving township or the county. They have no formal say in the matter. After the “required” 3 meetings with property owners an administrative law judge makes a decision. This person only looks at the detachment law, doesn’t take into consideration the character of the community nor do they consider any other statute that may conflict with this action. This judge is only accountable to the governor.
This judge, in the absence of an agreement, allocates costs for the proceedings if a hearing is held. The last hearings held in Breezy Point resulted in the city paying 75% of the costs. The city didn’t petition to have land removed, the petitioner did. Does the judge think because we’re a city or have deep pockets we should have the majority responsibility for loosing tax base and part of the city? It just doesn’t make sense.
The law provides that only abutting property owners are eligible for detachment. The state office allows non-abutting property owners to petition for detachment. They do this by considering that combinations of property create the abutting situation. This abutting property clause seems to address limited situations where one jurisdiction may be better able to be served by a neighboring unit of government. The legislative intent was not to allow wholesale detachment of vast acreages in a municipality without good cause. A very different interpretation is being used.
There criteria for determining whether or not the property could detach is both vague and broad. Rural in character, doesn’t affect the symmetry, not commercial or industrial or have utilities. This could be said of many communities in Minnesota that have a rural flair.
Given legal expenses, hearing expenses, the actions of the past hearings and the lack of common sense with the state’s administrative law judge the city council considered our options at the last meeting. They reluctantly voted to end the proceedings and the expense by allowing for the detachment. They also acknowledged indirectly that the resolve for this matter isn’t found at this juncture but rather lies in the need for change in law. We will be diligently working in this arena.
The statute that addresses this is a very brief one. This statute is a poorly written and accomplishes its goals but fails to address numerous concerns. I think the issue that generates the most concern is that of the lack of local control in the process. Here a property owner petitions the state and only the city and property owner are involved. There is no notice to the receiving township or the county. They have no formal say in the matter. After the “required” 3 meetings with property owners an administrative law judge makes a decision. This person only looks at the detachment law, doesn’t take into consideration the character of the community nor do they consider any other statute that may conflict with this action. This judge is only accountable to the governor.
This judge, in the absence of an agreement, allocates costs for the proceedings if a hearing is held. The last hearings held in Breezy Point resulted in the city paying 75% of the costs. The city didn’t petition to have land removed, the petitioner did. Does the judge think because we’re a city or have deep pockets we should have the majority responsibility for loosing tax base and part of the city? It just doesn’t make sense.
The law provides that only abutting property owners are eligible for detachment. The state office allows non-abutting property owners to petition for detachment. They do this by considering that combinations of property create the abutting situation. This abutting property clause seems to address limited situations where one jurisdiction may be better able to be served by a neighboring unit of government. The legislative intent was not to allow wholesale detachment of vast acreages in a municipality without good cause. A very different interpretation is being used.
There criteria for determining whether or not the property could detach is both vague and broad. Rural in character, doesn’t affect the symmetry, not commercial or industrial or have utilities. This could be said of many communities in Minnesota that have a rural flair.
Given legal expenses, hearing expenses, the actions of the past hearings and the lack of common sense with the state’s administrative law judge the city council considered our options at the last meeting. They reluctantly voted to end the proceedings and the expense by allowing for the detachment. They also acknowledged indirectly that the resolve for this matter isn’t found at this juncture but rather lies in the need for change in law. We will be diligently working in this arena.
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