Sanitary Sewer Fund
2022-2027 Financial Plan
Introduction
The Sanitary Sewer Fund accounts for the activities related to wastewater collection and treatment. Approximately 53.6% of the expense in the Sanitary Sewer Fund’s 2022 budget is comprised of contractual payments made to the Metropolitan Council Environmental Services (MCES) for sewage interceptor and treatment related services. The Sanitary Sewer Fund portion is approximately 95.0% of the total paid by the City to MCES with the remaining 5.0% being provided by the Storm Water Fund. The fund also accounts for City services, operations, maintenance, design work, capital programs, transfers, and long-term debt service associated with the sanitary sewer system.
Sanitary sewer sources of funds include monthly billing for sewer services, proceeds from sales of bond used for capital programs, SAC fees and miscellaneous activities. Monthly billing for sewer services is the major source of revenue for sanitary sewer follow by bond sales and SAC fees. SAC fees are offset by expenditures related to the design activities and SAC charges. The Surface Water & Sewer division of the Public Works Department is responsible for the management of operations within this fund.
Historical financial performance
The Sanitary fund has performed consistently over the last five years up until 2018. In 2018, there were very few bonds issued, thus contributing to lower than normal cash balance. Bond issuance increased in 2019 but not enough to bring cash balance up to a more normal historic level. In 2019, the cash balance improved somewhat to $7.4 million from $4.5 million in 2018. Bond issuance increased in 2020 to catch up with prior year bonds not issued and 2020 ended with a cash balance of $13.5 million. For 2021 we project a cash balance of $13.7 million and for 2022 through 2026 we expect the cash balance to gradually increase to $29.2 million due primarily because of larger revenues while keeping expenses under control. Other than 2018 through 2022, the fund has regularly maintained its cash reserve above the three months operating threshold. As a result, the department has been able to use the cash balance to:
- fund operations and construction;
- meet obligations for shared costs and services with other City departments;
- appropriately time the sales of bonds to keep debt financing low;
- structure and restructure the debt schedule for lower interest and payments; and
- control utility rate increases.
The Sewer division will continue its major repairs, upgrades, rehabilitation, and cleaning work, paying these out of its operating and capital appropriations. The goal has been to maintain, and build upon, unrestricted cash reserve, and fall upon debt financing only as needed. The outlook for the fund for the next five years looks stable with increasing cash and unrestricted reserve balances.
Current year projections
Revenues
The current operating revenue is projected to be under the budgeted amount of $91.7 million, by $5.0 million due to lower SAC revenues by $3.0 million and lower operating revenues by $2.0 million because of less activities in Minneapolis due to COVID-19. The lower SAC revenues are offset by correspondingly lower SAC expenses.
Proceeds from prior years’ bond sales are available in the arbitrage fund to cover infrastructure related costs. In 2021, $0.2 million were used from this arbitrage fund from 2020 bond sales. The fund also had $5.5 million in bond appropriations carried forward from 2020 to be used on future Capital projects.
Sewer Availability Charges, or SAC, are one-time fees collected from residents or businesses for initial connection to the wastewater system. These fee revenues are collected from property owners and developers and passed on to the Metropolitan Council. Therefore, any increase or decrease in SAC revenues corresponds to similar increase or decrease in SAC expenditures.
Expense
Operating expenses for 2021 are projected at $73.5 million compared to the 2021 budget of $76.8 million. The projected expenses being $3.3 million under the budgeted amount is due to SAC charges projected at $3.0 million under budget, but these lower SAC charges are offset by lower SAC revenues.
Net position and cash balance
The Sewer fund net position and cash balance are projected to total $139.6 million and $13.7 million respectively by the end of 2021.
2022 Budget
Revenues
Revenues from operations account for 86.9% of the budget with the remaining 13.1% coming from capital programs which is consistent with prior years. For 2022, use of funds is estimated to decrease by 0.1% over 2021’s projections mainly due to increases in debt service by $3.1 million, and Met Council Services by $1.7 million. Also, capital programs are expected to decrease by $5.0 million in 2022.
The total revenue budget for the Sanitary Sewer Fund for 2022 is $108.1 million compared to the 2021 projected revenues of $106.2 million, an increase of $1.9 million, or 1.7%. The majority of the change is a result of a combined: (i) increase in service revenues of $3.9 million, reflecting increases in monthly utility rates; (ii) an increase in SAC revenues of $3.0 million; and (iii) a decrease in proceeds from long-term liabilities of $5.4 million due to less bonds being issued in 2022 than in 2021.
Sanitary utility rates
Sanitary sewer rates are comprised of variable and fixed rates. For 2022, the variable sewer rate is proposed to increase to $5.01 per one hundred cubic feet (one unit, or 748 gallons) compared to $4.84 for 2021, while the fixed rate is set at $7.30 for 2022 compared to $6.80 for 2021. Rates were increased to fund sanitary treatment programs, design, maintain, upgrade and rehab sanitary tunnels, and to pay for debt service and shared meter costs.
Expenses
The total expense budget for 2022 is $105.9 million compared to the 2021 projected amounts of $106.0 million, an overall decrease of $0.1 million, and reflects the following changes from the 2021 projection: (i) increase in Met Council charges of $1.7 million due to a rate increase; (ii) decrease in professional services, upgrades, rehab, repairs, and maintenance work by $0.3 million in the Sewer Maintenance section; (iii) increase in City services, as established by the allocation model of $0.6 million; (iv) increase in debt services by $3.1 million; and (v) decrease in capital programs by $5.0 million. Capital expenses for 2022 total $18.6 million, and includes the ongoing inflow/infiltration, sanitary tunnel, and sewer rehab programs.
Met Council sets the rate for treatment services, referred to as Municipal Water Charges (MWC), which are allocated regionally to all users of the system, based upon their proportionate use. The largest expense in the Sanitary Sewer Fund is the service charge paid to Metropolitan Council Environmental Services (MCES) for the treatment of wastewater. The estimated payment to MCES for 2022 is $49.1 million, a 2.8% decrease over 2021. The Sanitary Sewer Fund bears $46.7 million of this cost with the remaining $2.4 million paid from the Storm Water Fund. Minneapolis is the largest customer in the MCES system. (Please note this payment is only a portion of the Met Council Environmental Services line as shown on the plan; the SAC payments are included in the plan total).
Transfers
A transfer from this fund is made to the Water Fund to cover shared meter expenses. The transfer was initiated in 2012 and will remain a yearly budget item. For 2022, the transfer amount is estimated at $1.0 million with future year amounts jointly decided in cooperation with Water department.
Debt service
To date, the Fund’s outstanding debt arising from bond financing stands at $43.2 million, of which nothing has been added yet in 2021. The bonds were sold to finance capital infiltration and inflow programs and upgrade the City’s sewer system. For 2022, $10.9 million is set aside for debt service payments. For the next five years, bond proceeds will be the major source of funding for capital programs. Yearly payments for interest and principal in future years will vary depending on total bond sales.
Net position and cash balance
At the start of 2021, cash balance was $13.5 million, with the Fund’s net position at $139.4 million. Based on 2021 projections, the cash balance and net position will increase to $13.7 million and $139.6 million respectively by the end of the year. The five years plan forecasts a steady increase, due to increases in utility rates and proceeds from long term liabilities.
The City’s policy is to have a cash balance equal to or greater than three months of operating expenses. Therefore, the targeted cash balance for 2022 is $18.9 million, leaving the fund below the target reserve by $3.0 million. Through constant monitoring, this cash reserve requirement will be met in years 2023-2026.