By Ryan Gueningsman
DELANO, MN The City of Delano is taking steps to make it easier for local industries wishing to expand operations and potentially create more jobs within the community.
City staff admits Delano has high infrastructure fees, and City Administrator Phil Kern said this issue is something that has continued to present itself over time.
However, a recent request from Modern Molding, located in Delano’s industrial park, brought the issue to the forefront once again.
In February, the city approved plans for a 38,000-square-foot expansion for Modern Molding. As part of its approval process, city staff developed an estimate of infrastructure fees that would apply for the expansion under city code. After seeing the fees associated with the expansion, Modern Molding representatives were unsure if they wanted to move forward with the project.
In recent months, city staff has been taking a look at its overall approach to infrastructure fee policies. There have been several new or expansion projects in the industrial park, and the city has employed a variety of techniques in response to infrastructure fees, Kern said in a memo to the city council dated March 23.
How the city calculates infrastructure fees
The city uses the Service Availability Charge (SAC) procedures manual as developed by the Metropolitan Council Environmental Services Agency in January 1996.
The manual stemmed from a study to standardize charges for wastewater utilities between the different types of utility users residential, commercial, industrial, and institutional. It created equivalency units for the users compared to the designed residential use.
Kern said Delano is one of many communities statewide using this method of assigning utility capability.
The city and Delano Municipal Utilities have established its existing infrastructure fees based on the premise of making sure new development pays for itself, Kern said in the memo. He said, historically, projects such as the wastewater treatment plant construction, the water tower, and the water treatment plant have allocated a portion of the capital expense to the existing rate payers, and the remaining portion to new growth through infrastructure fees.
“The policy design is that capacity allocated to handle new growth is built in advance (to accommodate growth) and recouped through fee collection,” Kern said in the memo.
During rapid growth years of 2003-2006, Kern explained new growth kept a pace that met or exceeded the city’s planned infrastructure revenue collection through new hook-up fees. Since 2006, new growth has slowed, and the city has not collected the necessary infrastructure fees to meet the annual debt obligations assigned to new growth. Because of this, the past three years the city has met its debt obligations partially through fees and also through reserves accumulated in the previous high-growth years.
In 2008 and early 2009, Kern said the city and DMU made adjustments to rates to meet ongoing cash flow needs.
“It is anticipated that without a return of more moderate growth, the city will need to consider additional adjustments or debt restructuring within a few years,” Kern said in the memo.
What the city has done in the past
Kern said, with the recent construction of new facilities on the sewer, wastewater, and electric front, the city has increased its rates on each significantly since 2002.
He said the reconstruction of the wastewater plant, sewer trunk lines, and water trunk lines, combined with the new water treatment plant and water tower, have contributed to the increased infrastructure connection fees.
“Subsequently, the city’s fees have been under pressure from many development projects over the past eight-year period,” Kern said in the memo. “On many occasions, development projects have expressed the burden of the city’s fees and requested relief.”
Some past fee amendments include:
• March 2004 the city adopted an ordinance amending the process of calculating apartment units.
• Tax Increment Financing (TIF)/Tax abatements these are the most commonly used methods to reduce the amount of infrastructure charges against a project. Kern said, typically, the city has used this form of public subsidy only when it’s the only resort to a project not proceeding. He said the development of the existing industrial park utilized TIF to assist on a number of projects.
Most recently, the city has used TIF to offset infrastructure charges for the Delano Commons and also the Legacy of Delano assisted living development projects, both of which provided needed housing options in the city, Kern said.
He said TIF/tax abatement essentially capture taxes generated because of the project, allowing these future revenue streams to offset upfront development expenses.
Kern said, despite some risks, TIF remains a viable option to use for larger development projects, provided protections are in place for the city.
• reducing calculation based on previous water usage this method has been used by the city in recent years for amending SAC collection amounts.
It was noted that city staff recommends finding an alternative method to doing this in the future.
• deferring payments in June 2003, the city took a step to provide a method of assistance to those looking to expand or build new in the community.
This method involved the up- front payment of a portion of the infrastructure charges, and the remaining amount could be assessed against the property at an interest rate of 5.95 percent. This assessment would collect the outstanding infrastructure fees over a five-to-10-year period.
Kern said, in the memo, this mechanism has not been used since its creation, but city staff recommended leaving it in place for future possibilities.
Looking at area comparable communities
As the recent discussions with Modern Molding developed, city staff took a look at what differences existed in terms of infrastructure charges among comparable communities.
The survey consisted of two sets of data the first being the type of system used to calculate fee amounts, and the second being the amount of local fees (see graph).
Of the 11 cities in the survey, 10 are using the Met Council manual to generate the residential equivalency factor for infrastructure charges. Buffalo is the only city utilizing something other than that.
As for fees, the survey showed Delano to be among the highest communities in terms of total fees for sewer and water, and the highest community when including electrical charges, Kern said.
Some cities, such as Delano, St. Michael, and Otsego, have all constructed new wastewater treatment facilities since 2000, likely contributing to the higher-than-average SAC charges. Another large variable in the comparison is the provision of metro-wide wastewater services by the Met Council in the seven-county metro area. This impacts five cities in the comparison that are not independently responsible for their wastewater services.
Of the non-Met Council communities, the median cost for one SAC/WAC unit of construction is St. Michael at $9,632, with a range of $11,901 (Delano) to $6,079 (Elk River).
Figuring in the electrical factor
In addition to the water and sewer portions of the infrastructure fees, the electrical infrastructure fees also play a significant role in the cost of development in Delano, according to the memo.
In the example with Modern Molding, the electrical impact fees account for more than $52,000.
DMU has broken these costs into three categories an electrical access fee of $12,569, a need to upgrade the on-site transformer at a cost estimated at $23,500, and an additional estimated $13,000 to move the existing transformer location, install the new transformer, and maintain the system as “live” during this process so Modern Molding can remain up and running.
In looking at DMU’s electrical fees in comparison to other communities, an “apples-to-apples” scenario is less effective than sewer or water utilities, Kern said, explaining that the comparable communities within Delano’s geographical area are served by Xcel Energy, a private company, or Wright Hennepin Electric, a non-profit cooperative. He said Buffalo and Elk River have municipal utilities, like Delano does.
City staff examined the costs to an industrial user in Delano, or one wishing to locate to Delano, compared to those other neighboring communities. In the memo, it noted DMU historically has operated under the policy that new development should pay for itself, and explained Xcel Energy and Wright Hennepin follow a much different policy in other communities. Kern said both entities recover their capital costs through their electric rates.
The memo said, in the Modern Molding instance, it is most likely the business owner would pay the costs associated with the relocation and keeping the system live about $13,000, but the remaining amount that is charged by DMU wouldn’t be incurred in most other communities.
Where to go from here
At the Delano City Council meeting Tuesday night, the council approved a resolution approving an infrastructure fee policy for industrial expansion. Mayor Joe McDonald and Council Member Holly Schrupp were absent.
This resolution reduces infrastructure fees by 50 percent for industrial expansions, provided certain conditions are met.
These conditions include:
• the proposed construction meeting the city’s architectural and site building requirements.
• the city having investigated TIF/tax abatement and other subsidy opportunities and determining they are not feasible for the specific project.
Kern said the research done by city staff shows Delano had the highest infrastructure fees for an industrial expansion. He said this is a significant issue for the city, and said the city needs to collect enough fees to make payments on its debts and keep the infrastructure in good working condition.
“At the same time, economic development in the form of industrial expansion provides valuable jobs and tax base to the city,” Kern said in the memo.
He said, with rising gas prices and the goal of the city to continue residential growth, increasing jobs locally has “never been more important.”
“The more jobs that are available locally, the more Delano residents have access to nearby employment,” Kern said.
He also added the growth of the local tax base particularly with industrial development helps pay for the public services consumed by its residents.
“School levies, city tax levies, and even county expenses are spread over a larger tax base, thus reducing the overall impact on the existing property owners,” Kern said.
He said the expansion of Modern Molding may produce local tax generation of $15,000 to $18,000 per year.
The council is also recommending DMU adopt the same policy relative to the 50 percent reduction in established fees, with the stated conditions. The council is also requesting DMU adopt a more competitive policy regarding electrical equipment costs for industrial expansion, comparable to those used by other electric providers.
Kern said Delano Municipal Utilities met the night before the council meeting in a work session and discussed the issue in great detail. He said the commission wished to discuss the issue again, but said the general feeling he received was positive.
“The utility and commission and staff strongly support taking the same action the city council did, really for all the same reasons,” commented DMU General Manager Hal Becker last week. “We’re all in this together. We want to promote and help our local industrial accounts out, especially when they’re going through these expansion projects.”
Becker said further discussion on the issue is expected at the commission’s meeting Monday, April 20.