Lake Elmo staff propose 20% annual water and sewer rate increases for five years to cover new treatment and depreciation

Finance Director Clarissa Handler told the Lake Elmo City Council workshop on March 11 that staff are recommending a 20% increase in water and sewer rates each year for five years to put the utility funds on a sustainable footing.

"So we are here to discuss the 2025 utility rates," Finance Director Clarissa Handler said. "...we are recommending 20% every year for the next 5 years, and that would, essentially double the rate over a 5 year period slightly."

Why it matters: the city plans to bring more than $50,000,000 in capital projects online over the next three years for new water treatment plants funded by Minnesota Pollution Control Agency (MPCA) grants. Staff told the council the capital will be grant-funded but that operating and depreciation costs will fall to the utility funds. Handler said the plan assumes those operating costs will not be covered by the grant and that the treatment plants will substantially increase annual operations expenses.

The finance presentation and council discussion focused on three problems: operating losses in utility funds going back to 2019, underfunded depreciation for system assets, and uncertain future revenue from development connections. Handler said modeling uses a 10-year forecast built from three years of historical data and that the forecasts are sensitive to weather-driven water sales and timing of new development connections.

Financial picture and proposed change: staff showed a status-quo projection that would drive the water and sewer funds negative within the forecast horizon if rates were not increased. Under the staff proposal—20% annual increases for five years—cash balances rise over the same period while the city also begins charging for depreciation. Handler said the depreciation charge is intended to set aside funds to replace assets instead of relying on future bonding.

Council discussion flagged restricted cash and the scale of catch-up needed. "Some of this cash is restricted," a council member noted during the presentation, and staff pointed out availability and connection charges are restricted by city policy for capital or debt service but are not available for operations. One council member calculated the gap: to fully cover operating costs including depreciation in a single year, the water fund would require an increase roughly in the 80%-plus range and the sewer fund a similar order of magnitude—hence the recommended phased approach.

Stormwater: staff recommended no stormwater rate increase for 2025 in the packet, but councilmembers and staff said the stormwater fund is not covering operating expenses (excluding depreciation) and likely needs further study. One council member suggested a 15% increase for stormwater over a longer period would be needed to close the gap.

Development charges and other fees: council and staff noted water and sewer connection/availability charges have not been updated since February 2013 and are currently $3,000 (availability) and $1,000 (connection), the same for water and sewer. Staff recommended a study of connection and availability charges to consider replacement-cost methodologies and system-wide asset allocation.

PFAS treatment and the 3M settlement: council members asked staff to quantify how much of the rate increase is driven by projected operating-and-maintenance (O&M) costs tied to PFAS treatment. An engineer’s estimate referenced during the discussion showed a per-plant first-year O&M in the high-six-figures (the presentation cited figures around $690,000, rising to about $721,000 when inflation is included). Council members asked staff to separate the portion of projected rate increases attributable to PFAS-related O&M so the city could use that information when engaging trustees and legislators about reimbursement under the 3M settlement.

Direction to staff and next steps: Council agreed to place the recommended rate change on the regular council meeting agenda next Tuesday so the quarter‑1 bills can be produced with the new rates if adopted. Staff were directed to: - Provide the council a breakdown showing how much of the proposed increase is attributable to the new treatment plants (O&M) versus catch-up for depreciation and other legacy shortfalls; and - Run alternative scenarios (for example, the projection without PFAS-related costs) so council can see the sensitivity of the plan to those assumptions.

Councilmembers and staff repeatedly emphasized that the five-year, phased approach is intended to minimize immediate resident impacts compared with a single-year, large increase while still moving the funds toward policy targets.

Ending: Staff said they will bring the detailed rate tables and the requested breakdown to the council meeting next week. Council direction included pursuing a separate engineering analysis of connection and availability fees and continuing to refine the long-term maintenance capital improvement plan.