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City looks to reduce WAC/SAC by 25 percent

As the Hastings City Council looks to adjust its water and sewer (utility) rates, they are also taking a look at a related fee: sewer access charges and water access charges.

SAC and WAC fees are charged at the time of new development or when an existing structure expands to a degree that could create additional demand on the city's water supply, explained Public Works Director Nick Egger. It is a one-time fee, charged when a developer or property owner obtains a building permit. That also means that WAC and SAC revenues depend in large part on economic development, something that has been lacking locally since about 2008 and the Great Recession.

The money the city collects from SAC and WAC doesn't fund day-to-day water and sewer operations, or even yearly utility maintenance. Those costs are borne by water and sewer rates paid quarterly by users. Rather, revenues from SAC and WAC are set aside over long periods of time to fund expansion or growth of the city's utility system — things like a new water tower, for example, or large sewer interceptor lines or lift stations, which would be built when the city recognizes utility usage will soon exceed the current system's capacity.

There are currently a few such projects the city expects in the next several years, to be paid for out of the city WAC budget: A new pressure reducing station and elevated storage tank in 2021 (estimated at $2.65 million together), a new well and pumphouse in 2022 ($1.2 million) and a new water treatment plant in 2025 ($3 million). The fund is also still paying off debt for a water well, water treatment plant and new trunk watermains, which were built back in the mid-2000s.

Given the existing debt burden on the fund, lower than expected revenues since 2007 and upcoming needs, the WAC fund as it's currently designed, isn't able to keep up with expenses.

"You can see that it is not a sustainable model," said Assistant City Administrator Julie Flaten at a Feb. 16 City Council workshop.

How it's charged

SAC and WAC is charged per unit, a measurement determined by the Met Council and adopted by the city. According to the Met Council website, one SAC unit is 274 gallons per day of potential capacity.

The confusing part is that the fee is not based on actual or expected usage. Instead, it considers what the maximum usage could potentially be. The reason for that, according to the website, is because "the system has to be designed to flow effectively under maximum potential usage. This way, if every business turned on every fixture all day, the system would not back up."

Met Council charges $2,465 per SAC unit. The city charges $945 per SAC unit and $3,075 per WAC unit.

The city does offer a 10-year financing program for the city SAC and WAC.

Not all cities charge SAC and WAC, and even among those that do, fee structures vary. In some cities that don't charge SAC and WAC, other fees may be significantly higher to fund necessary infrastructure expansion.

Burden on business

One of the concerns about SAC and WAC fees is the burden it places on business. In recent years, the issue has already come up. In early 2016, the Hastings Co-Op Creamery approached the Hastings Economic Development and Redevelopment Authority with a request to waive the fees. The co-op had hoped to expand its location, but doing so would have incurred a $1.3 million SAC/WAC charge, all due at the time of permitting. The city ultimately decided not to waive the fees, and the co-op has not moved forward with its expansion.

A few months later, the Hastings YMCA made the same request in regards to their expansion. There, the council agreed, waiving a total of $52,000 in SAC and WAC charges. The YMCA received a similar waiver back in 2004 when it first constructed its facility here.

Other businesses have needed help covering the expense of SAC and WAC. Within the past year, Egger told the council, both Las Margaritas and BreakAway Arts have used the city's SAC and WAC financing program, spreading the payment out over time rather than fronting the entire bill at once.

The city fees aren't the only ones local businesses have to worry about. The Metropolitan Council also charges its own SAC fee, separate from the city's.

Business concerns aren't lost on this year's City Council. At the February workshop, councilmember Tina Folch said that the cost on small business, especially, was concerning. She wanted to come up with more ideas for how the city could provide relief for small businesses when it comes to SAC and WAC. Councilmember Lisa Leifeld also wanted to take a deeper look at options, and councilmember Lori Braucks pointed out complaints about the costs for new construction versus an expansion, asking if there was any way to differentiate between the two in the fee structure.

"It seems tough for a small business to swallow," Braucks said.

In turn, the cost could be a factor in whether or not a business decides to operate here, Leifeld suggested. She questioned if a lower fee might attract more business. The same concern was noted in a recent economic development study, which HEDRA received at its February meeting. According to the report, Hastings charges considerably more in WAC than comparison cities (Cannon Falls, Red Wing, River Falls, Cottage Grove, Rosemount, Farmington, Prescott and Inver Grove Heights). In SAC fees, Hastings wasn't the most expensive, but also wasn't the lowest. However, of cities that also incur Met Council SAC fees, Hastings charges the most for both SAC and WAC combined (based on a standardized comparison).

But the council was also careful to acknowledge that changing SAC and WAC alone isn't necessarily going to spur development.

"Higher rate cities are growing like crazy," Braucks said, "which tells me this isn't the only factor."

Councilmember Trevor Lund agreed, and said the city needs to avoid thinking of SAC and WAC as a business incentive and instead work on making sure the numbers are right.

"Think about what these fees are supposed to do," he said.

Greg Stotko, a Hastings-based developer, offered his own comments at the workshop. He said he wants to see the city explore other options, as SAC and WAC are tough fees for developers to absorb. He suggesting adding a fee to property taxes to spread the burden on all residents, not just those who want to build or expand here, and said reducing the fees could make Hastings more competitive with communities that are outside the Met Council.

Attempts to reduce

At the February workshop, the council worked on selecting an option for adjusting local water and sewer rates. Their final direction at the workshop was to move forward with an option that not only creates more stability for the utility funds but also provides a 25 percent reduction in SAC and WAC. The loss in revenue from SAC and WAC, about $40,000, according to city staff, would be recouped in usage and meter charges instead.

For some of the council, however, that might not be enough. Mayor Paul Hicks at the meeting recognized that the reduction might not be as much as people would like to see.

"At least it's a beginning," he said.

Leifeld said the city needs to create a funding model that works right now, and then revisit it in a few years.

"Find a process that works for our current situation," she said.

Next steps

The city has not yet taken formal action on either WAC and SAC fees or quarterly utility rates. At the workshop, the council shifted its preferred option, which included a 25 percent reduction in SAC and WAC, to its finance committee. The committee will refine the proposed rate structure and send it back to the full council for final approval.