Get Smarter: Shorewood Enterprise Funds Analysis

Revised December 5th, 2023

Every 3 months, property owners in Shorewood receive a bill from the city for utilities and services. Those utilities and services are:

Recycling, Storm Water, Sewer and Water (if connected to city water)

The money from each of those line items are distributed to separate accounts called enterprise funds. Municipal enterprise funds allow a city to generate revenue through user fees to cover the costs of providing a service to the public and allow those who use the service to pay for it directly.

This means that those functions operate as businesses and the rates that each of the funds’ charges are expected to cover the expenses.

Necessary enterprises should only charge enough to cover operating costs and the costs of renewal and replacement. Necessary enterprises should be structured to only break even.

It is important to note that, per the city website, property taxes are not used to support the activities of the enterprise funds.^[1]

With that understanding of the purpose of these funds, let’s take a look at how each of the 4 funds in Shorewood are doing and what that means for taxpayers and homeowners in the future.^[2]

(Spoiler alert: some are doing poorly).

We’ll start with an easy one:

Recycling

Analysis: This fund covers fees and administration of the bi-weekly recycling pickup.

Operating income (user fees) are relatively static. Expenses increased 21% in 2021 leading to a small operating loss. Small fluctuations in expenses are to be expected. The fund is averaging a net income of $25K and appears to be healthy.

Storm Water Management Utility

Analysis: This fund covers the construction, maintenance, associated fees and administration of storm water handling facilities such as storm sewers and retention ponds.

Given that the purpose of enterprise funds is to cover the costs with providing the covered services, a valid question is why this fund is consistently running on average a $200K surplus. Capital outlays and borrowing have increased significantly.

Sewer

Analysis: This fund covers the construction, maintenance, associated fees and administration of the sanitary sewer infrastructure that handles waste from homes and businesses.

As shown in the table above, this fund has consistently run at a deficit each year from 2017 – 2021. Revenue increases have not kept pace with expenses causing an increasing loss of net income. Because expense reduction is difficult to attain, increasing revenue seems the likely remedy. Because virtually all homes are already connected to the sanitary sewer infrastructure, increase in the user base will be modest, consisting mostly of new construction. That means increasing fees on quarterly utility bills is the likely remedy for the shortfall.

Water

Analysis: This fund covers the construction, maintenance, associated fees and administration of the municipal infrastructure that delivers water to homes and businesses that are connected to the system.

While the table above shows only the five years starting in 2017, this fund has run at a loss for many, many years. While revenue shortfalls have improved from a 44% deficit in 2017 to a 21% deficit in 2021, it appears that the city has relied on borrowing rather than fee increases to cover those deficits. That is not a sustainable fiscal model.

Currently 45% of properties in Shorewood are connected to this infrastructure (1473 of 3262).

An additional 462 properties have a connection available to them but have chosen not to connect. This is likely due to the high cost of that connection. The city has a connection charge of $10,000. In addition, homes that currently have their own well, would be responsible for disconnecting from the well and providing a connection from the city water stub in the street to their current in-home plumbing. While each property is different, the additional plumbing expense to connect to city water is substantial.

City staff has provided potential options to “incentivize” (coerce) these properties to connect.^[3] These options include:

Required Time Frame: establish a policy that residents must connect within 2 to 5 years of water availability.
Increased Connection Fee: plan to increase connection fee significantly in several years and communicate this to residents to encourage them to connect.
Sale of House: establish a policy that any sold house needs to connect to water if it is available.
Building Permit: establish a policy that any home issued a building permit must connect to water.

These potential “incentives” are alarming given the current practice of “to expand the distribution system on an opportunity basis”.^[4] This means that the city will install water main as street is being reconstructed. This with the potential of the above potential coercions appears to be an attempt to bypass the water improvement process detailed in the city code 903.18. That allows the City Council to order an improvement, but “benefitting properties shall be assessed pursuant to the procedures set forth in M.S. § 429.” The current Birch Bluff Road does not follow that procedure as no properties are being assessed prior to connection.

It seems one of the strategies to overcome the current fund shortfalls, is to expand the customer base outside of the current processes detailed in city ordinances. ^[5]