CONSOLIDATION PLAN PREPARED ON BEHALF OF THE MERGER ADVISORY COMMITTEE FOR THE CITY AND VILLAGE OF PEWAUKEE WAUKESHA COUNTY, WISCONSIN MARCH 25, 2010

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1 CONSOLIDATION PLAN PREPARED ON BEHALF OF THE MERGER ADVISORY COMMITTEE FOR THE CITY AND VILLAGE OF PEWAUKEE WAUKESHA COUNTY, WISCONSIN MARCH 25, 2010 MUNICIPAL ECONOMICS & PLANNING A Division of Ruekert/Mielke W233 N2080 Ridgeview Parkway 2010 Copyright Ruekert & Mielke, Inc. Waukesha, Wisconsin

2 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 INTRODUCTION Prior studies have shown that consolidation of the City and Village of Pewaukee would result in overall cost savings in both annual operation and maintenance and capital costs. However, these studies have also shown that City taxpayers would not benefit from these savings unless some means can be found to redistribute these cost savings between City and Village taxpayers and utility ratepayers. Prior studies suggested several alternatives that may be feasible for accomplishing this goal. The purpose of this document is to set forth a detailed and specific plan under which both City and Village taxpayers and utility ratepayers may share in the benefits of consolidation. It is intended that the recommendations of this plan be used as the basis for an agreement between the City and the Village that will be set forth in the Consolidation Ordinance that must be adopted by the City Council and the Village Board before a consolidation referendum can be held in both communities. PREVIOUS WORK Since 2001, the City and Village of Pewaukee have discussed and studied the consolidation of the two municipalities Study A consolidation study was prepared by Ruekert/Mielke and submitted to the City and Village in January This study found that consolidation would result in significant cost savings, both in operational costs and capital costs, as well as improved levels of service and other benefits. The 2002 study also found that, due to differences in the fiscal capacity (equalized property value per capita) and tax rates of the City and the Village that existed at that time, consolidation would initially increase the property tax rate for City property owners and decrease it for Village property owners. The study also found that a decrease in utility rates would likely more than offset this increase in property taxes for a majority of City property owners, although there is a minority of City property owners who do not receive municipal sewer and/or water service. These property owners, therefore, would receive a tax increase from consolidation with no offsetting utility rate savings. Based upon the expected areawide benefits of consolidation, the Consolidation Study Committee recommended that the City and Village authorize consolidation referendums based on the findings of the 2002 study. Such referendums were not authorized Memorandum of Understanding and 2008 Interim Report In September of 2006, the City and Village of Pewaukee entered into a Memorandum of Understanding authorizing further discussion on the possible merger of the two communities in order to examine ways to better share the savings of consolidation so that both Village property owners and City property owners would realize property tax savings. 1

3 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 After the Memorandum was executed, the Southeastern Wisconsin Regional Planning Commission (SEWRPC) facilitated working sessions with the City and Village Administrators, the Mayor of the City, and the President of the Village. The City and Village Administrators updated portions of the 2002 consolidation study and prepared an updated hypothetical budget for a merged municipality. In the spring of 2008, the results of this work were summarized by SEWRPC in the Interim Report to the City and Village of Pewaukee on the Update of the Consolidation Study. The updated study made findings similar to those of the 2002 study: (i) an overall costs savings would result from consolidation; and (ii) consolidation would financially benefit Village property owners more than City property owners unless a means were found to achieve a lower effective tax rate for former City area property owners within a consolidated municipality. The SEWRPC report recommended forming a Merger Advisory Committee, comprised of the Village President, one Village trustee and two Village residents, the Mayor, one City alderperson and two City residents, and the City and Village Administrators as advisory, non-voting members, with the SEWRPC Executive Director serving as the non-voting Committee Chair. The report further recommended conducting a more formal study on how to accomplish a merger by effectively blending the finances of the two communities together over a relatively long period of time. The goal of the study would be to recommend ways to keep the property tax rate for City property owners equal to or less than the current tax rate, and to identify one or more options for recovering revenues exclusively from properties within the current Village area. The 2008 report also recommended that the City and Village Administrators and Engineering staff examine in detail the potential capital cost avoidance from merging utility operations. These recommendations were accepted by the City Council and the Village Board and a Merger Advisor Committee was formed Consolidation Tax Rate Feasibility Analysis In the spring of 2009, the Southeastern Wisconsin Regional Planning Commission (SEWRPC) facilitated the preparation of a Consolidation Tax Rate Feasibility Analysis prepared by Ruekert/Mielke and the Boardman Law Firm and the review of the study report by the Merger Advisory Committee, which was comprised of representatives of both the City and Village. The purpose of this study was to review and evaluate options under which both City and Village taxpayers could obtain reduced property tax rates as a result of consolidation. The study identified three primary options for achieving this purpose: 1. Seek legislation to allow the creation of a special taxing district in the Village as part of the consolidation process. 2. Use of Village utility reserves to offset the tax levy 3. Creation of a utility district to fund certain street-related expenses within the current Village area After review of the study, the Merger Advisory Committee recommended that the City Council and Village Board proceed with two of the next steps outlined in the Consolidation Tax Rate Feasibility Analysis report, dated March 11, These recommended steps were as follows: 2

4 City and Village of Pewaukee Consolidation Plan Revised March 25, Seek legislation to allow the creation of a special taxing district for consolidation. This taxing district would encompass the area that is currently within Village limits. Property within this district would be taxed and the revenues would be used to make a payment to the consolidated municipality in order to reduce its general tax levy. This payment would enable both City and Village property owners to benefit from the reduction in overall property tax rates. 2. Conduct studies of the future sewer and water utility capital projects needed with and without consolidation to quantify capital costs that could be avoided, as well as the associated utility rate impacts, and determine the amount of Village utility reserves, if any, that could be used to create a tax rate reduction fund for the new consolidated municipality. This tax rate reduction fund would be used to reduce the general property tax levy for some period of time and keep the property tax rate for City property owners from increasing due to consolidation. This would offer another alternative by which both City and Village property owners could benefit from the reduction in overall property tax rates due to consolidation Utility Consolidation Studies Ruekert/Mielke prepared three studies regarding the consolidation of the sanitary sewer and water facilities: the Water Utility Consolidation Study; the Sanitary Sewer Utility Consolidation Study; and the Utility Consolidation Financial Analysis. Those studies evaluated how the water and sanitary sewerage systems could be connected and evaluated future capital cost avoidance that could be achieved by consolidating the sewer and water utilities. The Water Utility Consolidation Study analyzed the capacity of the City and Village water systems to supply projected future water demands through 2035 under two scenarios: the continuation of separate water utilities; and as a single interconnected water utility. The study determined the new water facilities that would be needed under each of these scenarios, given the projected water demands, and the estimated cost of those facilities. The study found that improvements totaling $10.3 million would be needed through 2035 if the two utilities remain separate. Consolidation of the utilities would significantly reduce the need for new facilities due to several factors, such as a reduced need for backup facilities for areas of the City that are separated from one another and the ability of the two systems to share well and storage capacity. A consolidated utility would require approximately $3.6 million of new facilities through Therefore, a capital cost savings of approximately $6.7 million could be achieved through consolidation. Additional comments provided after the completion of the study indicated that if consolidation does not take place, the City will need to replace the elevated water storage tank at City Hall with a new tank, rather than repainting that tank. The additional cost for the City of the new tank versus repainting the existing tank is approximately $1.6 million. The new tank would not be needed if the water utilities are merged; provided that the merger takes place in the next 1-2 years. Therefore, the estimated savings including the avoidance of a new elevated storage tank are approximately $8.3 million. 3

5 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 The Sanitary Sewer Utility Consolidation Study conducted a broad evaluation of the capital costs to the sanitary sewer utilities to identify future anticipated benefits of consolidation. The study reviewed existing sanitary sewer studies, inter-municipal agreements, sewer service areas and system capacities. Prior studies of the consolidation of the City and Village sewer utilities have concluded that, while there would be some reductions in administrative and operations costs, there would be little impact on capital improvement costs. These studies assumed that the two municipalities would continue to cooperate with each other by interconnecting the two systems and allowing sewage from the City of Pewaukee to flow through the Village sewer system. Consolidation of the two utilities would reduce the costs associated with independent planning for the two systems and negotiation and administration of the inter-municipal agreements. Without consolidation, the City could be at risk for significantly higher capital costs to serve areas of the City that are currently without sewer service. The purpose of the Utility Consolidation Financial Analysis was to evaluate the impacts of consolidation of the sewer and water utilities on future utility rates; determine how much of the existing Village utility reserves, if any, could be used for tax rate reduction for a consolidated municipality; and estimate the likely impacts on future user charge rates of withdrawing utility reserves, taking into account future capital expenditures. An abbreviated summary of the findings of that study is as follows: 1. Current water and sewer user charges for City customers are currently about the same as those for Village customers, taking into account the slightly higher amount of water use per customer for City customers. 2. Since there are only modest operation and maintenance savings expected from consolidation of the sewer utilities, the forecast rate increases for a consolidated utility are similar to the rate increases that would be expected for separate City and Village sewer utilities if the communities would continue to cooperate. The consolidation of the sewer utilities would result in slightly lower rates for both City customers and Village customers, as compared to maintaining separate utilities. If the Village refused to allow the City to serve areas using the Village s sewer system, the sewer rates for the City would be significantly higher. 3. Consolidation of the water utilities is expected to yield significant capital cost savings. These savings would not be shared equally by City and Village customers, however. City ratepayers would receive far bigger savings in future water rates as compared to Village ratepayers. 4. The earlier Consolidation Tax Rate Feasibility Analysis hypothesized the withdrawal of $3.50 to $5.25 million in Village utility reserves for the purpose of making a consolidation payment to the consolidated municipality in order to achieve property tax savings for City tax payers as well as Village tax payers. That study pointed out that the amount that could be withdrawn from utility reserves should be verified and the impacts of such a withdrawal on future user charge rates should be studied. The Utility Consolidation Financial Analysis considered the impact of the withdrawal of $4.75 million in Village utility reserves to make a consolidation payment to the consolidated municipality in order to prevent property taxes from increasing for City property owners due to consolidation. 4

6 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 The withdrawal of funds would reduce the amount of reserves, but not below a reasonable level. That study concluded that it appears to be feasible to withdraw approximately $4.75 million from utility reserves without significant impacts on utility customers. 5. When both the sewer and water utilities are considered, both City and Village customers would benefit from the consolidation of the utilities. However, City customers would benefit substantially more than Village customers in terms of future utility rate savings. 6. If the City and Village were successful in obtaining legislation to allow for the creation of a consolidation taxing district, not only would City and Village property owners benefit from reduced property tax rates, but utility customers in both the City and the Village would also experience lower future water and sewer rates. To date, success in this regard has not been forthcoming. 7. If the City and the Village were not able to create a consolidation taxing district, utility reserve funds could be used to ensure that both City and Village property owners share in the benefits of consolidation. The use of utility reserves would enable the consolidated municipality to reduce tax rates for City property owners, all other factors being equal. It would also achieve an even larger property tax rate decrease for Village property owners. However, the savings in utility user charges would be somewhat smaller for both City and Village customers under this approach as compared to the use of the consolidation taxing district. GOALS AND GUIDING PRINCIPLES OF THIS PLAN The overall purpose of this plan is to provide detailed and specific steps by which the City and the Village can ensure that the savings realized from consolidation will be shared by both City and Village taxpayers and utility ratepayers. Within that overall purpose, the goals are to: 1) achieve consolidation in such a way that both City and Village taxpayers and ratepayers experience benefits either through a reduction in property tax rates or utility user charges or both; and 2) find a means to equalize, to the extent possible, structural differences between the City and the Village in terms of assets and liabilities that each will bring to the consolidated municipality. Several guiding principles were used in developing this plan: 1. It is difficult to precisely forecast the projected tax levy/tax rate impacts of consolidation. Both short and long-term benefits are anticipated, but are difficult to quantify due to outside factors such as the economy and the fact that future spending decisions will be made by future governing bodies. 2. Because of existing differences in property value per capita, assets and liabilities and tax rates, a General Fund consolidation payment from the Village to the Consolidated General Fund would be needed to more fairly distribute the benefits of consolidation between City and Village taxpayers. Without such a payment, the consolidation of general government operations of the City and Village will disproportionately benefit the 5

7 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 Village of Pewaukee taxpayers in the form of an immediate reduction in general property taxes, coupled with an immediate increase in general property taxes for City taxpayers. 3. Due to differences in existing reserve balances, debt and upcoming capital projects, a Utility Fund consolidation payment from the City to the Consolidated Utilities would be needed to more fairly distribute the benefits of consolidation between City and Village utility ratepayers. Without such a payment, the consolidation of the utility operations of the City and Village will disproportionately benefit the City of Pewaukee ratepayers in the form of future capital cost avoidance and larger reserve balances to minimize future rate increases. This will result in greater future utility rate savings for City customers as compared to keeping the utilities separate. 4. The benefits of consolidation for City utility ratepayers cannot be considered to offset the increase in property taxes that would occur for taxpayers (without a consolidation payment) because a significant percentage of City property owners do not have utility service. Therefore the means for more fairly distributing the benefits of consolidation for taxpayers and ratepayers must be considered separately since these are distinct constituent groups. 5. The amount of the payment(s) should be determined, to the greatest extent possible, based on objective, verifiable facts and plans rather than hypothetical forecasts of future conditions. 6. The net present value (value in today s dollars) of the payment or payments should be the same regardless of the source of funds or the manner in which the payment or payments are used. 7. The amount of the payment or payments should not exceed the anticipated benefits to be received by the group of taxpayers or ratepayers making the payment(s). In other words, there should still be a net benefit to the taxpayers or ratepayers after taking the payment(s) into consideration. 8. This plan includes forecasts of future operating expenditures, revenues, tax rates and utility rates to illustrate the anticipated impact on tax rates and utility rates of the proposed payment(s). However it must be understood that these figures are for illustration only and that actual conditions will vary based on the policy decisions of the consolidated government and general economic conditions which are beyond the control or ability of the Merger Advisory Committee to predict with any degree of accuracy. The primary elements of this recommended plan will include: 1. The recommended amount of the payment or payments 2. The recommended source of funds for the payment or payments 3. Recommended requirements for or restrictions on the manner in which the payments are used 6

8 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 ASSETS AND LIABILITIES OF THE CITY AND VILLAGE As stated above, one of the guiding principles used in developing the proposed consolidation payments is that the amount of the payment(s) should be determined, to the greatest extent possible, based on objective, verifiable facts and plans rather than hypothetical forecasts of future conditions. A reasonable estimate of the forecast budget of the consolidated City has been prepared (as described below) based on the current budgets of the City and Village. However, the actual budget will be determined by the City Council of the new City, and therefore cannot be determined exactly at this time. Any future projections of the budget beyond the first year are even more subject to variation from the actual due to a variety of factors such as future policy decisions and economic conditions. While the future budgets of a consolidated municipality are difficult to predict, the amount of reserve funds, debt and other assets and liabilities that the City and Village each bring to the consolidated city can be determined with a high degree of accuracy. The assets and liabilities that are of interest are: 1) financial obligations other than the annual operating budget that the City and Village have already incurred or are about to incur; and 2) spendable resources, other than the tax levy or utility user charges and other annual revenues, that the City and the Village have accumulated that are or will be available to meet their financial obligations. These items represent the known financial obligations and resources incurred or accumulated by the City and Village prior to consolidation, rather than a forecast of future decisions that will be made by the new City Council. It should also be noted that existing capital assets, such as buildings, roads and the like, are not spendable resources that are available to meet future financial obligations. Capital assets will require the municipality to incur future operation, maintenance and replacement costs and these assets, in some respects, represent both an asset and a future liability. The objective is to determine the net cash equivalent financial position of each municipality by considering known financial assets and obligations. Therefore, for purposes of this study, the terms assets and net assets will refer only to financial or spendable assets as described above. General Fund The General Fund of a municipality is used to fund the government activities for which the primary revenue source is general property tax revenues. The General Fund includes most of the revenues and expenditures of a municipality, with the exception of Enterprise/Proprietary Funds. Enterprise Funds are separate funds used to account for business-type activities such as a Water Utility, Sewer Utility or Storm Water Utility, which are funded primarily through charges for service (utility rates). Table 1 shows the General Fund assets and liabilities of the City and Village as of December 31, 2008, as well as forecast changes due to events that occurred in 2009 and events that are expected to occur in and which can be estimated at this time. This analysis focused on near-term inflows and outflows of spendable resources. The assets included were 7

9 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 spendable resources existing fund balances, special assessments levied but not yet collected and anticipated special assessments for near-term capital projects. The liabilities included were future financial obligations that have already been incurred or are anticipated to be incurred in the near future outstanding long-term debt, debt expected to be incurred in 2010, and anticipated near-term infrastructure capital costs. In order to take into account the relative size of each municipality in terms of taxing ability, the net assets for each municipality were divided by the total equalized property value to determine the amount of net assets per $1,000 of equalized value. As of December 31, 2008, the City of Pewaukee had net General Fund assets of -$0.664 per $1,000 of equalized value, while the Village Pewaukee had net assets of -$5.152 per $1,000 of equalized value. Both municipalities had future financial obligations that exceeded the current amount of accumulated financial resources. This means that, for both municipalities, future revenues such as the tax levy will be needed to help meet these financial obligations. However, the Village had $4.488 per $1,000 of equalized value more in future obligations as compared to the City. Based on the amount of total equalized value in the Village multiplied by the gap of $4.488 per $1,000 of equalized value, additional funds of $4,414,271 would be needed to increase the Village s General Fund resources to a level that is comparable to the City s General Fund as of December 31, When actions taken in 2009 and anticipated near-term actions or obligations are taken into account, the gap between the City and the Village General Fund obligations narrows somewhat. These factors included the estimated changes in fund balances during 2009; debt that was issued in 2009 or is budgeted to be issued in 2010; special assessments levied in 2009; anticipated major infrastructure projects in ; and estimated special assessments for future City road projects in Including these factors, the City s forecast net assets are -$2.540 per $1,000 of equalized value, while the Village s forecast net assets are -$6.095 per $1,000 of equalized value. Therefore, the Village is forecast to have $3.554 per $1,000 of equalized value more in future obligations as compared to the City. Based on the amount of total equalized value in the Village multiplied by this gap of $3.554 per $1,000 of equalized value, additional funds of $3,496,322 would be needed to increase the Village s General Fund resources to a level that is comparable to the City s General Fund. Utilities The City of Pewaukee has two Enterprise or Utility Funds a Water Utility and a Sewer Utility. The Village has three such funds a Water Utility, a Sewer Utility and a Storm Water Utility. The Village Storm Water Utility is a relatively small fund that did not carry a balance of cash and cash equivalents as of December 31, Since the City does not have a storm water utility and the Village s Storm Water Utility has not accumulated a fund balance, only the Water and Sewer Utilities were considered for this analysis. Unlike a general government fund, which is only allowed to carry undesignated reserves in an amount sufficient for an operating reserve (i.e. 25% of annual operating expenses), a utility fund may accumulate a substantial balance of unrestricted cash and cash equivalents. Therefore, it 8

10 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 is not uncommon to find utilities with fund balances in excess of outstanding debt and/or upcoming capital projects. This is the case for the Village of Pewaukee utilities, but not for the City of Pewaukee utilities. The Village utilities have accumulated substantial reserves relative to the outstanding debt, upcoming capital projects and customer base. Therefore, the analysis of utility assets and liabilities did not look at how much should be added to City utility reserves to increase them to a level comparable to the Village utility reserves. Instead, it looked at how much could be withdrawn from the Village utilities to reduce the level of reserves to a level that is comparable to the City s utility reserves, while still maintaining adequate reserves. Table 2 shows the actual utility reserves as of December 31, 2008, and the estimated utility reserves as of December 31, As shown, the City had total utility reserves of $4,649,728, while the Village had total utility reserves of $8,855,483. Table 2 also shows the estimated minimum reserve needs for each of the utilities. The minimum reserves carried by a utility should generally include an operating reserve equal to at least 25% of the annual operating expenses plus a debt service reserve equal to the highest annual debt payment required for all outstanding long-term debt. This analysis defined minimum reserve needs conservatively as 50% of annual operating expenses, plus the highest annual debt service payment required for all outstanding debt, plus the estimated amount of annual debt service payments for capital projects included in the 5-year Capital Improvement Program for each utility plus additional water utility projects through 2025 identified in the Water Utility Consolidation Study. The Water Utility capital projects that were taken into account for each municipality included only those projects that would be needed if the two municipalities were to consolidate. The specific projects that were included are shown in Appendix B. Comparing the amount of actual reserves to the estimated minimum reserves required, Table 2 shows that the City currently carries approximately 1.52 times its conservative minimum reserve needs. The Village carries approximately 4.01 times its conservative minimum reserve needs. A withdrawal of $5,497,901 would reduce the Village s reserves to $3,357,582, or 1.52 times the conservative estimate of the minimum amount of reserves needed. Withdrawing this amount of reserves could result in the Village borrowing for certain future capital projects that it would have otherwise cash financed from utility reserves. This could, in turn, result in the need to increase utility rates to cover the associated debt service. The potential impacts on future utility rates of withdrawing utility reserves were analyzed for purposes of this plan and are described in the section below entitled Forecast Impacts on Tax Rates and Utility Rates. Summary The financial statements of the City and the Village show that: 1. Compared to the current City of Pewaukee, the Village would contribute a significantly lower value of net assets per $1,000 of equalized property value to the General Fund of a consolidated City. 9

11 City and Village of Pewaukee Consolidation Plan Revised March 25, Taking into account the relative size of each municipality, in terms of equalized property value, an increase of $3,496,322 in the Village s General Fund reserves would be needed to raise its net assets per $1,000 of equalized value to a level comparable to the City s. 3. Compared to the City s Water and Sewer Utilities, the Village Water and Sewer Utilities would contribute significantly more reserves to the consolidated utilities. If the Village and the City were to remain separate, these are resources that could be used to offset future capital projects and minimize utility rate increases for Village ratepayers. In the alternative, Wisconsin Statutes would allow the Village to transfer these funds to its General Fund to be used for tax rate relief, benefiting Village taxpayers. If the City and Village were to consolidate, these funds could be used for similar purposes by either the consolidated utilities or the consolidated General Fund, thereby benefiting either the utility ratepayers or the taxpayers of the consolidated City. 4. Taking into account each utility s annual operating costs, debt service for existing outstanding debt, and estimated debt service for future capital projects through 2025, it is estimated that a withdrawal of $5,497,901 from the Village s utility reserves would reduce the Village s reserves to 1.52 times the minimum amount of reserves needed. This withdrawal would put the Village s utility reserves at a level comparable to the City s utility reserves. RECOMMENDED PLAN As stated earlier, the recommended plan must achieve two goals: 1) achieve consolidation in such a way that both City and Village taxpayers and ratepayers experience benefits either through a reduction in property tax rates or utility user charges or both; and 2) find a means to equalize, to the extent possible, structural differences between the City and the Village in terms of assets and liabilities that each will bring to the consolidated municipality. The recommended plan proposes the use of Village Utility reserves to establish a fund within the General Fund of the consolidated City that can be drawn from in future years to meet part of the new City s expenses. The use of Village Utility reserves would serve several purposes: 1. It would provide a source of funds that Village of Pewaukee taxpayers can bring to the merger to contribute to the general operating expenses in place of some of the property taxes that they currently pay. 2. It allows the merged municipality to have a lower tax rate than the City s current tax rate so that City taxpayers can benefit from their proportionate share of the savings. The gap between the Village s current tax rate and the tax rate that Village taxpayers would pay if they only received their proportionate share of the savings will be made up by the use of utility reserves. 10

12 City and Village of Pewaukee Consolidation Plan Revised March 25, The removal of these funds from the Utilities would also serve to put the City and Village utilities on more equal footing coming into the merger. Rather than having City utility customers receive a double benefit of savings in capital costs and sharing in the benefit of the Village s higher level of utility reserves, the reserves can be used to cover a portion of the Village s share of the General Fund expenses in the new City. 4. It would also have the effect of shifting some of the benefits of the merger from the City s utility ratepayers to the City s taxpayers. Rather than having taxpayers experience an increase in tax rates while utility ratepayers get benefits described above, City taxpayers would receive their proportionate share of the General Fund savings and City water utility ratepayers would still benefit from reduced future capital costs. The recommended plan also proposes the creation of a Street Utility District encompassing the boundaries of the existing Village as a means to further improve the distribution of costs and benefits between City area taxpayers and Village area taxpayers. The Street Utility District is recommended in order to achieve meaningful and long-term tax rate benefits for City taxpayers as well as Village taxpayers and to create a more fair method of funding street maintenance costs in the consolidated City. Each of these recommendations is explained in more detail below. Use of Village Utility Reserves Disparities exist between the City and the Village in both the financial position of the General Fund and the Utility Funds. In the case of the General Fund, the City has the superior level of financial resources. In the case of the utility funds, it is the Village that has the superior financial position. From the perspective of taxpayers and ratepayers, however, these differences do not cancel each other out because not all City property taxpayers are also utility customers. Therefore, these disparities must be resolved separately in order to ensure that the benefits of consolidation are distributed to all ratepayers and taxpayers to the fullest extent possible. It is recommended that a withdrawal of $5,497,901 from the Village utilities be used to make a payment from the Village to the General Fund of the consolidated City. This represents the amount that would be needed to reduce the amount of the Village s utility reserves to a level that is comparable to the City s, as compared to minimum reserve needs. It will therefore achieve an equalization of utility funds between the Village and City utility funds by reducing the Village s utility reserves, rather than increasing the City s utility funds. This is a rational approach, given that the City and the Village both have adequate utility reserves already and do not need to increase their utility reserve funds. It is also more than the amount that would be needed to equalize the disparity between the General Fund net assets of the City and the Village and would provide a substantial amount to use for future tax rate relief. There are two issues that need to be resolved with respect to the specific use of the Utility funds. First, there is the issue of how the funds will be designated within the General Fund. Wisconsin municipalities may not accumulate undesignated fund balances in excess of a reasonable amount needed as an operating reserve. Funds held within the General Fund must be reserved 11

13 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 or designated for a specific purpose, such as future capital projects or debt service. In order to address this issue, it is proposed that the funds be reserved as a debt service fund or debt redemption fund to be used to cover a portion of the debt service of the consolidated City. The existing debt service schedules for the City and the Village are included in Appendix A. As shown, the general fund debt service of the City and Village will total $2,230,367 in 2010, and will gradually decrease each year over the next 10 years. The second issue is the extent to which the Consolidation Ordinance approved by the City and the Village should specify the amounts to be withdrawn from the fund each year for tax relief. The Consolidation Ordinance could include a schedule of specific amounts per year, specific percentages each year, or more general guidance as to the use of the funds. It is recognized that it may be considered desirable by some to include a defined schedule of tax relief payments per year in the Consolidation Ordinance, in order to provide certainty as to how the payments will be used. Without such a schedule, the consolidation payment could be drawn down faster than is currently anticipated. However, there are some practical difficulties with attempting to develop a set schedule at this time. First, it is assumed that the funds will be held in an interest-bearing account. Since future interest rates are unknown, it would be difficult to determine the absolute dollar amounts that will be available in the future. This difficulty could be overcome by establishing a percentage of the remaining fund balance that would be used each year, rather than an absolute dollar amount. The more difficult obstacle is the fact that future tax rates cannot be predicted with any degree of certainty because they could change due to a multitude of factors, many of which are outside the control of the City Council. If such factors result in decreasing tax rates, the Council may desire to reduce the amount of tax relief funds applied each year and extend the tax rate relief out for additional years. In addition, it is uncertain at this time how levy limits will impact the consolidated City s budgets in the future. It may be advantageous to have some flexibility in the application of the consolidation payments in order to accommodate future levy limits. For these reasons, it is recommended that the Consolidation Ordinance not include a schedule of specific amounts per year to be drawn from the fund and applied to the consolidated City s debt service. This approach would provide a designated purpose for these funds and would also establish a maximum amount that could be used each year, while still providing some flexibility to the new City Council in the use of these funds. Street Utility District The Consolidation Tax Rate Feasibility Analysis noted that although Village expenditures per capita for most services are comparable to the City s, the Village currently spends significantly more per road mile to maintain its local streets, as compared to the City. That report also noted that the Village generally has more publicly maintained street lights and more streets with sidewalks than the City. That report proposed the creation of a Street Utility District encompassing the area within the current Village limits as a means to charge these higher costs of street maintenance to the area within the consolidated City that receives a more urban level 12

14 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 of service in terms of street amenities. This would also have the benefit of helping to shelter taxpayers in the current City area from experiencing an increase in tax rates due to consolidation. Table 3 shows an analysis of City and Village budgeted 2010 expenditures per road mile. As shown, the Village has budgeted over twice as much per road mile compared to the City, which has historically been the case. The most significant differences are in the amount budgeted for wages and benefits and the amount budgeted for electricity for street lighting. Table 4 shows an analysis of the number of full-time equivalent (FTE) laborers dedicated to street maintenance in the City and the Village. The Village employs nearly twice as many FTE laborers per road mile compared to the City. The Village also spends approximately 24 times as much per road mile for electricity for street lighting. The proposed budget for the consolidated City is based on the assumption of utilizing the same total number of laborers and the same total costs for electricity as the City and the Village do currently. However, if the consolidated City were to provide a level of service per road mile throughout the consolidated City that is roughly equivalent to the City s current level of service, fewer laborers and much less electricity would be required. Table 5 shows a proposed method for allocating a share of the consolidated highway department costs to a street utility district. It is proposed that the wages and benefits of the Highway Superintendent and the mechanics, as well as the costs of various operating supplies and expenses be allocated entirely to the General Fund as a general, city-wide cost. The wages and benefits associated with the number of laborers required to provide the level of service provided to the City currently would be allocated as a city-wide cost, while the cost of the additional laborers required to provide a higher level of service in the Village would be allocated to the street utility district. Similarly, the proportionate share of the electricity costs that is equivalent to the cost per road mile to provide the level of service currently provided by the City would be treated as a city-wide cost, while the cost over and above that amount would be allocated to the street utility district. Using this approach, approximately 20% of the total consolidated City costs, or $324,314 would be allocated to the street utility district. It is recommended that this amount be funded through a utility district tax imposed on property within the district. It is important to note that this amount is an estimate based on differences in current budgeted expenditures per road mile between the City and the Village. If a Street Utility District is established, the amount that could be charged to the District each year would be the estimated cost of services provided within the District that are over and above the level of service provided to the rest of the City. This figure would change if there were changes in the level of service provided. FORECAST IMPACTS ON TAX RATES AND UTILITY RATES For purposes of testing whether the recommended plan is likely to achieve the stated goal of achieving benefits for City and Village taxpayers and ratepayers, an attempt was made to forecast the impacts on tax rates and future utility rates of the recommended plan. This analysis 13

15 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 relied on the proposed merged general fund budget and the forecast utility rates that were previously prepared for the Consolidation Tax Rate Feasibility Analysis and the Utility Consolidation Financial Analysis described above, with certain updates and refinements described below. The details of this analysis may be found in the Appendices to this report. Proposed Merged General Fund Budget The City and Village Administrators worked cooperatively to prepare a proposed budget for a consolidated municipality. The merged budget prepared by the Administrators includes only general municipal revenues, operation and maintenance expenses, and existing debt service. Utility operations and utility capital costs were not included in this merged General Fund budget. This effort was initially conducted in conjunction with the preparation of the actual City and Village 2008 budgets and was completed in the spring of The proposed merged budget was updated in 2009 in conjunction with the Consolidation Tax Rate Feasibility Analysis, based on the City and Village 2009 budgets. Due to changes in the economy and policy changes made that had significant impacts on the 2010 budgets, the 2010 budgeted costs and revenues of both the City and the Village are substantially different than the 2009 budget. Therefore, the merged budget was again updated by the City and Village Administrators to reflect the adopted 2010 budgets of the City and Village. The 2010 budget information is attached as Appendix C. This estimate of the savings in annual operating costs for general government services, based on the 2010 budgets of the City and Village, identified savings of a minimum of $331,000 per year. These savings were based on conservatively high estimates of the cost to operate a consolidated City. The budget was prepared using the following general assumptions: 1. In every area where there are differences in the cost structure between the City and the Village, for example full-time staff versus contracted services, or different levels of wages and benefits, the consolidated budget assumed that the costlier option would be selected. 2. The budget was based on the assumption of in-house staffing of all functions except for City Planner and City Attorney 3. It assumed the higher of the two wage and benefit packages between the City and Village for all staff positions. For City employees where there are not comparable positions within the Village (i.e. Fire Department), it was assumed that wages would remain the same, but that the employees would receive the Village s benefits package. 4. It did not estimate future savings on vehicle or equipment purchases. Due to these conservative assumptions, there may be additional cost savings that could be achieved, depending on the decisions of the new City Council. For example, the estimated costs for a consolidated City assumed that the new City would have its own Police Department and that the more costly benefits package provided by the Village would be offered to all 14

16 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 employees of the consolidated City. An analysis of the difference in benefit structures between the City and Village indicates that significant additional savings could be achieved if benefits offered by the new City were in line with those offered by the current City. In addition, this estimate was based on 2010 budgets and did not include a detailed study of potential future efficiencies and cost savings from eliminating duplication in vehicles and equipment. It is expected that additional savings would likely be captured as the details of operating a consolidated City were determined by the newly-elected City Council. Forecast Impacts on Tax Rates Based upon these budgets, the amount of general operating fund savings that could be realized by consolidation has been calculated, and a combined tax rate for the consolidated municipality was computed. The use of tax relief funds from the consolidation payment and the allocation of costs to a proposed street utility district were then factored in to determine the impact of consolidation on the tax rates for both City and Village property owners. Table 6 summarizes the 2010 tax levies and tax rates of the City and the Village. Table 7 shows the proposed Year 1 use of the Utility reserves and the Street Utility District to fund a portion of the budget of a consolidated City. As shown, the City s 2010 tax levy was $7,550,766, while the Village s tax levy was $4,436,838, or a total of $11,987,604 between the two municipalities. The total tax levy for the proposed merged budget without the use of utility reserves or the street utility district would be $11,656,114, for a savings of $331,000. Based on the relative amount of property tax base in each community, the City s proportionate share of that savings would be approximately $245,000, while the Village s share would be approximately $85,000. Distributing the savings in this manner would reduce the City taxpayers contribution to a consolidated municipality to $7,305,050 and the Village taxpayers contribution to $4,351,064. It is proposed that part of the Village taxpayers contribution to the funding of a consolidated municipality would consist of the street utility district taxes, estimated at $324,000 per year. In addition, the use of utility reserves in the amount of $1,750,000 in the first year is proposed to be used to offset part of the amount that would otherwise be levied in taxes for both the Village and the City. As shown, the use of these two revenue sources would reduce the amount of property taxes levied to $7,102,478 on City properties and $2,479,322 for Village properties. This would result in an estimated overall property tax rate of $2.52 per $1,000 of equalized value. As noted in a previous section of this report, the amount of the utility reserves to be used each year is not specified in the Consolidation Ordinance and would be determined each year by the City Council of the consolidated City. Therefore, the amount that is actually used in the first year could vary from the amount shown in Table 7. As illustrated by this table, a lesser amount could be used in the first year while still allowing the City of Pewaukee taxpayers to receive their proportionate share of the estimated $331,000 in annual savings. The proposed street utility district would be funded through a tax on property within the district. This district would encompass the area within the current Village limits. For purposes of 15

17 City and Village of Pewaukee Consolidation Plan Revised March 25, 2010 estimating the tax rate that would be needed, the total property value of the Village was used. It is estimated that, based on the estimated 2010 merged budget, a tax rate of $0.33 would be required to fund the street utility district. This would be an additional tax for those properties within the district, resulting in a total tax rate of $2.85 for those properties, located within the former Village. Certain caveats to these estimates must be noted. The 2010 merged budget is being used solely to provide a reasonable approximate budget for purposes of the analysis in this report. The budgetary figures are not intended to represent exactly what the budget of a consolidated municipality would be as this would be a decision to be made by the elected officials of the consolidated community. Forecast Impacts on Utility Rates The Utility Consolidation Financial Analysis developed forecasts of future Water and Sewer Utility revenues, O&M and capital expenditures and user charges per customer through The forecasts were extended to 2025 in order to take into account all of the major future capital improvements identified in the Water Utility Consolidation Study, the last of which were anticipated to be needed by Several cash flow scenarios were prepared to estimate future utility rate increases that would be needed if the utilities were to remain separate, if they were to consolidate and not use utility reserves for purposes of a consolidation payment, and if they were to consolidate and use utility reserves for purposes of a consolidation payment. The utility financial analysis was updated for purposes of this plan to take into account new information received since completion of the utility consolidation studies and to evaluate the impact of different assumptions about the Village s use of its utility reserves. Under the scenario of separate utilities, the City s costs were updated to include a new elevated water storage tank on the City s east side at a cost of $2.0 million, versus repainting the existing City Hall tank at a cost of $400,000. Also under the scenario of separate utilities, it was assumed that the Village would draw down its existing utility reserves to the extent possible to offset future capital costs and keep rates low, rather than maintaining its reserves at the current levels. Similarly, under the scenario of consolidated utilities without the use of utility reserves as a consolidation payment, it was assumed that the reserves would instead be used to offset future capital costs and keep rates as low as possible. Finally, the scenario that included consolidation of the utilities and use of utility reserves to make a consolidation payment was revised to reflect the payment amount proposed in this plan. Table 8 summarizes the current and projected 2025 utility user charges per customer for the City and Village Water and Sewer Utilities under the three scenarios described above: continuation of the existing separate utilities, consolidation of the utilities without the use of utility reserves to make a consolidation payment, and consolidation of the utilities and withdrawal of $5,497,901 of utility reserves to make a consolidation payment. As shown, it is expected that City utility ratepayers would benefit from the consolidation of the utilities in terms of lower future 16