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68 years ago, voters removed Shakopee Public Utilities from city oversight. Now some want to put it back.

Water ran hot at the Shakopee City Council meeting on July 2, when council members and staff discussed Shakopee Public Utilities water rates.

City Administrator Bill Reynolds shook his finger as he laid out his frustration with the utility company. Meanwhile, SPU Planning and Engineering Director Joseph Adams sat silently in the back row, shaking his head.

SPU and the city have long had a tense relationship, Shakopee Mayor Bill Mars said, but the strain came to a head recently over a $211,000 water capacity charge (formerly known as a water connection charge) proposed for a donated Lions Park Splash pad.

Eventually, the SPU commission waived the splash pad fee, but the splash pad became a poster child for the city’s frustration with SPUC. The city council is now looking into moving the utility back under the jurisdiction of the city. And Kayden Fox, who ran for the Shakopee City Council in 2017, started an online petition to merge the two entities.

Almost 70 years ago, a contrasting controversy in Shakopee was bubbling under the surface when the city council passed a motion to move the utilities out from under the city’s umbrella.

SPU staff and commissioners think residents have forgotten why. They say keeping SPU separate helps protect Shakopee from political influence, and say their prices are fair based on Shakopee’s rapid growth. Meanwhile, some city officials say SPU overstepped its bounds by over-charging residents for water connection fees and not being transparent about its finances.

SPU is born

Up until the 1950s, the city managed its own water and electric utilities, through what was called Shakopee Municipal Utility. The city subdivision was run by a superintendent, with oversight by a city light and water committee of the city council.

But in the 1940s, as Shakopee grew, the uptick in business demanded more time. That’s when some people in the community began to suggest Shakopee’s water and electric utilities should divorce itself from city oversight.

In December 1950, the city council voted to create an independent utilities commission. But then-Mayor Clarence Czaia opposed the idea, and vetoed the move. SPU was not born until March 1951, when the council revised the measure, which passed “by the barest of margins,” according to the SPU Centennial History report.

In the 1960s and 1970s, SPU was a popular entity that was widely liked, according to the centennial report. The community room in SPU offices was a popular gathering spot where senior citizens would hold hot dish suppers and play cards.

The report also notes the city frequently tapped into the commission’s reserve fund for community improvements. In 1967, SPU transferred $48,000 to the Shakopee Parks and Recreation department to help build a new swimming pool, and $10,500 for a new city hall.

Controversy surrounding SPU’s fees expanded with the city’s population. SPU Manager John Crooks said when the Highway 169 bridge was constructed, it made traveling to Shakopee from the Twin Cities easy, sparking growth.

In order to accommodate that growth, SPU began to raise its water capacity charges to pay for new water facilities.

“We’re growing like gangbusters now,” Crooks said. “And we have to plan and make sure our facilities are in place for that.”

SPU, which holds bi-weekly public meetings with five commissioners appointed by city council, has four water funds: operating, reconstruction, trunk and water capacity. The trunk fund and water capacity funds are one-time fees paid by new developers, and they generate the most complaints, Crooks said. The operating fund and the reconstruction fund are paid by ratepayers.

Trunk water charges go towards installing larger underground pipes. Water capacity charges go towards the construction of water towers, treatment facilities, wells and pump houses, otherwise known as capital improvements.

Since 2007, the water capacity charge has risen from $2,846 to $6,039 per unit. That charge is adjusted annually based on construction inflation, Crooks said. So if the cost of construction goes up 3 percent, the water capacity charge will be increased by 3 percent.

Water capacity charges are issued by unit, based on projected water usage. A house is usually charged one unit, while a restaurant — which uses much more water — could be charged for 20 units. That money goes into the water capacity fund, which pays for capital improvements.

Shakopee isn’t the only city in Minnesota with a separate water and utilities commission. Moorhead, Rochester, Owatonna, Elk River and Austin are some examples of cities that don’t have jurisdiction over their utilities, according to information provided by Crooks.

In Chanhassen, where water is provided by the city, the water capacity fee is $5,210, plus a $2,233 charge for water hookup. Chaska, which runs its utilities similarly, charges $4,230 per unit.

Other cities, such as Bloomington, don’t have a water capacity charge because it buys water from the city of Minneapolis, so it doesn’t need to install water facilities. In those cities, the water usage fee is typically higher, Shakopee Director of Planning and Development Michael Kerski said.

Not swimming in money

In a June letter to Crooks, Reynolds said SPU seemed to ignore the advice of its consultant, and raised its rates higher than its consultant recommended.

In May 2003, SPU’s consultant advised it raise its WCC rates from $831 to $854 per unit. SPU raised it to $1,213. Two months later, in July, SPU approved a $2,035 per unit WCC charge to fund additional water towers and water treatment plants.

“Where are these plants in your capital improvement plan?” Reynolds wrote on behalf of city officials. “Fees have been collected since 2003 with no apparent planning.”

Water capacity charges, or connection charges, don’t pay for the connection of a water pipe to a water main like so many people think, Crooks said. The charges go into a fund to build new water infrastructure.

Crooks said building infrastructure to accommodate for Shakopee’s growing population isn’t cheap, which means it needs to charge developers to pay for the construction of new water facilities, noting that it wouldn’t be fair to split the bill evenly among existing users of the system.

In a written statement, Crooks addressed Reynolds’ question. He wrote that, in 2003, the consultant recommendation was that “at a minimum SPUC increase the water connection charge to provide for at least one future water treatment plant.” The commission then approved funding for two treatment plants to accommodate for Shakopee’s growth.

Meyer and SPU staff members also said it’s unfair for the city to blame SPU for not having an up-to-date capital improvement plan, because in order to come up with that plan, SPU first needs projection numbers for the ultimate build-out of Shakopee, or an Alternative Urban Areawide Review, which the city has not yet provided.

“If city staff would focus on their jobs rather than SPU staff, maybe they could get this (AUAR) done,” Meyer said. “But I think they’ve wasted a lot of time in these issues.”

Shakopee Mayor Bill Mars, who was on the SPU commission for 12 years, said the city is “in the midst of doing an AUAR, and that’s an important piece, but (SPU) could do some early work and then plug in those (projection) numbers when the AUAR is done.”

In 2007, fees for water trunk charges and water capacity charges were increased 12 percent higher than the construction cost index because SPU said “actual material and labor costs have escalated significantly above and beyond the amount indicated by the CCI.”

SPU said this fee increase was a result of the pressure to build water facilities to serve a proposed elementary school and other major developments, such as a housing development proposal called the Bluffs of Marystown.

The elementary school construction would have required a booster station, a long water main, a water tower, a new well and a pump house. Because of this proposal, according to SPU, “The consultant’s recommended increase fell short of the SPUC’s goal to keep the existing fund balances intact. Consequently, after receiving the report and recommendation the SPUC deliberated, discussed and determined that it was in the best interest of the community that the fees be raised to the levels they were.”

The development was foiled when the Great Recession hit, developers passed on agreements with Shakopee, and the elementary school was moved to a location that didn’t require new water facilities. Now, Crooks said, the water connection fund has ballooned “to the point where with the improving economy and recent developments SPUC is on the cusp of completing all the water facilities envisioned in 2008 and is positioned to pay cash for their costs.”

In the next five years, SPU plans to use $15.6 million from the water capacity fund to pay for new water facilities. Major projects include a $3.67 million booster station under construction, a $2.7 million storage tank for 2020 in the Windermere housing development, and a $5.3 million water treatment plant for 2023. The location of that water treatment plant is still being determined.

According its audit reports, as of 2018, SPU had $13 million in its water capacity fund, $844,000 in its water reconstruction fund, $199,000 in its water trunk fund and $8.2 million in its operating fund.

SPU Director of Finance and Administration Renee Schmid said SPU is in a healthy financial position.

“The school district had $18 million in reserves that they worked down to nothing, and now they aren’t in a good place,” she said. “We are in good shape financially, and we’ve had clean audits here.”

Since 2010, SPU’s investments have grown from $20 million to $45.5. million, according to its financial statements. Reynolds and other critics say SPU has far too much money “just sitting in the bank,” referring to the 70 percent of its investments that are less than a year away from maturity, which means they are approaching lower interest rates. Reynolds said those funds should be invested to get better yields if they aren’t being used.

Schmid said those funds will be reinvested to take advantage of interest rates. The $45.5 million in investments is used for both its water and electric utility funds. Capital improvement projects for both utilities, from 2019 to 2023, are projected to cost more than $63 million.

“We’re trying to do what’s right by our ratepayers,” Schmid said. “We have to maintain reserves.”

According to its 2018 audit, after its operating expenses were paid, plus a $1.1 million donation to the city, SPU was left with about $255,000 left over to keep in its operating reserves.

The total water utility fund balance at the end of 2018 was $22 million, and the total electric utility fund balance was $32 million. That includes operating fund balances, an emergency reserve fund balance and the water capacity fund balance.

By state law, the commission must have between six and nine months in operating reserves in case of a calamity, at a minimum. By the end of 2018, SPU had $8.3 million in operating reserves in place, or 19 months in operating expenses.

Schmid said, contrary to accusations, the commission is not swimming in money.

“We’re right where I want to be,” she said. “We’re not here to gouge people. If you want to add demand to our system, you have to understand who’s paying for that.”

Councilman Matt Lehman, who is the council’s SPU liaison, isn’t bothered by what people like Reynolds consider “simply stunning” prices.

“Shakopee’s water and electrical rates are comparable or less than competitors,” Lehman said. “The issue is development fees. They have to plan out the future infrastructure to serve lands. When Shakopee decides to increase its density, wells and everything else have to be supersized to supply its demands.”

Shakopee’s water usage rates aren’t unusually high. A typical family of four that uses an average of 11,000 gallons of water per month would pay $32.78 in Shakopee. That same family would pay $29.81 in Chaska, $41.92 in Chanhassen and $24.75 in Eden Prairie. But most Shakopee residents aren’t concerned about water rates — they’re concerned about the water capacity charges. And Crooks doesn’t believe Shakopee’s water capacity charge is unreasonable when compared to other cities of its size.

“There are similar surrounding cities that have costs similar to us,” Crooks said. “Chanhassen’s prices are also high.”

Who’s to blame?

Crooks said it’s unfair to compare Shakopee’s water capacity charges with other cities, because Shakopee is very limited in where infrastructure can be placed, which makes adding water towers and wells significantly more expensive. If water is drawn out of certain aquifers east of County Road 83, it can harm the brown trout population, so the Department of Natural Resources has strict regulations preventing SPU from drawing water in that area.

From Canterbury Park to Mystic Lake Road, calcareous fens, which are rare, peat-accumulating wetlands that rely heavily on groundwater and are found along the Minnesota River Valley, are protected by the DNR, which means wells cannot be drilled in that area.

Crooks said SPU doesn’t have the right to put water facilities on Shakopee Mdewakanton Sioux Community land, which accounts for 12.7% of Shakopee’s overall land, according to the city’s 2040 comprehensive plan.

“So that once again limits us,” Crooks said.

And near the river, bedrock is close to the surface. Bedrock is permeable, so when it’s too close to the surface, chemicals from fertilizers can seep through its cracks and get into aquifers easily. Fertilizers can create dangerous nitrate levels in drinking water, and if those levels get too high, drinking water can become a health hazard.

Crooks said nitrate levels have been monitored over the last 40 years, and SPU tries to avoid drilling wells near the river for that reason.

The “sweet spot,” where it makes the most sense to drill wells in Shakopee, is near Shakopee High School. There are two wells at the high school, and three wells at the soccer complex, with room to drill two more, Crooks said.

Shakopee is an expensive city to drill wells and build water facilities because of all those restrictions, Crooks said, which is why SPU needs to save a significant amount of money banked for capital improvement projects.

Frustrations boil over

On June 27, the Valley News published an editorial by SPU commissioner Mathew Meyer, who wrote that SPU “has been under attack by the Shakopee City Council since its December meeting.”

Reynolds refuted this claim at the July 7 city council meeting.

“There’s been a lot of nonfactual information. And I found it really over the top,” he said. “These claims are false. They’re simply not true.”

The Shakopee City Council unanimously passed a motion to come forward at the next Shakopee Public Utilities Commission meeting to ask the commission to reconsider giving a complete response to the June 7 letter from Reynolds, which addressed SPU’s water rate increases and lack of transparency.

The council also unanimously passed a motion to request SPU hire an independent contractor to provide a complete financial analysis. Since SPU is a separate entity from the city, however, the commission does not have to comply with the council’s requests. Council member Jody Brennan also tossed around the idea of looking into bringing SPU back under the city’s jurisdiction, should the analysis come back clean, so the city could figure out ways to reduce the water capacity prices.

Schmid said this move would go against SPU’s founding purpose, which was to avoid mixing politics and utility charges. She also said she’s not confident the city would be able to handle utility finances like SPU has for so many years.

“If it goes to the city, are they going to eat away the reserves like the school district?” she said.

SPU commissioner Mathew Meyer said if SPU goes back under the jurisdiction of the city council, it would be easy to dip into the utilities fund to pay for other things the city needs.

“You put that under the city council and you’re going to have city staffers and officials wondering ‘Why can’t we just dip into the fund?’” Meyer said.

Mayor Mars said the tension between the two entities is “very real” and has existed for a long time.

“I don’t feel we’re integrated partners for the benefit of the community,” Mars said. “We need each other to grow, prosper, and be successful as a community.”