Financing of a few sorts was the topic at hand in the last Two Harbors City Council meeting, with Todd Hagen of Ehlers & Associates presenting on both the 2026A Bond Sale and a utility rate study for the City’s water and storm water.
The bonds are being sold to pay for several of the City’s projects going on in 2026, including the Lighthouse Point Road, 15th Street and Alley, and 4th Street Watermain Projects. Two Harbors has taken several measures to prepare for their sale, such as ensuring the City’s credit rating stayed at a relatively high AA- rating, with the bonds backed by the State of Minnesota’s AAA rating guarantee. Due to timing on the Lighthouse Point Road project, the bonds were slightly delayed in being issued, from a May 26th date to early June. However, the timing, according to Hagen, has ended up in the City’s favor: “Good strategy, just by chance, to be out on the market right now,” with little competition and several bids for the bonds as they go up for sale. Money from the bonds will be received and put towards projects starting June 25th.
Next on Hagen’s agenda were studies conducted by Ehlers on the Two Harbors’ Water and Storm Water Utility Rates. His chief emphasis for city utilities is that they should be operated like a business, with revenue from the utility’s service to self-sufficiently pay for projects, operations, debt, and replacement reserves related to the utility. As a general rule, Hagen noted, fixed costs needed for the utility should be covered by the base rates of the utility for residents. City utilities such as water and storm water should also keep a reserve fund to cover at least six months of operating expenses, in case of emergency and fluctuating costs, plus to aid in long-term planning and ensure the utility is stable in its operations.
Ehlers’ calculations for future utility rates used the 12 months of 2024’s billing data for projections. They assumed 3% annual increases in expenses and interest income projected at 1%, on average. In addition to handling the day-to-day costs, the utility’s revenue should also be able to handle large projects related to the utility. This year alone that encompasses water tower maintenance, VFDs at Hahn Station, and several street projects. Currently, the water utility’s base fee only covers around 42% of fixed costs to maintain the utility. Ehlers recommends changing charges to cover up to 71.3% of fixed costs, which would not hit the goal of covering 100% of costs but would at least be far closer to the mark.
The increased revenue would be managed by augmenting several aspects of the current water rates for Two Harbors. Water rates are currently based on residential vs commercial vs municipal and whether the user is in or out of the city. First, it was recommended to add a multi-family class and an irrigation class to bill more equitably and with an eye for rewarding water conservation, with multi-family being billed at the base rate for residential or commercial, and irrigation being in the highest tier of billing by default. Ehlers also suggested shifting tiers for usage downwards slightly, for example, by having the first tier increase for residential at 3,000 gallons rather than 4,000. Commercial use would be adjusted similarly. Water rates would, for now, remain stable at the lowest tier of use, with an increase in costs for residents generally at only the highest tier of use.
Ehlers does, however, also recommend that Two Harbors look ahead and prepare to increase its rates in the coming years. The City’s working cash balance for the water fund has been historically low, so the long-term goal should be to increase rates to bring the fund to a healthier level where the City can better handle emergencies as well as large future projects. Current projects relating to the water utility are, unfortunately, mostly funded by debt, which must then be paid off with added interest.
The Storm Water Rate Study was next and overall had much in common with the Water Rate Study: a suggestion to run the utility more like a business, with rate increases needed to meet ongoing operating expenses, plus build reserves for emergencies. The Storm Water Fund has been underwater, you could say, for the past couple of years, requiring the need for larger increases to build the fund back to a healthy level.
Hagen noted the situation of needing to recalibrate rates is common nowadays, as operational costs have become more expensive and water conservation has become more of an issue. As of this meeting, the City has only received the results of the study and accompanying advice – it has made no final decision. The next step will be to discuss the recommendations from Ehlers & Associates and determine the best path forward for the health and stability of Two Harbors and its wide variety of residents.
During the earlier agenda meeting, City Engineer Brotzler gave an update on several of the ongoing street projects. The block of 6th Avenue currently under construction is slated for a June 26th completion. The company working on that project, Northland Construction, was recommended and approved during this session to take on the Lighthouse Point Road Project. They tentatively plan to begin as soon as the work on 6th Avenue is complete. Accommodating Heritage Days is a known issue, and they are working to minimize the impact from the closed road.
Administrator Nordean’s report included the City receiving an award of $170,000 from IRRR (Iron Range Resources and Rehabilitation) to help cover the 15th Street and Alley Project. Nordean also thanked the Fire Department, Police Department, Lake County, the Minnesota DNR, and nearby communities for their work tackling the recent Stewart Trail Fire. “We have a lot to be proud of in these folks,” she said of local crews. “Situations like this are where we see the hours of training pay off in big ways.”
The Council also received an update to the Agate Bay Project provided by the Deputy Director of the Parks and Trails division of the Minnesota DNR, stating that “work on the deed and other conveyance documents required” for transferring the land to Two Harbors was going well and is anticipated to take around two months. The City will be kept up to date on progress.
Several of the Committee reports included discussion on the topics approved during this meeting, including the Personnel Committee covering chainsaw training and the Finance Committee’s plan for the Waterfront and cleaning the exterior of the water tower. Public Arts is continuing to cover the future of the bandshell and a grant relating to the Highway 61 project. The Housing Committee discussed Northshore Flats and is looking into rehabilitating dilapidated homes. THEDA (Two Harbors Economic Development Authority) has also been covering housing issues, collaborating with the County, and marketing for Two Harbors.
Consent agenda items approved of note included: an Artificial Intelligence policy “to protect public data, ensure transparency and accountability in decisionmaking and support compliance with applicable laws and regulations;” payment for the International Union of Operating Engineers, Local 49, to access the training center in Hinkley; the retirement and subsequent need to hire the position of Assistant Public Works Director as of July 21; pay to Utility Systems of America for work on the 15th Street & Alley Project; pay Lake County for the 2024 & 2025 Street Improvement Project; contract amendment with Rick’s Tree & Stump Removal; pay Lakehead Constructors for the Wastewater Treatment Plant Project; and amending the MN Paid Family Medical Leave Policy.
New Business items included approving the bonds discussed during the meeting; accepting a grant from the Local Road Improvement Program (LRIP) for the Lighthouse Point Road Project; awarding the Lighthouse Point Road Street and Utility Project to Northland Construction with Bolton & Menk providing construction engineering services; and purchasing two commercial mowers for Public Works and a truck for the Two Harbors Fire Department.
