The Brainerd City Council Monday awarded the bid for an upcoming project to a local company, forgoing a recommendation to award the project to a different company under a smaller scope.
The 2016 Brainerd Lakes Regional Airport utility extension project has been awarded to Tom’s Backhoe Service, Brainerd, at a total project cost of $8,591,721.
The project is broken into four different segments, with the first segment comprising the bulk of the work.
The cost breakdown for each segment of the accepted bid is as follows:
The project management team had recommended awarding the bid for segment one to Meyer Contracting, Maple Grove, at a cost of $7,331,662, and rejecting all bids on the other project areas.
First motion
Council member Mary Koep made a motion to award the project bid for segment one to Meyer Contracting and to reject all the bids for the other areas. Her motion was seconded by council member Kelly Bevans.
Her motion ultimately failed on a 3-4 vote, with council members Bevans, Koep and Council President Gary Scheeler voting for the motion.
Council member Chip Borkenhagen was absent Monday night, so Mayor Ed Menk was required to cast a vote to break the tie on the motion.
Scheeler said he voted for Koep’s motion because he’s wanted the airport utility project since he first served on the Airport Commission in 1998.
“I think this has been in the making for many, many, many years,” Scheeler said.
Koep said the airport’s value to the community is indisputable and it’s important to keep it strong and competitive.
“Not just now, but in the future, the community that doesn’t have a thriving airport is going to be lost,” Koep said.
Hilgart, who voted against Koep’s motion, said she understood the value of a low bid but it was disappointing it couldn’t be awarded to a local business.
“I know that local contractors provide local jobs for local citizens,” Hilgart said.
Council member Gabe Johnson, who voted against Koep’s motion, said the project should be for all four segments and should be awarded to a local contractor.
Successful motion
After the failure of Koep’s motion, Johnson made a motion to accept Tom’s Backhoe’s bid for all four project segments. Koep questioned the validity of the motion, as the city is required to accept the low bid for a project.
Scott Hedlund, engineer and project manager from Short Elliott Hendrickson, clarified Tom’s Backhoe was the low bidder when considering the total of all four project segments.
Asked by the council, Finance Director Connie Hillman said she had no idea how the city would finance the larger project. Bevans, who voted against Johnson’s motion, said he was concerned the city wouldn’t be able to pay for the larger project.
Council members Dave Pritschet, Johnson and Hilgart voted for the motion, while council members Bevans, Koep and Scheeler voted against the motion. Again, Menk was called in to cast the tiebreaking vote but first questioned Hillman how the larger project would be financed.
She replied she couldn’t answer the financing question definitively at the moment. At the least, she said, the city would need to issue bonds in terms of more than 20 years while pledging to increase sanitary sewer collection rates, levy, or a combination of the two. She also mentioned two large sewer projects in 2016 on South Sixth Street and Southeast 13th Street which still need to be paid for.
“We haven’t even talked about financing (those) yet,” Hillman said.
Brainerd Public Utilities secretary/finance director Todd Wicklund said collection rates would have to increase significantly to cover the additional $800,000-$900,000 cost, plus interest on those costs.
“We’d have to go back and reassess the different scenarios,” Wicklund said.
After hearing Hillman’s and Wicklund’s input, Menk cast his vote in favor of Johnson’s motion.
Following the vote, Koep said a project was approved with the city not being sure of how to pay for it.
“What this is going to do, to probably both the tax levy and the sewer and water rates to the people of Brainerd,” Koep said. “Is almost going to be something they can’t bear.”
Paying for pipe
Prior to action on two motions to award the project bid, council members engaged in a little more than an hour of discussion about the details of the project and its financing.
The project will largely be funded by an $8 million contribution from the city of Baxter, collected via a local option sales tax, approved by the state Legislature.
As the city of Baxter collects its local option sales tax revenue, it will make payments to the city of Brainerd, rather than contributing an $8 million lump sum up front. The taxable period lasts until Dec. 31, 2037, or until $40 million is collected. The remaining $32 million of the $40 million will go towards other sanitary sewer, storm sewer and water projects, as well as transportation safety improvements.
The city of Brainerd will need to issue general obligation bonds to pay for the project with the LOST payments from the city of Baxter as the primary source of funding for the bond payments. The financing costs of the project will be about $1.4 million.
Hillman said as a requirement of issuing the bonds, there needs to be enough water and sewer revenues to cover the debt service payments. If there’s a shortfall between the LOST payments and the bond payments, the city will need to pledge to either increase sanitary sewer collection fees or issue a levy, she said.
“The thought is that we will not have to increase rates for this project because we are getting the revenue stream from Baxter,” Hillman said.
The total project cost, for only segment one, including issuance costs and interest is around $11.9 million, Hillman said. Brainerd’s own LOST charges are paying for one-third of the total project cost, she said. The bonds for the project completing only segment one would be 15-year bonds.
The council is planning to set the sale for the bonds at its March 7 meeting, Hillman said.
The city of Brainerd has already received $500,000 from the city of Baxter to cover initial project costs, city finance director Connie Hillman said.
If all the project areas are awarded, the city would have to issue 20-year bonds, Hillman said, and the city would need to seriously look at whether an increase in sanitary sewer collection fees would cover a shortfall. The city would need to work with its financial advisers and bond counsel to find an answer.
Menk said business cycles are changing and it would be hard to predict sales tax revenue in Baxter 10 years into the future.
Bevans said he thinks the airport project is a phenomenal, viable project which has experienced some stumbling in its scope and cost. But ultimately, he said, it could be one of the better projects the city has undertaken.
Bid questions
Four bids were opened for the project on Feb. 9, and project consultant Short Elliott Hendrickson noticed some mathematical errors on a couple bids, City Engineer Jeff Hulsether said. The bid forms were submitted to City Attorney Eric Quiring for review, he said, and Quiring concluded the bidders met the minimum requirements and the incorrect mathematics didn’t disqualify them.
The engineer’s estimate for the project is as follows:
The bids might be higher than the estimate because bidding contractors might have seen more risk in the project, Hulsether said. In order to account for the risk, contractors added cushion into their bids, in case an issue came up. Still, he said, there’s not much variance in the range of bids, so all bidders saw the project similarly.
“We do feel this is the price of the project,” Hulsether said. “There really isn’t anything we can do with the project to try and reduce costs.”
Scheeler said he spoke with three of the bidders and all three said the risk made them bid the project higher. During an opportunity for citizen input, Kathy Thompson of Tom’s Backhoe said the project risk could have made the bids come in higher than expected.
Tom’s Backhoe has been doing similar work to the type in the airport project for more than 30 years, Thompson said, and has more than 30 employees. Giving the project to a local company would keep $4.5 million right in the city, she said.
Hilgart said it looks like the difference between the bids and the estimates is in labor costs. It appears there’s a significant difference in the estimated labor rates and time versus what came in the bids, she said.
“We were off in what we put into the estimate as far as labor rates go,” Hilgart said.
Just one?
Just completing project segment one would have provided water and sewer service to the airport, Hulsether said. At a later date, the other segments would have to be completed in order to handle the increased flow from additional hookups at the airport. Hulsether said it was difficult to predict when that later date would be.
If the council had accepted the bid for segment one and rejected bids for the other segments, the city would have been able to go back at a later date and rebid the other areas of the project.
The project management team recommended only doing segment one of the project because of funding, Hulsether said. The team considered the local option sales tax payments the city would get from the city of Baxter, he said, and considered it prudent to only look at segment one.
Because the city will have to eventually look at doing segments 2-4 of the project, Johnson said it would be worth it to consider doing all four phases at once.