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Serving Northern St. Louis County, Minnesota

Overrun a holdover of a troubled time

Cost overruns on city projects has plagued city finances for years

Posted 1/18/23

TOWER— The recent revelation of a nearly quarter million dollar cost overrun on the city of Tower’s so-called trailhead project adjacent to the East Two River is, once again, highlighting …

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Overrun a holdover of a troubled time

Cost overruns on city projects has plagued city finances for years

Posted

TOWER— The recent revelation of a nearly quarter million dollar cost overrun on the city of Tower’s so-called trailhead project adjacent to the East Two River is, once again, highlighting a pattern that has been at the heart of the city’s ongoing financial difficulties. For years, the city has faced costly overruns on capital projects ranging from streets to the airport, to the renovations at the downtown harbor, projects which in many cases had to be backfilled with other city funds.
Over the course of the past decade, cost overruns have left deficits in city accounts totaling well over $800,000, an amount that’s twice the city’s annual levy.
The cumulative effect of those overruns left city coffers all but drained by the end of 2018. The city’s general fund reserves were nearly exhausted and the clerk-treasurer at the time had pulled cash from reserve accounts earmarked for future capital purchases, the city’s storefront account, the Hoodoo Point Campground, and the ambulance service. The situation forced the city to borrow $250,000 from the League of Minnesota Cities in 2019 simply to pay its bills. That debt won’t be fully retired until 2024.
The city has been more cautious about spending, and project spending in particular, since and city officials were able to complete the $1 million Pine Street reconstruction in 2022 without any major deficits.
The trailhead project, however, a long-delayed holdover from the Carlson administration, proved to be yet another ticking time bomb, one that is again threatening city finances.
Due diligence lacking
The trailhead project, which is funded by $600,000 from the Legislative Citizens
Commission on Minnesota Resources, or LCCMR, is the second part of a two-phase project that included walkways and lighting around the harbor, intended to provide a walking connection from the harbor to Hoodoo Point. The first phase included graveled walkways and lighting around the harbor, along with a section of floating dock.
Cost overruns and mismanagement on the first phase of the project back in 2018 and 2019 left the city on the hook for approximately $120,000 in engineering costs owed to SEH, which had apparently been overlooked when budgeting for the construction costs. Soil testing on the project’s second phase was overlooked as well and when the soils along the access road and parking area proved to be little more than wetland muck, the cost of excavation and backfill with solid material sent the costs of the project skyrocketing. Just last week, the city council reluctantly approved a change order on the project totaling $237,168.
City engineer Matt Bolf, of SEH, acknowledged that soil testing would have been a good idea in retrospect, telling the council that “hindsight is 20-20.” Bolf, by way of explanation, noted that the area lacked good access for a drill rig. However, soil testing can also be undertaken by hand augering, an inexpensive effort that may well have revealed the presence of extensive wetland soils. The presence of wetland soils should have been no surprise, since the project maps developed by SEH showed the presence of wetlands throughout nearly the entire site. Bolf told the council that he had hoped the parking lot area, much of which had formerly been used for a small boat launch would contain better soils, but it turned out the area had been made suitable for parking in the past mostly with shallow fill. Bolf had recommended removal of the soft soils down to a depth of ten feet and backfill with pit run gravel. The additional excavation cost an extra $93,043, while the backfilling added $138,645 to the tally.
For now, the city has kept the financial impact of the cost overrun in check by eliminating portions of the project, including reducing the number of parking slots and eliminating lighting, and by tapping about $84,500 in contingency dollars from an Iron Range Resources and Rehabilitation grant earmarked for the next phase of the project, which included a planned extension of Main Street to the trailhead and canoe launch. The project also includes a paved walking trail connection between the Hoodoo Point spur and the harbor. But the city still has yet to receive bids for that work, the costs of which remain uncertain. The final cost likely won’t be known even when bids do come in, since unanticipated factors can significantly impact the final price tag on a project.
The city should be able to fund the road and trail extension, even if soils present another surprise. The IRRR grant also includes over $200,000 for a so-called “green flush” toilet proposed to be installed near the civic center. Mayor Dave Setterberg said completion of the road extension remains the city’s top priority for the use of those funds. “We can’t leave it all torn up,” he said, noting that the city should start the bidding process on that work later this winter.
While frustrated by the cost overruns on a project he inherited from a prior administration, Setterberg said he’s remained focused on ensuring the overruns don’t impact city finances and taxpayers as they did in the past. At the same time, he noted that the city has an obligation to go as far as it possibly can to achieve the goals they’ve laid out to funding entities, like the LCCMR and IRRR.
Harbor costs the biggest factor
The city’s efforts to bring development to the harbor have been costly, consuming enormous amounts of city staff time and public dollars. Over the past 15 years, the city has spent at least eight million dollars in public funds for a new highway bridge, for dredging and sheeting the harbor, and for docks, walkways and lighting around the harbor, all without a single dollar in private investment to show for it, at least to date. The Tower Economic Development Authority, which now owns the harbor area, has issued a new Request for Proposals from prospective developers in hopes of attracting a development partner for the site. Numerous proposals for the harbor, including a proposed hotel and, later, town homes, have failed to come to fruition over the years for a variety of reasons.
While a federal highway grant and funding from the state’s taconite production tax provided most of the funds for public infrastructure at the harbor, the city has poured plenty of its own money into the effort as well. As of the end of 2021, the city had spent just over $600,000 of its own funds on the project, for everything from engineering and design, extensive legal expenses related to platting and drafting of development agreements, and maintenance.
Adding to the mix have been a number of other capital improvement projects. The city experienced cost overruns on a variety of street projects totaling nearly $250,000 and nearly $50,000 in airport capital projects, according to city audits reviewed by the Timberjay. “In the capital projects funds, the deficits occurred because expenditures exceeded grant and tax revenues for the projects,” notes the city’s 2019 audit.
Ripple effects
The impact of consistent overspending on capital projects has been wide-ranging for the city. By tapping funds from other city accounts to cover overruns, the city has slowed much-needed reinvestment in the Hoodoo Point Campground. Campground managers and customers have complained for years about the condition of the campground’s public restrooms and showers as well as electrical service that doesn’t meet the demands of larger recreational vehicles. In addition, leaky sewer infrastructure at the facility inundated the campground’s septic system in 2018. In another case of questionable due diligence, city officials opted, upon the recommendation of SEH, to spend close to $500,000 to extend a sewer pipe to the campground. That project ran into troubles of its own and, once completed, further added to the city’s ongoing problem with inflow and infiltration into the municipal sewer system, consuming already limited sewage treatment capacity.
The city has long relied on Hoodoo Point profits to fund city operations, but the funds tapped by the city limited the city’s ability to reinvest in a key asset.
In tapping the city’s storefront renovation lending account, which once totaled over $100,000, the overruns ultimately impacted the ability of local businesses to tap low-interest loan funds for improvements. Diverting ambulance funds has made it more difficult for the city’s ambulance service to purchase new vehicles as well as weather a costly transition to a paid on-call service.
In addition, the city has been forced to incur interest costs on the repayment of its $250,000 loan from the League of Minnesota Cities.
Progress made
A tighter rein on spending the past couple years has allowed the city to begin to rebuild its finances, but it’s still far from recouping all that it lost during a period of relatively unchecked spending at city hall. The city also took steps under clerk/treasurer Victoria Ranua to establish separate bank accounts for enterprise operations, such as Hoodoo Point, to ensure that there’s more transparent accounting of the uses of profits from the campground. The city also now tracks fees assessed to campers, that were supposed to have been earmarked for campground improvements, that were not well accounted-for in the past.
TEDA recently obtained a $50,000 IRRR development partnership grant from the IRRR that TEDA is matching with a portion of proceeds from the recent sale of land, to re-supply its storefront/commercial redevelopment loan program.
The Timberjay sought answers to questions and comment from city engineer Matt Bolf for this story. He did not respond as of presstime.

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