Small Anoka County city struggles with high costs of thinking big

With the strike of a gavel in a far corner of Anoka County, five people committed nearly $50 million to a water and sewer project for homes and businesses that didn't exist.

It was December 2010, and the East Bethel City Council had just approved a controversial plan to build two plants in the largely undeveloped city that doesn't even have a grocery store. City leaders saw an opportunity to be the "next big burb."

The project wouldn't serve any of East Bethel's existing 11,000 residents; it was built for the future, for the growth it would spur and handle.

Three years later, the plants are up and running, but the growth that was expected to bankroll the project hasn't materialized. Only three businesses are connected.

Residents are absorbing a 15 percent jump in their 2014 city property taxes to meet the first round of payments on $18 million in bonds sold for the project. City leaders — who have all turned over since the project was approved — are desperately trying to keep the project from sinking East Bethel. One council member at a meeting with state lawmakers spoke of worst-case scenarios, including the prospect of a "failed city" without some outside help.

Many inside and outside the city point a finger at the regional planning agency, the Metropolitan Council, which fronted East Bethel $30 million for the project based on growth forecasts and now is in line for repayment through hookup and user fees that aren't materializing.

"It was a travesty it was passed. I think it was a travesty the Met Council let it happen," said Mayor Bob DeRoche, who joined the City Council in 2011, weeks after the project was approved. "We are in a position now to figure out how to make it work."

To many, the story is one of overly optimistic projections fueling unrealistic ambitions, of a once-fast-growing city that followed a path neighbors wisely resisted. But there are some who say it's too soon to write off the project. They say it may someday be remembered as an investment that helped lay the groundwork for the city's future.

Growth and recession

The project was first conceived around 2004, a time when the housing market was hot and suburban growth seemed all but guaranteed.

East Bethel was 48 square miles of mostly undeveloped fields and wetlands. But if it installed city services, it would be the first in the area to do so, enticing developers to the community 28 miles due north of Minneapolis.

"We were in times of rapid expansion. The city had been issuing 100-plus building permits a year," said City Administrator Jack Davis, who has held that job since 2011. "What happened in Blaine could happen in East Bethel."

A 2006 outside analysis for market potential envisioned a new city center, a "commercial and civic heart of the community" rising from the fields along Highway 65 with shopping, houses and condos. A city and Met Council forecast projected that East Bethel's population would double by 2030, to more than 23,000.

Then came 2008 and the Great Recession. Growth projections seemed iffy to many residents who pleaded with the council to pull the plug on the project. Housing permits, which had peaked at 126 in 2004, dropped to six in 2008.

The water and sewer project became the issue in the 2010 City Council elections. Three of the five seats were on the ballot, and all three were won by newcomers who opposed the project.

But the council, including three lame-duck members, pushed it through days before the majority left office in 2010. Part of the rush was to take advantage of several federal incentive programs that expired at year's end.

"This is what they thought they could do. It's an Alice in Wonderland kind of deal," said current Council Member Tom Ronning, who was elected in 2012 and had opposed the project as a private citizen. "It's my opinion there couldn't have been any due diligence with this. The numbers just don't add up any place."

The new council looked into scrapping the project. But with the bonds sold and other outlays already made, the cost would be steep — between $5 million and $10 million, according an analysis commissioned by the new council.

So plans were scaled back, and the new council reluctantly voted to move forward. The treatment plants, about a mile apart, were built along Highway 65 and opened last year.

Going forward, East Bethel will need the equivalent of 6,500 new households to hook up to the sewer to pay back the Met Council. Currently, it has around 60.

Met Council

The Met Council has come under fire from current city officials, neighboring communities and a legislator who represents East Bethel. The project would not have happened without the agency's financing, and the numbers didn't add up, said Sen. Michelle Benson.

"The Met Council kept coming back with numbers until the math worked," Benson said. "There were plenty of people in the community that saw Met Council's math doesn't make sense. … I would like to see the Met Council change some of their processes, so this can't be done to another community."

Neighboring Ham Lake also studied putting in a sewer but abandoned the idea because of the costs.

"We were running a parallel course for a while," said Gary Kirkeide, a Ham Lake council member. "They chose one route, we chose another. … Absolutely they made a mistake. They should have reanalyzed what was going on in the economy and reassessed if they really want to take the risk of putting in a system like that."

Kirkeide is also critical of the Met Council, saying its policies "could possibly harm citizens, especially when the elected officials in a city are not as sophisticated as they could be in dealing with these issues."

But Bonnie Kollodge, a spokeswoman for the agency, stressed that East Bethel initiated the project as well as the population projections. The Met Council helped the city "achieve their local aspirations for growth."

"East Bethel specifically requested wastewater service through the comprehensive planning process. The [Met] Council reviewed the city's plan and agreed the city could put it into effect," Kollodge said in a written statement.

She said the population forecasts for East Bethel were actually lowered by more than 10,000 at the Met Council's insistence. "The 2030 growth forecasts that were agreed to represented a compromise between the Council and City. City forecasts were more ambitious than the Council's, but it may be helpful background to note that the city's population doubled between 1980 and 2005," she wrote.

"The Council is not regulatory, but its role is to work collaboratively with communities to ensure that infrastructure and growth are synchronized," Kollodge wrote.

East Bethel's representative and the chairwoman of the 17-member Met Council, which is appointed by the governor, both declined to comment, saying through their spokeswoman that the project's approval preceded them.

City Council Member Ronning says: "Neither one of us can really accept failure, either the Met Council or us. We have shared responsibility here."

New business

While far short of what's needed, the project has had some impact. Two of the three businesses that are connected to the plants are new to East Bethel, and all three say reliable city services are critical to commercial growth.

Shaw Trucking, which has 47 full-time workers, moved from Ham Lake to East Bethel two years ago. Shaw is also working to develop a nearby property into 48 single-family homes.

The East Bethel 10 movie theater, which dates to the 1990s and is one of the city's few retail businesses, is hooked up to the new system. Before that, it had its septic tanks pumped twice a week at a cost of $1,300 a month.

Longtime East Bethel resident Paul Johnson moved his business, Aggressive Hydraulics, from Blaine to the city last summer. Access to city sewer and water has everything to do with the move, he said. He employs 50 full-time skilled workers with an average salary of $50,000.

City administrator Davis said that, for now, East Bethel is working every angle to dig out.

"You sit in the shade today because someone planted a tree 20 years ago," he said. "We have to be optimistic about this."

Shannon Prather • 612-673-4804