Loading...
HomeMy WebLinkAboutItem a - Study Session Updated Water Sewer Rate StudyStudy Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 1 of 9 DATE: March 17, 2020 TO: Honorable Mayor and City Council FROM: Tom Tait, Public Works Services Director By: Jacquelyn Mercado, Senior Management Analyst SUBJECT: REPORT AND DISCUSSION REGARDING THE WATER AND SEWER COST OF SERVICE STUDY UPDATE Recommendation: Provide direction on moving forward with water and sewer rate adjustments SUMMARY In October 2015, the City Council adopted a tiered water rate structure and approved a five-year water and sewer rate adjustment through the end of calendar year 2020, based on the completed Water and Sewer Cost of Service Study (“Cost Study”). In December 2019, the City Council adopted resolutions for the fifth and final year of the previously approved water and sewer rate adjustment. In an effort to continue to fund the City’s water and sewer systems ongoing operation and maintenance costs, an update to the Cost Study was completed to recommend a new five-year water and sewer rate adjustment. The Cost Study Update recommends that the City increase water rates by 3% for Fiscal Year 2020-21, and 6% for the following four fiscal years through 2024-25, in order to fund expected operations, maintenance, water supply costs, capital expenditures, and maintain a sufficient Reserve Fund balance. The Cost Study Update also proposes that the City increase sewer revenues by 1.5% for Fiscal Year 2020-21, and 3% for the following four fiscal years through 2024-25, in order to fund ongoing sewer operations and achieve a 75-year replacement cycle for the City’s sewer system. It is recommended that the City Council provide direction to the Public Works Services Department (“PWSD”) to move forward with the adoption of the Cost Study Update and water and sewer rate adjustment process by following Proposition 218 (“Prop 218”) balloting procedures to establish a five-year water and sewer rates structure for Fiscal Years 2020-21 through 2024-25. Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 2 of 9 BACKGROUND The City provides and maintains water and sewer services to more than 56,000 residents. Utility rate increases are necessary to fund ongoing operations, maintenance, and capital improvements, and to maintain adequate Reserve Fund balances for the water and sanitary sewer systems, in order to provide quality services to Arcadia residents and businesses. In February 2014, the City Council awarded a Professional Services Agreement to Carollo for the preparation of the Water and Sewer Cost of Service Study and the development of a financial model that would determine how best to recover projected ongoing operational costs, capital improvements to water and sewer infrastructure, and water supply costs, over a five-year period. The PWSD and Carollo gathered and analyzed data on the City’s water and sanitary sewer operations, and established a seasonal tiered water rate structure that would meet the City’s primary objectives of providing revenue stability, while encouraging water use efficiency. On January 19, 2016, the City Council adopted a seasonal tiered water rate structure and approved a five-year water and sewer rate adjustment schedule for calendar years 2016 through 2020. The PWSD annually reviews water and sewer operating budgets, revenues, expenditures, and Reserve Fund balances to determine whether the approved maximum rate adjustment is necessary. The City of Arcadia’s water and sewer rates are among the lowest in the area, and have remained so even with annual rate adjustments over the past five years. Although the Governor declared the drought emergency to be over, local regions continue to suffer from long-term drought impacts. In the Main Basin, where the City draws most of its water, basin levels have not recovered to minimum operating levels. In response, the Main Basin Watermaster adopted a Drought Management Plan that includes a Resource Development Assessment (“RDA”), which is a pass-through fee based on each individual producer’s annual amount of water pumped from the Main Basin. The purpose of the RDA is to restore ground water levels by purchasing imported water from the State Water Project, separate from the purchase of Replacement Water. The RDA has continued to increase annually and is anticipated to cost the City over $2 million dollars in Fiscal Year 2021-22. The RDA was implemented by the Main Basin in Fiscal Year 2017-2018; therefore, this cost was not accounted for in the 2015 Cost Study and the City has not been able to recover the costs of this charge from ratepayers. In December 2019, the City Council adopted resolutions for the fifth and final year of the approved water and sewer rate adjustment. Water and Sewer rate adjustments have typically been on a fiscal year cycle. However, in the spring of 2015 the City Council chose to delay the public hearing for new water and sewer rates, pending a decision from the California Fourth District Court of Appeals in the Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano case. This case involved the use of a budget-based water rate structure. Following the Capistrano ruling, the City Council Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 3 of 9 approved moving forward with a tiered water rate structure, and set the public hearing for water and sewer rate adjustments on a calendar year cycle. The PWSD is recommending that these adjustments be returned to a fiscal year calendar to align with the City’s budgeting practices and financial models. The goal of the 2015 Cost Study was to utilize Reserve Funds to minimize larger rate adjustments. Due to changes in water use trends resulting from the last drought emergency, increases to operations and maintenance budgets, mainly due to the cost of the RDA and Replacement Water, and funding capital improvements, an update to the 2015 Cost Study is necessary. In July 2019, the City Council approved a Professional Services Agreement with Carollo to complete an update to the 2015 Cost Study and to recommend a new five-year water and sewer rate adjustment for Fiscal Years 2020-21 through 2024-25. DISCUSSION The Cost Study Update comprehensively relies on the City’s financial and rate models, which were exclusively developed by Carollo during the 2015 Cost Study and subsequently updated and refined in 2017. These models have again been updated to include actual revenues and operational expenditures, capital improvement costs, and customer usage data, along with additional items that were necessary to develop financial projections for Fiscal Years 2020-21 through 2024-25. The current sewer and tiered water rate structures remain the same, but minor modifications have been recommended to the seasonal tier allotments. Some meter sizes received an increase or minor decrease in allotments, while other allocations remained the same. This was done based on an historical analysis of actual tiered customer usage data and is necessary in order to realign tier usage with each meter size to current customer demand patterns. The tier allotments are now more proportional across all tiers and meter sizes, which makes the proposed rate structure more fair and legally defensible. The following goals were identified in the 2015 Cost Study and carried forward through the Cost Study Update: • Generate sufficient revenue to fund continued operations and maintenance of the City’s sewer and water supply and distribution system, including increases in water supply costs driven by the Main Basin’s Drought Management Plan to restore the health the basin. • Provide for equipment replacement and improvements to the water and sewer systems infrastructure through capital improvements. • Review reserve policies and set rates to adequately maintain a reserve fund to make necessary repairs in the event of an emergency. Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 4 of 9 Based on discussions and previous direction from the City Council, rate adjustments have been designed to eliminate the ongoing use of Reserve Funds to fund operations and capital improvement expenditures. Water Rates Operations and maintenance expenditures comprise the majority of the expenses within the Water budget, with the single largest line item being water supply costs. The updated Cost Study financial model was used to forecast water sales and expenditures that include looking at the cost of current and future water supplies, including the rising cost of replacement water, system operation costs, and Watermaster’s imposed RDA fee. In addition to regular replacement water costs, the RDA fee has increased annually since 2016 from $40 per acre-foot to $140 per acre-foot for Fiscal Year 2019-20. The RDA fee is set to increase to $175 per acre-foot. By the end of Fiscal Year 2020-21, the City will have paid over $6 million dollars in total RDA fees without passing any of those charges onto customers. The RDA fee will continue for the foreseeable future and is estimated to cost the City approximately $2.1 million annually. The RDA fee has been included in the Cost Study Update and the proposed five-year water rate adjustments has accounted for this cost. The previous annual rate adjustments were designed to use Reserve Funds to lessen the amount of annual water rate adjustments. Accordingly, the City Council agreed to lower the water Reserve Fund balance from $20 million to $12 million over the five-year period. The updated Cost Study has estimated the value of the City’s water system replacement at $236 million. Based on industry standards for such a valuation, the Cost Study determined that $7.1 million in capital reserve (or 3% of $236M) is required, combined with about $3.8 million required to fund operation and maintenance costs for at least 90 days. As such, a total reserve minimum required is $11 million. Based on those factors, the Cost Study Update proposes that the City increase water revenues by 3% for Fiscal Year 2020-21, and 6% for the following four fiscal years through 2024-25, in order to fund expected operations, maintenance, and CIP expenditures, and maintain a sufficient Reserve Fund balance. The Cost Study Update took into account that water customers already received a 7% Water rate adjustment in January 2020. In order to align water rates to a fiscal year timeline, a smaller rate adjustment is proposed for the first year of the proposed 5-year rate adjustment schedule. The Cost Study Update has proposed the following water rates for Fiscal Years 2020-21 through 2024-25, which will not exceed the estimated amount necessary to fund the operation of the City Water System: Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 5 of 9 (a) An increase to the current fixed bimonthly meter charge for all customer classes to adequately reflect the actual cost of service incurred. Proposed Meter Charge ($/Meter Size) Meter Size (in inches) Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 5/8” $30.33 $31.80 $33.71 $35.73 $37.87 $40.14 3/4” $32.40 $33.85 $35.88 $38.03 $40.32 $42.73 1” $36.55 $37.95 $40.23 $42.64 $45.20 $47.91 1 1/2” $46.93 $48.21 $51.10 $54.17 $57.42 $60.86 2” $59.39 $60.52 $64.15 $68.00 $72.08 $76.40 3” $88.45 $89.24 $94.59 $100.27 $106.28 $112.66 4” $ 129.97 $130.27 $138.08 $146.37 $155.15 $164.46 6” $ 254.53 $253.35 $268.55 $284.66 $301.74 $319.85 8” $ 399.85 $396.95 $420.76 $446.01 $472.77 $501.13 10” $ 607.45 $602.09 $638.21 $676.50 $717.09 $760.12 (b) Commodity charges ($/HCF) for single-family residential customers based on the approved four-tier inclining block rate structure, and recommended seasonal variable consumption allotments based on the customers’ water meter size. This helps to account for the natural usage requirements of a large property versus a smaller one. The tier allotments were determined by analyzing the relationship between meter size and consumption patterns for all single-family accounts over the past five years. The updated Cost Study has proposed a few minor adjustments to some of the tier break points, which are necessary to realign tier usage with each meter size to current water demand patterns. Bimonthly Tier Break Points (in HCF) for Winter Water Usage (November through April) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 32 23 - 34 23 - 42 23 - 48 23 - 60 Tier 3 33 - 42 35 - 44 43 - 58 49 - 70 61 - 90 Tier 4 43+ 45+ 59+ 71+ 91+ Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 6 of 9 Bimonthly Tier Break Points (in HCF) for Summer Water Usage (May through October) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 34 23 - 42 23 - 60 23 - 70 23 - 94 Tier 3 35 - 44 43 - 58 61 - 92 71 - 112 95 - 148 Tier 4 45+ 59+ 93+ 113+ 149+ Additionally, a seasonal single-family tiered water rate structure assists in managing customer demand for water by pricing discretionary water uses, such as landscape irrigation, at a higher rate than water used for drinking and sanitation purposes. This is to provide a price signal to customers, to use water efficiently and offer an incentive to reduce excess water use. As water usage increases, so does the cost per unit of additional water; this methodology has proven effective in curtailing wasteful water practices. Proposed Single-Family Rates for Commodity Charges ($/HCF) Tier Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 Tier 1 $1.82 $1.86 $1.97 $2.09 $2.22 $2.35 Tier 2 $2.23 $2.27 $2.41 $2.55 $2.71 $2.87 Tier 3 $2.53 $2.34 $2.48 $2.63 $2.79 $2.95 Tier 4 $2.72 $2.96 $3.13 $3.32 $3.52 $3.73 (c) Commodity charges ($/HCF) for multi-family residential customers based on the approved two-tier rate structure with water allocations based on the number of dwelling units in each multi-family complex. Bimonthly Tier Allotments (Per Dwelling Unit) Tier Tier (HCF) x Per Dwelling Unit Tier 1 12 Tier 2 13 + Proposed Multi-Family Rates for Commodity Charges ($/HCF) Tier Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 Tier 1 $1.69 $1.79 $1.89 $2.01 $2.13 $2.25 Tier 2 $1.97 $1.98 $2.10 $2.22 $2.35 $2.49 Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 7 of 9 (d) Specific uniform rates for Commercial, Government, and Institutional classes. Proposed Rates for Commodity Charges ($/HCF) Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 Commercial $1.81 $1.89 $2.01 $2.13 $2.25 $2.39 Government & Institutional $2.13 $2.23 $2.36 $2.50 $2.65 $2.81 The net change to a customer’s water bill will be affected by the customer’s ability to use water efficiently. A typical single-family customer with a 1” water meter and 55 Hundred Cubic Feet (“HCF”) usage in the summer will see a $3.60 or 2.4% bimonthly increase in their water bill. The percent increase will vary among customers based on usage. Sewer Rates The City’s sewer system includes 138 miles of pipe and is, on average, 75 years old. The Sewer Master Plan is a comprehensive report outlining a long-range program of capital improvements and preventative maintenance measures to upgrade and maintain the City’s sewer system. Annual sewer rate adjustments are necessary to fund the operations and maintenance activities of the sewer system to ensure that the City’s sewer system is in compliance with state regulations that mandate the elimination of sewer overflows. The Cost Study Update determined that the current sewer rate structure equitably recovers costs from each customer class but that the City must increase sewer revenues annually in order to fund ongoing capital improvement projects and meet projected operating expenditures while maintaining a Reserve Fund balance of $1.3 million, or 1.5% of the valuation of the City’s sanitary sewer system, which is currently estimated at $90 million. Therefore, the updated Cost Study is recommending that the City increase sewer revenues by 1.5% for Fiscal Year 2020-21, and 3% for the following four fiscal years through 2024-25, in order to fund City to fund ongoing operations and achieve a 75-year replacement cycle for the City’s sewer system. The proposed sewer rates for Fiscal Years 2020-21 through 2024-25 are shown in the tables below, and will not exceed the estimated amount necessary to fund the operation of the City Sewer System: Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 8 of 9 (a) Single-Family Residential and Multi-Family Residential Dwellings Bimonthly Rates Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 $16.97 $17.27 $17.79 $18.32 $18.87 $19.44 (b) Commercial Dwellings Bimonthly Rates (Fixed Rate + Variable Per HCF Billed Water Usage) Current Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25 $50.69 + $0.28 Variable Per HCF $51.80 + $0.28 Variable Per HCF $53.36 + $0.30 Variable Per HCF $54.96 + $0.30 Variable Per HCF $56.61 + $0.31 Variable Per HCF $58.30 + $0.32 Variable Per HCF The proposed sewer rates are increased proportionally in each year to generate the necessary projected level of revenues provided in the Cost Study Update. Should the City find that revenue requirements are less than those projected in the study, the City could opt to forgo rate increases in any given year or implement rates lower than the proposed increase for that year. Implementation of New Rates At the April 21, 2020, City Council Meeting, the PWSD will request that the City Council approve the Water and Sewer Rate Cost of Service Study update and set a Public Hearing date for June 16, 2020, to consider any protests to the proposed rates. The PWSD will, at least forty-five (45) days before the date of the Public Hearing, mail a notice to all water customers detailing the proposed rate increase in accordance with Proposition 218 requirements. All public outreach efforts and informational pieces developed will be approved through the City Attorney’s office to ensure that the City is in compliance with Prop 218 regulations. If there is no majority opposition, the newly- established rates will become effective July 1, 2020. ENVIRONMENTAL ANALYSIS The proposed action does not constitute a project under the California Environmental Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt under CEQA. Study Session Water and Sewer Cost of Service Study Update March 17, 2020 Page 9 of 9 FISCAL IMPACT Water and sewer rate increases are necessary to fund ongoing operations and maintenance budgets and the Capital Improvement Program while maintaining an adequate Reserve Fund balance in case of an emergency. The lack of a rate adjustment would not allow the City to recover increasing water supply costs, and operations and maintenance costs for the City’s water and sewer system. The Water and Sewer Costs of Service Study Update has determined that the City will need to increase water revenues by 3% for Fiscal Year 2020-21, and 6% for the following four years through Fiscal Year 2024-25, in order to fund expected operations, maintenance, and Capital Improvement Program expenditures. Additionally, the Cost Study Update determined that a 1.5% sewer rate adjustment for Fiscal Year 2020-21, and 3% for the following four years through Fiscal Year 2024-25 is necessary to fund expected operations and maintenance costs for the City’s sewer system. RECOMMENDATION It is recommended the City Council provide direction to the Public Works Services Department to move forward with the adoption of the Cost Study Update and water and sewer rate adjustment process by following Proposition 218 balloting procedures to establish a five-year water and sewer rates structure for Fiscal Years 2020-21 through 2024-25.