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HomeMy WebLinkAboutItem 10a - Water and Sewer Cost of Service Study UpdateWater and Sewer Cost of Service Study Update September 1, 2020 Page 1 of 8 DATE: September 1, 2020 TO: Honorable Mayor and City Council FROM: Tom Tait, Public Works Services Director By: Jacquelyn Mercado, Senior Management Analyst SUBJECT: REPORT, DISCUSSION, AND DIRECTION 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. 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. In order to fund operations, maintenance, water supply costs, capital expenditures, and maintain a sufficient Reserve Fund balance, the Cost Study Update recommends that the City increase water rates by 5% for calendar years 2021 and 2022, and 6% for the following calendar years through 2025. The Cost Study Update also proposes that the City increase sewer revenues by 2% for calendar years 2021 through 2025, 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 following Proposition 218 (“Prop 218”) balloting procedures to establish a five-year water and sewer rate structure for calendar years 2021 through 2025. Water and Sewer Cost of Service Study Update September 1, 2020 Page 2 of 8 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 in 2017, local regions continue to suffer from long-term drought impacts. In the Main Basin, from which 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 Main Basin Watermaster implemented the RDA in Fiscal Year 2016-2017; 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. 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 Water and Sewer Cost of Service Study Update September 1, 2020 Page 3 of 8 Study and to recommend a new five-year water and sewer rate adjustment for calendar years 2021 through 2025. DISCUSSION The Cost Study Update relies on the City’s financial and rate models, which were exclusively developed for the City by Carollo during the 2015 Cost Study, and they were 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. These changes include increasing and decreasing allotments based on the analysis of actual tiered customer usage data during the last five years. Adjusting the tier allotments is necessary in order to realign tier usage with meter size and current customer demand patterns. The tier allotments are now more proportional across all tiers and meter sizes, which makes the proposed rate structure fairer and legally defensible. The following goals were identified in the 2015 Cost Study and carried forward through the Cost Study Update: • Generate enough 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 of 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. 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 most 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. Water and Sewer Cost of Service Study Update September 1, 2020 Page 4 of 8 In addition to regular replacement water costs, the RDA fee has increased annually since Fiscal Year 2016-17, from $40 per acre-foot to $175 per acre-foot in Fiscal Year 2020-21. To date, the City has paid over $6 million dollars in RDA fees without passing any of those charges on to ratepayers. The RDA fee will continue for the foreseeable future and is estimated to cost the City approximately $2 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, the total reserve required for an emergency is $11 million. Based on those factors and taking into account the current pandemic, the Cost Study Update recommends that the City increase water revenues by 5% for calendar years 2021 and 2022, and 6% for the following calendar years through 2025, in order to fund expected operations, maintenance, and CIP expenditures, and maintain a sufficient Reserve Fund balance. The proposed water rates shown in the tables below will not exceed the estimated amount necessary to fund the operation of the City Water System: The table below shows the proposed increase to the current fixed bimonthly meter charge for all customer classes to adequately reflect the actual cost of service incurred. Proposed Meter Charge ($/Meter Size) Meter Size (in inches) Current Rate 2021 2022 2023 2024 2025 5/8” $30.33 $31.96 $33.56 $35.57 $37.71 $39.97 3/4” $32.40 $34.15 $35.86 $38.01 $40.29 $42.71 1” $36.55 $38.53 $40.46 $42.88 $45.46 $48.18 1 1/2” $46.93 $49.48 $51.96 $55.07 $58.38 $61.88 2” $59.39 $62.62 $65.75 $69.70 $73.88 $78.31 3” $88.45 $93.29 $97.95 $103.83 $110.06 $116.66 4” $ 129.97 $137.09 $143.95 $152.58 $161.74 $171.44 6” $ 254.53 $268.51 $281.93 $298.85 $316.78 $335.79 8” $ 399.85 $421.83 $442.92 $469.49 $497.66 $527.52 10” $ 607.45 $640.85 $672.89 $713.27 $756.06 $801.43 Water and Sewer Cost of Service Study Update September 1, 2020 Page 5 of 8 Additionally, the Cost Study Update has proposed a few minor adjustments to some of the tier break points, which are necessary to realign tier usage with each meter size to current water demand patterns. These tier break points are shown seasonally in the following tables. Bimonthly Tier Break Points (in HCF) for Winter Water Usage (November through April) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 32 23 - 34 23 - 42 23 - 48 23 - 60 Tier 3 33 - 42 35 - 44 43 - 58 49 - 70 61 - 90 Tier 4 43+ 45+ 59+ 71+ 91+ Bimonthly Tier Break Points (in HCF) for Summer Water Usage (May through October) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 34 23 - 42 23 - 60 23 - 70 23 - 94 Tier 3 35 - 44 43 - 58 61 - 92 71 - 112 95 - 148 Tier 4 45+ 59+ 93+ 113+ 149+ A seasonal single-family tiered water rate structure assists in managing customer demand for water by pricing discretionary water uses, such as landscape irrigation, at a higher rate than water used for drinking and sanitation purposes. This is to provide a price signal to customers to use water efficiently and to offer an incentive to reduce excess water use. As water usage increases, so does the cost per unit of additional water; this methodology has proven effective in curtailing wasteful water practices. The table below shows the proposed single-family rates. Proposed Single-Family Rates for Commodity Charges ($/HCF) Tier Current Rate 2021 2022 2023 2024 2025 Tier 1 $1.82 $1.91 $2.00 $2.12 $2.25 $2.38 Tier 2 $2.23 $2.32 $2.44 $2.59 $2.74 $2.91 Tier 3 $2.53 $2.39 $2.51 $2.66 $2.82 $2.99 Tier 4 $2.72 $3.00 $3.15 $3.34 $3.54 $3.75 Water and Sewer Cost of Service Study Update September 1, 2020 Page 6 of 8 The table below shows the two-tier water allocations based on the number of dwelling units in each multi-family complex, followed by a table showing the proposed multi- family rates. Bimonthly Tier Allotments (Per Dwelling Unit) Tier Tier (HCF) x Per Dwelling Unit Tier 1 12 Tier 2 13 + Proposed Multi-Family Rates for Commodity Charges ($/HCF) Tier Current Rate 2021 2022 2023 2024 2025 Tier 1 $1.69 $1.82 $1.91 $2.02 $2.14 $2.27 Tier 2 $1.97 $2.01 $2.11 $2.23 $2.37 $2.51 Finally, the following table shows specific uniform rates for Commercial, Government, and Institutional classes. Proposed Rates for Commodity Charges ($/HCF) Current Rate 2021 2022 2023 2024 2025 Commercial $1.81 $1.92 $2.02 $2.14 $2.27 $2.40 Government & Institutional $2.13 $2.27 $2.38 $2.52 $2.67 $2.83 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 $6.93 or 4.6% 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 system is in compliance with state regulations that mandate the elimination of sewer overflows. Water and Sewer Cost of Service Study Update September 1, 2020 Page 7 of 8 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. revenues must also maintain 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 2% for calendar years 2021 through 2025, in order to fund ongoing operations and achieve a 75-year replacement cycle for the City’s sewer system. The proposed sewer rates shown in the tables below will not exceed the estimated amount necessary to fund the operation of the City Sewer System: The table below shows Single-Family Residential and Multi-Family Residential Dwellings Bimonthly Rates Current Rate 2021 2022 2023 2024 2025 $16.97 $17.35 $17.70 $18.05 $18.41 $18.78 Commercial Dwellings Bimonthly Rates (Fixed Rate + Variable Per HCF Billed Water Usage) are shown in the following table. Current Rate 2021 2022 2023 2024 2025 $50.69 + $0.28 Variable Per HCF $52.04 + $0.28 Variable Per HCF $53.09 + $0.29 Variable Per HCF $54.15 + $0.29 Variable Per HCF $55.23 + $0.30 Variable Per HCF $56.33 + $0.31 Variable Per HCF The proposed sewer rates are increased proportionally 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 Following direction from the City Council at the September 1 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 December 1, 2020, to consider any protests to the proposed water and sewer rate adjustments. The PWSD will, at least forty-five (45) days before the date of the Public Hearing, mail a notice to all water Water and Sewer Cost of Service Study Update September 1, 2020 Page 8 of 8 and sewer 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 following Proposition 218 regulations. If there is no majority protest, the new water and sewer rates will become effective January 1, 2021. 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 systems. The Water and Sewer Costs of Service Study Update recommends that the City increase water revenues by 5% for calendar years 2021 and 2022, and 6% for the following three years through 2025 in order to fund expected operations, maintenance, and Capital Improvement Program expenditures. Additionally, the Cost Study Update recommends that a 2% sewer rate adjustment for calendar years 2021 through 2025 is necessary to fund expected operations and maintenance costs for the City’s sewer system. RECOMMENDATION It is recommended that 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 rate structure for calendar years 2021 through 2025.