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HomeMy WebLinkAboutItem 09 - Setting Water and Sewer RatesPublic Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 1 of 10 DATE: February 2, 2021 TO: Honorable Mayor and City Council FROM: Tom Tait, Public Works Services Director By: Jacquelyn Mercado, Senior Management Analyst SUBJECT: RESOLUTIONS SETTING CITY WATER AND SEWER RATES FOR CALENDAR YEARS 2021 THROUGH 2025 Resolution No. 7348 setting City water rates and finding the rates will not exceed the estimated amount necessary to fund the operation of the City water system for calendar years 2021 through 2025. Recommendation: Adopt Resolution No. 7349 setting City sewer rates and finding the rates will not exceed the estimated amount necessary to fund the operation of the City sewer system for calendar years 2021 through 2025. Recommendation: Adopt SUMMARY On December 15, 2020, the City Council directed the Public Works Services Department (“PWSD”) to follow Proposition 218 (“Prop 218”) balloting procedures to establish water and sewer rates and conduct a public hearing. Proposition 218 requires the mailing of a written notice detailing the proposed rate adjustment to all property owners and tenants who are responsible to pay the utility bill. The City is proposing to adjust its water and sewer rates for five years. If approved, the new rates will become effective and operative for water use and all bills sent after February 2, 2021, and each January 1 thereafter, including January 1, 2025, as set forth in the attached resolutions. All necessary steps have been taken to be in compliance with Prop 218 balloting procedures for adjusting water and sewer rates. It is recommended that the City Council conduct a public hearing and, if there is no majority protest, adopt Resolution Nos. 7348 and 7349 authorizing the proposed rate adjustments for calendar years 2021 through 2025. Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 2 of 10 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 Engineers (“Carollo”) for the preparation of the Water and Sewer Cost of Service Study and the development of financial models 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 Study and to recommend a new five-year water and sewer rate adjustment for calendar years 2021 through 2025. Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 3 of 10 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 more 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. 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 Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 4 of 10 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 the replacement value) 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 $11 million. Based on those factors and taking into account the current pandemic, the Cost Study Update recommends that the City increase water revenues by 5% for calendar years 2021 and 2022, and 6% for each of the following calendar years through 2025, in order to fund expected operations, maintenance, and CIP expenditures, and maintain a sufficient Reserve Fund balance. The proposed water rates shown in the following tables will not exceed the estimated amount necessary to fund the operation of the City Water System. The table below shows the proposed increase to the current fixed bimonthly meter charge for all customer classes to adequately reflect the actual cost of service incurred: BI-MONTHLY RATES FOR METER CHARGE ($/SIZE OF METER) – ALL CUSTOMER CLASSES Meter Size Current Rates Effective Dates 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 5/8” $30.33 $31.82 $33.41 $35.41 $37.54 $39.79 3/4” $32.40 $33.99 $35.69 $37.83 $40.10 $42.51 1” $36.55 $38.34 $40.26 $42.67 $45.24 $47.95 1 1/2” $46.93 $49.22 $51.68 $54.78 $58.07 $61.55 2” $59.39 $62.27 $65.38 $69.31 $73.47 $77.87 3” $88.45 $92.73 $97.36 $103.20 $109.40 $115.96 4” $ 129.97 $136.23 $143.05 $151.63 $160.72 $170.37 6” $ 254.53 $266.75 $280.09 $296.90 $314.71 $333.59 8” $ 399.85 $419.03 $439.98 $466.38 $494.36 $524.02 10” $ 607.45 $636.57 $668.39 $708.50 $751.01 $796.07 Additionally, the Cost Study Update has proposed a few minor adjustments to some of the tier break points, which are necessary to realign tier usage with each meter size to current water demand patterns. These tier break points are shown seasonally in the following tables: Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 5 of 10 BIMONTHLY TIER BREAK POINTS (IN HCF) FOR WINTER WATER USAGE (NOVEMBER THROUGH APRIL) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 32 23 - 34 23 - 42 23 - 48 23 - 60 Tier 3 33 - 42 35 - 44 43 - 58 49 - 70 61 - 90 Tier 4 43+ 45+ 59+ 71+ 91+ BIMONTHLY TIER BREAK POINTS (IN HCF) FOR SUMMER WATER USAGE (MAY THROUGH OCTOBER) Meter Size Tier 5/8” 3/4” 1” 1 1/2” 2” Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22 Tier 2 23 - 34 23 - 42 23 - 60 23 - 70 23 - 94 Tier 3 35 - 44 43 - 58 61 - 92 71 - 112 95 - 148 Tier 4 45+ 59+ 93+ 113+ 149+ A seasonal single-family tiered water rate structure assists in managing customer demand for water by pricing discretionary water uses, such as landscape irrigation, at a higher rate than water used for drinking and sanitation purposes. This is to provide a price signal to customers to use water efficiently and to offer an incentive to reduce excess water use. As water usage increases, so does the cost per unit of additional water; this methodology has proven effective in curtailing wasteful water practices. The table below shows the proposed single-family rates: The table below shows the two-tier water allocations based on the number of dwelling units in each multi-family complex, followed by a table showing the proposed multi-family rates: SINGLE FAMILY RESIDENTIAL WATER RATES ($/HCF) Tier Current Rates Effective Dates 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 Tier 1 $1.82 $1.91 $2.01 $2.13 $2.25 $2.39 Tier 2 $2.23 $2.38 $2.50 $2.65 $2.81 $2.98 Tier 3 $2.53 $2.46 $2.58 $2.73 $2.90 $3.07 Tier 4 $2.72 $3.06 $3.21 $3.41 $3.61 $3.83 Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 6 of 10 BIMONTHLY TIER ALLOTMENTS (PER DWELLING UNIT) Tier Tier (HCF) x Per Dwelling Unit Tier 1 12 Tier 2 13 + Finally, the following table shows specific uniform rates for Commercial, Government, and Institutional classes: The net change to a customer’s water bill will be affected by the customer’s ability to use water efficiently. The percent increase will vary among customers based on usage. Arcadia’s water rates are among the lowest in the area and will remain so, even with the proposed increases. The table below provides a comparison of Arcadia’s rates along with other neighboring jurisdictions. MULTI-FAMILY RESIDENTIAL WATER RATES ($/HCF) Tier Current Rates Effective Dates 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 1 $1.69 $1.75 $1.83 $1.94 $2.06 $2.18 2 $1.97 $1.95 $2.04 $2.17 $2.30 $2.43 COMMERICAL, GOVERNMENT, & INSTITUTIONAL WATER RATES ($/HCF) Current Rates Effective Dates 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 Commercial $1.81 $1.86 $1.95 $2.07 $2.19 $2.32 Government & Institutional $2.13 $2.27 $2.38 $2.52 $2.67 $2.83 $375.34 $372.03 $355.06 $306.55 $238.13 $231.47 $205.90 $198.87 $192.25 $158.90 $150.18 South Pasadena Sierra Madre Golden State Water Areas* Pasadena Monterey Park Monrovia Alhambra Arcadia Proposed 2025 Azusa Arcadia Proposed 2021 Arcadia Current Single-Family Bimonthly Water Cost for Neighboring Cities Total Bimonthly Charge for 1 inch Meter with Summer Usage of 59 HCF Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 7 of 10 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 following 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. The Cost Study Update has estimated the value of the City’s sewer system replacement at $90 million. Based on industry standards for such a valuation, the Cost Study determined that $1.3 million in capital reserve (or 1.5% of replacement value) is required. The Capital Improvement Program will primarily be funded with cash from sewer rates as well as a small amount of reserve usage in certain years. Based on the Cost Study projections, reserves will be held relatively steady between $1.99 and $2.26 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 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 $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 2/2/2021 1/1/2022 1/1/2023 1/1/2024 1/1/2025 $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 Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 8 of 10 City find that revenue requirements are less than those projected in the study, the City Council could opt to forgo rate increases in any given year or implement rates lower than the proposed increase for that year. Arcadia’s sewer rates are also among the lowest in the area and will remain so through the year 2025, even with the proposed increases, as shown in the table below. Prop 218 Notice and Implementation of New Rates In accordance with Proposition 218, the City must engage in a voter approval process when increasing rates for the “property-related” services of water and sewer. These requirements include mailing a written notice detailing the proposed rate adjustments to all property owners and tenants who are responsible to pay the utility bill, and conduct a public hearing no less than 45 days after the mailing of the notices to consider any protests to the proposed rate adjustments. On October 20, 2020, the City Council directed the PWSD to follow Prop 218 balloting procedures to establish water and sewer rates and conduct a public hearing. During the public notification process, an inquiry was made regarding the formula utilized for the calculation of the water rates. Upon further review, Carollo found an error in their financial model that was utilized to calculate the water rates. As a result, the water rate calculations were off slightly and needed to be adjusted so that they are accurate. On December 15, 2020, the City Council directed the PWSD to again follow Prop 218 balloting procedures to establish water and sewer rates and conduct a public hearing at the February 2, 2021, City Council meeting. A written notice was drafted and reviewed by the City’s legal counsel to ensure Prop 218 compliance. The notice was then mailed on December 16, 2020, to all property owners and tenants who are responsible to pay the utility bill. All written protests against the rate increases are to be considered during the public hearing and, following the closure of the public hearing, if a majority protest exists, the proposed water and sewer rates cannot be established. However, if there is no majority protest, it is recommended that the City Council adopt the proposed water and sewer rate adjustment schedule for calendar years 2021 through 2025. The City currently has 14,436 active accounts and a majority protest would be equivalent to at least 7,218 written $42.19 $37.51 $28.15 $19.50 $19.04 $18.78 $17.60 $17.35 $16.97 Azusa*Sierra Madre South Pasadena San Gabriel Monrovia Arcadia Proposed 2025 Pasadena*Arcadia Proposed 2021 Arcadia Current Residential Bimonthly Sewer Cost for Neighboring Cities Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 9 of 10 protests. In order to facilitate submittal of written protests, the City has set up a drop-box outside of the City Manager/City Clerk’s Office for property owners or customers of record to submit written protests. Protests placed in the drop-box will be accepted until the close of the Public Hearing, at which point the City will close the drop-box and collect all valid protests to determine whether a majority exists. To date, the City has received four valid written protests and three electronically submitted public comments opposing the rates. In accordance with Prop 218, public comments at the Public Hearing will not qualify as formal protests unless accompanied by a written protest. Each year, as part of the budgeting process, water and sewer operating budgets will be reviewed and analyzed. Should it be determined that revenue projections don’t require the full percent rate increase, the PWSD will recommend a lesser rate increase. In addition, water and sewer rate adjustments will be brought to the City Council for adoption each year. ENVIRONMENTAL IMPACT 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 per section 15061(b)(3) of the CEQA Guidelines. 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. Based on study projections, the City must increase water revenue annually in order to meet expected revenue needs. Additionally, the Cost Study Update recommends that a 2% sewer rate adjustment for calendar years 2021 through 2025 is necessary to fund expected operations, maintenance and Capital Improvement Programs expenditures for the City’s sewer system. Based on study projections, the City must increase sewer revenue annually in order to meet expected revenue needs. Public Hearing to Adopt Water and Sewer Rates February 2, 2021 Page 10 of 10 RECOMMENDATION It is recommended that the City Council determine that this item is exempt under the California Environmental Quality Act (“CEQA”); and that the City Council conduct a public hearing, and if there is no majority protest, adopt the following Resolutions. a. Resolution No. 7348 setting City Water Rates and finding the rates will not exceed the estimated amount necessary to fund the operation of the City Water System for calendar years 2021 through 2025; and b. Resolution No. 7349 setting City Sewer Rates and finding the rates will not exceed the estimated amount necessary to fund the operation of the City Sewer System for calendar years 2021 through 2025. Attachments: Resolution No. 7348 (City Water Rates) Resolution No. 7349 (City Sewer Rates)