CC 2016-05-10_11b Water and Wastewater Financial Plan MEMORANDUM
TO: CITY COUNCIL
FROM: DEBBIE MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES
GEOFF ENGLISH, DIRECTOR OF PUBLIC WORKS
RYAN CORNELL, ACCOUNTING MANAGER
SHANE TAYLOR, UTILITY MANAGER
SUBJECT: CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN
AND IMPLEMENTATION OF TEMPORARY DROUGHT RATES
DATE: MAY 10, 2016
RECOMMENDATION:
It is recommended the City Council: 1) schedule a public hearing to consider
adjustments to water and wastewater rates via drought rates and; 2) direct staff to
prepare and distribute a Proposition 218 notice for the proposed temporary water and
wastewater drought rates.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
The proposed temporary drought rates would add a 10% surcharge to the current water
and wastewater rates. It was initially projected that water and sewer revenue would total
$21.1 million and $3.3 million, respectively, from FY 2016-17 to FY 2018-19. Due to the
unprecedented reduction in consumption caused by the implementation of the Stage 1
Water Shortage Emergency program and the Governor’s 28% mandatory reduction, the
projected water revenue over the next three years is estimated to be $17.9 million, a
shortfall of approximately $3.2 million. If the proposed drought rates are in effect
through June 2019, the rates would generate approximately $1.7 million towards this
$3.2 million shortfall, with the remaining $1.5 million coming from fund reserves and
reductions in expenditures. Wastewater revenues are now estimated to be $2.8 million,
a shortfall of approximately $450,000 over the next three fiscal years. The proposed
drought rate would generate $200,000 over the next three fiscal years, reducing the
shortfall to $250,000.
BACKGROUND:
In March 2014, the City Council reviewed the Water and Wastewater Financial Plan and
Rate Study prepared by Raftelis Financial Consultants, Inc. (RFC). The RFC study was
intended to set rates for a 5-year period, beginning in July 2014 through June 2019. As
a result of that study, the City Council also approved minimum fund balance reserves be
increased to 90-days of operating expenses plus $500,000 for a capital asset reserve
plus 1-year of debt-service obligations (approximately $1.4 million for the Water Fund).
At the time, it was in the City’s best interest to keep total reserves at approximately $6
million due to capital project needs and water supply and conservation related project
costs.
Item 11.b. - Page 1
CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
PAGE 2
On May 26, 2015, the City Council adopted a Resolution declaring a Stage 1 Water
Shortage Emergency and implemented restrictions on single and multi-family
residences and dedicated irrigation water usage. Residential accounts are required to
reduce consumption by 0%, 10%, 20% or 30%, depending on usage tier, when
compared to the same billing period in 2014 and 25% for those accounts with dedicated
irrigation meters. On April 1, 2015, California Governor Brown signed Executive Order
B-29-15, enacting statewide mandatory water conservation requirements. The
Governor’s Executive Order requires the City of Arroyo Grande to reduce consumption
by 28% when compared to 2013.
Based upon the provisions of Proposition 218, all affected rate payers must receive
written notice by mail at least 45 days prior to the City Council consideration of rate
adjustments. The notice must include the amount of the fee, the basis on which the fee
was calculated and the date, time and place of the public hearing and must clearly
advise of the right to protest the fee increase. In order to implement potential
adjustments as soon as possible, staff is requesting the City Council provide direction
prior to notification of the public hearing and formal consideration of the rate
adjustments, which is scheduled for July 26, 2016.
ANAYLYSIS OF ISSUES:
Water Fund
As reflected in the chart below, since the implementation of the Stage 1 Program,
consumers have reduced water consumption by 24% compared to FY 2014-15 and
35% compared to FY 2013-14. Approximately 62% of the water fees charged to
customers are based on the actual water consumed with the remaining 38%
representing a flat fee per account. As a result, in FY 2015-16, revenues were originally
anticipated to be $6.9 million and are now projected to be $5.7 million.
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CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
PAGE 3
Due to the past management of the rate adjustments and cost control measures
implemented by the City, the Water Fund has held a healthy fund balance. This fund
balance has been sufficient enough to help absorb the shortfall in current year revenue.
However, without any adjustments to revenues and expenses, by the end of FY 2016-
17, fund balance will be $111,000 below minimum reserve requirements, and in FY
2018-19, $2.4 million below minimum reserve requirements and approximately
$500,000 below the contractually obligated minimum fund balance.
With the uncertainty of the length of the drought and the average rainfall received
this past winter, the financial model shown above projects that consumption will
remain at a reduced level, similar to consumption in FY 2015-16 for two years, with
a very slight increase in the third year.
A number of items have been examined to help minimize the impact of the shortfall
in revenue, including deferring Reservoir No. 3 and 4 exterior recoating and seismic
evaluation project ($640,000) and suspending the contribution to the Water
Neutralization Fund ($200,000 per year). These actions will reduce expenditures by
approximately $1.3 million over the next three fiscal years.
It is recommended that a temporary drought rate be added to the current rates to
help offset the revenue shortfall caused by the dramatic reduction in consumption.
These rates are temporary in nature, so that when the drought ends and
consumption returns to “normal,” the revenues initially projected should return as
well. Regardless, consumption habits have permanently been changed in some
instances as demonstrated by the increased usage in the cash for grass and
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CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
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plumbing retrofit programs. The City will need to examine consumption habits after
the drought to determine what the new level of normal consumption is, and then set
rates accordingly. It is anticipated that rates will be reviewed in 2018, at the end of
the current 5-year rate study.
Should the temporary rates remain in effect through FY 2018-19, it is anticipated
that this will enable the fund balance for the Water Fund to remain above the
minimum required by $550,000.
The recommended approach relies on an increase in rates along with the deferral
or elimination of expenditure programs and projects. However, an alternative that
could be considered is to implement a higher drought rate, which could therefore
provide enough revenue to allow for the expenditures to occur as planned.
Sewer Fund
Similar to the Water Fund, the Sewer Fund revenue is performing less than initially
projected due to the reduction in water consumption. A portion of sewer charges is
based on the amount of wastewater generated, as measured by the amount of water
consumed. In addition, there is a fixed fee. Prior to the Stage 1 Water Shortage
Emergency Program, the average amount of wastewater added to the system was
approximately 64 gallons per person per day. Due to conservation measures, the
amount has been reduced to 55 gallons per person per day.
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CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
PAGE 5
It was originally anticipated that the City would receive $3.3 million in sewer-related
revenues from FY 2016-17 through FY 2018-19. It is now projected that revenues will
be $2.8 million over the same period, a shortfall of $450,000.
Unlike the Water Fund, it is recommended that the capital projects anticipated to be
constructed over the next 3-years should not be deferred to future years. The need to
complete these projects is important to the overall infrastructure of the system and any
deferrals could place the City at higher risk for system failure and result in higher project
costs.
As shown in the chart below, without any additional rate increase, the Sewer Fund’s
balance will remain above minimum reserve. However, a 10% surcharge to the current
rates is recommended because the minimum reserves are relatively small and are
unlikely to be sufficient should a major system failure occur. Implementing drought
rates for the Sewer Fund will result in a fund balance of just over $1 million by the end
of the 2018-19 fiscal year.
Item 11.b. - Page 5
CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
PAGE 6
Effects to the Customer
The impact of the water rate recommendations on an average water customer will be
approximately $10 to $18 per billing cycle (or $5-$9 per month). Nearly 80% of the
single family residential customer base uses between 10 and 30 units of water on a 5/8”
size water meter per billing period. The actual increase per usage level is shown below:
FY 2016-17 FY 2017-18 FY 2018-19
Current
Rates
Drought
Rates Increase
Current
Rates
Drought
Rates Increase
Current
Rates
Drought
Rates Increase
10-units $91.71 $100.88 $9.14 $94.26 $103.72 $9.46 $96.82 $106.52 $9.70
15-units 109.44 120.33 10.89 112.56 123.87 11.31 115.72 127.32 11.60
20-units 127.86 140.58 12.72 131.60 144.82 13.22 135.38 148.96 13.58
25-units 147.36 162.03 14.67 151.75 166.97 15.22 156.18 171.86 15.68
30-units 166.86 183.48 16.62 171.90 189.12 17.22 176.98 194.76 17.78
The impact of the sewer rate recommendations for an average customer will be
approximately $1 to $3 per billing cycle (or $0.50-$1.50 per month). Unlike the water
rates that already have approved rate increases for the next three years, the sewer
rates remain the same for the next several years. As a result, the changes in the
increase in the drought rates will remain the same until a detailed rate study is
conducted. The actual increase per usage level is shown below:
Current
Rates
Drought
Rates Increase
10-units $11.50 $12.68 $1.18
15-units 14.85 16.38 1.53
20-units 18.20 20.08 1.88
25-units 21.55 23.78 2.23
30-units 24.90 27.48 2.58
ALTERNATIVES:
The following alternatives are provided for the Council's considerati on:
1. Approve staff’s recommendation;
2. Increase drought rates by 20% (which will maintain fund balances that were
originally projected by the rate study);
3. Do not approve staff’s recommendation and maintain the current rate
schedule; or
4. Provide direction to staff.
ADVANTAGES:
Implementing the proposed water and wastewater rate increases will provide ongoing
revenue needed to meet the next 3 years of operating, capital and debt expenditures
and reserve policies in the Water Fund and Sewer Fund.
Item 11.b. - Page 6
CITY COUNCIL
CONSIDERATION OF WATER AND WASTEWATER FINANCIAL PLAN AND
IMPLEMENTATION OF TEMPORARY DROUGHT RATES
MAY 10, 2016
PAGE 7
DISADVANTAGES:
Customers will experience higher water and sewer utility costs.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted in front of City Hall on Thursday, May 5, 2016. The Agenda
and report were posted on the City’s website on Friday, May 6, 2016. No public
comments were received.
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