City Council is hereby recommended to approve Resolution No. 3989 to adopt revised water and sewer rates, effective November 1, 2020, to cover increased operating costs, bond covenants, and critical capital projects for the water system.
Water rates were last increased July 1, 2015, primarily to compensate for lower sales caused by drought-related water conservation. Following the drought, water sales remained at the drought levels and have not returned to previous, higher levels. Since 2015, operating costs have continued to increase, and more attention is now focused on critical capital improvement projects for the water system. The cash balance of the water system is fully depleted.
Sewer rates were last increased July 1, 2005, 15 years ago. Sewer rates have been constant because sewer operating costs are less variable than water, less capital equipment is involved, and because of contributions from sewer impact fees. However, increases in operating costs have caught up with revenue, and now rates must be increased. Sewer, unlike water, has a healthy fund balance of approximately $3 million. Consequently, the sewer system does not need a component of its rate increase to increase its fund balance or to cover project costs.
Working closely with City staff, Dan Bergmann of IGService has prepared a financial analysis and rate study which is the basis for the revised water and sewer rates. The full rate study is included with this staff report. In summary:
The critical components of the water rate increases are to:
- Cover operations and maintenance costs, including the bond covenant for debt service coverage.
- Collect additional rate-based revenue to cover new debt service for $7 million in new bonds for capital improvement projects, most notably reconstruction of the seven-million-gallon Derrick water tank.
- Rebuild the depleted water enterprise fund balance.
There are also two components of the water rate study that reduce rates slightly. First, the Series 2012 bonds are being refinanced, resulting in combined savings to water and sewer of approximately $100,000 per year. Second, associated with the refinance of the old bond money, and new bond money for new projects, is a third component of finance to enable payment of approximately $1 million to USBR to obtain a new long-term water supply agreement. Lower water rates associated with the new USBR agreement more than offset the debt service cost of the additional $1 million.
The critical component of the sewer rate study to achieve adequate rate-based revenue to cover increased operating expenses without reliance on impact fees, and to do so adequately to meet the bond covenant related to debt service coverage. The revised sewer rates are also reset to be more consistent with cost of service between residential and commercial customers. Specifically, the volumetric rate for commercial customers has been increased significantly, essentially doubled, to match the average system cost to process wastewater.
Much effort has been extended to communicate these needs with City Council and the public, as follows:
- A City Council workshop was held on July 29, 2020 to initially inform city council of the water and sewer system needs, and the associated costs and rate increases.
- A Proposition 218-compliant notice was sent to all customer as a billing insert with bills at the end of August. The notice explains the rate increases needed and provides the opportunity for customers to protest and attend the rate hearing on October 15, 2020.
- Virtual community meetings were advertised ahead of time and hosted by City Staff and Mr. Bergmann on Tuesday September 29th at 11 am, and Thursday October 8, at 6 pm.
Commercial customers with landscape water usage are being notified of the benefit of installing landscape water meters to avoid excessive monthly sewer bills during summer.
- The alternative is not to increase water and sewer rates. If so, water and sewer revenue will be less than operating expenses, bond covenants will be violated, and critical water system improvement projects will be suspended.
V. FISCAL IMPACT:
Over three years, stepped increases in water rates will increase rate-based revenue from the current level of $4.4 million per year by a projected total of $1.8 million. The projected revenue level of $6.2 million per year in FY 22/23 will be a 40 percent increase over the current revenue level. The 37 percent increase in sewer rates will increase revenue in the first year from the current level of $1.1 million per year to $1.5 million per year. For both water and sewer, three percent increases follow through the fifth year to enable revenue to follow projected inflationary increases in expenses.