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C I T Y OF SAN LU I S O B I S P O
FROM: John Moss,Utilities Director
Prepared By: Sue Baasch,Administrative Analyst*
Gary Henderson,Water Division Manager
SUBJECT: 2000 WATER FUND REVIEW
CAO RECOMMENDATION
1. Review and file the 2000 annual water fund financial review; and
2. Conceptually approve the proposed operating program change request($19,700 in 2000-
01, and $25,700 per year through 2006), and capital improvement plan request($90,000),
pending the June 20,2000,budget review.
DISCUSSION
This report presents the annual review of the water fund and recommends no change (0%)to the
currently adopted water rates. As recommended in last year's review, which ended with a roll
back of water rates by 10% and a projection of no rate change for 2000-01, current water
revenues are adequate to fund proposed expenditures in 2000-01. This includes funding the
construction of the water reuse project that has received important approvals and appears to be on
track to deliver water for irrigation by 2002-03.
There is one recommended change to the currently approved 2000-01 Budget:
Significant Operating Program Change Request
❑ Provide temporary staffing for Water Reuse fish monitoring mitigation project ($19,700
in 00-01; $25,700 per year through 2006).
Capital Improvement Plan Request
❑ Replace three water service trucks ($90,000).
Within this analysis are three prior years of financial information, an update to projections for the
1999-00 year end, and a forecast for the next four years through 2003-04, based on identified
assumptions for future City growth, inflation and water demand patterns. In summary, this
analysis confirms that the water fund will meet the fiscal policies established by the City and will
support the recommended operating budgets and capital improvement plan contained in the
preliminary 2000-01 Budget. In addition, this analysis includes estimates for the revenues
required to fund the Salinas project and water master plan improvements.
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Council Agenda Report—2000 Water Fund Rate Review
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Background
While no change is recommended to water rates and to required revenues, it is important to
review the major accomplishments and goals of the water division over this financial period.
❑ Metron Meter replacement
❑ Water Master Plan development and implementation
❑ Water Reuse Project design and construction
Metron Meter replacement
The Metron Meter project involved replacing all 1'/z" and larger meters throughout the City with
higher efficiency Metron meters and was approved as a$950,000 capital improvement project for
fiscal year 99-00.
The by of San Luis Obispo entered into a contract with Metron-Farrier to supply and install
approximately 660 meters at existing locations throughout the city. The project construction
began around the first part of April and was essentially completed at the end of May 2000. The
project went very smoothly and was under budget. The estimated pay back period is three to four
years,based on estimated increased revenues.
Water Master Plan development and implementation
The final draft of the City Water Master Plan (in development for the past several years, in
conjunction with the Airport Area Specific Plan) was received in May 2000. The final draft is
essentially complete with only minor revisions being required for completion of the report. The
report recommends various system improvements to meet current city water demands as well as
future development needs. Some of the more significant proposed improvements include a new
4 million gallon water tank at the water treatment plant, a new 1.2 million gallon water tank to
replace the existing Bishop tank(above General Hospital) and the potential future need for a new
sedimentation basin at the water treatment plant.
The current water fund analysis includes $1,500,000 in 2000-01 and $1,500,000 in 2001-02 to
fund Water Master Plan recommendations (total of$3.0 million). Upon completion of the Water
Master Plan, staff will discuss the recommendations with City Council. A number of the
consultant recommendations may not merit staff support due to costs and other factors. Staff will
recommend a project priority list to Council for the projects that are deemed necessary and will
then include those projects in the capital improvement plan as part of the 2001-03 Financial Plan
process.
Water Reuse Project
The Water Reuse Project, currently under design, is approved for $8,900,000 in construction
funding in 2000-01. It will be a debt-financed project, and is on the State list to receive grant and
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Council Agenda Report—2000 Water Fund Rate Review
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loan funding through the State Revolving Fund Clean Water program.
The project passed a major milestone on May 8, 2000. The State Water Resource Control Board
(SWRCB) issued an Order approving the City's petition to use recycled water for irrigation and
other non-potable uses. The Order also recognized the City's dedication of 1.7 cubic feet per
second of treated wastewater to San Luis Obispo Creek for maintaining existing instream uses.
Design efforts have been coordinated with the water rights approval process. Brown and
Caldwell is scheduled to complete a preliminary design report in June, 2000. This report will be
presented to City Council for review and approval to proceed with preparation of construction
documents. The schedule calls for the award of a construction contract near the end of fiscal year
00-01. Construction is estimated to take twelve months. Recycled water deliveries are
anticipated to begin in 2002.
1999-01 Financial Plan Supplement: 2000-01 Budget
• Operating Budgets
The total operating budget for the Water Division indicates a large increase in 1999-00 and a
subsequent decrease in the 2000-01 fiscal year. This anomaly is the result of funding the Whale
Rock pipeline capital improvement project in 1999-00, costs of which are shown in the "Source
of Supply" budget. The project to relocate the Whale Rock pipeline from a landslide area has a
budget of more than$1.1 million.
The only significant operating change request is to fund the hiring of three temporary part-time
staff persons to operate the Water Reuse fish monitoring mitigation program at an estimated cost
of$25,700 per year. Previously, $6,000 was approved for this purpose for 99-00 and 00-01, so
this request is for an additional $19,700 for 00-01 and then$25,700 per fiscal year through 2006.
• Capital Improvement Plan
The total 2000-01 capital improvement plan for the Water Fund is $11,029,900. The major
projects in the 2000-01 capital budget are water distribution system improvements at$1,080,000;
water reuse project construction at $8,900,000; and additional studies for Salinas Reservoir
Expansion Project at$578,800.
The recommended addition to the previously approved capital budget is the request to replace
three water service trucks meeting the fleet management replacement criteria at a cost of
$90,000. These trucks were previously anticipated to be replaced in 2001-02, but due to
deteriorating conditions warrant replacement sooner.
Future Major Water Supply Proiects
The Water Fund analysis assumes the construction of the Salinas Reservoir Expansion Project in
2002 at a cost of $20,110,000. It is assumed that this project will be debt financed and debt
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Council Agenda Report—2000 Water Fund Rate Review
Page 4
service payments would begin in 2003. Staff will review this assumption with Council and
include any changes in the 2001-03 Financial Plan.
Rate Review Exhibits
Financial schedules providing detail for the Water Fund analysis are provided in Exhibits A.1
through A.3. These include an analysis showing changes in working capital from 1996-97 to
2003-04; summary of key assumptions by year for fund projections; and the proposed four year
capital improvement plan.
Rate Setting Methodology
In determining water revenue requirements and setting recommended rates,the following general
methodology is used:
Step 1: Determine Water Fund revenue requirements for:
■ Operations and maintenance
■ Capital improvements and replacements
■ Debt service obligations (existing and projected)
Step 2: Subtract from this amount "non-rate revenues" such as:
■ Interest earnings
■ Connection fees and meter sales
■ Revenues from other agencies (Cal Poly)
■ Other service charges(service start-up fees,late charges, etc.)
Step 3: Identify water rate requirements:
■ Revenue needed to be generated from water rates is the difference between water
revenue requirements(Step 1) and "non-rate" revenues (Step 2).
Step 4: Determine new rates:
■ Model the rate base (consumption and customer account assumptions) against the
existing rate structure and rate requirements identified in Step 3.
Because this analysis is performed over a multi-year period, other factors are considered, such as
working capital available to support capital projects, debt service requirements, and minimum
working capital policy.
Summary of Key Assumptions
The following is a summary of key assumptions for expenditures and revenues:
❑ Operations and maintenance costs are based on the 2000-01 Budget with an inflation rate
of 3%thereafter.
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Council Asenda Report—2000 Water Fund Rate Review
Page 5
❑ Sales to Cal Poly are based on historic use and the 1998 Agreement with Cal Poly. This
agreement set the proportion (53%) of the commercial rate the University pays to account
for the University's difference from other customers (own water supply and ownership
percentage at the treatment plant).
❑ Water customer growth rate is projected at 1.0%.
❑ Debt service is reduced by $50,000 in 2000-01 when the 1960 Whale Rock Series B
bonds mature.
❑ Debt Service is increased by $623,000 in 2001-02 to pay for the construction of the water
reuse project. It is further increased by $1,407,700 in 2003-04 to pay for the Salinas
Reservoir Expansion Project.
o Capital improvement charges (development impact fees) are estimated based on inflation
and customer growth assumptions. This analysis assumes a varying percentage collection
of these fees (see Exhibit A-2). Development occurring under maps vested prior to
impact fee establishment pays only those fees in place at the time of approval.
Development can further reduce impact fees through the toilet retrofit credit program.
❑ Additional water revenue due to the installation of metron water meters for customers
having meters 1'/2 inch and larger has been assumed at$250,000 per year.
❑ Master Plan implementation reserves are established in 2001-02 ($1,500,000) and 2002-
03 ($1,500,000) to fund system improvements, such as an additional clear well at the
Water Treatment Plant.
FISCAL IMPACT
There are no changes recommended to the approved rate schedule as follows:
Current Rates
Inside the City
■ 1 —5 ccf's $2.51
Outside the City
$5.02
Inside the City
■ More than 5 ccf s $3.15
Outside the City
$6.30
EXI HITS
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Council Agenda Report=2000 Water Fund Rate Review
Page 6 --- -
A. Water Fund Review
1. Changes in financial:position
2 Assumptions for fund projections
3.. Capitalimprovement plan
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EXHIBIT A.1
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