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HomeMy WebLinkAbout05/29/2003, PH1 - 2003 WATER FUND REVIEW f � 1 council m,.ny May 2003 acEnc)a izEpont It.Numb"?H C I TY O F SAN LUIS OBIS P O FROM: John Moss,Utilities Directo Prepared By: Sue Baasch, Administrative dal�Yst Gary Henderson, Water Division Manager SUBJECT: 2003 WATER FUND REVIEW CAO RECOMMENDATION 1. Review and accept the 2003 annual water fund financial review; and 2. Conceptually approve the proposed operating program change requests and capital improvement plan requests contained in the preliminary 2003-05 Financial Plan,pending the final budget review and adoption. REPORT IN BRIEF The 2003 analysis shows the City's Water Fund continues to be healthy and stable, capable of supporting the continued and expanded operations and capital programs in the 2003-05 Financial Plan with no rate increases in 2003-04 or 2004-05. This is good news because within the projected revenues, the City will be able to supplement its current water supply through the implementation of the recycled water program and a possible expansion of the groundwater program. In the current economic climate, it is important to ask how the water fund can continue to be healthy with no rate increases forecasted. (In fact, the current water rates are slightly less than nine years ago.) Several factors have allowed the water fund to support the new programs and adapt to the current economic pressures affecting all city operations: a. Ongoing cost containment measures like the off-peak pumping at the Water Treatment Plant and the budget reductions taken by all water sections for this financial plan; b. Replacing older water meters four years ago with the highly accurate metron meters; c. Updating the development impact fees in July 2002 to ensure new development pays its fair share of the resources and improvements required to support it; d. Receiving excellent bids and a state grant of$3.39 million for the water reuse project; e. Elimination of the reliability reserve policy requiring an additional 2000 acre feet; and f. Maintaining a healthy working capital balance that absorbs year to year fluctuations in revenue and allows time to plan for large capital projects. Important water system infrastructure improvements have been completed over the past several years, and this financial plan and fund analysis continues this commitment to system maintenance and improvements. At a time when many other cities are faced with huge Council Agenda Report—2003 Water Fund Review Page 2 unanticipated costs associated with replacement of their aging infrastructure, San Luis Obispo has prudently committed to an ongoing appropriate level of capital funding that ensures sound water infrastructure. Funding for the Nacimiento or Salinas water supply projects is not included in this recommended capital plan or fund analysis, as no one is able to accurately project the exact timing and cost. At this time, the best way to plan for these projects is to maintain the existing healthy_working capital balance that exceeds the minimum requirements. Another reason to maintain a working capital balance of more than the minimum is to plan prudently for a drought contingency reserve to cushion the impacts of revenue losses due to the associated reduced water sales. Rates will not need to be raised as quickly or as much to meet the operating requirements of the water system with a drought contingency reserve in place. In summary, the 2003 water fund analysis is positive: with water rates that are slightly less than nine years ago, the City is securing a new source of water, maintaining its water system infrastructure,planning for the future, and ensuring resource and revenue adequacy. DISCUSSION Background—the development of the 2003-05 Financial Plan Knowing the economic challenges facing the City, the water operations staff developed its recommended budgets and, at the same time, identified areas for possible reductions or productivity enhancements. This resulted in a number of departmental recommendations, such as transferring expenses for all hydrant testing to Utilities from the Fire Department, with Fire administering the program, and using the Natural Resources staff to perform significant portions of the mitigation work associated with the Water Reuse project and the Whale Rock Habitat Conservation Plan. The cumulative impact of the departmental budget balancing activities was to reduce expenditures by about $85,000 annually and to identify key recommendations for providing support to the General Fund including paying an increased franchise fee. Overview of Cost Reductions I)Nr \Vater 1'rouram Administration/Engineerfng Contract services reduced by$5,000/yr Service Impact: water education, Engineering/Plan check eliminated - public information and $1,000/yr engineering services have been Legal Services reduced by$2,000/yr mostly eliminated; legal services Office supplies reduced by$4,000/yr reduced to$1,000/yr. Travel reduced b $1,900/yr Conservation Office Contract services reduced by Service Impact: reduce public $22,500/yr relations and educ materials by Rebate funding reduced by$10,000/yr 20%; reduce printing budget by Printingreduced b $6,700/ 50%; reduced toilet rebates. Water Treatment Overtime budget reduced b $2,700 1 Service Impact: this maintains ( `9 Council Agenda Report—2003 Water Fund Review Page 3 (about 50% of previous budget) the plant's commitment to Bldg & Cons Contacts reduced by providing a high quality of treated $1,000/yr water to the community, as well Contract Labor reduced by$3,000/yr as the ongoing seasonal shift changes for the operators that results in about $100,000 of savings annually from pumping off-peak. Water Distribution Call back reduced by$7,000/yr Service Impact: Call back Contract services reduced by$5,000/yr funding is primarily to provide for Pipes, fittings & valves reduced by emergencies; Eliminates tipping $2,000/yr fee funding for possible requirement to take spoils to the landfill (currently have a less expensive site for legal spoils dumping). Water Customer Service Contract services reduced by$2,500/yrService Impact: minimal. Water Meters reduced by$10,000 however, savings for water meters are one-time only. Ongoing Commitment to Meeting our Goals The recommended budgets are based on the Utilities Department ongoing commitment to providing a high quality of treated water to this community, at the lowest possible cost. With this in mind, the section following provides an overview of the key water projects and issues in the next two years. Following this discussion is a review of the recommended operating budgets and a listing of the recommended 2003-05 significant operating program changes and capital improvement projects. Key Water Projects and Issues Water Reuse Final plans and specifications were completed for the Water Reuse Project in early 2003. The project was broken into two components: one for the improvements at the Water Reclamation Facility and the other being the offsite pipelines for the distribution of the recycled water. Separate bids have been received for both projects and award of the contracts is anticipated early this summer. The bids received for the project were below the engineers estimate. The 2001-03 Financial Plan identified a total of $11,847,500 for construction, construction management and other related costs for the project. With bids below the original estimates, no additional funds are needed and therefore no CIP request is included in the 2003-05 Financial Plan for this project. Construction of the project is anticipated to begin this summer with project completion projected for fall 2004. I- 3 Council Agenda Report—2003 Water Fund Review Page 4 Groundwater Development The request for proposals for the Groundwater Development Project was approved by the City Council on May 6, 2003. The project will identify the necessary facilities to expand the City's groundwater production in order to increase the safe annual yield of our water supplies to meet existing and future water demands. Funding for preliminary design and study and environmental work is $150,000 in 2003-04, final design is $250,000 in 2004-05, and construction of necessary facilities is identified as $2,050,000 in 2005-06.. Expanded Water Conservation Program The City Council conceptually endorsed an expanded water conservation program on January 30, 2003. The program will include a landscape water efficiency component and an increased commercial water conservation element with a goal of adding 300 acre feet of water to the City's safe annual yield. A significant operating program change request has been prepared for this expanded program in the 2003-05 Financial Plan. The expanded program will cost $69,300 in 2003-04 and$69,300 in 2 004-05. To support the additional program activities, an additional small pick-up truck has been included in the 2003-05 Capital Improvement Project requests, at an estimated cost of$16,000. Nacimiento Pipeline and Salinas Reservoir Projects The City is interested in the potential to increase available water supplies from either the Nacimiento Pipeline Project or the Salinas Reservoir Expansion Project. a. Nacimiento Pipeline The County of San Luis Obispo is the lead agency in charge of the Nacimiento Pipeline Project. A revised draft environmental impact report(EIR) is currently being prepared to evaluate the revised pipeline alignment for the project. The draft EIR is expected to be released in the summer of 2003 with certification of the EIR by the Board of Supervisors scheduled for early 2004. The revised EIR is being funded by the County so no money has been included in the budget for this project. b. Salinas Reservoir The work on the Salinas Reservoir Expansion Project is on hold until the EIR for the Nacimiento Project is certified and a decision on participation in the Nacimiento Project is made by the City Council. No funding is requested for this project as part of the 2003-05 Financial Plan. Water Treatment Plant Master Plan The draft Water Facilities Master Plan was completed in the fall of 2000 in conjunction with the Airport Area Specific Plan. The Plan included an analysis of the entire water system including the Water Treatment Plant. The City has contracted with the consulting firm of Black and I -q `l. y Council Agenda Report—2003 Water Fund Review Page 5 Veatch for a more thorough evaluation of necessary improvements at the water treatment plant including an evaluation of the potential to reactivate the Sterner Canyon hydroelectric facility. The first phase of the contract.has been initiated to prepare preliminary evaluations and studies for the improvements. This first phase was funded from previous budgets for a total of $231,000. The second phase involves the final design and environmental documentation at a cost of$197,600, and the final.phase is budgeted at $4,209,700 in 2004-05 for construction and construction management. 2003-05 FINANCIAL PLAN: Water Fund Operations The table below shows the requested budgets for the 2003-04 and 2004-05 water fund operating programs. There are two recommended program changes: the expanded water conservation program and a temporary position in the distribution section in 04-05 to restore the water work order history. Operating Programs 2003-04 2004-05 Administration 896,800 951,000 Source of Supply 1,121,000 1,041,700 Conservation 397,500 406,500 Water Treatment Plant 1,078,400 1,117,000 Distribution 789,400 830,100 Customer Service 261,700 271,000 Total 4,544,800 4,617,300 Requests for Significant Operating Program Changes Expanded Wafer Conservation Program Implementing an expanded water conservation program to include a landscape water efficiency component and an increased commercial water conservation element with a goal of adding 300 acre feet of water to the City's safe annual yield will cost $69,300 in fiscal year 2003-04 fiscal year and $69,300 in fiscal year 2004-05. To support the additional program activities, an additional small pick-up truck has been included in the 2003-05 Capital Improvement Project requests, at an estimated cost of$16,000. Restoration of Water System Work Order History Restoring the water system work order history in the new Hansen database will require hiring a temporary employee in fiscal year 2004-05 at a one-time cost of$10,000. 2003-05 FINANCIAL PLAN: Water Fund Capital Improvement Plan The complete proposed Capital Improvement Plan for the Water Fund for-the next four years is shown in Attachment 1. C. Below are brief descriptions of the major projects for the next two years. ( ` J �h Council Agenda Report—2003 Water Fund Review Page 6 Water Distribution—Master Plan Implementation Implementing the projects identified in the Water System Master Plan, in order to correct existing deficiencies and provide additional facilities necessary to serve existing residents and planned growth within the City, will cost $500,000 in 2003-04, and $1,480,000 in 2004-05 for design, right-of-way acquisition, and construction of the projects. Groundwater Development Pursuing expansion of the City's groundwater production to increase the safe annual yield of our water supplies to meet existing and future demands will cost $150,000 in 2003-04 for study and environmental work, $2:50,000 in 2004-05 for design, and $2,050,000 -in 2005-06 for construction. Water Treatment—Major Facility Maintenance Performing routine maintenance on facilities at the City's Water T reatment P lant, i n o rder t o ensure proper operation and prolong the useful life of equipment and other facilities, will cost $20,000 in 2003-04 to study pavement problems at the plant, $100,000 in 2004-05 and $100,000 in 2005-06 for pavement repair, and$50,000 in 2006-07 to rebuild a large compressor. Water Treatment-Master Plan Implementation Implementing projects at the Water Treatment Plant as identified in the Water Facilities Master Plan, in order to maintain water treatment quality and reliability, will cost $197,600 in 2003-04 for design and environmental documentation, and $4,209,700 in 200405 for construction and construction management. Water Distribution System Improvements Replacing pipelines and related infrastructure to eliminate bottlenecks, leaking, deteriorating or substandard mains and facilities,to strengthen portions of the distribution system, and to improve water flow for fire protection is expected to cost approximately$1,000,000 annually. Polybutylene Water Service Replacements Replacing polybutylene water services in order to proactively and systematically eliminate this inferior material from the Water Distribution System will cost $250,000 annually during the four year Capital Improvement Plan. Rate Review Exhibits Financial schedules providing detail for the Water Fund analysis are provided in Attachment 1. A through I.C. These include an analysis showing changes in working capital from 2001-02 to 2007-08; a 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 t-LQ Council Agenda Report—2003 Water Fund Review Page 7 methodology is used: Step 1: Determine Water Fund revenue requirements for: a. Operations and maintenance b. Capital improvements and replacements a. Debt service obligations(existing and projected) Step 2: Subtract from this amount"non-rate revenues"such as: a. Interest earnings b. Connection fees and meter sales c. Revenues from other agencies (Cal Poly) d. Other service charges(service start-up fees, late charges, etc.) Step 3: Identify water rate requirements: a. 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: a. 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: a. Operations and maintenance costs are based on the 2003-04 and 2004-05 budgets with an inflation rate of 3%thereafter. b. Sales to Cal Poly are based on historic use and the 2003 Agreement between the City and the University. This agreement set the proportion (61%) of the non-residential rate the University pays to account for the University's difference from other customers (own water supply and capacity interest at the Water Treatment Plant). c. Debt service is increased by$29,200 in 2003-04 to pay for the energy conservation projects. d. Debt Service is increased by $422,800 in 2004-05 to pay for the construction of the water reuse project. e. Debt service is increased by $240,000 in 2005-06 to pay for Water Treatment Plant master plan improvements. l � �l Council Agenda Report—2003 Water Fund Review Page 8 f. Development impact fee revenues are estimated based on inflation and customer growth assumptions. This analysis assumes. a varying percentage collection of these fees (see Attachment 1. B). Development occurring under maps vested prior to impact fee establishment pays only those fees in place at the time of approval. Water Rate History Water rates have been very stable over the last ten years; in fact, rates were rolled back in July 1999 by ten percent and have not changed since that time. The current rates are slightly less than the rates in 1994. Year Water Service Rates per CCF 2004-05 1-5 ccf 2.51 More than 5 ccf 3.15 2003-04 1-5 ccf 2.51 More than 5 ccf 3.15 2002-03 1-5 ccf 2.51 More than 5 ccf 3.15 2001-02 1-5 ccf 2.51 More than 5 ccf 3.15 2000-01 1-5 ccf 2.51 More than 5 ccf 3.15 1999-00 1-5 ccf 2.51 More than 5 ccf 3.15 1998-99 1-5 ccf 2.79 More than 5 ccf 3.50 1997-98 1-5 ccf 2.79 More than 5 ccf 3.50 1996-97 1-5 ccf 2.75 More than 5 ccf 3.45 1995-96 1-5 ccf 2.65 More than 5 ccf 3.35 1994-95 1-5 ccf 2.60 More than 5 ccf 3.25 Oct 1993 1-5 ccf 2.45 More than 5 ccf 3.05 Mar 1993 1-5 ccf 2.25 More than 5 ccf 2.80 In March 1993, the rate structure was changed to become totally consumption based, eliminating minimum charges. 1 ` � I� Council Agenda Report-2003 Water Fund Review Page 9 Summary In summary, even during these times of economic challenges, the City water operations continue to provide a high quality of water to the community at rates that have not changed in the last five years. The current water rates are slightly less than the rates in early 1994, as rates were actually reduced by 10% in 1999 and have not been increased since that time. This is especially significant as the City's first new water supply in forty years, recycled water, will be coming on line in 2004. FISCAL IMPACT No changes are recommended to the approved rate schedule shown below. 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 ATTACHMENT 1. Water Fund Review A. Changes in financial position B. Assumptions for fund projections C. Capital improvement plan ( - q Attachment 1. A. 00 C20 0 0 0 0 0 0 0 0 0000oCo 0 0 o e 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 r V N o o b �n �n C O l �n b ^ O M Q M o0 "' C Cl M O b N N h O V'� r Ul V) �/1 M W fry b V't r b N N - N V• M1 N r b b b M O N G N 00 7 0 •- CT O V vi h r M O 00 Ow M1 N O h b CT h b p p O0 0 0 0 0 0 0 0 0 0 0 0 0 0 O O O O O O O O O O O O O O O O O O. 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