HomeMy WebLinkAbout06/02/2005, 5 - 2005 SEWER FUND REVIEW council Mmbm D� June 2,2005
j acEnoa RepoRt
CITY OF SAN LUIS OBI SPO
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FROM: John Moss,Director of Utiliti s
Prepared By: Sue Baasch, A� nistrative Analyst
Dave Hix, Wastewater Division Manager
SUBJECT: 2005 SEWER FUND REVIEW
CAO RECOMMENDATION
1. Review and accept the 2005 annual sewer fund financial and rate review; and
2. Conceptually approve the proposed operating program changes and capital improvement plan
requests contained in the preliminary 2005-07 Financial Plan, pending final budget review and
adoption; and
3. Adopt a resolution increasing sewer service charges pursuant to the recommended
Alternative 1 as shown in Exhibit A-1, effective July 1, 2005 and July 1, 2006.
OVERVIEW—An importantperspecdve
This report recommends significant rate increases in the sewer fund. Even with these increases,
however, the monthly single family sewer charge will be less than the typical monthly cost of
cable TV, cable internet service and cell phone costs. Yet sewer service provides perhaps
society's most basic, vital health protection service. While it is easy to understand the cost of a
service such as water and wastewater, it is much harder to understand its value. The sewer rate
options set forth by staff will result in rates that, while seemingly high for this local area, are not
unlike those of many other cities. Additionally, industry perspective tells us that cities across
California are struggling with many of the same regulatory and infrastructure issues as San Luis
Obispo and that over time the proposed rates will indeed be consistent with many California
cities.
There are many variables that affect the cost of wastewater collection and treatment which
include discharge location, age and complexity of infrastructure, degree of planning for future
requirements, timing and cost of latest facility upgrades, and regulatory permit status. To put
things into perspective, the recommended single family rate of $36.72 monthly for San Luis
Obispo compared to the latest estimate for the Los Osos sewer and treatment facility of$200.00
plus monthly, clearly shows that the cost to provide a comparable service today starting from
scratch, is significantly greater than prudent maintenance, upgrade and planning for meeting the
future requirements of our existing system. Many Cities in California are facing even more
significant rate increases than San Luis Obispo because they have ignored their wastewater
systems and are now being forced to complete significant improvements to assure compliance
with regulations and provide for required maintenance.
2005 Sewer Fund Review Page 2
San Luis Obispo's wastewater systems have benefited from sound maintenance and planning in
the past. The investment we have made in our systems has paid off and will continue to yield
positive results in terms of environmental protection, infrastructure longevity, and quality service
for our residential and commercial customers. Recommending a significant rate increase is never
easy. However, in the face of the significant regulatory, operational and maintenance needs of
our wastewater systems, not confronting this issue at this time will only create a more difficult
problem in the future.
REPORT IN BRIEF
The sewer fund must be able to pay for all of its programs, and the annual review is to assess the
changes in the sewer fund's financial condition through the end of the fiscal year as well as to
anticipate what the future holds and set rates accordingly. What is the sewer fund's condition at
the end of this year? A number of key assumptions contained in the 2004 sewer fund analysis
relative to both cost and revenues have not developed as expected this past year. In looking to
the future, conditions have changed there, as well. Significant additional costs associated with
regulatory upgrade of our Water Reclamation Facility have been identified; that in combination
with the reduced revenues and increased costs, have resulted in the sewer fund being fiscally
unable to meet its programmatic requirements and policy-level minimum working capital
requirements.
Staff estimates that at the end of the 2004-05 fiscal year our sewer fund working capital will be
dangerously low, about $200,000 or 2% of operating expenses, well below our policy level of
20%. To meet our current and future program objectives of providing safe and environmentally
responsible wastewater services for the community and ensure sufficient working capital reserves
to respond to emergencies, staff must ensure the fiscal health of the sewer fund and recommend
significant increases to the sewer rates. Staff has thoroughly evaluated our operating and capital
improvement program budgets for the 2005-07 Financial Plan and are recommending reductions
in both operating and capital programs to help offset the rate impacts; however, the fund's fiscal
issues are significant and ongoing, and there is little in terms of operating and capital reductions
which are sustainable and do not ultimately result in merely deferred maintenance and larger
costs in the future.
This report presents a summary of the sewer fund's 2005-07 Financial Plan recommendations
and two alternative rate increase strategies to remedy the fiscal shortfalls and return the fund to a
fiscally healthy position. The recommended alternative would increase rates in July 2005
approximately 29.5% and would increase the single family sewer charges by $8.36 to $36.72 per
month. An additional increase of 2.8% is recommended for July 2006 and will take the single
family sewer rate to $37.73 (with all other rates adjusted proportionately). The recommended
alternative will bring the fund to fiscal solvency in one year. The second alternative would split
the required increase over two years, with the July 2005 rate increase being 20%, resulting in a
single family residential rate of $34.03 and an additional 11% in July 2006 taking the single
family residential rate to $37.73 (all other sewer rates adjusted proportionately). Staff
recommends the first alternative because it brings the fund to a stronger financial position in one
year as opposed to two, and due to the nature of compounding, results in lower rate increases in
ongoing years. With working capital well below policy levels, any emergency could be more
than the sewer fund can afford and the General Fund is in no position to support an emergency in
2005 Sewer Fund Review Page 3
the sewer fund. In addition, the Tank Farm Lift Station costs could increase over the current
estimate, given the difficulty of obtaining the necessary right-of-way for the project. The second
alternative would have the fund working capital at well below policy levels for two years.
However, staff understands that this is a significant increase and the Council may prefer to solve
this fiscal health issue over two years rather than one.
Single family sewer rates are currently $28.36 a month, so either alternative would represent a
significant increase to the existing rate. Staff does not make these recommendations lightly.
They come after many hours of review and cost cutting in the newly proposed financial plan as
well as eliminating about $274,000 in approved capital funding in the current budget. The sewer
fund has significant financial obligations (annual debt service of over$2.4 million presently,with
an anticipated increase of about $400,000 annually for the new Tank Farm Lift Station) as well
as increasing programmatic and regulatory requirements that are costly to meet and implement.
Sewer 16te Increase Recommendations
Current Alternative I Alternative 2
2004-05 2005-06 2006-07 2005-06 2006-07
Single Family 28.36 36.72 37.73 34.00 37.74
Multi-Family 22.33 29.38 .30.18 27.20 .30.19
Mobile Home 16.86 22.03 22.64 20.40 22.64
DISCUSSION
The 2005 Analysis
The assumptions in the annual update are included in the attached 2005 Sewer Fund Analysis. A
summary of the 2005-07 Sewer Fund Financial Plan Requests are also included in the report and
the detailed requests are included in the City's 2005-07 Financial Plan prepared by the Finance
Department and previously provided to Council under separate cover. Annually, staff reviews
the sewer fund's health and recommends appropriate rates to meet the forecasted financial and
programmatic conditions. For the last few years, this review has confirmed that with annual
moderate rate increases, the sewer fund was pretty much on track. However, new requirements,
as well as lower revenues and increasing expenses, show that it is now time to make a significant
adjustment to the sewer rates. The major factors affecting this analysis are as follows:
What changes occurred in 2004-05?
1. Revenues are down by at least $355,000, primarily from reduced wastewater
development impact fee collection. It appears that although building has been up, fee
collection has been lower for several reasons including a significant number of fee
exempted low income housing units being constructed and a number of intensification
projects which bring with them some level of preexisting water and sewer use credit.
2. Estimated working capital is reduced by about $600,000, primarily because design
and engineering costs cannot be included in the State financing being sought for the Tank
Farm Lift Station project, meaning that these costs will have to be funded from working
capital.
2005 Sewer Fund Review Page 4
3. Expenses are higher by about$350,000 than projected a year ago due to increased State
permit fees, chemical costs, and laboratory services required to ensure regulatory
compliance.
What's in the future?
1. Increased costs to fund mandated programmatic requirements and more stringent
regulations: Implementing the Clean Water Act programs, such as the municipal storm-
water and total maximum daily load programs and meeting the California Toxics Rule
requirements. Staff has requested $1,100,000 for the design and pilot testing of an
alternative disinfection process in 2006-07 and $5,500,000 for construction and
construction management in 2007-08.
2. Continued infrastructure improvements and upgrades: Designing and constructing
improvements to our wastewater collection system and water reclamation facility that
have been identified in our adopted Wastewater Facilities Master Plan, to ensure the
collection system and water reclamation facility are able to meet the community's needs
as it builds to the adopted General Plan. These improvements are expected to cost
between $20 and$50 million. i
3. Policy levels of system maintenance: Maintaining the wastewater collection system and
WRF to ensure the community's health and protect the environment by protecting the
community's infrastructure investments at a cost of about$2 million annually.
How does this compare with other communities?
The City of San Luis Obispo is not unique in experiencing significant increases in sewer rates. A
review of what's happening statewide'shows that other California communities are also facing
steep increases. The driving forces behind most of the increases seen across the state are meeting
the increased regulatory requirements that have been enacted into law, and increasing costs to
maintain a complex and costly sewer infrastructure. Many California communities are facing
even more significant increases to their sewer fees because they are being required to achieve
similar levels of treatment as the City, but have not yet even completed the tertiary treatment
upgrades as the City did some 15 years ago. A table showing the water and sewer rates of our
standard list of comparable cities,.is included as Attachment 4 to the companion Water Fund
Analysis Council report being presented at this same meeting.
How does this compare with other utilities?
Overall, when compared to other utilities such as gas, electricity, cable TV, cell phone, and
phone, the cost of wastewater service must be viewed as a solid value for a basic sanitary
necessity. In San Luis Obispo, City customers have virtually carefree sewer service transporting
all of their waste from their homes and businesses and then treating that waste to a quality
suitable for release back to the environment or recycling. Our citizens can be assured that their
payments are being used to protect and preserve their health and environmental quality, for a
little more than a dollar a day.
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2005 Sewer Fund Review Page 5
By comparison, some other seemingly less necessary services have seen significant increases
over the years and our proposed sewer rates are not out of line with the costs of these other
services. For example: Basic digital cable TV service in San Luis Obispo - $54.99 per month;
Cable internet service - $39.99 per month; Basic cell service- $39.99 per month. Services based
on commodity rates are harder to define what the "typical single family" rate would be but $50
per month for electric or gas service is not uncommon.
What is being done to reduce or control sewer fund expenses?
After the proposed significant rate increase became apparent, staff deferred or cut many capital
projects and reduced some operating programs to ensure some working capital and lessen the
proposed rate increase. Capital projects in the wastewater collection system improvements and
WRF maintenance were cut or deferred, and the sewer lateral rebate program has been eliminated
for this next financial plan. An open operator position at the WRF will not be filled for at least
another year and a significant operating program change request that identified the need for at
least two more lab analysts has been revised to request only one position. To offset this, a
request for two temporary positions to assist WRF operations and lab staff has been included as a
significant operating program change request. These deferrals and cuts result in about a $1
million reduction in operating and CIP expenditures in 2005-06 and about $1.2 million in 2006-
07.
These reductions should only be viewed as temporary measures to help bridge the current fiscal
gap and lessen the immediate extent of the required rate increases. The capital projects should be
funded in the future because of the importance of replacing aging and failing infrastructure. An
adequate capital replacement program reduces unnecessary maintenance, addresses efficiency
issues and eliminates emergency repairs while stabilizing rates and avoiding possible water
quality violations. Likewise, attempting to operate our facilities with less than adequate
laboratory and operations staff for an extended time will likely lead to lower quality control and
operational errors as non-mandated laboratory sampling and operations activities are curtailed to
ensure adequate time to perform those activities that are mandated. This reduces the information
available for making operational decisions at the facilities.
Staff is exploring any and all opportunities for relief from new regulations that may not be
technically or scientifically justified. Staff is currently working with the Regional Water Quality
Control Board and consultants to explore every possible regulatory avenue for meeting the
stringent discharge requirements being driven by the State's Sources of Drinking Water Policy.
This exploration will put the City in the best possible position to base future decisions regarding
treatment process upgrades, alternatives or additional studies. Staff wants to ensure that the City
only constructs what is absolutely necessary and scientifically justified, acquire as little debt as
possible in the process, and provide suitable protection of the ongoing enjoyment and beneficial
use of San Luis Obispo Creek and the environment.
Finally, staff continues to seek efficiencies in our operations through energy and chemical
management programs, maintaining quality yet minimal staffing through our skills based pay
program, limiting our hours of staffed operations while ensuring full compliance with water
quality standards and an ongoing program of proactive and preventive maintenance.
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2005 Sewer Fund Review Page 6
ALTERNATIVES
The two proposed alternatives for rate adjustments required to maintain the sewer fund's health
and fiscal adequacy are described below. The recommended alternative, Alternative 1, proposes
a higher initial rate increase to achieve fund fiscal health more quickly. This is the recommended
alternative as any emergency next year, or even a failed assumption in this fund analysis, could
easily leave the fund with no working capital and unable to respond to even the smallest
contingency.
The referenced financial schedules are included as Exhibits to Attachment 1-- the 2005 Sewer
Fund Analysis.
■ Alternative i (Recommended)—see Exhibit A.19 29 3
Based on the assumptions and fiscal analysis contained in the 2005 Sewer Fund Analysis Report,
the sewer fund would end fiscal year 2004-05 with about $206,800 in working capital and with
the proposed rate increase for this alternative would end fiscal year 2005-06 with about
$1,181,300. The minimum working capital requirement is $1,152,800. Raising the single family
sewer rate to $36.72 (all rates would be raised proportionately; this uses single family charge for
illustration purpose) shows the Sewer Fund meeting minimum working capital requirements by
2005-06 with about a 2.8 percent increase the following year to$37.73.
The effects of this recommended increase on commercial customers can be most closely
estimated by merely applying the proposed rate increase percentage to the commercial
customer's current sewer charges. By example, a commercial bakery with a monthly sewer bill
of$685 per month would see an increase of about $198 per month, or a monthly sewer bill of
$883. Likewise a restaurant with a monthly sewer bill of$300 would see an increase of about
$87 per month, or a monthly sewer bill of$387. The examples provided are estimates from real
business billings in San Luis Obispo, but they are specific for those businesses. Due to the
tremendous variability of commercial business water and sewer use, it is not possible to define a
"typical"or"average"commercial customer.
■ Alternative 2—see Exhibit B.1,2,3
Again, based on the same assumptions contained in the analysis, the sewer fund would end fiscal
year 2004-05 with about $206,800 in working capital and with the proposed rate increase for this
alternative, only $414,000 in 2005-06. This alternative leaves the sewer fund remaining well
below the minimum working capital requirement of $1,152,800 for two full years. This
alternative would raise the rates 20% to $34.00 in July 2005 (all rates would be raised
proportionately; this uses single family charge for illustration purpose), followed by about an
11% increase to $37.74 in July 2006 in order to show the Sewer Fund meeting minimum
working capital requirements in two years, 2006-07.
Both proposed alternatives show the fund developing a capital reserve account beginning in
2007-08 in anticipation of a future facility upgrade which falls just outside the planning horizon
of this fund analysis. This capital reserve is absolutely necessary in order to prepare for the
significant upcoming cost of that upgrade (currently estimated to fall between 20 and 50 million
2005 Sewer Fund Review Page 7
dollars) and to reduce the amount of ongoing debt used to fund facility upgrades. Debt service
affects fund stability in several ways: It requires a coverage requirement of between 110 and
125% of our operating costs to ensure the annual debt service can be paid; this alone can become
a factor in increasing rates. With required upgrades coming faster than we are able to retire our
debt service, the debt on multiple projects could become staggering. The solution is to build
capital reserves and working capital to ensure as much as possible can be paid for without debt
financing. Indeed, showing equity in a project ("leveraging funds") is oftentimes required to
secure some of the more favorable funding sources such as the low interest state infrastructure
bank financing.
Public Participation
The recommended rate increases will be discussed as a public hearing item before the Council
and will thus allow the public an opportunity to comment. Much of the information that is
driving the significant increase in rates has only recently developed leaving little opportunity for
public outreach. Additionally, the need for revenue adequacy for the sewer fund is not one in
which there is a lot of opportunity for public outreach to affect the required outcome. That said,
on May 17, 2005, Council approved the previously mentioned consultant contract to complete an
analysis and recommendations for enhancing our utility billing system, which among other things
will take a close look at our rate structure goals, equity between customer classes, billing
frequency and methods. This analysis will involve extensive public outreach and input and is
one where public participation can have a significant effect on the end result.
2005 Sewer Fund.Analysis
Attached to this report is the 2005 Sewer Fund Analysis. Contained within this report is an
update on this year's.activities as well as a forecast of the significant programs and requirements
on the horizon and the financial implications until 2009-10. Detailed information on the Sewer
Fund Financial Plan requests for 2005-07 can be found in the draft 2005-07 Financial Plan
distributed to Council on May 19, 2005.
Rate Structure Changes
The issue addressed in this report is the health of the sewer fund and its ability to meet its
financial, policy and programmatic obligations. Staff is recommending rates to set a course to
ensure that the sewer fund is financially healthy. These recommendations do not address any
issues of rate structure. Those will be addressed in the study that will be done during the summer
and fall by HDR Engineering, Incorporated in association with Langham consultants. These
firms will be analyzing the sewer and water rate structure policies with Council. At that time,
Council may decide to change the structure and how various customer classes pay for sewer
services. That study will also review billing frequency and make a recommendation about
possible changes to the current bi-monthly billing.
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2005 Sewer Fund Review Page 8
SUMMARY
With the recommended rates proposed in either alternative the city will be able to ensure the
solvency of the Sewer Fund and meet the capital, operating and regulatory requirements
contained in this financial analysis. The recommended alternative allows the fund to attain
adequate resources to meet our working capital requirements which are needed to fund
unanticipated costs or revenue shortfalls and emergencies which may occur in our sewer fund
programs or infrastructure in a one year time frame. The sewer fund programs are critical to the
physical health and quality of life and the environment of San Luis Obispo and the continuation
of the quality services provided by the sewer fund are of tremendous value to the community.
ATTACHMENTS
1. 2004 SEWER FUND ANALYSIS
Exhibit A—Financial Schedules—ALTERNATIVE I
A.1 Changes in Financial Condition
A.2 Assumptions
A.3 Capital Improvement Plan
Exhibit B—Financial Schedules—ALTERNATIVE 2
B.1 Changes in Financial Condition
B.2 Assumptions
B.3 Capital Improvement Plan
2. RESOLUTION NO. ESTABLISHING SEWER SERVICE RATES
Exhibit A.I ALTERNATIVE 1. -- Schedule of Sewer Service Rates,
effective July 1,2005 and July 1, 2006
Exhibit A.2 ALTERNATIVE 2. -- Schedule of Sewer Service Rates,
effective July 1,2005 and July 1, 2006
ATTACHMENT 1
2005 Sewer Fund Analysis
June 2, 2005
Prepared by the
Utilities Department
city Of San WIS OBI SPO
Attachment 1
Page 2
City of San Luis Obispo
2005 Sewer Fund
TABLE OF CONTENTS
I. OVERVIEW
He 2005-07 FINANCIAL PLAN
A. Summary of Operating Programs
B. Significant Operating.Program Change Requests
C. Capital Improvement Plan Requests
III. RATE SETTING
A. Methodology
B. Structure
C. History
IV. ASSUMPTIONS
A. Sales
B. Development Impact Fee collection
C. Debt Service Payments
V. 2004-05 UPDATE
VI. LOOKING TO THE FUTURE
A. New Regulatory Requirements
B. Master plan upgrades and improvements
C. Infrastructure Maintenance
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Attachment 1
Page 3
EXHIBIT A—ALTERNATIVE I FINANCIAL SCHEDULES
A. 1. Changes in financial position
A. 2. Assumptions
A. 3. Capital Improvement Plan
EXHIBIT B—ALTERNATIVE 2 FINANCIAL SCHEDULES
B. 1. Changes in financial position
B. 2. Assumptions
B. 3. Capital Improvement Plan
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Attachment 1
Page 4
City Of
Ali Sail LUIS 0131S130
2005 Sewer Fund Analysis
I. OVERVIEW
This report presents the financial condition of the Sewer Fund, based on the 2005-07 Financial
Plan operating program budgets, and recommended program and capital requests to address the
identified needs in the Master Plan, regulatory requirements, and adopted City financial and
infrastructure maintenance policies.
IL 2005-07 FINANCIAL PLAN
A. Summary of Operating Programs
Including requests shown in section B. 2005-06 2006-07
BUDGET BUDGET
Wastewater Collection 710,600 717,300
Pretreatment 301,100 293,400
Water Reclamation Facility 2,969,500 2,942,100
AdminisuatiomEngineering 354,000 357,300
Wastewater Taxes and Fees 332,000 382,300
Total Wastewater Services 4,667,200 4,692,400
B.Significant Operating Program Change Requests
2005-06 2006-07
BUDGET BUDGET
Pretreatment
Municipal Storm Water Requirements 31,300 23,000
Water Reclamation Facility
Increased Chemical Costs 287,800 154,400
Forklift 14,000
Protective Painting of Facilities and Equipment 10,000 10,000
Lab Analyst-proportionate share 68,800 68,900
Temporary staffing 34,400
Wastewater AdministratiomEngineering
Energy Monitoring 5,800 5,800
Total Wastewater Services-SOPCs 452,100 262,100
Attachment 1
Page 5
C. Capital Improvement Plan Requests
2005-06 2006-07 2007-08 2008-09
BUDGET BUDGET PROPOSED PROPOSED
Wastewater Collection
Collection system improvements 876,000 1,040,000 1,209,900 .3,321,000
Computerized Maintenance Program 20,700
Fleet replacement:
Backhoe 75,000
Hydro cleaner truck 250,000
1/2 ton pickup 20,900
Reclamation Facility
Master plan implementation
Study/Design 1,100,000
Construction 5,500,000
Water reclamation facility maintenance 655,000 520,000 430,000 555,000
Fleet replacement
Flat bed truck 74,000
Pick up 17,200
2 electric utility carts 18,800
Pretreatment
Fleet replacement-pickup 22,100
Administration and Engineering
Fleet replacement-sedan 17,000
Total Wastewater Services-C1P 1,680,000 2,930,800 7,196,200 3,915,700
M. RATE SETTING
A. Methodology
In determining sewer revenue requirements and setting recommended rates, the following
general methodology is used:
Step 1: Determine Sewer Fund revenue requirements for:
a. Operations and maintenance
b. Capital improvements and replacements
C. 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 sewer rate requirements:
a. Revenue needed to be generated from sewer rates is the difference between sewer
revenue requirements(Step 1)and"non-rate"revenues(Step 2).
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Attachment 1
Page 6
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.
B. Sewer Rate Structure
The current sewer rate structure has a fixed minimum charge for residential customers, and a
fixed minimum charge plus variable charge based on water use for non-residential customers. .
As shown below, rates within the various residential customer classes vary according to a
concept of"equivalent dwelling units" (EDU's) which is useful in establishing a ratio between
the various types of uses. It is based on 2000 census data for population per housing unit type in
single and multi-family units.
Alt I Alt 1
Current
TYPE OF ACCOUNT EDI Monthl
Rate y 2005-06 2006-07
Single family dwelling,including single meter condominiums 1 28.36 36.72 37.73
and townhouses
Multi-family dwelling in any duplex,apartment house or 8 22.33 29.38 30.18
rooming house,per each dwelling unit
Mobile home or trailer ark each dwelling unit .6 16.86 22.03 22.64
Public or private school,based on average daily attendance at 3.20 4.14 4.26
the school
I! 171111111111���
All non-residential accounts 1 28.36 36.72 37.73
Plus additional charge for every 100 cubic feet of water used 3.42 4.43 4.55
in excess of 500 cubic feet of metered water consumption
Minimum charge 93.43 120.99 124.38
Additional charge per 100 gallons in excess of 1500 gallons 5.62 7.28 7.46
discharged
C. Sewer Rate History
The table at the right shows a ten-year history of the minimum
sewer charge for single family households from 1995 to 2005.
2004-05 28.36
2003-04 26.63
2002-03 25.24
2001-02 24.50
2000-01 23.79
1999-00 22.88
1998-99 21.79
1997-98 21.47
1996-97 20.95
1995-96 20.35
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Attachment 1
Page 7
IV. ASSUMPTIONS
The following provides more detail for the key assumptions in Exhibit A.I. and Al. to this
report, the financial schedules showing the sewer fund's changes in financial position and the
listing of assumptions.
A. Revenues
1. Sales are calculated based on the percentage increase in rates and a one percent
growth rate.
2. Sales to Cal Poly are based on historic use and the 2003 Agreement between the
City and the University. This agreement set the proportion (74%) of the non-
residential rate the University pays to account for the University's difference from
other customers (prepaid capital share in the collection system and at the Water
Reclamation Facility).
3. Development Impact Fee collection is calculated according to the base set by the
impact fee study in 2004 and adjusted by the one percent growth rate and inflation.
Annually, this calculation is evaluated and proportionately adjusted due to lower
than one percent growth as well as development occurring under maps vested prior
to impact fee establishment. Development in those areas pays only those fees in
place at the time of approval.
B. Expenses
The operating and capital expenses are based upon projections to end of the 200405 fiscal year
and the preliminary 2005-07 Financial Plan. Thereafter, operations and maintenance costs are
adjusted according to an inflation rate of 3%.
C. Debt Service Payments
One of staff's goals for debt financing is to avoid overlappingof debt service. Staff's objective
whenever possible, is to defer as much debt service as possible prior to 2011-12 so as not to
compound the sewer fund's current annual $2.14 million debt service payment any more than
necessary. This strategy, along with efficient operations, ongoing capital replacement and
sensibly deciding to fund debt financed improvements only when necessary should serve to
stabilize rates.
1. Annual debt service payments of$2,135,500 are to repay the State Revolving Loan
Funds received by the City for the construction of the Unit 3 and 4 improvements to
the Water Reclamation Facility and collection system improvement ("Relief Sewer
Main"
2. Annual debt service payments of $276,700 for the energy conservation projects
began in 2003-04. Electrical savings at the Water Reclamation Facility are
Attachment 1
Page 8
projected to equal debt service payments by 2005-06.
3. Annual debt service is increased by $391,500 in 2005-06 to pay for the $7.2 million
Tank Farm Lift Station project. It is anticipated that this project will receive a
California Infrastructure and Economic Development Bank revolving fund loan
with a favorable interest rate (3.5%).
4. Annual debt service is increased by $52,800 in 2006-07 to pay for the sewer fund's
share of the police dispatch and radio upgrade project.
5. Annual debt service is increased by $358,900 in 2008-09 to pay for estimated $6.6
in process and infrastructure improvements that may be required to meet the
pending regulatory requirements for the removal of trihalomethanes from the Water
Reclamation Facility's effluent.
V. 2004-05 UPDATE
Key factors which changed the Sewer Fund's financial condition at the end of fiscal year 2004-
05:
1. Reduced wastewater development impact fee collections
Staff anticipated receiving $650,000 in impact fees in 2004-05. We now project
receiving only $300,000 for that same time period. Staff is currently working with
Finance and Community Development in reviewing our projection methodology
and the various factors that have influenced such low fee collection this past year.
It appears that although building has been up, fee collection has been lower for
several reasons including a significant number of fee exempted low income housing
units being constructed, and a number of intensification projects which bring with
them some level of preexisting water and sewer use credit.
2. Use of more working capital than projected to fund the Tank Farm Lift
Station
Another revenue shortfall identified is that we will not be eligible to receive debt
service proceeds for the design of the Tank Farm lift station project ($600,000)
from the California Infrastructure Bank in order to ensure eligibility for the much
larger construction component. The design of the Tank Farm lift station is now
recommended to be paid from sewer fund working capital.
3. Operating expenses were higher than projected (permits, chemicals, lab
services, regulatory compliance).
The City is funding an $89,000 feasibility analysis of regulatory options for the
City's upcoming permit changes for the WRF's National Pollutant Discharge
Elimination System (NPDES) permit. This study will allow the City to consider at
all of its regulatory options and their respective benefits and disadvantages and
present all of the viable alternatives to the upcoming proposed regulations.
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Attachment 1
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VI. LOOKING TO THE FUTURE
A. New Regulatory Requirements
Pending regulatory requirements may require the costly removal of nitrates and
Trihalomethanes (THMs) from the Water Reclamation Facility's effluent. Nitrates are
produced when toxic ammonia is converted, which must be done to comply with the
current toxicity discharge requirement. THMs are the by-product of the interaction of
organic materials and chlorine used in several WRF processes. The driver for the
stringent regulation of these constituents is the State's beneficial use designation of San
Luis Obispo Creek as a Municipal and Domestic Water Supply (MUN). This designation
requires the application of discharge requirements that meet or exceed drinking water
requirements for the WRF's effluent. The City is working with consultants to study
disinfection alternatives to chlorine, determine the feasibility of point of compliance
options in the creek and regulatory alternatives to the proposed discharge limitations and
beneficial use. Because the State mandates a compliance date of 2010 to comply with the
proposed THM limit, staff has placed $1,100,000 in the budget for the design and pilot
testing of an alternative disinfection process in 2007-07 and $5,500,000 for construction
and construction management in 2007-08.
The preliminary results from the on-going studies disinfection study are promising and,
hopefully, will result in a more affordable and efficient manner to reduce THMs,
requiring significantly less capital, but increasing operating costs from current levels.
Also staff is working with consultants to explore every possible regulatory avenue the
City has when having to meet the stringent discharge requirements being driven by the
State's NUN policy. This process will put the City in the best possible position to base
future decisions regarding treatment process upgrades, alternatives or additional studies.
B. Master plan upgrades and improvements
Beyond the horizon of this analysis is the capacity, treatment and facility upgrade of the
WRF. These upgrades are required to meet the needed capacity for the City's build out
per the General Plan; possible proposed regulatory requirements discussed.earlier in this
report and needed facility upgrades to improve the efficiency and operability of the
facility. This project will need to begin within the next ten years to meet the demand of
the City's new annexation areas, possible new discharge requirements and is expected to
cost between $20 to $50 million
Tank Farm Gravity Sewer and Lift Station Project, currently in design, is expected to
begin construction early next year. This $8 million project will upgrade and resolve
cun;ent service issues to lower Broad Street, Edna Islay areas, the newly annexed
Margarita area as well as the Airport and Orcutt annexation areas. The project is
requiring some re-design and extensive acquisition of easements and right-of-ways that
add cost and delay construction. Increases to the "add-on" development impact fees were
approved for the areas served by this lift station last year.
S- /7
I
Attachment 1
Page 10
C. Infrastructure Maintenance
Industry standard would set annual infrastructure replacements at two percent of system
value (based on a fifty year replacement cycle) for the wastewater collection system.
This equates to expenditures of$1,020,000. Due to current fiscal constraints, this level of
funding is not achieved for routine replacements until 2009-10. Repair and upgrade at
major facilities such as the Water Reclamation Facility and lift stations is based on
maintenance and repair history as well as depreciated value and overall efficiency.
Attachment 1
Page 11
EXHIBIT A
2005 SEWER FUND
FINANCIAL SCHEDULES
TTACHMEN_ T 1. ALTERNATIVE 1
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ATTACHMENT 2
RESOLUTION NO. (2005 Series)
A RESOLUTION OF THE COUNCIL
OF THE CITY OF SAN LUIS OBISPO
ESTABLISHING SEWER SERVICE RATES
WHEREAS,it is the policy of the City of San Luis Obispo to review enterprise fund fees and rates
on an ongoing basis and to adjust them as required to ensure that they remain equitable and adequate to fully
cover the cost of providing services;and
WHEREAS,a comprehensive analysis of sewer fund operating,capital and debt service needs has
been performed for fiscal years 2004-05 through 2009-10; and
WHEREAS, this comprehensive analysis has been revised based on updated revenue and
expenditure information;and
WHEREAS,the Council has reviewed the sewer service rates necessary to meet system operating,
capital and debt service requirements.
NOW,THEREFORE,BE IT RESOLVED by the Council of the City of San Luis Obispo as follows:
SECTION 1. Resolution No. 9569(2004 Series)is hereby rescinded,effective July 1, 2005.
SECTION 2. The rates set forth in Exhibit"A-_"are hereby adopted,establishing rates effective
July 1,2005 and July 1,2006.
Upon motion of seconded by and on the following roll call vote:
AYES:
NOES:
ABSENT:
The foregoing resolution was adopted this day of 2005.
ATTEST: Mayor Dave Romero
Audrey Hooper, City Clerk
APPROVED AS TO FORM:
Jonathan Lowell,City Attorney
S —2,2 '
EXHIBIT A.1 to Resolution No. (Series 2005)
MONTHLY SEWER SERVICE RATES— Alternative 1
Type of Account July 1, 2005 July 1, 2006
Single family dwelling,
including single meter 36.72 37.73
condominiums and
townhouses
Multi-family dwelling in any
duplex, apartment house or 29.38 30.18
rooming house, per each
dwelling unit
Mobile home or trailer park, 22.03 22.64
per each dwelling unit
Public, private,or parochial 4.14 4.26
school, average daily
attendance at the school
All .
Minimum charge 36.72 37.73
Additional charge for every
100 cubic feet in excess of 4.43 4.55
500 cubic feet of metered
water consumption
Each vehicle discharging sewer into City system
Minimum charge 120.99 124.38
Additional charge per 100 7.28 7.46
gallons in excess of 1500
gallons discharged
S'2 �
EXHIBIT Al to Resolution No. (Series 2005)
MONTHLY SEWER SERVICE RATES— Alternative 2
.- of Account July 1j 200500.
Single family dwelling,
including single meter 34.00 37.74
condominiums and
townhouses
Multi-family dwelling in any
duplex, apartment house or 27.20 30.19
rooming house, per each
dwelling unit
Mobile home or trailer park, 20.40 22.64
per each dwelling unit
Public, private, or parochial 3.84 4.26
school, average daily
attendance at the school
All other accounts
Minimum charge 34.00 37.74
Additional charge for every
100 cubic feet in excess of 4.10 4.55
500 cubic feet of metered
water consumption
dischargingEach vehicle . City system
Minimum charge 112.02 124.34
Additional charge per 100
gallons in excess of 1500 6.74 7.48
gallons discharged
S'��
t
iiiiiil!IIIIII�IIIII I `� RECEIVED
I"';'1111
COUNCIL MEMORANDUM 2605
17- sup eip� ERK
May 31, 2005
OUNCIL j DD DIR
ICAO 1N DIR
To: Mayor Dave Romero ACRO ,jyFIRE CHIEF"
Paul Brown TTORNEY ZVPW DIR
Christine Mulholland CLERK/ORIG 2'P0LICE CHF
Allen Settle [I DEP HEADS '" a REC DIR
�'LITIL DIR
John Ewan ._�_ _ �G'rili [SIR
From: John Moss, Utilities Director
RED FILE
Via: Ken Hampian, City Administrative Officer MEETING AGENDA
DATE t�ITEM #.
Subject: Sewer Fund analysis revisions
A discrepancy has been discovered in the Sewer Fund analysis that has identified an additional
$1.5 million in debt proceeds that.had not been counted in our analysis. While this discovery
does not significantly alter the fund's ]ong-term outlook and the significant operating and capital
improvement challenges facing the fund, it will allow us to moderate the significant rate increase
recommended for this year needed to bring our working capital up to policy levels.
The discrepancy discovered was in how we receive and show the funding and expenses for the
lease purchase financing of the distributed generation energy projects at the Water Reclamation
Facility. Lease purchase funds were acquired in 2002-03 for the energy projects. With lease
purchase financing, the funds are placed in a trust or escrow account and are drawn upon as the
project is completed and the equipment is in place to guarantee the financing. Since the money is
not available to the lender, payment for the full amount of the financing begins immediately,
however the funds are not technically received by the City until the work is completed. Our
accounting appropriately did not show the funds as received, even though they are available to
us, but this obviously alters the position of the fund significantly once those funds are received.
We anticipate completion of the energy projects very soon and will therefore show receipt of
these funds in 2004-05 and this will significantly affect the short-term fiscal outlook of the Sewer
Fund.
Staff is completing a revised analysis and will provide the analysis and a revised
recommendation to Council prior to and at the June 2, 2005 budget hearing. While we never like
mistakes we are nonetheless pleased with the fact that this discovery will allow us to moderate
the significance of this years rate increase to our customers. We are also pleased that we will be
able to show and maintain working capital at or above policy levels this year, thus maintaining
the security that the working capital provides. If you have any questions please don't hesitate to
contact me.