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HomeMy WebLinkAbout06/01/2010, B4 - 2010 WATER FUND REVIEW council. "1eeoogDm June 1,2010 j acEnaa Report CITY O F SAN LUIS O B I S P O FROM: Carrie Mattingly, Utilities Director Prepared By: Kathe Bishop, Senior Administrative Analyst ] SUBJECT: 2010 WATER FUND REVIEW RECOMMENDATIONS 1. Review and accept the 2010 annual water fund financial review; 2. Approve the amended Capital Improvement Plan, which eliminates $350,000 for Polybutylene Replacements and eliminates $250,000 for Water Distribution Master Plan Implementation in 2010-11, and 3. Conceptually approve revisions to the water fixture charges, based on current material costs, pending the June 15, 2010 adoption of a resolution to update water fixture fees. DISCUSSION This report presents the annual review of the water fund. Within the 2010 Water Fund Analysis, which forecasts the financial position of the water fund through 2017-18, the City is able to: 1. Achieve the long-term goal of adequate water supply for the community, with the construction of the Nacimiento water supply project currently scheduled for completion in November 2010; 2. Fund the City's share of long-term financing costs for the Nacimiento water supply, with operating costs and debt service obligations beginning in 2010, in addition to funding the long-term financing costs for completed master plan improvements at the City's Water Treatment Plant; 3. Upgrade a booster pump station at the base of Cuesta Grade to maintain the Salinas Reservoir delivery system for transporting raw water to the City's Water Treatment Plant, with the construction scheduled in 2010-11; 4. Complete the design phase of the Telemetry System Upgrade project, with construction award planned for spring 2011; 5. Maintain an ongoing level of capital maintenance projects to maintain the community's water infrastructure assets; and, 6. Deliver recycled water for landscape irrigation, including system expansion and user site improvements, and the supply of recycled water for construction purposes. a)/-/ 2010 Water Fund Review Page 2 1010 Water Fund Analysis Report The 2010 Water Fund Analysis report, including the details of the process, changes in financial position, assumptions used to complete the analysis, and an update on major activities and programs is attached. The Analysis takes into consideration current economic conditions, the significant ongoing operating expenditure reductions that were implemented July 1, 2009 and proposes additional ongoing operating expenditure reductions to be effective July 1, 2010. The 2010 analysis includes reductions in both operating programs and capital programs delivering the lowest responsible budget, within the previously adopted 2010-11 water rates, while ensuring high quality, safe, and reliable water services to the community. 2009-11 Financial Plan Supplement: 2010-11 Budget Operating Program Reductions The operating program reductions are summarized in the Attachment on page 4. The water services operating reductions are ongoing in nature as opposed to a one-time"stop gap"measure. The ongoing water operating reductions result in a savings of $191,500 in 2010-11, which is $28,000 greater than the water program reductions adopted in the 2009-11 Financial Plan in June 2009. The $191,500 savings in 2010-11, including continued annual savings is reflected in the Water Fund Change in Financial Condition (Exhibit A.1.) as projected through 2017-18. The water source of supply operating program funds the Salinas Reservoir, recycled water, and the City's share of both the Whale Rock Reservoir and Nacimiento. The Water Fund Analysis includes a one-time operating savings for the City's share of the Whale Rock Reservoir budget, with savings in the amount of $99,500 in 2010-11 when compared to the adopted 2009-11 Financial Plan. Operating Program Staffing Allocation Adjustment The infrastructure for the production of recycled water supply is located at the City's Water Reclamation Facility, with daily operations and maintenance performed by Water Reclamation Facility (WRF) staff. Recycled water deliveries began in November 2006 resulting in a modest impact to WRF staff resources which are funded through the Sewer Fund. Water Distribution staff is directly responsible for the distribution portion of the recycled water system. Over the past three years, the recycled water distribution system has expanded to serve an increasing customer base, resulting in a gradually increasing recycled water production level and increasing daily operation demands and maintenance performed by reclamation facility and water distribution staff. Based on an analysis of reclamation facility staff time directly related to the production of recycled water supply, a proportionate share of Water Reclamation Facility staffing costs are charged to the Water Fund beginning in 2010-11, as follows: one Water Reclamation Facility Operator at 0.50 full time equivalent (FTE), one Water Reclamation Facility Maintenance Technician at 0.10 FTE, and the Water Reclamation Facility Supervisor at 0.10 FTE. This 0.70 FTE staffing allocation adjustment results in a $76,600 increase to the Water Fund (source of supply program staffing budget) and a corresponding reduction to the Sewer Fund (reclamation program staffing budget). 2010 Water Fund Review Page 3 Capital Improvement Plan Reductions Recommended amendments to the previously approved 2009-11 Capital Improvement Plan(CIP) will result in a $600,000 total reduction in water CIP funding. The 2010-11 CIP reductions include elimination of $350,000 for Polybutylene Replacements and $250,000 for Water Distribution Master Plan Implementation. Water Service Charges Adopted Water Service Rates As part of the 2009-11 Financial Plan process, in compliance with Proposition 218 requirements, in the spring of 2009 City water and sewer customers were informed of the proposed rate changes for 2009-11. The City received 160 written protests, which included 135 valid protests opposing the recommended two-year water rate changes. The City serves approximately 14,400 water and sewer customers, with Prop 218 requiring a majority protest (about 7,201) to stop a water rate change from moving forward. In accordance with Prop 218 requirements, in a public hearing on June 11, 2009 the City Council adopted water services charges for the City's 2009-11 two year financial planning period. The previously adopted water services charges include an 11% increase in 2010-11, effective July 1,2010. Water Service Rate Change for the Average Residential Customer What does this mean for the average residential customer? The average residential customer uses 10-units (7,480 gallons) of water monthly. The following illustrates the changes to the monthly bill with the approved water services rates for 2010-11, when compared to 2009-10. Average Residential Water Customer Monthly Charges Assuming 10 units of water use per month UNITS 2009-10 2010-11 1-5 $4.69/unit 23.45 $5.21/unit 26.05 6-25 $5.87/unit 29.35 $6.52/unit 32.60 26+ $7.36/unit n/a $8.17/unit n/a $52.80 $58.65 Note: 1 Unit= 100 Cubic Feet=748 Gallons. Average residential customer usage is 10 units or 7,480 gallons monthly It is important to note that the City's water rate structure is fully volumetric, with no base or minimum fee. Water charges are directly related to the individual customer's water use habits and choices. The third tier water rate for 26 units or greater, for residential customers, is designed to encourage conservation. Water service charges for the average residential customer, assuming 10 units or 7,480 gallons of water use per month, will increase by $5.85 monthly in 2010-11. In 2010-11, the average residential water customer will be charged less than one-cent ($0.008) per gallon of City water supplied, treated and delivered. a �3 2010 Water Fund Review Page 4 Proposed Revisions to Water Fixture Charges The proposed revisions to water fixture charges are based on increases in actual material costs and to simply update the charges to reflect the actual amount the City currently pays for these items. Based on Assembly Bill 1953 and effective January 1, 2010 the amount of lead in specific plumbing fixtures was reduced from a regulated amount of no more than 8%, to a new standard not to exceed 0.25% (essentially no-lead). As a result, cost increases for water fixtures, when compared to current City charges, range from a 30% increase for the 1" service (.58 x .75 meter) adaptor up to a 70%increase for the 2"service adaptors and the 2"customer valves. Water Fixture Charges Approved Proposed Customer Valve Costs Customer Valve Costs 1.0 inch $ 58 1.0 inch $ 80 2.0 inch $ 147 2.0 inch $250 Adapter Costs(Per Pair Adapter Costs(Per Pair)* 1.0 inch service/.58 x.75 inch meter $ 14 1.0 inch service/.58 x .75 inch meter $ 18 1.0 inch service/.75 inch meter $ 11 1.0 inch service/.75 inch meter $ 16 1.5 inch service/ 1.0 inch meter $ 74 1.5 inch service/ 1.0 inch meter $ 124 2.0 inch service/ 1.0 inch meter $ 75 2.0 inch service/ 1.0 inch meter $ 128 2.0 inch service/ 1.5 inch meter $ 108 2.0 inch service/ 1.5 inch meter $ 184 In addition to the fixture charge adjustments proposed above,staff is proposing that new fees for mission style adobe colored meter boxes and lids, be added to the Utility Services Fee Schedule. Meter Boxes and Lids—Mission Style Adobe Proposed Solid Cover 12 inch x 20 inch,with`water' logo $ 48 Meter Box 12 inch x 20 inch x 12 inch $ 54 Drop In Lid 7 inch x 13 inch,with`water"logo $ 18 Cover for Drop In Lid 17 inch x 28 inch $ 76 Meter Box 17 inch x 28 inch x 12 inch $ 106 Suppliers for the adobe colored meter boxes are currently limited to two vendors. The adobe color is mixed into the polymer concrete material to provide a high quality product that wears well over time. Contractors are having a difficult time obtaining the adobe colored boxes and lids due to the required minimum order and extended lead time for batch production and delivery. To maintain the integrity of the City's mission sidewalk specification, the proposed new fees will provide contractors with the ability to obtain high quality mission style meter boxes and lids from the City's inventory, with fees charged based on actual product costs. ATTACHMENT 2010 Water Fund Analysis Exhibit A — Updated Financial Schedules A.1. Changes in Financial Position A.2. Assumptions for Fund Projections A.3. Capital Improvement Plan B q— V 1 • ATTACBMENT 2010 Water Fund Analysis June 1, 2010 Prepared by the Utilities Department city of san WIS OBISPO Attachment Page 2 city of san lues osispo 2010 Water Fund TABLE OF CONTENTS I. OVERVIEW II. 2009-10 FINANCIAL PLAN SUPPLEMENT: 2010-11 BUDGET A. Summary of Operating Programs B. Operating Program Reductions C. Amended Capital Improvement Plan III. WATER RATES A. Water Rate Structure and 2010-11 Rates B. Water Rate History IV. ASSUMPTIONS A. Revenues B. Expenses C. Debt Service Payments V. MAJOR ACTIVITIES AND PROGRAMS A. 2009-09 Update B. 2010-11 and Forecast EXHIBIT A— FINANCIAL SCHEDULES A.I. Changes in Financial Position A.2. Assumptions for Fund Projections A.3. Capital Improvement Plan Attachment Page 3 �7 city of Man san lues OBISPO 2010 Water Fund Analysis I. OVERVIEW This report presents the financial condition of the Water Fund, based on the 2009-11 Financial Plan Supplement: 2010-11 Budget operating and capital programs, taking into consideration current economic conditions, while addressing the identified needs in the Water Master Plan, regulatory requirements, and infrastructure maintenance and adopted City financial policies. R. 2009-11 FINANCIAL PLAN SUPPLEMENT: 2010-11 BUDGET Water Division operating programs are summarized in Table A. The summary of operating programs reflects the net operating program base budget amounts for 2010-11, which includes the operating budget reductions, as further discussed in this report and displayed in Table B. A. Summary of Operating Programs Includes Operating Program Reductions as outlined in Table B. 2010-11 BUDGET Water Source of Supply 11 6,905,800 Utilities Conservation 380,600 Water Treatment 2,209,500 Water Distribution 1,129,200 Water Customer Service (2) 336,800 Water Adminimadon/Engineering 595,600 Water Franchise Fees 516,000 TOTAL WATER SERVICES OPERATING PROGRAMS 12,073,500 Source of Supply costs include$4,162,900 in 2010-11 for the Nacimiemo Water Project, and$1,071,000 in 20 10-1I for a Booster Pump Station Upgrade Project at Salinas Reservoir (2)Customer Service is funded 50%Water Customer Service and 50%Wastewater Collection The 2009-11 two-year financial plan development process included identifying operating cost reduction options to further tighten the ongoing operating program budgets for water service, in an effort to recommend the lowest responsible budget and associated water charges, while ensuring high quality, safe and reliable water services to the community. Operating reduction options were identified in the water programs resulting in short-term and long-term service impacts to water customers and the community. As outlined below in Table B, the operating program reductions for water services approved by the City Council and implemented July 1, 2009 represent an ongoing expenditure savings of $163,500 annually. This action included a reduction in temporary staffing and a reduction of 1.10 full-time equivalent positions representing the water fund's proportionate share of three regular benefited positions that were eliminated effective July 1, 2009. 3 /^ Attachment Page 4 Again, as part of the 2009-11 Financial Plan Supplement: 2010-11 Budget development process, Utilities staff identified further operating program reduction options. The outcome of this evaluation results in an additional $28,000 in reductions effective July 1, 2010. The water services operating reductions are ongoing in nature as opposed to a one-time"stop gap"measure. Operating savings total $191,500 in 2010-11, of this total about 65% ($122,800) is staffing related and 35% ($68,800) reflects non-staffing operating saving. The continued annual savings is reflected in the Water Fund Change in Financial Condition(Exhibit A.1). B. Operating Program Reductions Temp Regular 2009-10 2010-11 FTE 1l1 FTE 1l1 SAVINGS SAVINGS Operating Reductions Implemented July 1,2009 1. Eliminate Utilities Engineer position-50%share a1 0.50 73,700 73,600 2. Eliminate Water Customer Service position-5o%share 13) 0.50 39,700 39,600 3. Eliminate Laboratory Analyst position- io%share(4) 0.10 9,400 9,600 4. Reduce Operating Materials and Supplies 1,000 1,000 5. Reduce Outreach to Landscape Professionals 7,000 7,000 6. Reduce Professional Association Dues 400 400 7. Reduce in Publications and Subscriptions 200 200 8. Reduce in Printing and Reproduction Services 3,000 3,000 9. Reduce in Office Supplies 100 100 10. Reduce in Conservation Temporary Salaries 0.20 4,000 4,000 11. Reduce in Public Outreach and Education 25,000 25,000 2009-10 WATER SERVICES OPERATING REDUCTIONS 0.20 1.10 163,500 163,500 Operating Reductions Implemented July 1,2010 12. Eliminate Commercial Incentive Progam-Conservation 15,000 13. Reduce Water Efficient Irrigation/Appliance Rebates 7,500 14. Reduce Contract Services for Database Management 4,000 15. Reduce Computer Supplies 1,500 Additional Water Services Operating Reductions 28,000 2010-11 WATER SERVICES OPERATING SAVINGS 191,500 ".FrE represents full time equivalent (I)Engineer position savings is shared 50%water,40%sewer and 10%whale rock (3)Customer Service position savings are shared 50%water and 50%sewer (4)Lab Analyst position savings is shared 90%sewer and 10%water There are no Significant Operating Program Changes for new initiatives or water budget increases requested in the 2009-11 Financial Plan Supplement: 2010-11 Budget. Capital improvement project expenses are forecast based on infrastructure maintenance and repair history, individual project budget estimates and regulatory requirements. Maintaining the water system infrastructure, including major equipment and technology, is critical for the delivery of uninterrupted high quality water services to the community. Based on the current fiscal environment and the continued downturn in the construction industry, the construction bidding climate remains highly competitive. At the same time, based on the current economy and with increased regulations on private financing, the number of construction 51/-r Attachment Page 5 projects (or jobs) in the community are fewer than in recent years. This combination of factors has the ability to result in less cash flow for individual contractors and the potential for a more volatile bidding climate as we continue forward near the bottom of this economic cycle. At the same time, capital improvements are vital to infrastructure health. Supporting capital investments at this time results in value added to the City, its water customers, the community, and local businesses in construction related services. To deliver the lowest responsible budget within previously adopted water service charges, while meeting increasing debt service obligations and continuing to maintain a working capital balance of a minimum 20% of operating costs requires amendments to the previously approved 2010-11 water capital program. As proposed, the amended 2010-11 Capital Improvement Plan is reduced by $600,000, which eliminates $350,000 for Polybutylene Replacements and eliminates $250,000 for Water Distribution Master Plan Implementation in 2010-11. Table D below, displays the amended 2010-11 Capital Improvement Plan, including a revised (reduced) capital forecast for 2011-12 and 2012-13. C. Capital Improvement Plan 2010-11 2011-12 2012-13 BUDGET PROPOSED PROPOSED Source of Supply Water Reuse Master Plan 250,000 50,000 0 Water Treatment Plant Major Facility Maintenance 250,000 0 0 Fleet Replacement: Compact Pickup 24,700 Water Distribution Distribution Master Plan Implementation 0 0 0 Distribution System Improvements 1,375,000 1,150,000 1,175,000 Water Customer Service Fleet Replacement: Two Compact Pickups 49;500 Administration and Engineering Exterior Painting of 879 Morro-50%share 9,000 Fleet Replacement: Sedan 22,200 Fleet Replacement:Compact Pickup 25,500 Total Water Services CIP 1,875,000 1,231,200 1,274,700 Shared City Information Technology Utilities Telemetry System Upgrade 1,500,000 Technology Infrastructure 7,500 24,000 IT Disaster Prevention and Recovery Plan 2,300 Office Application Software Replacement 14,700 SharePoint Enterprise Content Management 3,800 IT Strategic Plan 16,000 Total Share of Technology CFP 1,507,500 44,800 16,000 TOTAL WATER FUND CAPITAL PROGRAM 3,382,500 1,276,000 1,290,700 The top priority water capital improvement projects in 2010-11 include: (1) the Salinas Reservoir Booster Pump Station Upgrade estimated at $1,071,000 for construction with funding programmed through the water source of supply operating budget, and; (2) the Utilities Telemetry System Upgrade with estimated at$1.5 million for the construction phase. 8V-9 Attachment Page 6 M. WATER RATES A. Water Rate Structure and 2010-11 Water Rates Current policies to guide rate structure setting: ■ Comply with legal requirements ■ Encourage conservation ■ Ensure revenue adequacy to fully meet system operating and capital needs • Provide equity and fairness between customers ■ Be easy to understand and administer ■ Facilitate ongoing review to maintain rate stability The City's water rate structure is commodity-based with charges based on the volume of water used. The table below displays the water rate structure with the previously adopted 2010-11 water rates. Customer Type Single Family i All Other Customers Residential Customers Inside the City Rates 1 -5 Units $5.21/Unit' 1 -5 Units $5.21/Unit 6-25 Units $6.52/Unit 6+ Units $6.52/Unit 26+ Units $8.17/Unit Outside the City Rates 3 1 -5 Units $10.42/Unit 1 -5 Units $10.42/Unit 6-25 Units $13.04/Unit 6+ Units $13.04/Unit 26+ Units $16.34/Unit Third tier charges for more than 25 units are applicable for Single Family Residential(SFR)customers only to encourage water conservation. Z 1 unit =100 Cubic Fed=748 gallons of water 3 For service to customers outside the City,the water rates are two times the"in-City"rate. B. Water Rate History The table below displays a two year history of water charges. 1-5 units 4.69 2009-10 6-25 units 5.87 26+ units 7.36 1-5 units 4.19 2008-09 6-25 units 5.24 26+ units 6.57 R�_/v Attachment Page 7 IV. ASSUMPTIONS The following provides more detail for the key assumptions in Exhibit A.1. and Al. to this report, the financial schedules include the Water Fund changes in financial position and assumptions for the Water Fund projections included in the Analysis. A. Revenues 1. Sales are calculated based on the percentage increase in rates and a one percent growth rate, applied to an analysis of water deliveries. The water sales analysis examines acre feet of water delivered, changes in population, and revenues to determine price per acre foot sold, adjusted based on water rate changes and forecasted rates changes. 2. Sales to Cal Poly are based on water use trends and the 2007 Agreement between the City and the University. This agreement, covering the period beginning July 1,. 2007 and extending through June 30, 2012, set the proportion (66%) of the non- residential rate the University pays to account for the University's difference from other customers (the University owns its own water supply and capacity interest at the Water Treatment Plant associated with the 1994 WTP upgrade). 3. Development impact fee collection is calculated according to the 2007-08 base year revenues 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 current impact fee establishment. Developments in those areas pay only those fees in place at the time of approval plus an annual adjustment based on the consumer price index. As a result of the continued downturn in development activity, development impact fee revenue projections have been revised. Revenues are not projected to reach 2007-08 levels ($1,386,300) within the seven year forecast through 2017-18. Revenue projections, which maybe conservative, assume development impact fees returning to the 2008-09 levels($663,000) in 2016-17. B. Expenses Total operating and maintenance costs for 2010-11 are based on the approved 2009-11 Financial Plan. Operating and maintenance costs forecasted for 2011-12 through 2013-14 are adjusted assuming an inflation rate of 2.5% annually, which increases to 3.0% annually beginning in 2015-16. The most significant non-staffing operating costs for water services are for electric utility services to pump raw water from the reservoirs and chemicals and electricity for water treatment processes and distribution. Projected electric utility rate increases range from five to eleven percent annually depending on the type of metered account. Chemicals go out to bid on an annual basis. Chemical contracts for February 2010 through January 2011 are below the 2009-10 contract amount. This analysis assumes a moderate increase in chemical costs beginning in February 2011. With the Nacimiento water supply project debt financing facilitated through the County, the City's share of the debt service costs are accounted for as an operating expense in the 8Lf-0 Attachment Page 8 source of supply program budget. The City's share of Nacimiento project annual costs begin in 2010-11. Nacimiento expenses are reflected in Exhibit A.2 as detailed in the listing of assumptions and included Water Fund change in financial position worksheet (Exhibit A.1.) with the Public Utilities operating expenses. Nacimiento expenses total $4,162,900 in 2010-11, which includes $875,600 (a one-time payment for prior capital expenses), $1,723,700 for operations and maintenance, and $1;563,600 representing the City's share of an interest-only payment for the debt financing. The City's full share of Nacimiento debt financing payments, including principal and interest, begin in 2011-12 with payments at$4.7 million annually. Capital expenses are based upon projections to the end of the 2009-10 fiscal year and proposed amendments to the previously approved 2010-11 Capital Improvement Plan budget. The 2010 Water Fund Analysis includes a reduction in capital funding levels as forecasted for a three year period beginning 2011-12 through 2013-14. Factors driving the forecasted reduction in CIP funding levels include: (1) the number of previously approved and funded water projects pending construction and the "production" capacity limitations of Utilities and Public Works staff; (2) current project budget estimates based on recent materials and construction costs are revised downward when compared to previously approved project budget estimates; (3) based on the current available budget in the Distribution System Master Plan Implementation account and considering the `timing" of private development activity and associated demands for significant water system expansions in the southern portion of the City, allows for a revised funding timeline for water master plan improvements; (4) maintaining a working capital minimum balance of 20% of operating costs which includes the City's share of Nacimiento while meeting full debt service requirements of the Water Fund, and; (5) to balance expenditures within previously approved water service rates and to deliver water rate projections for 2011-13 that remain the same as previously forecasted in the 2009 Water Fund Analysis when presented to the City Council on June 11, 2009. C. Debt Service Payments 1. Debt service for the 1994 upgrade of the Water Treatment Plant, the 2002 Refunding Water Revenue Bond debt payment, is $687,200 in 2010-11. 2. Debt service for the 2006 upgrade of the Water Treatment Plant, the 2006 Water Revenue Bond, is $1,032,800 in 2010-11. 3. Debt service for the repayment of the State Revolving Loan Fund for the construction of the Water Reuse system is $525,500 in 2010-11. 4. Debt service to pay for the Water Fund's proportionate share of the energy conservation project is $29,000 in 2010-11. 5. Debt service to pay for the Water Fund's proportionate share of the City's Public Safety Communications Center ($28,900) and the Public Safety Radio System Upgrade($38,100)total $67,000 in 2010-11. -/a i Attachment Page 9 V. MAJOR ACTIVITIES AND PROGRAMS A. 2009-10 Update 1. Nacimiento Water Project Participation in the Nacimiento Pipeline Water Supply Project is the most significant water supply accomplishment for the City in terms of both cost and benefit. The project will provide an additional 3,380 acre feet per year to the City's water supply portfolio which will provide water necessary to support the General Plan goals as well as provide more secure and reliable water supplies during drought periods or other water supply shortages for all water users. The Nacimiento Water Project is the largest construction project (by a factor of six) ever undertaken by the County of San Luis Obispo. The project is currently ahead of schedule with water deliveries anticipated to begin in October of 2010. The project is approximately 90% complete and within construction budgets. The total project budget for the Nacimiento Project is $176 million for design and construction. The City's share of that cost is estimated at $83.7 million. An operating, debt service and maintenance payment to the County for the City's share of project costs is estimated at $4.2 million (prorated) in 2010-11 and $6.5 million annually thereafter. 2. Water Reuse Project The Water Reuse project was approved by Council in 1997. Construction of the backbone distribution system was completed in August of 2004 and improvements at the Water Reclamation Facility for the project were completed in 2006. Recycled water deliveries began in November of 2006. Recycled water is used for construction purposes, such as dust suppression and compaction, and landscape irrigation at the following sites: ■ Damon Garcia Sports Complex ■ Laguna Lake Park ■ Medians on Los Osos Valley Road ■ French Park ■ Parkways on Calle Joaquin Road ■ Islay Park ■ The Courtyard by Marriott Inn ■ DeVaul Park ■ Costco and Irish Hills Plaza ■ CalTrans - Hwy 101 landscaping ■ Laguna Village Shopping Center ■ De Tolosa Ranch HOA ■ Laguna Lake Golf Course ■ Los Verdes Park I HOA ■ Laguna Middle School ■ Meathead Movers • Laguna Hills Park k Note:HOA=Homeowners Association The Water Reuse project is the first significant water supply added for the City since the completion of the Whale Rock Reservoir and transmission facilities in 1961. The project was funded through a combination of State Grant ($2.6 million) and State Revolving Fund loan funds ($8.1 million) with annual debt service payments for the Water Reuse project at $525,500. Additionally, funding is programmed for capital improvement projects to expand the system to serve new customers, including$250,000 in 2010-11. 16 Y—/—? Attachment Page 10 B. 2010-11 and Forecast 1. Salinas Reservoir Infrastructure Upgrades The San Luis Obispo County Flood Control and Water Conservation District operates the Salinas Reservoir under contract with the Army Corps of Engineers. Through payments in the City's source of supply program, the City pays for the total cost of operating and maintaining Salinas Reservoir and delivery system for transporting raw water to the City's water treatment plant. In 2007, City and County staff began forecasting budgetary needs for a booster pump station upgrade at the base of Cuesta Grade. The booster pump station upgrade was approved as part of the 2009-11 Financial Plan (Appendix A, Significant Operating Program Change, page 18 provides additional background information on this project) including $238,800 in 2009-10 for design and $1,052,200 in 2010-11 for the construction phase. This results in an increase in the City's payment for Salinas Reservoir operations over multiple years, which was previously forecasted in annual water fund reviews since 2007. The project is currently in the design phase with construction scheduled to begin in the spring/summer of 2011. 2. Telemetry Upgrade Project Capital funding was approved as part of the 2009-11 Financial Plan (Appendix B, Capital Improvement Plan, page 3-99 provides background information and project objectives) including $400,000 in 2009-10 for design and $1,850,000 in 2010-11 for the construction phase of the telemetry system upgrade of the control and monitoring systems for the Whale Rock and the city-wide water distribution system. The costs associated with the upgrades to the Whale Rock system are shared with partnering agencies of the Whale Rock Commission (Cal Poly and the California Men's Colony). The Water Fund's share of project costs includes $366,300 for design in 2009-10 and $1,692,700 for construction in 2010-11, which includes the City's-share(55%) of the Whale Rock component. 3. In Replacements The City has adopted a goal for annual infrastructure replacements at approximately two percent of system value (based on a fifty year replacement cycle) for the water distribution system. For previously approved distribution system improvements projects this equates to a funding level of $1,375,000 in 2010-11. The attached capital improvement plan forecast includes a reduction in funding for water distribution system improvements beginning in 2011-12 for a three year period. The capital forecast presented to the City Council on June 11, 2009 included a capital funding level of$4.2 million over a three year period beginning in 2011-12. The attached 2010 capital forecast reflects a funding level of$3.6 million for the same period, resulting in a 14% reduction equal to a $600,000 savings ($200,000 when annualized over the three years). These reductions, as well as the following ones, are recommended for the short-term to minimize rate increases that otherwise would have been needed. The polybutylene replacements program which began in the late 1990's is now substantially complete, with the final significant capital project completed in 2009- 10. The small number of remaining polybutylene services, mostly in condominium 11� 1HT '/ Attachment Page 11 complexes, will be replaced by City water distribution staff. The 2009-11 Financial Plan (Appendix B, Capital Improvement Plan, page 3-78 provides background information on polybutylene issues from the mid-1970's to the late 1990's) included approval of $350,000 in 2010-11 for polybutylene replacement. This report includes a recommendation to amend the 2010-11 Capital Improvement Program budget downward, thereby eliminating the $350,000 in 2010-11 for polybutylene service replacements. Repair and upgrade at major facilities such as the Water Treatment Plant and pump stations is based on maintenance and repair history. Funding was previously approved in the amount of $250,000 in 2010-11 for major facility maintenance projects at the Water Treatment Plant. The capital improvement plan forecast presented to Council on June 11, 2009 forecasted $100,000 annually in years three and four (2011-13). The attached capital improvement plan forecast eliminates the $100,000 in 2011-12 and defers the $100,000 from 2012-13 to the following year (2013-14). 4. Recycled Water System Expansion Based on recycled water capital improvement projects approved in the 2009-11 Financial Plan, $250,000 is programmed in 2010-11. After completion of the Water Reuse Project in 2006, capital funding levels for on-going expansion of the recycled water system were established at $250,000 beginning in 2007-08, with a funding commitment of$250,000 annually thru 2010-11. The attached capital improvement plan forecast reflects a lower level of funding forecasted for a three year period beginning in 2011-12, with capital funding levels returning to $250,000 annually beginning in 2014-15. The capital improvement plan forecast will be further evaluated, based on additional information and factors, and updated as part of the 2011-13 Financial Plan development process. Attachment Page 12 EXHIBIT A 2010 WATER FUND FINANCIAL SCHEDULES B4-IL Attachment Exhibit A.1. I � oc o T = g s ssssssso �O M aV{1 T N b V1 V1 N p O O a ^ � T � N 00 .rte• T ^ eN�l M 00 N � � T � e^�f 0 JG-1 N 8O �O �O O O� Q00' O S S O S S O S O p O O S O O p O. r 00 06 O N a V N O ^ V M Ez N Q M e+f f1 N m O CT N pO 1+ m 1i ^ cp Q Q z M O 0 Q h e� v^ DO M ry. M O� V N f i. C 00 1� M �O �O N �O eN� M Vi of N N afNy�i 1� Vi V � 00 n O b M a v Q n m N G O� r+i NN1N O -t OO._ O t? T b �D �D N 000 b N FY Q -o W N of 00 0 �O lz ? m M O w O N n P M m I: N Q N T M P! "' �O �O �O 0? O� N O� l� O M t•1 O m t�1 N Op N O 00p F H M o Q m a G 'O S S 8 8 P001 8 $ 8 0 S y n 25 b S p LL Q W O p p p p p °J O O S OQ S Q O M O O N 000 OpD O OCA '0 ��pp Vpyp� Q le 00 1z N 0d Z rO W S O S N m .0. 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C a - = A �° 0 0 C o A ° ° v ° ° o [r ° a U c u aai aai h '= 'g .im m y y `y y ca O S Q RECEIVED RED FILE JUN 012010 _ NGAGBM F �SLO CITY CLERK DATlid counat mEmoI.Anbum �TV, 1�IL June 1,2010 l'VaNCIL EDD DIR 17FIN 0IR TO: City Council Lf�4TTOFINEY t WIRE CHIEF ft'PW BIR KNOW ��dEE&PVIA: Katie Lichtig,City Manager ; � H 613 FROM: Carrie Mattingly,Utilities Directort Prepared by: Kathe Bishop, Senior Administrative Analyst I1 — ' SUBJECT: Water and Sewer Fund Reviews–Council Meeting June 1,2010 ly The following information is in response to Vice Mayor Andrew Carter's questions regarding the water and sewer fiord reviews that are on the Council Agenda for June 1,2010. WATER FUND 1) How much recycled water is currently being used? As I recall the capacity is 1000 acre feet year(AFI9, but we're well below that in use. Month Acre Recycled water deliveries for the most recent 12 month period FeetiYear total over 150 acre feet. Monthly detail is displayed in the May 2010 13.94 table, reflecting changes in demand based on seasonal Aril 2010 7.21 irrigation periods. March 2010 0.57 Fe6rua 2010 0.52 2) What is the true delivered cost of recycled water? By Janua 2010 8.35 "true," I'm wondering if we keep separate "books"for December 2009 8.67 recycled vs.potable. November 2009 8.51 October 2009 22.12 While we do maintain separate data on the operational September 2009 19.15 demand associated with recycled water, for example: staff August 2009 23.14 July 2009 21.86 time, electrical utility service, chemical costs, laboratory June 2009 17.64 analysis, operating materials and supplies, system Total 151.68 AFY maintenance and repair, system expansion, etc., recycled water deliveries began in November 2006, so the program is relatively new. Utilities staff has not yet completed a comprehensive evaluation of all recycled water program costs, to determine ongoing program and operating costs versus costs that are directly associated with start-up or are one-time in nature,in order to calculate the"true"delivered cost of recycle water. With a new source of water supply,and specifically recycled water, there are significant start-up costs.,The costs associated with the Water Reuse project, including construction at the Water Reclamation Facility and the backbone system are financed at a low interest rate of 2.5% over a 20-year period.. In addition state grant fiords in the amount of$2.6 million partially funded the project The customer pays 90% of the potable water rate for recycled water, which takes into consideration: (1) water quality and.the additional application of water for leaching purposes, and;(2) for philosophical reasons to encourage the use of recycled water. I I 1 1 Council Memorandum-Response to Council Questions on Water and Sewer Funds page 2 3) What portion of the proposed 11% rate increase is due to Nacimiento and what portion is due to regular operations? The approved 11%water rate increase results in an additional $1.4 million in projected revenues in 2010-11. The Nacimiento expenses are incorporated into the water source of supply operating expenses,along with the Whale Rock and Salinas reservoirs and recycled water supply. Costs to. operate Nacimiento are about 22% ($4.2 million) of the fund's total $19.5 million expenditure requirements in 2010-11. Because of the many factors that influence the approved water rate increase,Utilities staff is unable to provide a precise empirical answer by tonight specific to what portion of the 11%rate change is due to Nacimiento operating costs. As part of the long-term financial planning for water services, expenditures and projected revenue requirements are forecast for multiple years into the future. Revenues from the 2010-11 rate increase and forecasted rate changes are to prepare the Water Fund to meet future total expenditures and working capital requirements of the Water Fund, a portion of which is the full Nacimiento expense of$6.5 million annually,beginning in 2011-12. In the 2010 Analysis the Water Fund is ready for Nacimiento expenses which begin in 2010-11, and the fund is fully positioned for the ongoing annual $6.5 million Nacimiento expenses in 2013-14. Thereafter,the water rate forecast returns to an inflationary level. 4) How far along are we in the planned increases needed to pay for Nacimiento? Could you provide the annual rates going back to the year before we started these in Fiscal Year I Rate Change After four years of no water rate increases (2000-01 to Forecast 2003-04), which followed a 10% rate decrease in 1999-00, 2015-16 3% the City embarked on a multi-year rate increase strategy in 2014-15 5% 2004-05 to accommodate Nacimiento plus other key water 2013-141 8% improvement projects. 2012-13 9% 2011-12 10% Knowing that higher costs were in our future, but not right Actual away,the City purposely set out to incrementally raise rates 2010-11 11% over a number of years to meet our revenue requirements 2009-10 12% for the future. This included Nacimiento as well as other 2008-09 13% important projects such as water line replacements, water 2007-08 13% reuse, the Bishop Tank replacement, the Alrita Pump 2006-07 12% Station replacement, water treatment plant improvements and the telemetry system upgrade. Many of these projects 2005-06 8% are now completed. 2004-05 8% 2003-04 0% The City's share of Nacimiento (operating, capital reserves 2002-03 0% and debt service requirements) is included in the Water 2001-02 0% Fund, as an operating expense. While the debt service 2000-01 0% requirements are fixed, the operating budget for 1999-00 -10% Nacimiento is based on reasonable assumptions which are Council Memorandum-Response to Council Questions on Water and Sewer Funds page 3 on the conservative side. After the first year with Nacimiento supply in service, staff will then have an operational cost basis from which firture budgets will be developed. The 2010 Fund Analysis includes a working capital minimum balance of 20%of total operating program costs. The water rates as forecast for 2011-13 in the 2010Water Fund Review remain the same as previously forecasted in the 2009 Water Fund Review,as presented to Council on June 11,2009. 5)I'm interested to know the assumptions behind the assumed rate increases in 11/12, 12/13, and 13/14 since those are higher than the assumed CPI. 9% increase between 10/11 & 11/12 in "water service charges." Then 8•�. Then 55yo. Subtract I%growth, so the apparent anticipated rate increases are 8% 7016, and 4%with inflation assumed at 2.5% Expenditure assumptions include an inflationary rate of 2.5% on the operating, maintenance and supplies expenses. Capital expenses are based on the capital improvement plan. Debt service expenses are based on debt service obligations and coverage requirements. Working capital is based on the policy minimum of 20% of total operating program. All Nacimiento expenses are recognized as operating expenses in the Water Fund, which drives the working capital policy minimum dollar amount upward. Forecasted rate changes are necessary to meet the revenue requirements to cover expenditures, and policy decisions including working capital policy minimum as noted above. The water sales analysis includes an examination of the past seven years of annual (fiscal year) water deliveries in acre feet and actual population changes, to determine water per capita (gallons per customer daily) taking into consideration a 7-year average (to smooth annual changes in rainfall). Forecasting future rates includes adding a population growth of I% annually, multiplied by the updated water per capita sales projection to determine projected annual water sales in acre feet. Actual revenues from water sales are also evaluated for the past seven years, to determine actual revenues received per acre foot of water sold, which is adjusted for rate increases to-date to determine revenues per acre foot based on current water rates. The outcome is the projected base total revenues from water sales. Using this water sales revenue base, the forecasted water rates are applied to the rate model. A number of rate scenarios are run, including re-phasing of expenditures to establish the rate forecast. The goal of the 2011-13 rate forecast in the 2010 Analysis is to deliver the lowest responsible rates to meet the requirements of the Water Fund. The rate forecast is based on all known factors and the best information available at this point in time, with the intention of returning to Council next year (June 2011) with recommended rates for 2011-13 that are at or below the current rate forecast. Historically,this methodology, which evaluates past trends and future projections,has proven to be an accurate and self-correcting model in.forecasting water sales. 6)For Meter Boxes&Lids(B4-4), what are comparison prices for "stock"colored product? Meter boxes and lids in the adobe color for mission style sidewalks are currently priced at about 40% 'greater(37%to 42%based on individual items)than the standard polymer concrete colored products. Council Memorandum-Response to Council Questions on Water and Sewer Funds page 4 SEWER FUND 1) Refresh my memory as to what portion of the$44M in Master Plan Improvements is due to decisions by the Water Quality Control Board. Current planning estimates show roughly $24 million will be required to upgrade the Water Reclamation Facility (WRF) to meet the State's requirements for nutrient and disinfection by- products removal. These requirements stem from the Regional Water Quality Control Board's (Board)beneficial use designation for San Luis Obispo creek as a drinking water supply source. All costs are from a planning level and more precise estimates will be developed as the WRF Master Plan is completed and other preliminary design and regulatory information becomes available. Several deadlines loom, and City staff have been meeting frequently with Board staff with the goal of having some resolution of these issues in the near future. Staff will be bringing Council a regulatory update to provide more in-depth information on these issues before the end of the year. 2)As with water,Tm interested in the assumptions regarding sewer rate increases above CPI in the out years. Expenditure assumptions include an inflationary rate of 2.5% on the operating,maintenance and supplies expenses. Capital expenses are based on the capital improvement plan. Debt service expenses are based on debt service obligations and coverage requirements, and projected future debt service needs for capital projects in the forecast. Working capital is based on the policy minimum of 20% of total operating program. However, in the Sewer Fund we are building a larger working capital balance to position the fiord to be able to secure favorable financing for master plan infiashucture projects. Forecasted rate changes are necessary to meet the revenue requirements to cover expenditures, policy decisions, regulatory decisions, and to build a stronger working capital balance as noted above. Assumptions include fewer sewer billable units in general and a lower"sewer cap" on residential sewer bills. As a result, the basis on which the sewer rate is applied is lower. Forecasted sewer rates above CPI in the out years take into consideration: (1) additional debt service requirements for Buckley and Los Verdes lift stations; (2) conservatively assume the level of usage or billable units and a lower sewer cap of 6-units for residential, and; (3) maintaining a greater working capital balance to leverage fixture financing opportunities. The sewer revenue plan and forecast will be reviewed by financing agencies over the next year as staff works to secure favorable financing sources for significant upcoming master plan projects. 3) In looking at the Service Charges line of the Changes in Financial Positionworksheet,for both water and sewer it appears to be increasing by the rate increase only and not by the rate increase plus the customer growth. I wonder if there is a mistake here. On the water side refer to answer#5 above, on the sewer side refer to answer#2 above. In both fiords, based on the most recent 12-months of consumptiontusage there is a decrease in billable units. On the water side, the decrease in billable units offsets the 1%population growth. On the sewer side,with the lower residential sewer cap, assumptions are conservative. Council Memorandum-Response to Council Questions on Water and Sewer Funds page 5 4) For both water and sewer, have electric rates been truly increasing by 5-11%per year? I wasn't aware of that Electrical service rate changes vary based on customer class and usage during peak demand periods. For example, current assumptions include up to: 5% for small commercial accounts, 9% for medium commercial accounts, and 11% for large commercial accounts. Assumptions take into consideration PG&E forecasted needs to improve infrastructure and telemetry equipment for outage restoration. To minimize or off-set electrical expenses, the Utilities Department participated in a PG&E California demand response program, administered by EnerNoc, Inc. by helping to reduce peak demand and to keep the electrical grid running when it is most vulnerable to blackouts (June through September). Efforts by Utilities staff at the Water Treatment Plant resulted in capacity payments of$9,400 in 2008 and$18,600 in 2009 awarded to the City for the amount of electrical capacity that Utilities committed to reduce from the electrical grid during demand response events. The $18,600 awarded in 2009 is about 5% of the total electrical budget at the Water Treatment Plant. In closing, Utilities staff appreciates the thorough review and clarifying questions that.have been raised and,in particular,having the opportunity to respond in advance of the fund presentations.