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Home My WebLink About05/20/2008, PH 4A - 2008 WATER FUND REVIEW council. MccmgDa May 20,2008 j agenba REpoat ,w.N� CITY OF SAN LUIS O B 1 S P O FROM: John Moss, Utilities Director Prepared By: Kathe Bishop, Senior AdminYstrative Analyst Gary Henderson, Water Division Manager SUBJECT: 2008 WATER FUND REVIEW CAO RECOMMENDATION Review and accept the 2008 annual water fund financial review. DISCUSSION This report presents the annual review of the water fund. The 2008 water fund analysis confirms the ongoing moderate rate increases forecast in recent years during consideration of the Nacimiento water supply project and the Water Treatment Plant Master Plan Improvement project. The construction phase of the Nacimiento water supply project began this year and all five construction contractors are currently performing work on their portions of the project. The Water Treatment Plant Master Plan Improvements project was completed in February 2008. With the approved rate increase and projected future rate changes, the water fund will continue to be healthy and stable, capable of supporting the continuing operations and capital programs. In June 2007, Council approved a multi-year rate increase for the water fund with a thirteen percent (13%) increase effective July 1, 2007 and a thirteen percent (13%) increase effective July 1, 2008. No modification to the 2008-09 adopted rate increase is necessary based on this year's fund analysis. Within this analysis, which forecasts the water fund's financial position through 2013-2014, the City is able to achieve its long-term goal of adequate water supply through participation in the Nacimiento water supply project, fund the long-term financing costs on the Master Plan Improvement project at the Water Treatment Plant, and deliver recycled water for irrigation. This analysis also includes an ongoing level of capital maintenance projects to maintain the City's water infrastructure assets. Regular annual rate increases are forecast to position the water fund to meet its current and future obligations. Last year, in the 2007 water fund analysis, rates were forecasted to increase 12% in 2009-107 12% in 2010-11, 9% in 2011-12 and 3% in 2012-13. The 2008 water fund analysis forecasts revisions in some of the future year increases. For 2010-11 the projected rate increase is 11% instead of 12%, 2011-12 remains at 9% and the 2012-13 projection increased from 3%to 7%. This fund analysis includes updated cost figures associated with the Nacimiento Project based on the lower construction costs that were realized following the bid process this past year. In addition, there have been some increased operating costs associated with on-going operational and maintenance demands to deliver water services. y� 2008 Water Fund Review Page 2 2007-09 Financial Plan Supplement: 2008-09 Budget Significant Operating Program Changes and Capital Improvement Plan There are no new Significant Operating Program Changes or Capital Improvement Plan requests for the Water Fund 2008-09 Budget. Those continuing program changes already identified and approved in the 2007-09 Financial Plan and 2008-09 Budget are included in this analysis. Water Rate Changes In June 2007, Council approved a multi-year rate increase for the water fund with a thirteen percent (13%) increase effective July 1, 2007 and a thirteen percent(13%) increase effective July 1, 2008. What does this mean to.the average residential customer? For the average residential customer using 10 units ("ccf') of water monthly, the following illustrates the changes to the current monthly bill with the 2008-09 adopted rates and 2009-10 as currently projected. Average Residential Water Customer Monthly Bill Assuming 10 units of water use per month CCF 2007-08 2008-09 2009-10 tz� 1-5 $3.71/ccf 18.55 $4.19/ccf 20.95 $4.69/ccf 23.45 6-25 $4.64/ccf . 23.20 $5.24/ccf 26.20 $5.87/ccf 29.35 26+ $5.81/ccf n/a $6.57/ccf n/a $7.36/ccf n/a $41.75 $47.15 $52.80 (1)Includes adopted 13%rate increase in 2008-09. (2)Includes projected 11%rate increase in 2009-10. Development Impact Fees Water Development Impact fees are currently being reviewed and updated to reflect updated costs for Nacimiento Water Supply project, Water Treatment Plant upgrade and Water Master Plan updates which include water distribution improvements to serve the Airport and Margarita planning areas. Revised fees are projected to be presented to Council in July 2008. The 2008 Water Fund Analysis Attached to this report is the 2008 Water Fund Analysis including the details of the process, changes in financial position and assumptions used to complete the analysis, along with an update on major activities and programs. This annual rate review confirms the previously adopted rate increase for 2008-09 water service charges and projects a series of annual rate increases through 2013-14. As identified in recent years, the water fund is being positioned to pay for the City's share of the Nacimiento Project and the Water Treatment Plant Master Plan Improvements, as well as meeting operational and maintenance demands, improving customer services and ensuring the water fund's fiscal health. 2008 Water Fund Review Page 3 ATTACHMENT 2008 Water Fund Analysis Exhibit A — Updated Financial Schedules A.1. Changes in Financial Position A.2. Assumptions for Fund Projections A3. Capital Improvement Plan G:\UTQ.\Kathe\Fiscal\FQVANCIAL PLANS\2007-09 Financial Plan\2008-09 Budget\Staff Reports\Water\2008 Water Fund CAR.doc y� -3 ATTACHMENT 2008 Water Fund Analysis May 20, 2008 Prepared by the Utilities Department city of San WIS OBISPO Attachment Page 2 city of san Luis osispo 2008 Water Fund TABLE OF CONTENTS I. OVERVIEW II. 2007-09 FINANCIAL PLAN: 2008-09 BUDGET A. Summary of Operating Programs B. Capital Improvement Plan III. RATE SETTING A. Methodology B. Structure C. History IV. ASSUMPTIONS A. Revenues B. Expenses C. Debt Service Payments V. MAJOR ACTIVITIES AND PROGRAMS A. 2007-08 Update B. 2008-09 and Forecast EXHIBIT A— FINANCIAL SCHEDULES A.1. Changes in Financial Position A.2. Assumptions for Fund Projections A.3. Capital Improvement Plan Schedule Attachment Page 3 C�7rt� city of san lues 0131spo 2008 Water Fund Report I. OVERVIEW This report presents the financial condition of the Water Fund, based on the 2007-09 Financial Plan Supplement: 2008-09 budget operating and capital programs to address the identified needs in the Water Master Plan, regulatory requirements, and adopted City financial and infrastructure maintenance policies. II. 2007-09 FINANCIAL PLAN SUPPLEMENT: 2008-09 BUDGET A. Summary of Operating Programs 2008-09 BUDGET Source of Supply 1,401,000 Conservation 456;500 Treatment 1,974,500 Water Distribution 1,092,800 Customer Service 548,900 Administradon/Engineering 697,900 Water Taxes and Fees 514,200 Total Water Services 6,685,800 B. Capital Improvement Plan 2008-09 2009-10 2010-11 2011-12 BUDGET PROPOSED PROPOSED PROPOSED Source of Supply Water Reuse Master Plan 250,000 250,000 250,000 250,000 Water Treatment Plant Major Facility Maintenance 140,000 Fleet Replacement: 4-wheel drive pickup 30,900 Water Distribution Distribution Master Plan Implementation 250,000 250,000 250,000 250,000 Distribution System Improvements 1,325,000 1,350,000 1,375,000 1,400,000 Polybutylene Water Service Replacement 350,000 350,000 350,000 350,000 Fleet Replacement: 4-Mid-size pickups 83,600 Administration and Engineering Exterior Painting of 879 Morro-50%share 8,500 Fleet Replacement Sedan 19,200 Light pickup 20,700 Total Water Services CIP 2,398,600 2,227,700 2,276,600 2,250,000 Shared City Information Technology CIP 75,000 3,200 16,000 Total Water Fund CIP 2,473,600 2,230,900 2,292,600 2,250,000 Attachment Page 4 III. RATE SETTING A. Methodology In determining water revenue requirements and setting recommended rates, the following general methodology is used: Step 1: Determine Water 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. Development impact fees,and meter sales c. Revenues from other agencies(Cal Poly) d. Other service charges(service start-up fees, late charges,etc.) Step 3: Identify water rate requirements: a. Revenue needed to be generated from water rates is the difference between water revenue requirements(Step 1) and"non-rate"revenues(Step 2). Step 4: Determine new rates: a. Model the rate base(consumption and customer account assumptions)against the existing rate structure and rate requirements identified in Step 3. Because this analysis is performed over a multi-year period, other factors are considered, such as working capital available to support capital projects, debt service coverage requirements, and minimum working capital policy. B. Water Rate Structure 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 easy to administer ■ Facilitate ongoing review to maintain rate stability c Attachment Page 5 The current water rate structure is completely variable, with the charges based on the volume of water used. The table below shows the water rate structure with approved 2008-09 water rates. Customer Type Single Family All Other Customers Residential Customers Inside the City Rates 1 -5 CCF $4.19/CCF Z 1 -5 CCF $4.l9/CCF 6—25 CCF $5.24/CCF 6+ CCF $5.24/CCF 26+ CCF $6.57/CCF Outside the City Rates 3 1 -5 CCF $8.38/CCF 1 -5 CCF $8.38/CCF 6-25 CCF $10.48/CCF 6+ CCF $10.48/CCF 26+ CCF $13.14/CCF Third tier charges for more than 25 units are applicable for Single Family Residential(SFR)customers only to encourage water conservation. 'CCF= 100 cubic feet=748 gallons of water For service to customers outside the City,the water rates are two times the"in-City"rate. C. Water Rate History The table below displays a six year history of water charges. 1-5 ccf 3.71 2007-08 6-25 ccf 4.64 more than 25 ccf 5.81 1-5 ccf 3.28 2006-07 5-25 ccf 4.11 more than 25 ccf 5.14 2005-06 1-5 ccf 2.93 more than 5 ccf 3.67 2004-05 1-5 ccf 2.71 more than 5 ccf 3.40 2003-04 1-5 ccf . 2.51 more than 5 ccf 3.15 2002-03 1-5 ccf 2.51 more than 5 ccf 3.15 � l Attachment Page 6 IV. ASSUMPTIONS The following provides more detail for the key assumptions in Exhibit A.1. and A.2. to this report, the financial schedules showing the water 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, applied to an analysis of water deliveries. 2. Sales to Cal Poly are based on historic use 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 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 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. Water Development Impact fees are currently being reviewed and updated to reflect updated costs for Nacimiento Water Supply project, Water Treatment Plant upgrade and Water Master Plan updates which include water distribution improvements to serve the Airport and Margarita planning areas. Revised fees are projected to be presented to Council in July 2008. Adjustments to the development impact fees are not projected in this fund analysis and are not anticipated to haven significant affect on the rate recommendations. Any affects to the rates as a result of updated impact fees will be included in the 2009 Water Fund Review as part of the 2009-11 Financial Plan. B. Expenses Operating and maintenance costs, historically, were adjusted assuming an inflation rate of 3% annually. However, based on recent trends for operating and maintenance expenses and considering the all counties consumer price index (CPI) of 4.1% in December 2007, this analysis assumes an inflation rate of between 3%-4% annually with the goal of achieving funding requirements to meet an inflation rate of 4% in the 2009-11 Financial Plan process, assuming inflationary trend continues. With the Nacimiento water supply project debt financing facilitated through the County, the City's share of the project debt service costs are accounted for as an operating expense. The City's share of the Nacimiento project annual costs are reflected in Exhibit 'P7 W I Attachment Page 7 A on the listing of assumptions and included with the Public Utilities operating expenses listed in the Change in Financial Position worksheet. Capital expenses are based upon projections to the end of the 2007-08 fiscal year and the approved 2008-09 Budget, including capital projections through 2010-11. Thereafter, capital expenses are forecast based on infrastructure maintenance and repair history, and regulatory requirements. C. Debt Service Payments 1. Debt service for the 1994 upgrade of the Water Treatment Plant and the refinancing of earlier bonds for system upgrades, the 2001 Refunding Water Revenue Bond, is $386,200 and the last debt payment will be paid from the debt reserve account in December 2008. The 2002 Refunding Water Revenue Bond debt payment is $686,300 in 2008-09. 2. Debt Service for the 2006 upgrade of the Water Treatment Plant, the 2006 Water Revenue Bond, is $1,032,300 in 2008-09. 3. Debt service to pay for the energy conservation project is $28,900 in 2008-09. 4. Debt service for the repayment of the State Revolving Loan Fund for the construction of the Water Reuse system is $525,500 in 2008-09. V. MAJOR ACTIVITIES AND PROGRAMS A. 2007-08 Update 1. Nacimiento Pipeline Water Supply Project Participation in the Nacimiento Pipeline Water Supply Project is the most significant water supply achievement in terms of both cost and benefit. The project, as identified, will provide the City with an additional 3,380 acre-feet per year of water, providing adequate supplies to meet our current General Plan build-out needs and provide greatly improved system and service reliability. The project is currently under construction with water deliveries estimated to begin in late 2010. The total project cost for the Nacimiento Project is $176 million for design and construction based on bid award amounts. The City's share of that cost is estimated at $83.7 million. An operating and maintenance payment to the County for the City's share of project costs is estimated at $4.1 million (prorated) in 2010-11 and $6.4 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 2006 and the system now serves nine sites including: 7/'/ Attachment Page 8 ■ Laguna Lake Golf Course ■ Damon Garcia Sports Complex ■ Medians on Los Osos Valley and Calle Joaquin Roads ■ The Courtyard by Marriott Inn ■ Costco and Irish Hills Plaza ■ Laguna Village Shopping Center Sites to be added to the Water Reuse project in 2008-09 include: Laguna Middle School, City parks including Laguna Lake Park, Laguna Hills Park, French Park, Islay Park, DeVaul Park and Vista Lago Park, and a portion of the Highway 101 corridor landscaping(Caltrans). 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 Loan funds ($8.1 million) with annual debt service payments for Water Reuse at $525,500. Additionally, $250,000 has been committed annually for capital improvement projects to expand the system to serve new customers. 3. Water Treatment Plant Master Plan Implementation The construction contract for the Water Master Plan Improvements to the Water Treatment Plant was awarded on May 16, 2006. Construction began in July 2006 and was completed in February 2008. Capital project costs are included in this analysis. The total project cost was approximately $16.8 million. Annual debt service payment for $15.5 million of the Water Treatment Plant Master Plan Improvement project cost is $1,032,300 in 2008-09. B. 2008-09 and Forecast 1. 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. This equates to an expenditure of $1,325,000 in 2008-09. Repair and upgrade at major facilities such as the Water Treatment Plant and pump stations is based on maintenance and repair history. 2. Dispatch Center and Radio Systems Improvements Utilities relies on the radio system for dispatch of field crews and communication between crews on routine and emergency operations. The Enterprise funds will be expected to participate financially in the Dispatch Center and Radio Systems Upgrade Project. The Water Fund portion of the total project cost is estimated at $716,800 and is included in this analysis in 2008-09. Attachment Page 9 EXHIBIT A 2008 WATER FUND FINANCIAL SCHEDULES y� -ice Attachment Exhibit A.1. c o 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o e •b o 0 0 0 0 p o o p p o o e $ 0 0 T Off, 00 O� �O � 00 vl p � Q O O N O� .r C b QD\ b 00 M M N E O a - M b N N-. N r Cr ^• ^ vnt V'1 Q O u v b b O. N M ~ N N N M M .M. p O 00 0 0 p 0 0 0 p 0p 0 0 0 0 0 0 o Opp O O O N 000' 0 000 00 O O N e0 0� 0 O M W n Y1 Q M ery Q M n h N 01 O1 00 h 'O 10 'o NCL .N a K N b N N N 00 v v v pry b E ON .14 O O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O OO O O O .: •a o 00 00 000 0 0 0 0 0 0 0 0 0 O Do � en o0 N vt n O �O O �D O W Q M M S M O n Q M N N O\ eb N h n M V N O er Q O M �O O N N N v y 00 ON N Q .-� Or O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O O O O O O O O 0 0 0 0 0 0 0 pp 0 0 0 0 0 0 O O O O O O O N h M N N 1� �'' �'•� �p try p O 0 0 0 0 00 0 0 0 0 0 0 0 0 O O O O O O O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O C O O O O O� �O •� O 00 00Iol�vA �O fV N 10 N �D 0 O' It O C O 00�O vt ..� O o N } M — N wMi v0i N N v N N N h ONO N N 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O O O O O O O a Q N 00 rl M b n 00 en — �O O l� O O O O m 1 a 10 O — h O O h n M M M QOl N N b N M N b b M Q N Ono v n 000 v b N Z O 3 U O 0 0 0 0 0 0 0 0 0 0 00 0 /y C •K>i N NN h eO1 aO 0vy � rO M00N1 00— 0> M 0�OO 0eeNOVryi OOOv—t OOOh MOb OOO Otinrbl N v V en `W r Q p 00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O O O O O O O O 0 0 0 0 0 0 pp 0 0 0 0 0 0 O O O O O U n a0 10 N N O O Z W M n M = 0 M M Q h h a N M N Q Q N N Al M N N Q N Q O. `O n r U) O CL Q v y C Z v ` v y 00 C Z > U .0 O y� y , U O U. 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