SR-505-006 (4)
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Council Meeting: June 13, 1989
Santa Monica, California
TO: Mayor and City Council
FROM: city Staff
SUBJECT: Report on Wastewater Fund Status and Recommendation to
Approve a Wastewater Rate Increase
INTRODUCTION
This report discusses the reasons for rapidly increasing costs of
collection, treatment and disposal of Santa Monica wastewater over
the next five years and recommends a financing plan to fund these
costs.
BACKGROUND
City wastewater user rates were last revised on November 24, 1987.
staff advised the City council in 1987 that additional rate
increases would be required in the near future due to impending
cost increases resulting from the very significant improvements at
the Hyperion Sewer Treatment Facility. AS projected, costs related
to wastewater treatment and disposal have continued to increase
dramatically.
The Hyperion Treatment Facility is owned by the city of Los Angeles
and its subscribing agencies. The City of Santa Monica contracts
wi th the city of Los Angeles for sewer treatment and disposal
services, as do several other area cities and agencies.
Due to
Federal Clean Water Act requirements, the City of Los Angeles (and
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the subscribing agencies) are in the process of improving the
treatment facilities to provide full secondary treatment for all
wastewater. Also, a waste-to-energy facility which, when operable,
will incinerate sewage sludge is being constructed. As a contract
agency with the City of Los Angeles, Santa Monica is required to
pay its pro-rata share (2.6%) of all costs associated with the
increased operating and maintenance (O&M) costs and capital
improvement costs at the Hyperion Treatment Plant.
fIVE-YEAR ~ROJECTION OF FUTURE WASTEWATER fUND EXPEND~TURES
The most current projections for Santa Monica's share of the
Hyperion O&M and capital improvement costs as prepared by the city
of Los Angeles are presented below:
CITY OF LOS ANGELES
5 YEAR ESTIMATED COST PROJECTION FOR
SANTA MONICA'S SHARE OF HYPERION COSTS
YEAR
O&M
CAP1;TAL
1989-90
1990-91
1991-92
1992-93
1993-94
3,346,000
5,015,000
4,350,000
4,360,000
4,616,000
7/656,000
6/471/000
6,001,000
5,158,000
7,444,000
TOTAL
$21,687,000
$32,730,000
The average annual O&M expenditures over the five year period from
1982-83 to 1986-87 was $583,000. Projected Q&M costs for the next
five years average 744% more than the past annual average.
Similarly, capital improvement costs have increased significantly.
In addition to these estimated O&M and capital improvement costs,
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it may be necessary to negotiate with the city of Los Angeles for
additional sewage flow capacity rights. Current estimates indicate
that the cost for each additional one million gallons per day of
capacity may range between $4,000,000 and $6,000,000. The city of
Santa Monica may have to purchase additional capacity depending on:
1) the amount of future development in Santa Monicai 2)
interpretation of present capacity rights~ and 3) adoption and
success of the proposed plumbing fixture retrofit program.
Presented below is a chart which indicates how the Wastewater Fund
balance would be affected by these increased costs, if the rates
were not increased.
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5-YEAR WASTEWATER FUND BALANCE PROJECTION
ASSUMING NO RATE INCREASE
FY90 FY91 FY92 FY93 FY94
Beg. Fund Bal. $345,399' (8,132,518) (17,567,441) (24,907,186) (31,728(842)
Revenues 2 5,752,944 5,752,944 5,752,944 5,752,944
5,752,944
LESS:
City's O&M 1,726,761 1,830,367* 1,940,189* 2,056,600* 2,179,996*
City's elP 1,502,100 1,871,500 801,500 1,000,000** 1,000,000**
Hyperion O&M 3 5,015,000 4,350,000 4,360,000 4,616,000
3,346,000
Hyperion elP 7,656,000 6,471,000 6,001,000 5,158,000 7,444,000
End. Fund Bal. (8,132,518) (17,567,441) (24,907,186) (31,728,842) (41,215,894)
*Includes a 6% adjustment for general inflation.
**city's capital costs for FY93 and FY94 are estimates.
ALTERNATIVE FINANCING STRATEGIES
There are two feasible means by which wastewater revenues can be
raised to pay these increased costs. These alternatives entail:
1) increasing the current wastewater fees, the "pay as you go"
method; or 2) using bond financing to pay for the Hyperion capital
improvement costs in combination with lesser increases in the
wastewater fees. Staff estimates that financing the obligations
1Staff has indicated in the City's proposed budget for FY89-
90 that the Wastewater Fund will have a fund balance of $2,709,984.
The balance shown above takes into account additional Hyperion ClP
and O&M charges which had not been billed at the time of budget
preparation.
2This figure does not match the revenue amount in the Proposed
FY89-90 Budget as the Proposed Budget used an estimated rate
increase assumption based on information available at that time.
3This figure is $154,000 less than the amount presented in the
1989-90 Proposed Budget due to corrections in the estimate received
from the city of Los Angeles.
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of the Wastewater Fund over the next five years solely through
wastewater fees would require a rate increase of 180%.
Since a
rate increase of this magnitude could place a financial hardship
on many of the system users, staff recommends financing through the
combination of rate increases and a bond issuance.
INCREASE IN WASTEWATER RATES/SALE OF BONDS
This proposed alternative consists of the sale of approximately
$41. 3 million4 in revenue bonds to finance capital improvement
costs associated with the Hyperion Treatment Plant for the period
of FY89 - FY94. Wastewater rates would be increased by 81% on July
1, 1989, and will need to be increased an additional 20% on July
1, 1990. These rate increases are necessary to finance Hyperion
O&M costs as well as Santa Monica's own operating and capital
improvements costs and the annual debt service payment associated
with the bond issuance.
Below is a five year fund balance projection based on the sale of
$41.3 million in bonds and increases in the current wastewater fees
in the amounts described above; i.e. 81%, effective July I, 1989
and 20%, effective July 1, 1990:
4lncludes 5-year Hyperion elP costs ($32,730,000); FY88-89
Hyperion elP costs ($2,226,000); and additional funds to provide
for issuance costs and the required bond fund reserve.
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5-YEAR WASTEWATER FUND BALANCE PROJECTION
WITH RATE INCREASES/SALE OF BONDS
FY90 FY91 FY92 FY93 FY94
Beg. Fund Bal. 2,571,399:l 2,638,002 2,369,703 3,726,582 4,758,550
Revenues 9,796,464 11,603,568 11,603,568 11,603,568 11,603,568
LESS:
city's O&M 1,726,761 1,830,367* 1,940,189* 2,056,600* 2,179,996*
City's CIP 1,502,100 1,871,500 801,500 1,000,000** 1,000,000**
Hyperion O&M 3,346,000 5,015,000 4,350,000 4,360,000 4,616,000
Hyperion CIF NjA6 NjA N/A N/A NjA
Debt Service 7 3,155,000 3,155,000 3,155,000 3,155,000
3,155,000
End. Fund Bal. 2,638,002 2,369,703 3,726,582 4,758,550 5,411,114
*Includes a 6% adjustment for general inflation.
**City's ~apital costs for FY93 and FY94 are estimates.
By issuing bonds, the City can payoff the Hyperion capital
improvement costs over a 20 year period. This allows the City to
better control future rate increase needs, thereby lessening the
potential financial burden on system users.
This alternative
results in a fund balance which complies with established bond
5 Beginning fund balance is increased in this alternative as
staff proposes to include the 1988-89 Hyperion Capital Improvments
charge ($2,226,000) in the proposed bond issuance.
6There is no Hyperion capital improvements charge as the costs
are paid by the bond revenues.
7This amount represents the annual debt service which would be
owed for the next 20 years.
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covenant requirements,8 The fund balance will be available to meet
the following future financial demands:
1. To pay for costs associated with capital system
replacement needs within the city of Santa Monica;
2. To cover contingencies in the Hyperion proj ect during the
five year period; and/or
3. To finance all or part of the Hyperion capital
improvement costs which are expected to be levied in the
period beyond the 5 year planning period.
Presently, staff is investigating various financing options,
including joining with other agencies. A financial consultant will
be retained to review these options. staff will evaluate the
findings of the consultant and will recommend the best bonding
option to the City Council at a later date. However, for purposes
of the financial projections in this report, it was assumed the
City would sell its own revenue bonds at current market rates.
COST IMPACT TO SYSTEM USERS
The following table illustrates the projected rate increases to
average system Users.
Type of Service
Current
Avg. Monthly
Rate
Monthly Rate
After Recommended
Rate Increase
Residential
6-unit Apt.
Commercial (15,000 sq.ft)
Restaurant (75 seats)
$ 6.14
55.28
52.65
307.13
$ 11.11
100.06
95.30
555.91
8Bond covenants require that enough pledged revenues be
generated each year so that after all O&M costs have been paid for
that year, there is $1.25 in pledged revenues remaining for every
$1 in debt service owed.
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A comparison of wastewater rates in other cities contracting with
the City of Los Angeles for sewage disposal is presented below:
6-unit 15,000 Sq.Ft 75 Seat
city Home Apt. Commercial Restaurant
Santa Monica $11.11 $100.06 $ 95.30 $555.91
Beverly Hills 12.04 67.90 117.00 689.00
Burbank 8.24 51.00 51. 75 950.00
Los Angeles 10.43 60.76 52.08 303.80
Glendale 5.46 53.10 48.00 398.00
Note: Rates for Beverly Hills and Glendale do not reflect likely
rate increases in the near future.
BUDGET/FI~ANCIAL IMPACT
At this time, staff is proposing that the Council adopt the 81%
rate increase, effective July 1, 1989. Approval of the remaining
20% rate increase will be deferred until spring, 1990 to ensure
that the second increase will make the revenue stream consistent
with bond debt service requirements.
Additional wastewater fee
revenue to be derived from this rate increase would be
approximately $4,043,520 in FY1989-90.
~EC;OM11END~TION
It is recommended that the city Council:
1. Direct staff to return to council with bonding option
recommendations within 90 days; and
2. Adopt the attached resolution increasing wastewater fees,
effective July I, 1989.
Prepared by:
Stanley E. Scholl, Director of General services
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RESOLUTION NO.
(CITY COUNCIL SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF SANTA MONICA INCREASING THE SEWER SERVICE
CHARGE
WHEREAS, Section 7143B(C) of the Santa Monica Municipal
Code provides that the city Council may establish the sewer service
charge by resolution; and
WHEREAS, the joint powers agreement between the City of
Santa Monica and the City of Los Angeles for the transportation,
treatment and disposal of sewage requires that the City of Santa
Monica pay certain capital improvement charges related to
improvements at the Hyperion Wastewater Treatment Plant and certain
operational and maintenance charges related to operation and
maintenance at the Hyperion Wastewater Treatment Plant; and
WHEREAS, the proposed capital improvement charges and
operation and maintnance charges for the Hyperion Wastewater
Treatment Plan result in a projected deficit for the Wastewater
Fund in Fiscal Year 1989-90,
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA
MONICA DOES RESOLVE AS FOLLOWS;
SECTION 1.
Effective July 1, 1989, the sewer service
charge shall be $1.59 per billing unit.
SECTION 2.
That utility bills which overlap the
effective date in section 1 of this Resolution shall have the sewer
service charge, where applicable, prorated over the period as
though the sewer use were equivalent on each day of the billing
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period.
SECTION 3. The city Clerk shall certify to the adoption
of this resolution, and thenceforth and thereafter the same shall
be in full force and effect.
APPROVED AS TO FORM:
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ROBERT M. MYERS
City Attorney
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