SR-02-24-2015-9ACity Council Meeting: February 24, 2015
Agenda Item: 9-14+
To: Mayor and City Council
From: Susan Cline, Interim Director of Public Works
Subject: Public Hearing to Adopt Water Rates
Recommended Action
Staff recommends that the City Council:
1. Hold a public hearing.
2. Receive public comment pursuant to Proposition 218 requirements.
3. Consider all protests against the proposed water rate increases that have been
submitted in accordance with Proposition 218.
4. Adopt the attached resolution establishing a five year schedule of water rate
adjustments comprising a 9% maximum increase in the first year and 13%
maximum rate increases in the following four years.
5. Authorize budget changes as outlined in the Financial Impacts & Budget Actions
section of this report.
Executive Summary
Due to projected declining water sales, the City's self- sufficiency plan program costs,
and increased capital funding needs, the City's cost to provide water service is projected
to exceed the City's water revenues without additional water rate increases. Details of
the rate analysis and the rate report were presented at the October 28 2014 and
December 16 2014 Council meetings. Water rates were last adjusted in a five year
schedule on July 8, 2008. At that time, a commodity -only rate structure was approved
which eliminated the fixed service charge and provided a strong conservation signal.
On December 16, 2014, Council directed staff to commence the Proposition 218 public
notice process for this five -year plan to increase water rates:
Calendar Year
2015
2016
2017
2018
2019
Maximum Projected Increase
9%
13%
13%
13%
13%
The proposed five -year plan maintains the same conservation rate structure adopted in
2008 and represents the maximum increase in the indicated years. If Council adopts
the proposed rate plan as indicated above, annual rate increases could be lower if
future revenues are greater or if future costs are lower than anticipated and the Council
then decided to suspend part or all of that year's full rate increase, but would not exceed
the approved maximums. Prior to annual rate adjustments in January, staff would
provide a State of the Water Fund report to Council to determine the rate adjustment
amount up to the maximum percentage adopted.
Background
California continues to experience severe drought conditions. The State is entering its
fourth year of drought, with water year 2014 (October 1, 2013 — September 30, 2014)
resulting in the third driest year on record. On January 17, 2014, the Governor declared
a Drought State of Emergency and issued a proclamation asking all Californians to
reduce water use by 20 %. As of late January 2015, the U.S. Drought Monitor classified
98% of California in "severe" drought condition or greater (including 38% classified as
"extreme" and 40% as "exceptional ", including Santa Monica). After its second snow
measurement of the winter in January, the California Department of Water Resources
called the snowpack "dismally meager," with the Sierra snowpack at about one -third of
normal.
The City has taken action to address the drought. Council declared a Stage 2 Water
Supply Shortage requiring mandatory water conservation to achieve a 20% reduction in
water use compared to 2013 at the August 12, 2014 Council meeting. Given these
drought conditions the Council has directed staff to expedite conservation programs
outlined in the Sustainable Water Master Plan (SWMP) that Council adopted on
October 28, 2014. Additionally, staff is recommending the continuance of the rate
structure adopted in 2008 that eliminated the bi- monthly fixed service charge so that the
water bill became entirely based on actual water usage, thereby improving the water
conservation incentive at all levels.
The current water rate structure was adopted on July 8 2008 to provide equity between
customer types and among customers within a classification. The City provides water
service to three customer classifications. These classifications are single - family, multi-
family and non - residential. For residential customers, the previously existing three tier
structure was replaced with a four tier structure.
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For non - residential customers, a uniform commodity rate was established, applicable to
nearly all water use. A second tier for non - residential customers is applied at the high
end of consumption. In 1999, a resolution to annually raise rates by the actual Consumer
Price Index (CPI) increase was adopted and has been implemented with each annual
budget. Rates were adjusted by CPI annually between 1999 and 2008 with the exception
of a 6% increase in 2005. The last five year schedule of rate increases was from FY
2008 -09 to FY 2012 -13 consisting of 11%, 10.5 %, 10.5 %, 10 %, and 10% in respective
years. After the 2008 schedule of rate adjustments ended as of June 30, 2013, rates were
adjusted by CPI on July 1, 2013, and July 1, 2014.
2014 Water Rate Analysis
A rate study was completed by Kennedy Jenks Consultants as part of its contract with
the City to prepare the Sustainable Water Master Plan (SWMP). The rate study report
was included as an attachment to the staff report for the December 16, 2014 Council
meeting and is available on the Water Resources Division web page. The objectives of
the rate study included development of a strategy for meeting the utility's ongoing
financial obligations for the five year planning period (FY 2014 -15 through FY 2018 -19)
and assessment of changes to the rate structure in keeping with the City's self -
sufficiency goals to encourage water conservation and sustainability
Previous Council Actions
At the May 14, 2013 Council meeting, staff presented the status of the Sustainable
Water Master Plan (SWMP), which included the City's water self- sufficiency goals.
Council directed staff to complete the development of the SWMP and to proceed with
the water rate study. At the August 12, 2014 Council meeting Council declared a Stage
2 Water Supply Shortage requiring mandatory water conservation to achieve a 20%
reduction in water use compared to 2013. At the October 28, 2014 Council meeting
staff presented an updated SWMP and the findings of the rate study. Elements of the
SWMP include enhanced conservation programs, rain harvesting and storm water
capture projects, increased groundwater production and recycled water system
improvements.
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At the October meeting, staff provided rate adjustment information addressing SWMP
program requirements that addressed the 20% reduction requirement, projected capital
project needs and associated revenue reductions. Council approved the SWMP and
directed staff to return upon completion of the rate study report. At the December 16,
2014 Council meeting, staff presented the rate study findings and Council took the
following actions:
1. Approved public noticing of a five -year plan to increase water rates:
Calendar Year
2015
2016
2017
2018
2019
Maximum Projected Increase
9%
13%
13%
13%
13%
2. Adopted a resolution setting the public hearing to increase water rates on
February 24, 2015, in accordance with Proposition 218.
3. Authorized the City Clerk to issue notices of the proposed water rate increases
and public hearing on February 24, 2015, in accordance with Proposition 218.
4. Directed staff to report annually on the State of the Water Fund, to include a
financial analysis recommending the magnitude of the following year's rate
increase up to the maximum approved.
5. Directed staff to provide allowances for low income customers, explore a cap in
water billing for low income customers, and investigate low income allowances
for 100% affordable housing projects.
6. Directed staff to explore the Task Force on the Environment's recommendation
to revisit the rate structure at such time as the August 12, 2014 Water Shortage
Declaration is lifted.
Subsequently, on January 13 2015, Council approved implementation of the Water
Shortage Response Plan (WSRP) and directed staff to expedite conservation programs
that would be funded from the Water Fund in FY 2014 -15 and FY 2015 -16.
Discussion
As a basis for the 2014 rate study and in accordance with governmental accounting
standards for municipal enterprises, the Water Fund's revenues, generated from user
charges and fees related to the City's provision of water service, should cover the cost
of providing the service. Accordingly, the financial revenue plans presented in the 2014
rate study are based on the requirement that the Water Fund will be self - supporting.
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The proposed 5 -year plan to increase water rates addresses the City's intent to achieve
its stated goals of achieving water self- sufficiency by the year 2020, invest in capital
programs necessary for system reliability, meet conservation goals, and account for
decreased revenues resulting from mandatory conservation measures. This last notion
of paying more, but using less may be counterintuitive to some. Yet, it derives from a
few interconnected facts.
First, the City must provide water to all of its residents and visitors every hour of every
day year in and year out. The City's water service is truly a 24/7 operation. Hence,
unlike some businesses, which are able to reduce production or certain operational
costs in the face of declining product sales, the City has far fewer options.
Second, most of the City's water revenues come from the sale of water. As water sales
decline due to conservation efforts made necessary by the ongoing drought emergency,
water revenues decline. Although some might debate the exact percent increase, water
rates do need to increase in order to make up for this decline in revenue.
Third, the basic water supply infrastructure and its ongoing operational and
maintenance needs are largely fixed costs. These remain the same whether there is a
drought or not and they remain virtually the same almost regardless of the volume of
water sales. The operational and maintenance needs of the City's water delivery
system do not decline in tandem with the decline in water sales. The number of City
staff who operate and maintain the City's water system has remained remarkably
consistent over the years. Today the water systems' basic operations and maintenance
staff totals 46 full time employees, the same number that were employed in 1997.
The following section of this report provides additional details on the costs for programs,
capital expenditures and operations and the revenues needed to maintain and to
improve the water system given the likelihood of reduced water sales. Further detail
regarding the areas that significantly impact the proposed rate plan is provided under
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these subsequent sections: Water Shortage Response Plan (WSRP) Implementation;
Capital Requirements; and Revenue Loss from Reduced Water Consumption.
Water Shortage Response Plan (WSRP) Implementation
As discussed in the January 13 2015 WSRP staff report, the SWMP includes new
water conservation programs and enhancements to existing programs totaling $7.2
million (this figure includes $1.2 million in financial assistance from MWD) that will help
the City reach its goal to be water self- sufficient by 2020. In order to immediately reduce
water use to lessen the effects of the drought and meet the City's 20% reduction goal,
Council approved accelerating the implementation of conservation programs in the
SWMP. The drought response will be implemented by the new Water Conservation Unit
in the Office of Sustainability and the Environment (OSE). Water conservation
programs will be funded by water rates in addition to grant funding from the Metropolitan
Water District of Southern California (MWD). Staff will continue to actively pursue other
funding sources as they become available, such as Proposition 1 funds (the Water
Quality, Supply, and Infrastructure Improvement Act of 2014).
Capital Requirements
In addition to funding ongoing operations and maintenance expenses, revenues should
be sufficient to address capital needs. By nature, water systems are capital- intensive
operations. The SWMP addresses system capacity, long -range water supply reliability,
and conservation programs necessary to meet the City's stated water self- sufficiency
goals. Details of the five -year $33 million General Water System CIP are provided in
Table 4 of the Rate Study, which include these selected projects and cost projections:
® General Water System Capital Improvement Program:
➢ Infrastructure improvements associated with replacing aging existing
facilities comprised of water mainlines and appurtenant distribution
system facilities that are approaching the end of their useful lives over
five years, $20M
➢ Commencement of an Advanced Meter Infrastructure (AMI) program to
provide more frequent and accurate metering of water use, $5M Water
Fund contribution and $5M Wastewater Fund contribution. Benefits
provided to both the City and its customers include:
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• Frequent, even daily, transmission of more precise water
consumption data allowing for quicker and more precise
identification of high usage and suspected leaks. With the ability
to detect large leaks in a more timely manner, field customer
service personnel can be dispatched to investigate and shut off
water service to mitigate water loss and property damage.
• A customer web interface would be developed for customers to
monitor their daily water usage online and improve customers'
ability to monitor usage and adjust water use patterns to realize
more water savings.
• Customer service representatives would have access to more
frequent and accurate water consumption data resulting in
improved responses to customers.
• Not having to manually read meters or physically investigate a
high water bill complaint means less water wasted and cost
savings for the operation.
➢ Plans for reliability and water transmission improvements for the City's
highest pressure zone (zone 500) with a new booster pump station,
$2.5M
➢ Funding for ongoing rehabilitation and facility specific improvements
and studies. These include fleet replacement, software upgrades,
Urban Water Management Plan reporting, and Sustainable
Groundwater Management Plan development, $5.5M
® Sustainable Water Master Plan capital expenditures related to decreased
reliance on imported water and achieving the City's year 2020 self- sufficiency
goal, include:
➢ Brine concentrator evaluation at Arcadia Treatment Plant to increase
finished water recovery, $0.3M
➢ Charnock Granular Activated Carbon (GAC) improvements to improve
carbon performance and potentially reduce carbon change -out
frequency, $0.3M
➢ Infrastructure Capacity Improvements (water main connections to new
supply sources), $2.OM
Revenue Loss from Reduced Water Consumption
The City's Water Fund is projected to experience a decrease in water sales and related
revenue associated with the City's adoption of a Stage II Water Shortage Plan, which
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calls for a mandatory 20% reduction citywide, and the implementation of additional self-
sufficiency related water conservation programs. Since most of the water utility's costs
are fixed, the Water Fund is projected to be affected by a reduction in water sales-
based revenues while fixed costs of service remain fairly constant.
The proposed rate plan, as outlined in the 2014 rate study, addresses this and sets the
City on a path to achieve water self- sufficiency, address drought conditions, support
operations, and maintain water system infrastructure while continuing with a balanced
Water Fund.
Water Rate Options
Three projected revenue plan scenarios with various rate adjustments were developed
to compare the water utility's revenues and revenue requirements through FY 2019 -20.
At present, on a per gallon basis the City's water customers are pay $.0033 for each
gallon of water used. Three rate increase options are presented in Table 1 and further
discussed below. Under each, on a per gallon basis, water customers will continue to
pay less than $0.01 for each gallon of water they use. These are among the lowest
rates anywhere.
Table 1 — Rate Adjustment Options
1. CPI -only increases would be implemented on a fiscal year basis assumed at 2.5% (July 1`t)
2. Options 2 and 3 would be implemented on a calendar year basis (March 1st in the first year
and January 1st each year thereafter).
3. All of these plans are inclusive of CPI and would impact the Utility Users Tax
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2015
2016
2017
2018
2019
Option 1
2.5%
2.5%
2.5%
2.5%
2.5%
(CPI only)
Option 2
9%
9%
9%
9%
9%
(9% plan)
Option 3PT
9%
13%
13%
13%
13%
(9/13% plan)
1. CPI -only increases would be implemented on a fiscal year basis assumed at 2.5% (July 1`t)
2. Options 2 and 3 would be implemented on a calendar year basis (March 1st in the first year
and January 1st each year thereafter).
3. All of these plans are inclusive of CPI and would impact the Utility Users Tax
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Option 1: Projected Revenue Plan — Consumer Price Index (CPI) Based Annual Water
Rate Increase (Baseline Option)
Under this option, projected revenues do not support ongoing operations and capital
programs. Water conservation efforts continue to reduce revenue from water sales and
Council adopted reserve requirements are not met. Based on the Council adopted
SWMP and other water conservation efforts, water rate increases limited only to the
general rate of inflation are insufficient to support the activities of the Water Fund. The
Water Fund would be in deficit as of FY 2016 -17 after it uses its reserves.
Option 2: 9% Proiected Revenue Plan — 9% Annual Water Rate Increase (inclusive of
Under this scenario, projected revenues would support ongoing costs of operations, but
as noted in the Rate Study the capital program would need to be reduced. Similar to
the prior plan, following actual CPI increases in FY 2013 -14 and FY 2014 -15, a
projected increase of 9% is included in each calendar year from 2015 through calendar
year 2019. The 2014 increase would be implemented March 1, 2015, with each
successive year's increase taking effect January 1. While this rate plan provides a
stronger financial performance than the CPI only (baseline) alternative and achieves a
positive net operating performance in the later years of the forecast it does so by
reducing needed capital programs and by failing to maintain adequate reserves. These
impacts (relative to Option 3 below) are as follows:
• Approximately $5 million in capital projects would have to be eliminated or
deferred, which is a reduction in general system planned capital improvements of
15 %. The likely projects to be reduced or deferred would be some combination of
water main replacements and the AMI system. This could potentially affect the
long term reliability of the water distribution system and potentially defer
enhanced conservation efforts made possible with AMI.
• One time capital projects would be deferred to a later part of the planning period
and funded by debt.
® Preserves conservation as a priority
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Option 3: 9 %/13% Projected Revenue Plan
Under this scenario, there is a much stronger financial performance over the previous
rate plans. This rate structure provides financial stability for the Water Fund to meet
projected capital improvements, potential emergency system responses, implement
conservation programs, and absorb projected declines in water sale revenues. This
proposed rate plan retains the capital projects over the plan period that would have
been deferred or eliminated in Option 2.
Bonding
To further evaluate how rate increases could be mitigated and still meet all needs, staff
was asked to look at the potential of bond financing. Furthermore, staff was asked about
the possibility of using bond financing to amortize Water Fund costs over a longer period
of time and therefore reduce the required rate increase in the short term.
For many years the City has followed prudent and fiscally conservative financial practices
in using bond financing to pay for one -time capital projects whose cost may be amortized
over the life of the facility being funded. As a potential bond issuer, the City has to be
mindful of the bond market and how it might react to any potential bond issuance. The
Water Fund cannot issue a bond to cover its projected deficit, which is primarily due to the
ongoing reduction of operating revenues associated with lower water consumption. To
attempt to do so would fly in the face of the City's consistent practices over the years. But
even more than this, the bond market would not recognize such an issuance, at least not
with anything approaching reasonable rates. The bond market requires the Water Fund to
generate a consistent operating revenue stream that exceeds operating expenditures
during the length of the bond term; this is not the case without a rate increase. In other
words, without an adequate rate base and rate increase there can be no bond issuance as
there will be no viable market for the bonds.
Members of the community and the Council have asked whether, despite these
challenges, any bond financing could still occur. The following is a description of the
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various methods of debt issuance that the City has access to, and the ability of these
methods to assist the Water Fund.
General Obligation (GO) Bonds are backed by the full faith and credit of the issuer,
which has the power to levy taxes on property owners to pay bondholders. The bond must
be approved by 2/3 of the voters. The City most recently used GO bonds to finance the
Main Library.
If the City were to issue GO bonds, the bonds would effectively tax only property owners
for water infrastructure based on their property's valuation, instead of charging water users
based on their consumption levels. An individual's or property's actual water use would
have almost nothing to do with how much any person would be charged to pay back the
bond. Currently, the maintenance, operation and investment in water infrastructure is paid
for by water users based on their consumption patterns and amounts. This is the basic
premise of governmental enterprise fund accounting, which seeks to segregate the use of
general tax funds to uses serving the general community.
General governmental accounting standards and best practices dictate that rate -based
funds, called enterprise funds, should cover their own costs and should not be subsidized
by the general taxpayers of the City. On this basis, credit rating agencies frown upon such
structures and would potentially give the bond a low rating. This would impact the City's
AAA rating. For these reasons, GO bonds are not an option for the Water Fund.
Lease Revenue Bonds (LRBs) /Certificates of Participation (COPs) are secured by
annual lease payments on a City property, which is in turn used as collateral. Lease
payments are made from general revenues available to be appropriated for debt service
payments. In Santa Monica, bonds are issued by the Santa Monica Public Financing
Authority, a joint powers authority. The decision to issue LRBs /COPs rests with the City
Council. The City recently used such bonds to finance Parking Structure 6. LRBs are
generally rated two notches below the City's GO bond rating (and are therefore more
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expensive than GO bonds), as the use of general revenues is not considered as strong as
the full faith and credit of the City.
The General Fund is limited in the amount of financing that it can carry out, primarily
because of the availability of revenues to pay for the debt, but also due to the perceived
weakening of the City's financial position as it issues greater amounts of debt. During the
next 3 years, the City is anticipating issuing LRBs for two general fund projects — Fire
Station I and the City Services Building. Additionally, using General Fund revenues to pay
for an enterprise does not conform to the requirements of governmental accounting
standards and would likely be greeted with great concern by rating agencies. For these
reasons, General Fund LRBs /COPs are not an option for the Water Fund.
Revenue Bonds are backed by a specific revenue stream generated by an enterprise as
defined in Section 54300 et seq of the California Government Code. City issuance of
revenue bonds is specifically authorized by Chapter 2.36 of the City's Municipal Code.
The City's utility revenue bonds are payable solely from the appropriate City enterprise
fund and are not secured by any pledge of ad valorem taxes or general fund revenues of
the City. In accordance with standard bond covenants, the revenues generated by the
issuing enterprise fund must be sufficient to maintain required coverage levels, or the
customer rates of the enterprise must be raised to maintain the coverages. The issuance
of revenue bonds does not require voter approval. The City has used revenue bonds to
finance Wastewater infrastructure; these particular bonds were awarded an AAA bond
rating.
Revenue bonds would be the only appropriate financing mechanism for the Water Fund to
pay for capital projects, and are contemplated in the later years of the forecast once rate
increases are in effect. As noted above, it is not possible at this time, with the current
projected revenue stream of the Water Fund, to issue revenue bonds without a rate
increase. Bond covenants require a minimum ratio of net operating income to debt service
payments. The City's minimum debt coverage ratio has been 1.20x, although the industry
target debt coverage ratio for revenue bonds is approximately 2.00x for programs with
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large ongoing capital needs and 1.50x for programs without such needs. In 2013, the
City's AAA rated Wastewater Bonds had coverage of 5.32x.
At this time, staff has determined that both operating and capital needs of the Water Fund
will require a rate increase, as a bond issuance cannot be supported by the Water Fund or
the General Fund.
Rate Criteria and Assumptions
The financial projection for each scenario is based on the City's projected customer
account characteristics, the projected operation and maintenance expenses, and the
inclusion of the City's comprehensive Capital Improvement Program. Additionally,
several ratemaking criteria were also integrated in the revenue plan. These key criteria
include:
• Water usage is projected to reduce by approximately 10% during FY 2014 -15,
and an additional 10% during FY 2015 -16 due to conservation efforts. Water
usage is projected to essentially remain at these reduced levels during the
balance of the planning period. Reduced water consumption would result in
reduced revenues to the water fund while operations and maintenance costs
would be expected to increase at inflationary levels.
• The option of additional $10 million in debt financing is programmed for FY
2018 -19. This may be available through a new debt issuance, potential short -
term inter -fund borrowing, or other strategies as determined appropriate by
the Finance Director at that time to fund one time capital expenditures.
• With potential rate increases commencing in March of FY 2014 -15, no
change in rates is proposed beyond FY 2018 -19. Five years is the maximum
planning horizon for water rate adjustments allowed by state law.
• Rate increases corresponding to Options 2 and 3 would be implemented in
January of each year. Implementation of new rates in this time frame would
minimize the immediate impact of any rate increase as customer water use is
at its lowest during the winter.
• Short term population growth is based on the projections indicated in the
City's 2010 Urban Water Management Plan and estimated annualized LUCE
projections of 0.5% per year. This is expected to be approximately 0.5% per
year and yield a modest increase in new accounts through 2020. New
development is required to comply with all water efficiency requirements,
including the use of the most stringent water efficiency standards to date.
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To further elaborate on the above bullet, between 2003 and 2013 the number of total
water accounts in Santa Monica increased from 14,979 to 17,709 but total water use
decreased by about 1 %. Even though the number of water customers increased over
the past ten years, overall water use declined slightly. The biggest increases in water
use during that period were from dedicated landscape water meters (mostly for public
parks and open spaces). Another area where water use has increased significantly is in
the single family residential sector where use has gone up over 7% during the past four
years. Much of the single - family usage is from additional landscape irrigation due to
much lower than normal precipitation during that time.
All new or major remodel projects in the City, including residential and commercial, are
required to meet very strict state and local water efficiency requirements. In order to
meet the requirements of the new State CalGreen building standards, all new
developments must be at least 20% to 40% (depending upon building type) more water
efficient than buildings that met the previous code. For example, the most recent low
income housing development uses 43% less water than similar size existing low income
housing developments. The newest hotel uses 23% less water than existing similar size
hotels.
All new developments and remodels are required to pay a Water Demand Mitigation
Fee based on the estimated first year of water demand. This Fee is calculated using
water fixture flow rates listed in the State Plumbing Code. The Fee is used to fund city -
related water efficiency projects such as pipe replacement to fix or prevent leaks,
cisterns, irrigation, toilets, urinals, etc. This investment in the City's infrastructure helps
to meet the immediate goal to reduce use in response to the drought and the long -term
goal for water self- sufficiency.
New connections to the water system are required to pay a Water Capital Facility Fee.
Additionally, if a water distribution main is not available adjacent to the property, then
the utility may require the installation of a water main at the applicant's expense. In
short, development — either actual or anticipated - is not a reason why water rates need
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to increase. If there was no new commercial or residential development, water rates
would still need to increase to meet anticipated future costs and declining water sales.
Water Fund Balance and Rates
To further articulate impacts of the rate scenarios on the Water Fund, fund balance
trends corresponding to the three options are presented in Figure 2 below. The fund
balance trend in the 13% option (red line) dips below the trend of the 9% option (green
line) due to reductions in capital improvements and conservation programs in the 9%
option. Future performance of the 13% option (redline) improves over that of the 9%
option (green line) after FY 18/19.
Figure 2 —Water Fund Revenue Requirements, Fund balance trends
$SOM
Sam
—CPI lnarease
No Change to Capital & No Cash Infusion
- "-.
— 13%Io.rease
....-
,.,....
No Change to Capital & $IDM Cash Infusion
$30M
—
�...
---- 9 %Innoae
_
...__..
Deaeaae In Capital & $10M Cash Infusion
$EOM
___
� —_
SIOM
Om
FY 2019 -10
HION.15 FY201516 FY20107
FY 2017-18 FY2018.19 FY2019.20
330M
-$20M
- - --
-$a0M
Should Council adopt staff's proposed five -year rate schedule, a 9% rate increase in the
first year would take effect on March 1, 2015. Subsequent annual rate increases of up
to 13% would become effective January Vt of each successive year. It is important to
note that, should Council approve staff's proposed rate schedule, in each successive
year, the Council retains the option to suspend part or all of the 13% rate increase
depending on revenue and costs. For the next five year period, each year, staff would
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provide a State of the Water Fund report before calendar year's end. At such time,
based on the fiscal conditions of the water fund and other information presented, the
Council could opt to continue with a 13% rate increase or suspend part of the increase
in light of, for instance, better than expected water fund fiscal health.
In reviewing FY 2014 -15 financial performance to date, the 9% increase for the period
from March 1, 2015 to December 31, 2015 remains appropriate. Although FY 2014 -15
capital program expenditures for the Water Fund will be lower, the costs incurred by the
Water Fund for conservation programs and administration of the Water Shortage
Response Plan (WSRP) offsets this savings. As approved by Council at its January 13
2015 meeting, the WSRP implementation strategy included an acceleration of the
outreach, education, and conservation programs included in the SWMP in order to
assist customers in achieving water savings as soon as possible with a first year cost of
$1.2 million.
As directed by Council, staff will return to Council before the end of each calendar year
to report on the status of the water utility, which will include a review of the financial
condition of the Water Fund and a recommendation whether a suspension (and the
amount of such suspension) of the following year's rate increase is appropriate.
Conditions to be evaluated in formulating a recommendation to Council for the following
year's rate adjustment would include:
• Climate conditions; state -wide hydrologic status and forecasts
• State drought declaration status
• Progress in achieving 20% reduction in water use
• Revenue collection forecast and revenue collected to date;
• Funds received from outside sources, i.e., Federal and State funding
opportunities and the possibility of offsetting budgeted capital expenses or
conservation programs
• Expenditures for capital and operations
• Evaluation of expenditures for water conservation programs
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Furthermore, the rate resolution recommended for approval in this staff report includes
provisions for "suspension" of the maximum approved rate increase on an annual basis
for reasons including, but not limited to:
® Greater than anticipated revenues
® Decreased operating costs
® Decreased capital expenditures
Water Rates in Comparison with Other Cities
It is worth noting that Santa Monica has experienced the same pressure for increased
water efficiency and conservation over recent years due to drought and climate effects as
other statewide and regional water agencies. In comparison to other regional water
agencies, Santa Monica single - family residential rates are in the lower quarter of
neighboring comparison agencies (Figure 3). For instance, Santa Monica charges
$0.0033 per gallon of water used, at the current Tier 1 rate and the City of Los Angeles
charges $0.0066 per gallon of water used. Santa Monica's water rates would remain well
below $0.01 per gallon even under Option 3, when in 2019 the price per gallon would be
$0.0059. The average charge for all comparison cities (excluding Santa Monica) in FY
2014 -15 is $133.37 for 30 HCF of water usage over a two month period. The Santa
Monica average charge for the same period and the same usage is $95.00.
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Figure 3 — Proposed Water Rate Comparison with Neighboring Agencies
(1.) Proposed 9% increase effective March 1, 2015
(2.) Culver City serviced by Golden State Water Company, a CPUC regulated utility
Low Income Provision
On Mav 13 2008, Council approved a change in the discount for low income customers.
Because the rate structure changed in 2008 to eliminate the fixed charge and moved to
a commodity -only rate structure, the first tier water rate for qualified single - family low
income customers was discounted. Prior to 2008, the low income discount waived the
fixed fee component of the water charge. Staff recommends continuing the discount
rate approved in 2008 of $1 per HCF for the first tier only. This remains consistent with
the rate structure established in 2008.
For single - family customers the maximum bi- monthly discount would be $14. Second,
third, and fourth tier rates would not be discounted since these apply to more
discretionary uses of water, rather than basic water needs. Low income customers
IF
qualify for the water discount by providing evidence of enrollment in the low income
program offered by Southern California Edison or the Southern California Gas
Company. There are currently 213 customers qualified as low income and receiving the
discounted first tier water rate.
A survey of low income discounts among neighboring agencies is provided below:
Agency
Discount Provided
Burbank
No low income water discount
Glendale
No low income water discount
Los Angeles
$10 flat discount for qualified participants
Long Beach
No low income water discounts
Pasadena
$15/ two month billing cycle flat discount
Santa Monica
$14/ billing cycle maximum
Cost of service requirements in proposition 218 require that the discount provided to
qualified low income customers be covered by the City's general fund in order to avoid it
becoming subsidized by other rate payers. The maximum projected General Fund
transfer to the Water Fund is estimated at approximately $20,000 per year.
Although not currently in place, staff is reviewing the potential eligibility and
administrative issues involved in extending the low- income discount to multi - family
accounts which are 100% low income. Staff would return to Council with information
and a recommendation with the biennial budget in May 2015.
Public Notice Requirements
Proposition 218 requires a public notice of proposed changes to rates be made to all
property owners in the affected area. A 45 day notice /response period is required prior
to the hearing date of February 24, 2015. Notices of the proposed increase were
mailed to all owners of record of each parcel in the City, as well as to all Santa Monica
water account holders, on January 5, 2015. Owners of record can submit written,
signed protests up to the close of the public comment period at the hearing date of
February 24, 2015. Absent a majority protest (which would be approximately 11,000
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protests), City Council may approve the final adoption of the rates at the public hearing.
As of February 18, 2015, there have been almost 950 protests received by the City
Clerk. Additionally, written notices of the rate increases were published in the Santa
Monica Daily Press at least once each week prior to the February 24 hearing. The
dates of publication were January 30, 2015 and February 6, 2015.
Community Outreach
Outreach efforts continue in an effort to engage the community in discussions about
proposed rate adjustments, the Sustainable Water Master Plan (SWMP), and the Water
Shortage Response Plan (WSRP). Staff from Public Works and the Office of
Sustainability and the Environment (OSE) conducted a community forum for the
business community and residents, "Let's Talk Water ", on November 24, 2014 at Ken
Edwards Center, and have presented drought and rate information at neighborhood and
business groups including North of Montana Association, Northeast Neighbors, Ocean
Park Association, Chamber of Commerce Government Affairs Committee, and the
Convention and Visitors Bureau Hotel Managers Group. City staff has also been
present at all of the recent Santa Monica Talks community forums.
Water Division staff continues to meet with the Water Advisory Committee to discuss
rate issues, conservation programs, and general water issues. Staff anticipates
continuing to meet with the Advisory Committee as future issues arise including
groundwater management planning and the development of the 2015 Urban Water
Management Plan.
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Financial Impacts & Budget Actions
The proposed water rates would increase annual water sales revenue by $577,983 in
FY 2014 -15. Adopting the attached resolution would require increasing the revenue
budget by $577,983 in account number 25671.402310.
The maximum projected discount to qualifying low income customers is approximately
$20,000 per year. The following budget action is required to reimburse the Water Fund:
1. Appropriation of budgets in the amount of $20,000 for transfers from the General
Fund (01695.570081) to the Water Fund (25695.570081).
Prepared by: Gil Borboa, P.E., Water Resources Manager
Approved:
Susan Cline
Interim Director of Public Works
Attachment:
A — Resolution
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Forwarded to Council:
f'�,-
Elaine M. Polachek
Interim City Manager
Reference:
Resolution No. 10867
(CCS)