City Council

City of Sebastopol City Council Meeting Rate Studies Presentation April 23, 2024  Agenda Utility Financial Plan Options Study Results • Water Rates • Wastewater Rates Bill Impacts and Bill Comparisons Next Steps 2  Key Points on Proposed Utility Rates Proposed three-tier water use rate alternative for Single Family Residential Customers- improves affordability at low-to average use and provides a conservation price signal Maintaining approximately 50% fixed cost revenue recovery provides the City with revenue stability. Wastewater fixed charges are differentiated by wastewater flow patterns at each meter size to improve fairness and better align with how costs are incurred between wastewater users Tiered water use rates, along with updated wastewater rates, moderates impacts to Single Family Residential customers with combined utility service (Greater than 75% of the customer base) 3  Nearby Utility Comparison – Combined Water and Wastewater Service Total Monthly Bill Agency Water (1) Wastewater (2) (FY 2024-2025) Rohnert Park(3) $55.28 $51.62 $106.90 Windsor(3) $29.93 $78.91 $108.84 Sebastopol (Current) $45.01 $69.24 $114.24 Santa Rosa $46.62 $75.77 $122.39 Petaluma $51.05 $79.26 $130.31 Cloverdale $79.18 $57.06 $136.24 Cotati $50.10 $90.54 $140.64 Sebastopol Option 2 $57.77 $94.04 $151.80 Sebastopol Option 1 (Staff Recommended) $63.22 $103.45 $166.67 Healdsburg $82.28 $110.33 $192.61 St. Helena $115.27 $134.49 $249.76 Calistoga $161.08 $132.80 $293.88 1) Average water use of 4,500 gallons per month 2) Average winter water use of 3,000 gallons per month 4 3) Rohnert Park and Windsor are currently conducting rate studies  Rate Study Terms • Financial Plan: How much money is needed each year to provide safe drinking water and to collect and treat wastewater • Cost of Service: How utility costs are divided between classes of customers based on who is responsible for paying for what • Rate Design: How different users pay for the cost to serve their water and wastewater service • Fixed Charge: Charge that is the same each billing period and does not vary by the amount of water or wastewater used • Variable Charge: Charge that varies by the amount of water or wastewater used • CIP: Capital Improvement Plan for reinvestment in utility infrastructure • Revenue Increase – the amount of revenue the water or wastewater fund require to be financially sustainable, this is different than a rate increase 5  Rate Study Terms (Continued) • Customer Class / Rate Class: customer types based on land use, demand patterns, and/or connection size • SFR: Single Family Residential customer class • Irrigation: customers with a metered connection dedicated to outdoor landscaping • Commercial: All connections not classified as SFR or Irrigation providing domestic water service • Proposition 218: California’s legal framework for developing, adopting, and implementing utility rates 6  Establishing Rates Data + Principles Guide Our Work 7 Data drives the 05 Rate Adoption rate study process Send notice to customers and host a public hearing 04 Study Documentation Provide documentation and study report; Review of rates by legal counsel 03 Rate Design Conduct cost of service and evaluate rate alternatives; conduct rate calculations and customer impact analyses 02 Financial Plan Evaluate operating and capital costs; conduct cash flow and scenario analysis 01 Rate Setting Framework Identify financial goals, pricing objectives, and alternative rate structures for evaluation  Guiding Principles Financial Stability The City must meet water and wastewater system financial obligations from its own rate revenues; the utility enterprises should be sustainable over time Affordability of Service and Conservation Allow customers to have more control over their bill and an incentive to conserve Equitability Fairness in rates between existing customers based on their use of the systems; and fairness between current and future users 9  Financial Plans 10  Financial Plan Elements CAPITAL PROJECT FUNDING Funding Mix Debt (Cash vs. Debt) Covenants FINANCIAL PLAN INPUTS • Customer connections • Billed water use ANNUAL CASH FLOW ANNUAL REVENUE • Revenues REQUIREMENTS • Operating expenses • Capital plan • Beginning cash position FISCAL POLICIES AND TARGETS Cash Debt Service Reserves Coverage 11  Long-Range Financial Plan Drivers Inflationary Pressures Supply and Treatment Costs Cash Reserves Future Borrowing Terms & Baseline Water Capital Reinvestment Assumptions Sales Estimates 12  Aging Water and Sewer Infrastructure 13  Reserves Policy Discussion • Maintain a minimum Operating Reserve level of 25% (Operating expenses plus debt service), which represents 90 days of cash • 90 days of cash is considered the lowest threshold allowed for future access to credit • Considering the bi-monthly billing cycle, a higher minimum should be explored in the next rate cycle This Recommendation: Aims to be a starting point for getting the enterprise funds back on track Helps to mitigate otherwise higher rate increases 14  Enterprise Fund Cash and Cash Flows FY 2023-24 Water Wastewater Revenue $2,417,972 $3,107,820 Operations & Maintenance Expenses $2,720,000 $3,868,640 Net Revenue -$302,028 -$760,820 Debt Service $380,704 $178,656 Cash-Funded Capital $530,000 $542,000 Net Cashflow -$1,212,732 -$1,481,476 July 1, 2023 Beginning Cash Balance $1,225,855 $392,668 June 30, 2024 Projected Ending Cash Balance $13,123 -$1,088,808 15  Financial Plan Options • Option 1: Baseline • Option 2: Lower Service Level › Best engineering judgment › Minimum service levels › Staff-preferred option › CIP is at an even lower level than Option 1 but “can live with” for now › CIP is minimum but based on best but still includes master plan. engineering judgment at current › No staffing addition in year 5 but “can – Future Master Plan studies will better live with” for now inform long-term CIP › Wastewater: Pays back GF loan and › Staffing increase is needed based on meets or works towards minimum best Public Works judgment 25% operating reserve › Wastewater: Pays back GF loan and › Increases risks of system failures meets or works towards minimum and more frequent service 25% operating reserve interruptions 16  Water Baseline Option 1 $1.8 Reserve Balance Millions $1.6 $1.4 $1.2 $1.0 $0.8 Fiscal Year Revenue *Planned $0.6 $0.24 Adjustment Bonds $0.4 $0.2 FY 2024-25 50.0% $0 $0.0 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2025-26 16.0% $0 Ending Balance Minimum Balance Alert Balance FY 2026-27 1.5% $3,758,846 Water CIP Funding FY 2027-28 1.5% $0 $4.5 $4.1 Millions $4.0 FY 2028-29 1.5% $0 $3.5 $3.0 $2.5 $2.0 *Presumes debt is issued for the Well #4 $2.0 $1.5 $1.2 replacement project. $1.0 $0.8 $0.9 $0.5 $0.0 Rate Funded Capital Debt Funded Capital FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Total CIP Average CIP Excluding Well 4 17  Water Lower Service Level Option 2 Reserve Balance Fiscal Year Revenue Planned $2.0 Millions Adjustment Bonds $1.8 $1.6 FY 2024-25 37.0% $0 $1.4 $1.2 FY 2025-26 4.0% $0 $1.0 $0.8 FY 2026-27 4.0% $3,758,846 $0.6 $0.4 FY 2027-28 3.5% $0 $0.2 $0.0 FY 2028-29 3.5% $0 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Ending Balance Minimum Balance Alert Balance Presumes debt is issued for the Well #4 replacement project. 18  Water Revenue Increase Comparisons FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Sebastopol – Baseline Option 50% 16% 1.5% 1.5% 1.5% Sebastopol – Lower Service Option 37% 4% 4% 3.5% 3.5% Healdsburg 21% 20% 13% 12% 12% St Helena 28% 8% 8% 8% 8% Calistoga 50% 12% 10% 6% 6% Cloverdale 12% 12% - - - City of Sonoma 5% 5% 5% 5% 5% Rohnert Park 5% 5% 5% - - Santa Rosa 4% - - - - Windsor Study in Progress 19  Wastewater Baseline Option 1 Fiscal Year Revenue GF Reserve Balance Adjustment Loan $1.8 Repayment Millions $1.6 $1.4 FY 2024-25 65.0% $1.2 $1.0 $0.8 FY 2025-26 14.0% $0.6 $0.61 $0.62 $0.48 $0.09 $0.4 FY 2026-27 11.0% $237,746 $0.2 $0.0 FY 2027-28 11.0% $237,746 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Ending Balance Minimum Balance Alert Balance FY 2028-29 2.0% $237,746 Presumes a ~$1.1M loan from the general fund, repaid over 5 years, with 3% interest, starting in FY2026-27 ($237,746/yr). 20 If 0% interest, could reduce the FY2027-28 revenue adjustment from 11% to 10%.  Wastewater Lower Service Level Option 2 Fiscal Year Revenue GF Reserve Balance Adjustment Loan $1.6 Repayment Millions $1.4 $1.2 FY 2024-25 50.0% $1.0 $0.85 $0.8 $0.37 $0.75 FY 2025-26 11.0% $0.6 $0.4 FY 2026-27 10.0% $237,746 $0.2 $0.0 FY 2027-28 10.0% $237,746 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 Ending Balance Minimum Balance Alert Balance FY 2028-29 10.0% $237,746 Presumes a ~$1.1M loan from the general fund, repaid over 5 years, with 3% interest, starting in FY2026-27 ($237,746/yr). 21 If 0% interest, could reduce the FY2028-29 revenue adjustment from 10% to 9%.  Wastewater Revenue Increase Comparisons FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Sebastopol – Baseline Option 65% 14% 11% 11% 2% Sebastopol – Lower Service Option 50% 11% 10% 10% 10% Healdsburg 18% 18% 15% 9% 5% St Helena 50% 4% 4% 4% 4% Calistoga 35% 25% 3% 3% 3% Cloverdale 10% 10% - City of Sonoma - - - - - Rohnert Park Study in Progress Santa Rosa 2% - - - - Windsor Study in Progress 22  Why We Need Immediate, Large Increases • Current rate revenue does not • Water minimum reserve must be meet Operating needs (O&M + met before going for debt funding Debt Service costs): • Wastewater needs to be able to › Water requires > 25% increase repay General Fund borrowing › Wastewater requires >30% • Need additional staff to improve increase maintenance and save money on • Even higher increases are needed more costly, emergency repairs to meet capital spending and minimum reserves 23  Why Option 1 is Staff’s Recommendation • Immediately addresses the operating deficit • Provides funding for necessary capital expenditures on aging infrastructure • Provides funding for preventative maintenance to reduce system failures and emergency repairs • Reduces financial risk and systems risk • Establishes self-sustaining enterprise funds 24  Cost of Service and Rate Design Water 25  Financial Plan vs. Cost of Service Financial Plan vs. Cost of Service Financial Plan Cost of Service 26  Fixed & Variable Revenue Recovery - Water Current Share of Water Rate Revenues • Currently 48% fixed and 52% variable • No proposed changes to fixed revenue recovery to ensure Fixed Water revenue stability Charges Water Use › Rates designed to keep the Charges percentage of revenue from fixed charges the same 27  Single Family Residential Proposed Water Use Rate Structure Modifications TIER 1 TIER 2 TIER 3 0 - 7 kgal 8 – 16 kgal > 16 kgal Current Structure Average winter Peak summer use for Water use (Uniform) water use Single Family beyond Tier 2 customers 1 kgal = 1,000 gallons (approximately 20 bathtubs) 28  Proposed Single Family Residential Water Use Rates (Baseline Option 1) Current FY 2023-24 Rate FY 2024-25 Rate Water Use Charges ($/kgal) Water Use Charges ($/kgal) Tier 1 (0-7 kgal) $5.48 Uniform Rate (All Units) $4.52 Tier 2 (8-16 kgal) $6.99 Tier 3 (>16 kgal) $9.71 29  Proposed Non-Residential Water Use Rates (Baseline Option 1) Current FY 2023-24 Rate FY 2024-25 Rate Water Use Charges ($/kgal) Water Use Charges ($/kgal) Commercial $4.52 Commercial $6.03 Irrigation $4.52 Irrigation $10.86 Customer Classes are defined and charged based on their demand characteristics 30  Water Use Rate Comparison ($/kgal) – Year One Baseline Lower Service Customer Class Option 1 Option 2 Residential Tier 1: 0 – 7 kgal $5.48 $5.01 Tier 2: 8 – 16 kgal $6.99 $6.39 Tier 3: > 16 kgal $9.71 $8.87 Commercial $6.03 $5.51 Irrigation $10.86 $9.92 31 Five-Year Schedule of Water Rates – Baseline Option Rate Schedule - Fixed Bi-Monthly Meter Size Current 7/1/2024 7/1/2025 7/1/2026 7/1/2027 7/1/2028 5/8"x3/4" & 3/4" $49.33 $74.10 $85.96 $87.25 $88.56 $89.89 1" $82.41 $122.57 $142.19 $144.33 $146.50 $148.70 1.5" $164.13 $243.71 $282.71 $286.96 $291.27 $295.64 2" $262.77 $389.09 $451.35 $458.13 $465.01 $471.99 3" $575.37 $849.44 $985.36 $1,000.15 $1,015.16 $1,030.39 4" $821.78 $1,527.87 $1,772.33 $1,798.92 $1,825.91 $1,853.30 Note: Single family with 1” meters for fire service are charged at the ¾” rate. Rate Schedule – Water Use ($/kgal) Customer Class Current 7/1/2024 7/1/2025 7/1/2026 7/1/2027 7/1/2028 Residential Tier 1: 0 - 7 kgal $4.52 $5.48 $6.36 $6.46 $6.56 $6.66 Tier 2: 8 - 16 kgal $4.52 $6.99 $8.11 $8.24 $8.37 $8.50 Tier 3: > 16 kgal $4.52 $9.71 $11.27 $11.44 $11.62 $11.80 Commercial $4.52 $6.03 $7.00 $7.11 $7.22 $7.33 Irrigation $4.52 $10.86 $12.60 $12.79 $12.99 $13.19  Single Family Water Bill Impact – Year One Single Family Water Bi-Monthly Bill, 5/8"x3/4" $250.00 $200.00 $150.00 $100.00 $50.00 $0.00 Very Low Low Medium High Very High Current Bill $58.37 $71.93 $90.01 $108.09 $144.25 Baseline Option 1 $85.06 $101.50 $126.44 $154.40 $223.92 Lower Service Level Option 2 $77.70 $92.73 $115.53 $141.09 $204.61 Current Bill Baseline Option 1 Lower Service Level Option 2 33  Commercial Water Bill Impact – Year One Commercial Water Bi-Monthly Bill, 5/8"x3/4" $250.00 $200.00 $150.00 $100.00 $50.00 $0.00 Low Medium High Current Bill $58.37 $90.01 $171.37 Baseline Option 1 $86.16 $128.37 $236.91 Lower Service Level Option 2 $78.70 $117.27 $216.45 Current Bill Baseline Option 1 Lower Service Level Option 2 34  Irrigation Water Bill Impact – Year One Irrigation Water Bi-Monthly Bill, 1.5" $1,400.00 $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 $0.00 Low Medium High Current Bill $209.33 $390.13 $616.13 Baseline Option 1 $352.31 $786.71 $1,329.71 Lower Service Level Option 2 $321.79 $718.59 $1,214.59 Current Bill Baseline Option 1 Lower Service Level Option 2 35  Cost of Service and Rate Design Wastewater 36 Wastewater Cost Of Service Analysis 37  Fixed & Variable Revenue Recovery - Wastewater Current Share of Wastewater Rate Revenues • Currently 48% fixed and 52% variable • No proposed changes to fixed revenue recovery to ensure revenue stability Fixed Wastewater › Rates designed to keep the Wastewater Flow Charges percentage of revenue from fixed Charges charges the same 38  Proposed Rate Structure Modifications • Currently fixed charges are Current Proposed Meter Size Ratio Ratio differentiated by the size and capacity of the water meter 5/8”x3/4” & 3/4" 1.00 1.00 • Proposed fixed charges will be differentiated based on actual 1” 1.37 2.71 wastewater flow patterns at each 1.5” 3.33 6.90 meter size • This proposal will improve fairness 2” 5.33 8.83 and better align with how costs are 3” 11.67 21.98 incurred between wastewater users 4” 21.00 66.22 39 Five-Year Schedule of Wastewater Rates – Baseline Option 1 Fixed Bi-Monthly Charge Meter Size Current 7/1/2024 7/1/2025 7/1/2026 7/1/2027 7/1/2028 5/8x3/4" & 3/4" $76.61 $104.78 $119.45 $132.59 $147.18 $150.13 1" $127.97 $284.18 $323.97 $359.61 $399.17 $407.16 1.5" $254.86 $722.92 $824.13 $914.79 $1,015.42 $1,035.73 2" $408.03 $925.13 $1,054.65 $1,170.67 $1,299.45 $1,325.44 3" $893.44 $2,303.19 $2,625.64 $2,914.47 $3,235.07 $3,299.78 4" $1,276.06 $6,937.89 $7,909.20 $8,779.22 $9,744.94 $9,939.84 Volumetric Rate, $/kgal Current 7/1/2024 7/1/2025 7/1/2026 7/1/2027 7/1/2028 All Customer Classes $10.31 $17.02 $19.41 $21.55 $23.93 $24.41  Single Family Average Wastewater Bill – Year One Wastewater Bi-Monthly Bill, Winter Average 6 kgal, 5/8"x3/4" $300.00 $250.00 $206.90 $188.07 $200.00 $138.47 $150.00 $100.00 $50.00 $0.00 Current Baseline Option 1 Lower Service Level Option 2 41  Single Family Combined Bill, FY 2024-25 Combined Bi-monthly Bill, Typical Single Family, 5/8x3/4" (water = 9 kgal, sewer = 6 kgal) $400.00 $333.34 $350.00 $303.60 $300.00 $250.00 $228.48 $206.90 $200.00 $188.07 $150.00 $138.47 $100.00 $126.44 $115.53 $50.00 $90.01 $0.00 Current Baseline Option 1 Lower Service Level Option 2 Water Wastewater 42  Next Steps 43  Rate Study Next Steps 1 2 3 4 5 Notice Postmark 45 Day protest Hold Public Year One Rate date by period Hearing to Implementation Request Council receive public approve starting May 3 May 3 through comments, July 1, 2024 the Prop 218 June 18 count protests, process and consider adoption of April 23 City water and Council wastewater Meeting rates June 18 City Council Meeting 44  Suggested Motion • Move to › Accept the Staff recommended Water Baseline financial plan and associated rates › Accept the Staff recommended Wastewater Baseline financial plan and associated rates › Direct Staff to proceed with Proposition 218 notification and rate implementation processes › Schedule a Public Hearing for June 18, 2024 • Or, › Accept the alternative Water Lower Service Level financial plan and associated rates › Accept the alternative Wastewater Lower Service Level financial plan and associated rates › Direct Staff to proceed with Proposition 218 notification and rate implementation processes › Schedule a Public Hearing for June 18, 2024 • Or, › Direct staff to return with alternative rate proposals. Note that doing so will affect the schedule for the public hearing date. 45  Thank you Contacts: Kevin Kostiuk / kkostiuk@raftelis.com Melissa Elliott / melliott@raftelis.com Theresa Jurotich / tjurotich@raftelis.com 46