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HomeMy WebLinkAbout01. Financial Planning Workshop No. 2 Page 1 of 99 Item 1. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETINGDATE: JANUARY15, 2019 SUBJECT: FINANCIAL PLANNING WORKSHOP IN WHICH THE FOLLOWING WILL BE PRESENTED AND DISCUSSED: • PROPOSED FISCAL YEARS 2019-20 AND 2020-21 CAPITAL IMPROVEMENT BUDGETS AND CORRESPONDING UPDATED 10- YEAR CAPITAL IMPROVEMENT PLAN; • REPORT ON CAPITAL PROJECT BUDGET ISSUES/TRANSFERS; • COST OF SERVICE UPDATE, INCLUDING PROPOSED CHANGES TO CERTAIN NON-RESIDENTIAL SEWER SERVICE CHARGE CUSTOMER CATEGORIES; • UPDATED OPERATIONS AND MAINTENANCE BUDGET ASSUMPTIONS; AND • SEWER SERVICE CHARGE AND RECYCLED WATER RATE IMPACT SCENARIOS AND PROPOSED IMPLEMENTATION SCHEDULES SUBMITTED BY: INITIATING DEPARTMENT: DANEA GEMMELL, PLANNING AND ENG-PDS-DIVISION MANAGER DEVELOPMENT SERVICES DIVISION MANAGER PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION REVIEWED BY: JEAN-MARC PETIT, DIRECTOR OF ENGINEERING AND TECHNICAL SERVICES ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE This workshop is a follow-up to the November 1, 2018 Financial Planning Workshop and addresses Sewer Service Charge (SSC) and Recycled Water (REW) rate issues and outlook. Staff will present January 15, 2019 Special Board Meeting Agenda Packet- Page 3 of 101 Page 2 of 99 updated information for the Board of Directors' (Board) consideration on the following: 1. Proposed Fiscal Year(FY) 2019-20 and FY 2020-21 Capital Improvement Budgets (CI B) and 10- Year Capital Improvement Plan (CIP); 2. Report on capital budget issues/transfers; 3. Cost of Service update, including proposed changes to certain non-residential SSC customer categories; 4. Operations and Maintenance (O&M) Budget assumptions; and 5. Report on capital budget issues/transfers. Staff will also present updated SSC and REW rate impact scenarios and proposed rate implementation schedules. Upon conclusion of the presentation, staff will be requesting Board direction on proposed changes in the SSC non-residential customer categories, establishing the rate schedule for future SSC and REW rate increases, select a preferred rate scenario for purposes of preparing Proposition 218 notices, and confirm the proposed rate cycle timetable, including holding a public hearing on rate increases on April 18, 2019. BACKGROUND Central San's long-term financial plan is updated at least annually and discussed with the Board. Attached are two presentations: 1. The first presentation provides an overview of the proposed Cl B for the next two years and changes to the 10-Year Cl P. It also provides an analysis of capital project budget transfers to date, and overviews certain planned process changes. 2. The second presentation is the most comprehensive in that it provides updates on the 2015 Cost of Service study and includes proposed changes in the SSC customer categories for certain non- residential customers. This presentation also provides updated O&M budget assumptions, updated rate impact scenarios and proposed implementation schedules. Capital Projects - Budget Transfers (Attachment 1) With regard to capital improvement program updates and budget transfer issues, staff has conducted a review of budget transfers since FY 2016-17 in response to certain Board expressed concerns about these transfers. Project budgets are set prior to the availability of all information about the projects, including ultimately bid costs. Budget transfers have been a way to authorize necessary spending per project in the context of these individual project budgets. The first presentation provides an analysis of the transfers to date, and overviews certain planned process changes. Cost of Service Study (Attachment 2) With regard to the Cost of Service update, the prior Cost of Service Study was conducted in FY 2014-15. Since then, projected capital spending levels have changed, and treatment plant flow levels between residential and non-residential customer classes have changed. Additionally, staff has worked with rate consultant, Raftelis &Associates, to explore alternatives to simplify Central San's non-residential customer rate structures and to better align them with practices found at peer agencies. The attached presentation summarizes issues found in the Cost of Service update and outlines the proposed changes to the non- residential customer classes. Financial Plan Update (Attachment 2) With regard to the financial plan update, staff has updated the long-term financial plan and has developed various rate scenarios to share with the Board. Updates to the spending profile for O&M and capital have been entered into the financial model. O&M updates will be highlighted in the presentation; the transition to CalPERS healthcare on July 1, 2019 will allow another year of not just flat, but anticipated reduced O&M spending. Proposed capital spending has been reduced in the next couple of years, shifting spending January 15, 2019 Special Board Meeting Agenda Packet- Page 4 of 101 Page 3 of 99 further out in the 10-Year CI P, helping reduce near-term rate pressure. Several alternatives for the size and duration of required rate increases above the projected inflation level will be presented, along with resultant required debt issuances. Proposed recycled water rates, with a planned 3% increase, are also overviewed. ALTERNATIVES/CONSIDERATIONS With regard to the update on the capital improvement program and report on budget transfers, the Board can provide feedback on analysis provided, or request additional analysis be conducted. With regard to the Cost of Service Study updates and the resultant SSC non-residential customer categories, the Board could direct staff to maintain the status quo, adopt staff's recommended updates or provide some other direction to staff. With regard to the financial forecasts update and rate outlook, the Board can provide direction that staff should focus on one of the scenarios for implementation for the next fiscal year or years; or request that additional scenarios be developed. FINANCIAL IMPACTS Key Issues Regarding Cost of Service Cost of Service issues address the overall revenue requirement, how those costs are allocated between customer classes, and how those costs are recovered from each class. The presentation will provide information on the following key issues: 1. Due to changes in usage patterns, there is a shift of costs from residential to commercial customers. 2. Proposed changes to certain non-residential customer classes are designed to be revenue neutral to Central San overall, but individual customer charges can increase or decrease substantially as a result of reclassification from an old to a new class. Key Issues Regarding Rate Impact Scenarios The updated financial plan scenarios show alternative paths for Central San's rates and debt issuances. Assuming specified spending levels, the key issues for Board guidance are: 1. Early years require rate increases above inflation as a result of the ramp-up in capital spending. How much above inflation, and how long they persist are policy matters for the Board to decide. Staff will present three primary alternatives: Scenario 1 - Low(5.25%), Scenario 2 - Medium (7%), and Scenario 3 - High (12%). 2. The size and duration of the rate increases affect the need for debt. Further, if Central San succeeds in obtaining State Revolving fund (SRF)funding, the required debt amounts can be lowered (or subsequent rate increases reduced). The timing of and impact of potential SRF funding will be discussed during the presentation. It should be noted that changes to the customer rate categories, as well as changes in the revenue requirement, can have an additive or offsetting effect depending on customer class. In this instance, the increasing revenue requirement affects all customer classes, but a shift in cost from residential to non- residential customers means that residential customers will see moderated rate adjustments, but non- residential customers will see amplified rate adjustments. The presentation will highlight these changes, and alternatives to mitigate the magnitude of the rate increases for certain non-residential customer classes. January 15, 2019 Special Board Meeting Agenda Packet- Page 5 of 101 Page 4 of 99 COMMUNITY OUTREACH Central San takes its responsibility to provide customers with clear and detailed information on proposed rate changes very seriously. These outreach efforts far exceed the requirements of Proposition 218, including: • Providing an expanded Proposition 218 notice that is more readable, engaging, and accessible to customers by including graphics, maps, locations of projects and summarizing information • Incorporating the notice of the proposed rate increase and public hearing in the Pipeline newsletter in an effort to reach additional customers, including both property owners and tenants • Receiving protests and customer rate inquires through traditional mail, email, fax, and hosting a Community Information Line • Publishing a calendar of rate related events, holding public workshops, distributing Proposition 218 notices that comprehensively describe the proposed rate changes, and holding a public hearing regarding the changes Central San also publishes comprehensive budget documents describing the proposed change in revenue requirements. Additionally, Central San will conduct specific outreach to customers that would be affected by the proposed changes in SSC rate categories. The presentation will describe the planned outreach for this rate cycle. COMMITTEE RECOMMENDATION No Committee recommendation was sought for these matters. Given their agency-wide significance, they have been brought forward for discussion with the entire Board. RECOMMENDED BOARD ACTION Take action by motion or provide direction to staff with respect to each of the following items, which may include directing staff to bring back any or all of these items for consideration at a future meeting: 1. With regard to changes to the SSC non-residential customer categories and shift in cost from residential to non-residential customer as a result of the updated Cost of Service study results, direct staff to: • Maintain the categories and cost allocations as at present; • Adopt staff's recommended updates; or • Provide some other direction to staff. 2. Establish whether the rate schedule will be for one year, two years (staff recommendation), or a longer period. 3. For purposes of preparing Proposition 218 notices, select preferred rate scenario for: • Sewer Service Charge; and • Recycled Water Charge. 4. Consider proposed rate cycle timetable, including holding public hearing on rate increases on April 18, 2019, and provide direction to staff as to how to proceed. January 15, 2019 Special Board Meeting Agenda Packet- Page 6 of 101 Page 5 of 99 Strategic Plan Tie-In GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct long-range financial planning, Strategy 2- Manage costs ATTACHMENTS: 1. Presentation - Capital Update and Review of Budget Issues/Transfers 2. Presentation— Cost of Service Update; Update on O&M Assumptions, Capital Budget/Plan, and Rate Impact Scenarios January 15, 2019 Special Board Meeting Agenda Packet- Page 7 of 101