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HomeMy WebLinkAboutBOARD MINUTES 01-30-03 125 MINUTES OF THE ADJOURNED REGULAR BOARD MEETING OF THE DISTRICT BOARD OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT HELD ON JANUARY 30, 2003 The District Board of the Central Contra Costa Sanitary District convened in an adjourned regular session at its regular place of meeting, 5019 Imhoff Place, Martinez, County of Contra Costa, State of California, at 2:00 p.m. on January 30, 2003. President Nejedly called the meeting to order and requested that the Secretary call roll. 1. ROLL CALL PRESENT: Members: Menesini, Hockett, Lucey, Boneysteele, Nejedly ABSENT: Members: None a. PLEDGE OF ALLEGIANCE TO THE FLAG Board and staff joined in the Pledge of Allegiance to the Flag. 2. PUBLIC COMMENTS None 3. BUDGET AND FINANCE a. FINANCIAL PLANNING AND POLICY WORKSHOP Mr. Charles W. Batts, General Manager, stated that the analogy of the perfect storm has been used to describe the confluence of events now facing the District, including the State of California budget crisis, employee salary and benefits agreement negotiations, rising retirement and health care costs, the economic downturn, new regulations, and an aging infrastructure. The Board is concerned, management is apprehensive, and employees are anxious; but the Board has positioned the District to weather the storm. Mr. Batts stated that the purpose of the workshop today is to review last year's Board workshop scenario; provide updated financial information; and receive Board direction with regard to the 2003-2004 Sewer Service Charge increase of $24, operating expenses and maintaining the near term response with future reports to the Board, deferral of certain large capital projects identified in the Capital Improvement Program into future years, and anticipation of the loss of ad valorem tax revenue and dealing with the future loss of that $7 million in revenue. Mr. Batts stated that staff has made certain assumptions: that the State will take ad valorem tax revenue from enterprise districts, that the District will lose ad valorem tax revenue after the time for the Proposition 218 notice of a rate increase to offset the loss of ad valorem tax revenue, that the full impact of the State budget crisis on other services is unknown at this time, and that the Board does not want to increase the Sewer Service Charge rates beyond the adopted $24 amount before the need is evident to the District's ratepayers. Future actions by staff anticipated as an outcome of this workshop will be to plan to implement the $24 Sewer Service Charge rate increase for 2003-2004; complete the District budgeting process continuing with the near term actions previously discussed with the Board, consider reductions if warranted and provide budget information to the City of Concord; proceed with the District budgeting and rate setting process providing for public input and hearing although no Proposition 218 notice is required for implementation of the $24 Sewer Service Charge increase previously approved by the Board; and consider the impact of loss of tax revenue and the process for a 2004-2005 rate increase. Mr. Batts reviewed the District goals and stated that the challenge will be to maintain responsible rates while providing excellent customer service and full regulatory compliance and continuing to be a high performance organization coupled with contract 01 30 03 126 negotiations and expectations and the anticipated loss of ad valorem tax revenue. The variables analysis provided to the Board while defined for each scenario, includes the Sewer Service Charge amount under the rates; revenue assumptions from other sources of revenue remain fixed in all scenarios with a decrease based on projected modest economic downturn, operating expense assumptions, and modification of the Capital Improvement Budget. Mr. Batts stated that like the State of California, the District is seeing impacts of this economic downturn in revenue. The City of Concord reimbursement of $8 million is down for future years due to the planned decrease in plant capital projects and operations and maintenance (O&M) savings implemented to offset the loss of ad valorem tax. The State budget deficit is estimated at $35 billion. That fact, coupled with a State report that indicates that enterprise districts should not receive tax funding makes it probable that enterprise districts will lose ad valorem tax revenue. If the $7 million ad valorem tax revenue is lost, it would be equivalent to a $46 increase in the District's Sewer Service Charge. Connection fees may be impacted by the economic downturn. Mr. Batts stated that housing starts remain strong. Connection fees exceeded expectations for last year but long-term projections are down. Residential Unit Equivalents (RUEs) estimated at 1,600 for 2002-2003 are projected to decrease to 1,300 in 2004-2005 and throughout the remainder of the ten-year planning horizon. The previous year's budget showed connection fees increasing to 2,000 RUEs in 2006- 2007. Interest income revenue will be slightly reduced due to decreased reserves and lower interest rates. Staff projects future interest rates to be 3 to 4 percent, with total interest revenue decreasing in future years as reserves shrink and as interest rates remain low. The District has met the requirements of the San Ramon settlement agreement and the developers have paid for facilities in the Dougherty Valley, and the approximate $3 million in interest for the bonds for the San Ramon Pumping Station upgrades is being reimbursed by the developers over the next several years. Mr. Batts reviewed a chart showing the 2002-2003 projected total District revenue of $63.2 million and draw from reserves of $3.9 million for a total of $67.1 million. Of that total, Sewer Service Charges comprise 56 percent, ad valorem tax comprises 11 percent, and the draw from reserves makes up 6 percent. Mr. Batts provided a comparison of the District's annual Sewer Service Charge of $248 with other agencies' annual charges ranging of $113 to $436, noting that when the $24 Sewer Service Charge increase is implemented in 2003-2004 the District's Sewer Service Charge of $272 will still be below the median. Many of the other agencies listed are expecting major increases in expenses and some will be impacted if ad valorem tax revenue is lost. In response to questions from Member Lucey, Mr. Batts stated that about half of the agencies listed receive ad valorem taxes and the other half do not. Some of the cities that receive ad valorem taxes put the funds directly into the General Fund. Mr. Batts stated that staff is reviewing other fees and charges, recalculating connection fees, updating developer service charges, and reviewing the overhead calculation. Staff will present the findings to the Board at a future Board Meeting and the Board could consider adoption of any proposed changes in the April/May timeframe. Mr. Batts reviewed the staff recommended scenario, Scenario 4. The following expense assumptions were made: . Limited filling of budgeted positions (near term budget response); . Using salary increases of 4 to 5 percent in future years (2.5 to 3 percent of that increase is for normal merit increases); . Using projected increased costs for employee benefits; . Using projected rates and costs for both utilities and chemicals; . Using a 3 percent general inflation factor; and 01 G..~. n...'... [11. c:..J 'iß 127 . Using the approved Capital Improvement Budget with $4 million removed from projected spending in 2002-2003 and $14 million deferred over the next three years. Mr. Batts indicated that there are some cost increases. A major increase in benefit costs is expected. Medical costs for 2003-2004 are up 20 percent, retirement costs are up 25 percent and other benefits such as Workers' Compensation and dental are going up as well. There is also concern over future energy and chemical costs. A general inflation factor has been assumed for other areas. Total projected District expenses for 2002-2003 are $67.1 million. Of that total, 58 percent is O&M, 37 percent is Capital, and 5 percent is debt service and the recycled water loan. Mr. Batts stated that a Board Capital Improvement Budget workshop is scheduled in the spring. In Scenario 4, the staff recommended scenario, the Capital Improvement Budget for the next two years is $38.3 million. Some major projects have been suspended at design and staff will be involved in smaller projects. Mr. Batts stated that the funds required/funds available conceptual model was introduced at the 1999 Board workshop to show the need for ample reserves. Staff is still trying to have the same result; that is to have funds available to create a soft landing. A soft landing concept is for annual rate increases that allow the District to meet its essential cash flow requirements. With rate increases, capital deferrals, and no ad valorem tax revenue, funds available are projected to approach funds required by June 2004 creating a cash flow issue. Mr. Batts stated that staff is asking the Board to approve the adopted $24 Sewer Service Charge increase for the coming year. Mr. Batts then reviewed scenarios for future years as set forth in the binder provided to the Board. Scenario 1 (prior year) contains last year's assumptions of a $24 Sewer Service Charge rate increase, projected full revenues, projected expenses based on known 2002 increases, Capital Improvement Budget with deferrals only as needed to get the San Ramon projects done, and projected modest future Sewer Service Charge increases. It was expected that as expenses grew modestly each year, there should be funds available to cover them. Scenario 2 (baseline) establishes a baseline assumptions at a $24 Sewer Service Charge increase, loss of ad valorem tax revenue, near term responses in 2002-2003 only, projected increases in employee benefits, and capital spending at projected levels from the November Capital Improvement Workshop. Mr. Batts stated that this scenario will not work. Mr. Batts displayed a chart showing Scenario 2 - Funds Available/Funds Required, and the devastating effect of the loss of ad valorem tax revenue on funds required. There have been a number of changes in 2003-2003. Connection fee revenue, Sewer Service Charge revenue, and ad valorem tax revenue were higher than budgeted in 2002-2003 and Capital spending and O&M spending were less than budgeted. In addition, $15 million in bond proceeds were added to the Sewer Construction Fund. However, employee benefits increases, a decrease in interest income, and lower Concord O&M and Capital billings have had an unfavorable impact. The total net favorable effect was $9.5 million over what was expected last year. Scenario 3 (one year rate increase) is the baseline (Scenario 2) with a one-year Sewer Service Charge rate increase of $72 in 2004-2005, loss of ad valorem tax revenue, projected expenses with no reductions, Capital Improvement Plan with deferrals this year only and projected Capital Improvement Budgets in the future, based on the discussion in the November workshop, and projected modest Sewer Service Charge increases in the future. This scenario is based on raising rates the first year of the tax loss an amount necessary to eliminate the need for any O&M or Capital reductions. Scenario 4 (phased rate increases with budget cuts), the staff-recommended scenario, is the baseline (Scenario 2) with phased rate increases in 2004-2005, 2005-2006, and 2006-2007 and the staff assumptions as stated earlier. Scenario 4 assumes a $32 Sewer Service Charge rate increase for three years, the loss of ad valorem tax revenue, projected expenses with benefits increases offset by continued near term deferrals for the next three years beginning in 2004-2005, Capital project deferrals for a three-year 01 30 03 128 period, and the expectation that the District would return to full O&M and Capital expenditures in the fourth year. Mr. Batts stated that even though this will not be considered until next year's Board workshop, staff believes that this is what would be favorably received by the District's ratepayers. Mr. Batts presented the staff recommendation to: . Implement the $24 Sewer Service Charge increase for 2003-2004; . Defer $4 million in Capital projects in the current fiscal year (2002-2003) and implement the near term response for O&M discussed previously with the Board; . Anticipate the loss of ad valorem tax revenue; . Reduce the Capital Improvement Budget $14 million over the next three years; . Continue O&M savings over the same period of time; and . Consider future Sewer Service Charge rate increases at the 2004 Board Budget Workshop. Future staff actions will include: . Meet with Board Committees on continuing near term response; . Proceed with development of District budget based on Board input; . Provide rate and budget information to ratepayers in spring edition of Pipeline newsletter; . Develop appropriate rate setting process; and . Update Board on State budget developments that impact the District. Mr. Batts stated that he does not believe the District will go down with the ship. He believes that the District has the resources to respond to this crisis in a way that is favorable to the District's ratepayers and customers. Member Lucey stated that the District's connection fees are much lower than other nearby agencies. Member Lucey suggested that an outside consultant be retained to help review the connections fees and overhead calculation. Member Lucey stated further that the potential costs and benefits of changing from the County Retirement System to PERS should be investigated. Member Lucey emphasized that he is only interested in the PERS alternative if the District's employees do not lose. Finally, Member Lucey stated that the term "funds required" is being used. Member Lucey stated that he understands what is meant, but it must be understood that the final decision will be made by the Board. Mr. Batts agreed, stating that the use of the terms "funds available/funds required" is simply a cash flow analysis. This number floats based on expenses and revenues and future projections. Mr. Batts stated that PERS is another alternative that can be investigated. Mr. Randy Musgraves, Director of Administration, looked into this with another agency and understands that it is possible to transfer to PERS but the District would still owe the County Retirement System for the unfunded liability. That unfunded liability is approximately $15 million. Mr. Batts stated that an analysis of the District's overhead calculation is being done now. With regard to connection fees, there are other agencies with considerably higher connection fees. Ms. Ann Farrell, Director of Engineering, has contacted an outside consultant to look at that to determine if an increase is appropriate. 01 GJ.) f Ù cJ)\LJ P...'.'.\ ~,,1 '!..Y 129 Mr. Kenton L. Aim, Counsel for the District, excused himself and left the meeting at the hour of 2:35 p.m. President Nejedly stated that the District and the City of Concord are partners, and he asked Mr. Mike Vogan, Director of Public Works for the City of Concord, if he had any comments. Mr. Mike Vogan, Director of Public Works for the City of Concord, stated that the City is facing the same issues as the District with regard to the State budget crisis although the District has the disadvantage of losing its ad valorem tax revenue. Mr. Vogan stated that he works closely with District staff and has discussed the projections with them. Mr. Vogan stated that from his perspective, the things being discussed by the District are appropriate. Mr. Vogan agreed that implementing rate increases on a periodic basis is more prudent than a larger rate increase every several years. The City is running slightly behind the District and projects a $24 rate increase for the coming year but may be able to reduce that because capital projects were deferred in the past and cash flow turned out to be better than expected. The City of Concord Annual Sewer Service Charge is now $222. For many years, the City of Concord connection fee was $1,750. Last year an analysis was done and the connection fee was raised to $3,500 although the analysis showed that it could be raised to $8,000. The City of Concord is in PERS and has one of the best plans offered by PERS. The City just received a bill from PERS for an additional $1.5 million and next year a bill for an additional $1.6 million is expected. President Nejedly thanked Mr. Vogan for his comments. President Nejedly stated that it is unfortunate that the District does not know if the ad valorem tax revenue will be taken away. President Nejedly stated that if it is taken away, he does not see any other alternative except cost cutting and that is difficult if this District is to be run correctly. The District cannot cut 11 percent from its budget and continue to run at the standard expected by our ratepayers. President Nejedly stated that he would support the staff recommendation. The Board must trust staff to weigh the risks and recommend appropriate actions. The District is being hit with higher retirement and medical costs but so is everyone else. It is recommended that $14 million in Capital projects be deferred over the next three years but there may be some projects that may have to be done sooner. O&M savings should be an every day operation and watched continually. President Nejedly stated that he supports the staff recommendation. It is unfortunate that a gray cloud of the possible loss of ad valorem tax revenue is hanging over the District. Discussion followed with regard to prioritization of projects and factors considered when recommending deferral of a project, the economic slowdown and its impact on connection fees, and the likelihood that the District will lose its ad valorem tax revenue and the need to advise the ratepayers if and when that occurs. The Board commended staff on the excellent work that went into preparing the informational material distributed in advance of the meeting. BREAK None 4. REPORTS There were no reports or announcements. 5. EMERGENCY SITUATIONS REQUIRING BOARD ACTION None 6. ANNOUNCEMENTS/SUGGESTIONS FOR FUTURE AGENDA ITEMS None 01 30 03 130 7. CLOSED SESSION a. LABOR NEGOTIATIONS The closed session to discuss labor negotiations pursuant to Government Code Section 54957.6 was not held 8. REPORT OF DISCUSSIONS IN CLOSED SESSION None 9. ADJOURNMENT There being no further business to come before the Board, President Nejedly adjourned the meeting at the hour of 3:05 p.m. ~he ~~a~¡;~ors, Central Contra Costa Sanitary District, County of Contra Costa, State of California COUNTERSIGNED: Se r ta of the Central on Costa San ary District, County of Contra Costa, State of California 01 30 0'" '.'), '."\ '.,",'. .t, , .'i (.)