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HomeMy WebLinkAboutCAPITAL PROJECTS AGENDA 12-08-10 SPECIAL MEETING OF THE BOARD OF DIRECTORS: CENTRAL CONTRA COSTA MICHAEL R. MCGILL SANITARY DISTRICT President BARBARA D. HOCKETT CAPITAL PROJECTS COMMITTEE President Pro Tem GERALD R. LUCEY MARIO M. MENESINI Chair McGill JAMES A. NEJEDLY Member Menesini PHONE: (925) 228-9500 FAX: (925) 676-7211 www.centralsan.org Wednesday December 8, 2010 3:00 p.m. Second Floor Conference Room 5019 Imhoff Place Martinez, California INFORMATION FOR THE PUBLIC ADDRESSING THE COMMITTEE ON AN ITEM ON THE AGENDA Anyone wishing to address the Committee on an item listed on the agenda will be heard when the Committee Chair calls for comments from the audience. The Chair may specify the number of minutes each person will be permitted to speak based on the number of persons wishing to speak and the time available. After the public has commented, the item is closed to further public comment and brought to the Committee for discussion. There is no further comment permitted from the audience unless invited by the Committee. ADDRESSING THE COMMITTEE ON AN ITEM NOT ON THE AGENDA In accordance with state law, the Committee is prohibited from discussing items not calendared on the agenda. You may address the Committee on any items not listed on the agenda, and which are within their PUBLIC COMMENTS jurisdiction, under . Matters brought up which are not on the agenda may be referred to staff for action or calendared on a future agenda. AGENDA REPORTS Supporting materials on Committee agenda items are available for public review at the Reception Desk, 5019 Imhoff Place, Martinez. Reports or information relating to agenda items distributed within 72 hours of the meeting to a majority of the Committee are also available for public inspection at the Reception Desk. During the meeting, information and supporting materials are available in the Conference Room. AMERICANS WITH DISABILITIES ACT In accordance with the Americans With Disabilities Act and state law, it is the policy of the Central Contra Costa Sanitary District to offer its public meetings in a manner that is readily accessible to everyone, including those with disabilities. If you are disabled and require special accommodations to participate, please contact the Secretary of the District at least 48 hours in advance of the meeting at (925) 229-7303. Capital Projects Committee December 8, 2010 Page 2 1. Call Meeting to Order 2. Public Comments *3. Review preliminary 2011 Ten-Year Capital Plan and Fiscal Year 2011-12 Capital Budget a. Expenditures to meet new regulatory requirements b. Expenditures to expand recycled water program c. Expenditures for renovation/renewal/replacement/capacity needs for pipelines, equipment and facilities d. Estimated current revenues and projected revenue needs to fund proposed budgeted expenditures 4. Reports and Announcements 5. Adjournment * Attachment Central Contra Costa Sanitary District December 2, 2010 TO: BOARD OF DIRECTORS VIA: JAMES M. KELLY, GENERAL MANAGER 6 , FROM: ANN E. FARRELL, DIRECTOR OF ENGINEERING V7AC TAD J. PILECKI, CAPITAL PROJECTS DIVISION MANAGER SUBJECT: REVIEW PRELIMINARY 2011 TEN YEAR CAPITAL PLAN AND FISCAL YEAR 2011 -12 CAPITAL BUDGET EXECUTIVE SUMMARY Due to the recent economic downturn and rising unemployment, the Board elected for the last two years not to raise sewer service (SSC) charge rates. District revenues are pledged first to debt obligations and then to operations and maintenance costs including the self insurance fund, and finally to the capital program. SSC revenues have been diverted from the capital program in order to balance the overall District budget. Currently the capital program is under funded by over $10 million per year just to meet basic renovation and replacement needs. In addition, new regulatory initiatives that were not budgeted last year now have a high likelihood of being required in the next ten years. In particular, an expenditure of approximately $50 million to improve incinerator air emissions may be required in the next five years and an expenditure of approximately $70 million could be required in the subsequent five years for ammonia removal facilities. Last year we programmed an expenditure of $32 million with associated debt financing in the out years of the ten year window. This was in anticipation of needed regulatory projects, but the magnitude and timing of these projects has changed substantially. In addition to regulatory requirements, the District may be called upon to fund our share of the Concord Landscape Irrigation Project if we are successful in obtaining Federal funding. This is a $3.2 million expenditure that was not budgeted last year. The downturn in the economy along with increased regulatory requirements and the likely recycled water project have added significant strain on balancing the District's financial needs and rates. This memorandum contains an overview of the changes since last year, a historical review of the capital program expenditures and revenues, recommendations for the Ten Year Plan expenditures, and a discussion of revenue needs. In summary, significant sewer service charge increases will be necessary over the next three years and into the future to bring the funding of the District capital program to a sustainable level. RECOMMENDATION Staff recommends that the Board support the preliminary expenditures for the Capital Budget and Plan as proposed in this memo. Setting a conceptual budget for capital expenditures resolves one variable of the rate setting process. These figures are then used as District staff more fully develops and refines the rate planning scenarios based on current information on operations and maintenance costs. BACKGROUND In preparation for the first fiscal year (FY) 2011 -12 Capital Planning Workshop on December 16, 2010, staff has summarized the material we will be covering in this memo. Much of this information, with additional detail, will be reviewed with the Board Capital Projects Committee on December 8, 2010. We routinely hold a Capital Planning Workshop in the fall to set an estimated dollar amount for our capital program for the following ten years. We have found this approach to be very helpful in narrowing the scenarios and considerations for the winter Financial Planning Workshop (to be held February 17, 2011) in which the Board will be asked to consider rate - setting scenarios for future years. By fixing the level of capital expenditures, which comprise approximately 30 - 40 percent of District overall spending, depending on the size of the Capital Budget that year, the possible budgeting scenarios become more refined and understandable. If the scenarios in February lead to some concerns about capital revenue and expenditures, adjustments can be made at that time and incorporated into the draft Capital Improvement Budget and Plan, which is brought to the Board in a second FY 2011 -12 Capital Planning Workshop in April. FISCAL YEAR 2011 -12 CAPITAL PROGRAM OVERVIEW This year's Capital Planning document will be more complex than in past years. We will need to look at funding our ongoing renovation needs as well as addressing several expensive State and Federal regulatory changes that are likely to be implemented in the ten year window. Finally, our efforts to garner funding for recycled water projects are starting to look more promising and will result in the need for the District to fund its portion of any project for which we receive State or Federal grant funds. REGULATORY EXPENDITURES For the first time in many years we are faced with some regulatory initiatives that have a high likelihood of occurring. In many previous years we have not budgeted certain regulatory projects due to the low likelihood of occurrence and have simply listed them as unbudgeted. Last year, as some of the regulatory initiatives became more probable, we included an unassigned amount of $32 million in year 2016 -17 to be used for a regulatory project and funded from bonds. A lot has changed in twelve months on the regulatory front. In particular, new air emissions regulations for our incinerators are a certainty. It is only a matter of how stringent and how costly the compliance. Initial estimates are $50 million with compliance required within a 3 to 5 year time period. We are hopeful that our comments and those of other incinerator owners will result in some changes that could reduce the cost of compliance, but this remains to be seen. The focus on ammonia as a toxicant in the Delta /Suisun Bay ecosystem is intensifying. There is growing scientific evidence that ammonia may be impacting the food chain at the phytoplankton level and contributing to the decline of pelagic organisms. Assuming Sacramento Regional Sanitation District complies with the recent requirement to remove ammonia from their effluent, we will be the largest wastewater discharger of ammonia to the Suisun Bay. Thus, if the scientific evidence regarding the impact of ammonia to life in Suisun Bay continues to mount, the District may be required to spend an estimated $70 million to add nitrification (ammonia removal) facilities. Page 2 Finally, on a more positive note, it appears that we may be able to avoid any significant expenditure to mitigate green house gases by operating our cogeneration system such that we stay under the 25,000 metric tons of CO2 per year cap that would push us into the regulated sector. Therefore, for the purposes of this year's plan we are assuming no expenditures for the next ten years on green house gas related projects. RECYCLED WATER EXPENDITURES At the direction of the Board of Directors, staff has continued their efforts to grow our recycled water program. Due to the high cost of extending our recycled water infrastructure, staff has been vigorously seeking State and Federal grants and potential financial partners. It is looking very promising that we may be successful in obtaining a Federal Bureau of Reclamation Title 16 Grant to construct the Concord Landscape Irrigation Project. This grant would fund 25% of the project costs and the District would need to fund the remainder. There is also a possibility that some State Proposition 84 funds may be available which would further reduce the amount needing to be funded by the District. Assuming a 25% grant, staff is estimating the District portion of the Concord project would be $1.2 million in FY 2011 -12 and $2 million in FY 2012 -13. Staff has applied for a State Revolving Loan to fund the District portion of the project in order to reduce the impact on rates and allow the project to be paid for out of revenues from the sale of recycled water. These expenditure and revenue assumptions will be incorporated into some of the rate model scenarios. RENOVATION EXPENDITURES The proposed base scenario for the 2011 Ten Year Capital Improvement Plan provides for S275 million in ongoing renovation and selected capacity projects over the next ten years. This is less than the $290 million continued ten year investment required to achieve an equipment and facilities replacement of once every one hundred years for the estimated $2.9 billion replacement costs of our assets. However, it addresses known needed reliability, capacity and building improvement projects, including renovating 100% of the high priority defective sewers identified to date. It also provides $12 million to address needed seismic improvements. In addition, approximately $42 million of the S275 million addresses known capacity and regulatory projects. So, in total, only $221 million is truly dedicated to renewal and replacement which lengthens the replacement period to once every 130 years. ESTIMATED CAPITAL REVENUE Capital revenues consist of a number of sources. The District receives a portion of the property taxes that Contra Costa County collects. The tax revenue depends on assessed valuation and has historically increased each year given the increase in housing stock value. More recently the tax revenue has seen little or no increase due to the depressed housing market. Historically, the State has, on occasion, borrowed property tax revenue from local government to finance State government. The public responded with Proposition 1A which goes a long way to protect local tax revenues but does allow for some State borrowing. The District also receives a capacity fee each time a new user connects to our system. There is an overall capacity fee as well as an adder for those connections in pumped zones. These fees are based on a buy -in to existing assets and are increased each year based on the increase in valuation of the new District assets. These revenues are collected upon Page 3 connection, so in times of low housing and commercial growth, such as recent years, these revenues are significantly reduced. Other sources of capital revenue include interest on the Sewer Construction Fund Balance and reimbursements from others, particularly the City of Concord, whom we serve under contract. The one discretionary source of capital revenue the District has is the capital component of the sewer service charge. This amount is determined each year as necessary to fund the capital program and maintain an adequate Sewer Construction Fund Balance to meet the funds available needs of the District. HISTORICAL PERSPECTIVE As our District assets age, renovation and replacement is necessary to keep them functioning properly. For budgeting purposes, the amount of annual investment in renovation and replacement must be estimated. In January 2000, without a formal condition assessment and asset management plan, staff developed and recommended a baseline for investment in our capital facilities which assumed replacement of all assets every one hundred years. This equates to a reinvestment rate of 1% of the estimated replacement value. At that time, the total replacement value of our facilities was estimated at $2.1 billion and therefore the annual investment was set at $21 million. This target amount has been increased for inflation at 3% per year and has reached approximately $29 million in 2011 dollars for FY 2011 -12. Since January 2000, staff has invested significant resources in developing more sophisticated asset management programs for the collection system and treatment plant to provide the data for a more rigorous assessment of the appropriate baseline budgetary figure for asset renovation and replacement. These investigations support an annual investment of approximately 1% of replacement value as a reasonable amount for the collection system. In fact, due to the relatively good condition of our system and limited number of line segments needing capacity upgrades, we have been able to include the known renovation and capacity needs for the collection system in the 1% target budget amount. A higher annual investment rate may be necessary for mechanical equipment/pressure piping systems /electrical equipment at the treatment plan and pumping stations. Staff expects to continue to better define this reinvestment rate. Until that effort is complete, a renovation budget rate of 1% of replacement value for the treatment plant and pumping stations will continue to be used to set recommended minimum funding levels for the Ten Year Capital Improvement Plan. The historical District philosophy for funding ongoing renewal and replacement has been to do so out of ongoing capital revenues sources and not to bond finance. Bond financing has been limited and has been reserved for large one time projects which benefit all rate payers, existing and future, and can logically be funded by spreading the payments over current and future rate payers. Using this philosophy, the ongoing renewal and replacement targeted expenditures of $29 million per year in 2011 dollars should be funded from annual revenue receipts and this should be the minimum level of funding for the capital program. As introduced above, expenditures for significant projects to increase capacity or address changing regulations or construct recycled water projects should be viewed as in addition to the budget for renovation, renewal and replacement. For several years in the recent past, budgeted expenditures for needed capacity and regulatory projects were increased to take advantage of increased revenues from a number of sources, principle among them being Page 4 capacity fees for new connections. However, more recently, revenues have significantly decreased and the size of the capital program has been reduced. A number of the projects that had been initiated when revenues were higher were ready for construction. These projects targeted needed reliability, capacity and building improvements and had been contemplated for many years. They included the Solids Handling Improvements to allow hauling of sludge in the event of incinerators being out of service, and Dry/Wet Weather Improvements to allow bypass to Walnut Creek when the outfall is being inspected and when outfall capacity is exceeded and the wet storage ponds are full. Also Standby Power Improvements to replace the old engine generators that were unreliable and finally a new Collection System Operations Department Administration, Crew and Warehouse facility. In early 2009, staff recommended and the Board concurred that bonds netting $30 million should be sold to enable completion of these needed projects. The following figure shows historical expenditures, revenues and Sewer Construction Fund (SCF) balance. Since FY 1999 -00, District capital spending has ranged from a low of $19.8 million to a high of $41.5 million. This wide variation has been due to the conscious effort to defer needed projects in FYs 2001 -02 through 2003 -04, when the permanent loss of ad valorem tax was feared, and then escalate projects when the revenue picture improved with rapid build out of the Dougherty Valley and associated capacity fees. In 2002, bonds were issued for approximately $16.5 million to supplement capital revenue and fund construction of some capacity improvements needed to serve the Dougherty Valley area of San Ramon in advance of receiving the capacity fees generated upon connection of the completed homes and businesses. Those fees peaked in FY 2004 -5 when there were almost 2000 new connections in the Dougherty Valley alone. The Ten Year Capital Plan was developed based partially on anticipated revenues from the Dougherty Valley. However, as development slowed and the economy deteriorated, anticipated revenues did not materialize. As noted above, because a number of needed projects were under design and ready to be constructed and the bidding climate was very competitive, staff recommended in October 2009 that bonds netting $30 million be sold to supplement capital revenues. The SCF balance is included on the referenced figure and is an important District tool in daily In i i n funding the capital program, funding da y add t o to e c p p g , the SCF balance is used to meet the cash flow needs of the District. The District revenue from sewer service charge and property tax is collected twice per year by Contra Costa County. The District then receives its sewer service charge and property tax revenue from the County two times per year. In between revenue receipt, the District must pay its bills from the funds on hand. Based on the current District operating and maintenance and capital budgets, a SCF balance of approximately $30 to $35 million is necessary to pay the bills between revenue receipts. The SCF balance was projected to fall below the needed level in early 2009 if we continued the capital program at its budgeted level. Therefore, as noted above, a net $30 million in bonds were sold to allow continuing with construction of needed projects. After accounting for these receipts, the SCF balance stood at approximately $65.5 million at the end of FY 2009 -10. The FY 2010 -11 budget called for drawing $6 million from the SCF balance if a $16 sewer service charge rate increase was adopted. The amount of budgeted drawdown was increased to $8.8 million when no service charge increase was adopted. At this point in time, capital revenues such as capacity fees and interest on investments are significantly reduced. These reductions were anticipated when the budget was prepared, but Page 5 .% c) 13 13 y CI) 13 o 41 U = © U .0 0 CD - 0 0 _ O d _ O a X .n n. o W m ca t t. c ea Q a) a) N j C C CD CI) _ a u; L e C) eA a v cC Zu)Om • CO o el -6 CU N 80 9 +r m w • 0 03 so LL d ur O c"9 .4 • O p c, 1 1 9, 'r;, a. oQ o > ` ) - 'C C 4 • = O Q � U 00 C O E: > L M 0 .9 Y/ O, 03 - cn as c 0 t. c er 0 Q c — o v) U cz iv Q 5 a> y a U ` ,- 3 e — = Z � '� w , O CO m i Q U E l it N X O, LL co ee; O v a 0. • Q • • it t ca E '0 0a 9 0 • - r, 4: 64 00 . 0 a 0 0 0 0 0 0 0 0 t� CO In 'zr N7 N r b9 V, 69 4R b4 69 bet d9 projected revenues are expected to be even less than budgeted. A table of budgeted and projected capital revenue for FY 2010 -11 follows. FY 2010 -11 CAPITAL REVENUES BUDGETED PROJECTED Facility Capacity Fees $5,731,000 $3,816,000 Pumped Zone Fees $853,000 $493,000 Interest on Sewer Construction Fund Balance $850,000 $312,000 Property Taxes $6,873,000 $6,570,000 Sewer Service Charge ($11 capital component) $1,856,000 $1,812,000 Reimbursements from Others City of Concord $2,429,000 $2,871,000 Recycled Water Sales $175,000 $175,000 Developer Fees /Other $445,000 $287,000 Alhambra Valley Assessments $457,000 $193,000 TOTAL $19,669,000 $16,529,000 The capital component of the sewer service charge has been sharply reduced over the last several years to accommodate not raising the overall sewer service charge amount and still fund needed operation and maintenance activities. In order to fund needed capital improvements, the capital component of the sewer service charge will need to be raised significantly in future years. A table showing the sewer service charge components for the last eleven years follows. ANNUAL SERVICE CHARGE PER RUE Fiscal Year Operations Capital Component Total Sewer Service Charge per Component RUE 2000 -01 $185 $15 $200 2001 -02 $204 $20 $224 2002 -03 $207 $41 $248 2003 -04 $218 $54 $272 2004 -05 $204 $76 $280 2005 -06 $234 $46 $280 2006 -07 $213 $76 $289 2007 -08 $242 $58 $300 2008 -09 $260 $51 $311 2009 -10 $292 $19 $311 2010 -11 $300 $11 $311 It shows that the capital component has varied widely, depending on the other sources of capital revenue and on the Board's willingness to raise rates. Currently the capital component is at the lowest point in the last eleven years at $11 per residential unit. Based on expenditures of $29 million per year for renovation, renewal, replacement and known capacity projects; the current capital component of $11 per residential unit equivalent needs to be raised significantly. Assuming other sources of revenue are the same as budgeted in FY 2010 -11 at about $17.9 million without SSC, the capital component would need to be raised to about $65 from $11 per RUE. If future annual revenues were as low as the Page 6 projected figure of $14.7 million without SSC, the capital component would need to be raised to about $85 per RUE. This $65 to $85 dollar capital component represents a significant increase from the current $11 and does not address the funds that will be needed to construct facility improvements driven by new regulatory initiatives or to construct recycled water projects. Of course this calculation could overstate the needed increase because an improving economy would mitigate this increase in future years if property tax, interest and capacity fee revenues increase. Because we are carrying a balance somewhat higher than the funds required of $30 -$35 million, rate increases to fully fund the capital program can be phased in over several years, but still represent a significant commitment. It is necessary to recommit to the capital program and begin the process of raising the capital component of the sewer service charge to an amount that provides, at a minimum, for our renovation, replacement and routine capacity needs. A number of rate increase scenarios that incorporate the impacts of future regulatory projects will be presented later in this memo. PROJECTED FISCAL YEAR 2010 -11 EXPENDITURES /REVENUES /SCF BALANCE For the current FY 2010 -11, expenditures were projected to significantly exceed revenue. Given the competitive bid climate and the need for reliability, capacity and building improvement projects that were already in the planning /design phase, staff recommended moving forward with the projects and issuing $30 million net in bonds. The Board approved the bond issuance on October 15, 2009 in addition to a refinancing of current debt to reduce the interest rates and total cost of debt repayment. The following table shows that the bond sale brings the projected sewer fund balance to approximately $54 million on June 30, 2011. If the bonds had not been sold, the balance would have dropped to $24 million, unless projects had been deferred. This would have resulted in the need for short term borrowing to meet District cash flow needs. 2010 -11 CAPITAL RECOMMENDED BUDGETED PROJECTED PROGRAM (WITH $16 SSC (ADJUSTED FOR NO INCREASE) SSC INCREASE) Total expenditures $28.5 million $28.5 million $28.2 million Total revenue $22.4 million $19.7 million $16.6 million Variance -$6.1 million -$8.8 million -$11.6 million SCF Balance 6/30/11 $59.5 million $56.8 million $54.0 million (Beginning balance 6/30/10 $65.6 million w /$30 M bonds.) As part of the past debt financing, the District has pledged revenues to first pay it's debt obligations. Second revenue is assigned to Operations and Maintenance costs, including the Self Insurance Fund. Lastly, revenues are available for the Capital Improvement Program. This has significantly impacted the Sewer Construction Fund balance because revenue has been diverted from the Capital Program each of the last year when SSC rates were not increased. As discussed above, the District draws on the SCF balance to fund its operation and maintenance functions as well as the capital program. The cash flow needs for this self - funding dictate that the Sewer Construction Fund balance be maintained between $30 -$35 million. Thus, FY 2011 -12, for which we are preparing this budget, will start with a balance of Page 7 $54 million which is only approximately S19 to 24 million greater than the minimum funds required to meet District cash flow needs. RECOMMENDED 2011 CAPITAL IMPROVEMENT PLAN FY 2011 -12 TO FY 2020 -21 Within the preliminary $275 million ten year plan (Base Scenario) there are adequate funds budgeted for the sewer renovation program to complete renovation of essentially all of the high priority sewer projects that have been identified to date. There is also approximately $12 million budgeted to make the needed seismic improvements to many of our District buildings that have been identified by our ongoing seismic study. There are funds to begin constructing the highest priority collection system capacity projects identified in the recently completed collection system master plan. The S275 million budget is lower than the $290 million budget that would be recommended to accomplish a once per 100 year's replacement of all District assets. This reduction is intentional to free up some money and staff time to begin to address the potential new incinerator and ammonia removal regulations. In the short run, the reduced base scenario does not impact the District's goal to replace all assets in 100 years due to the current favorable bid climate which has been stretching the District's dollars. However, in the long run, once the economy has recovered and the regulatory driven projects have been funded, the funding for the based renovation program needs to return to a 1 percent annual reinvestment rate for existing facilities. Over the past year the major regulatory driven projects with respect to incinerators, ammonia removal and green house gases have become better defined. Given the clearer regulatory environment, staff deleted the $32 million in bonds in FY 2016 -17 that was proposed in the 2010 Capital Plan for an unspecified regulatory project and is instead presenting a number of scenarios to bracket the possible range of needed expenditures in the ten year window. The regulatory issues were described in an earlier part of this memo and include an expected expenditure of approximately $50 million within the next 5 years for incinerator air emissions treatment improvements and approximately $70 million in the later part of the 10 year window for addition of ammonia removal facilities. No expenditures for green house gas mitigation are expected to be needed in the next ten years. Recycled water construction projects are also looking more likely. In particular, the likelihood of obtaining a 25% Federal grant for the Concord Landscape Irrigation project is increasing which would require the District to fund the other 75 %. Therefore we have included a scenario that looks at funding our portion of the project through an SRF loan and repaying the loan from recycled water revenues. Expenditures for a refinery recycled water project have not been included. If the Martinez Refinery project becomes realty, additional revenue will be needed to fund this project. The total estimated cost of this project is in the $100 million range. Thus, it would require substantial commitments from other partners, such as the State or Federal government, to make this project something District rate payers could support. Should ammonia removal be required in the future for discharge to Suisun Bay, it would significantly improve the economics of a refinery recycled water project because a significant portion of the $100 million estimate is for ammonia removal facilities. Page 8 To account for the regulatory projects and expansion of the Recycled Water Program (REW) discussed above, staff developed three other scenarios that reflect the potential impacts of various regulations /REW expansion efforts. Table 1, Capital Budget Plan Scenarios for 2011, summarizes the various capital expenditure scenarios over the ten years of the 2011 plan. The scenarios are additive with Scenario 1 being the baseline scenario with renovation /renewal and capacity projects only. Scenario 2 adds the cost of the incinerator air emissions improvements estimated at $45.5 million (the baseline scenario already includes approximately $4.5 million that would be needed for scrubber improvements even without new regulations for a total of $50 million in scrubber improvements). Scenario 3 adds the cost of the District portion of the Concord recycled water project estimated at $3.2 million and Scenario 4 adds the cost of ammonia removal facilities estimated at $70 million. Using the Table 1 expenditure scenarios and the assumptions contained in the Assumptions Table 2, a range of rate increase and bond funding approaches were developed as shown in Table 3. The assumptions were based on a review of available economic projections from ABAG, UCLA and others. Our research indicates that those with the most experience in this area are forecasting a very slowly improving economy for several more years and then an increased rate of improvement as we move through the remaining years of the ten year window. We welcome any input the Board members may have on these assumptions based on their personal research and experience. Table 3 is presented in two sections. The top section indicates the total amount of the sewer service charge capital component necessary to supplement other sources of capital revenue and implement the recommended program. The amount increases as the balance in the Sewer Construction Fund is drawn down. Scenario's 1, 2, 3A and 4A and 4B all have gradually increasing capital components. This is made possible for the scenarios with large capital expenditures by bond financing to spread costs over 20 years and mitigate near term rate impacts. Scenario 3B specifically looks at raising rates to fund the incinerator improvements instead of selling bonds. This had the advantage of saving a significant amount of money over the bond life but requires a much higher initial capital component. Going to the bottom section of Table 3, the relative sewer service charge increase needed to both fund O &M (based on preliminary figures) and fund the capital component of the various scenarios is shown. Scenario 3B vividly illustrates the benefits of raising rates to fund large projects such as the incinerator improvements. When comparing 3A to 3B, the total rate increase needed with bond funding is $204 over ten years while that needed with no bond funding is only $140 over ten years due to the compounding effect of raising the rates higher in the three early years. Preliminary estimates indicate that by strategic utilization of bond funding, annual rate increases, even with the projected large regulatory projects, could be kept to a range of $20 - $30 per year for the first three years of the ten year window. If the Board chooses the alternate approach of minimizing the ten year cumulative rate increase by raising rates to fund the near term incinerator improvements project, the rate increases would be more substantial in the first three years, on the order of $40 - $50 per year, but the total 10 year rate increase would be reduced significantly. Page 9 O o CD 0 0 0_ O CD O_ O o _ N O O O O O O O O CD a N 'Cl co co co co co CO I. N N- CO O_ LCD CO CAD CD O N LCD CO O LO "Cr O CO V — , ti N.- N t--- N N CO .- N co co co C9 , — r-". 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'O 'CI U 03 L C is Q Q V U m C i p Q Q .G CL c9 • ,a G N — C 0 (Q c6 . 0 C C N O 8 r - O O s c = O c *C2— N Q v cl O m A CO d' c) c) N CU O L� a m m v v 0 O 0 _ ._ 0)) C W W Z Z d O L V) C W W Z Z O N IX CC ' a `m CO N i a) o a ti -- -a c r ▪ a a L '. L > _ 4 ' m < Q Q < Q '0 CO Q i } m Q Q Q Q Q CO Q CO Q CO � ” ' O L / 1 — Q m Q m E ✓ N M M V 'Q = .0 = W N M M R V 0 y m m m m m m O ti CO CO m CO CO CO U it 0 _ 0 C . ) U 0 0 r Yi ''L• LL 0 U 0 U 0 0 RECOMMENDED FISCAL YEAR 2011 -12 CAPITAL IMPROVEMENT BUDGET The recommended baseline FY 2011 -12 Capital Improvement Budget totals $25.5 million of which $23.6 million is for renewal and replacement and routine capacity improvements. This is lower than the $29.0 million annual investment recommended to accomplish a once per 100 year's replacement of all District assets. The reduction is intentional to free up money and staff time to begin to address the new incinerator regulations which place our sewage sludge incinerators under Section 129 of the Clean Air Act and to implement the Concord Landscape Irrigation project, should we receive grant funding from Title 16. An expenditure of $3 million is budgeted for beginning work on the incinerator air emissions improvements and an expenditure of $1.2 million is budgeted for the Concord landscape irrigation project. If both of these projects come to fruition, the total budgeted expenditures reach $29.7 million. The following table breaks down the expenditures by program. FY 2011 -12 CAPITAL IMPROVEMENT BUDGET TOTAL Treatment Plant Baseline $ 6.9 million Incinerator Improvements _ $ 3.0 million Collection System Baseline $13.9 million General Improvements Baseline $ 4.1 million Recycled Water Baseline $ 0.6 million Concord Recycled Water $1.2 million Total Baseline $25.5 million Total Baseline + Incinerator Improvements $28.5 million Total Baseline + Incinerator + Concord REW $29.7 million Staff will be working to develop the detailed budget document using the above preliminary figures as modified by the December 2010 and February 2011 Board Workshops. Many of the projects have already been defined. Others will evolve and emerge as we prepare the budget document over the next six months in anticipation of the second Board Capital Workshop in April 2011, when the detailed draft Capital Improvement Budget is reviewed with the Board. A review of the preliminary 2011 -12 Capital Improvement Budget for major projects and areas of emphasis follows. TREATMENT PLANT PROGRAM Preliminary estimates of baseline expenditures for the FY 2011 -12 Treatment Plant Program can be grouped into two major categories: one time renovation and recurring renovation. In addition, a regulatory project for adding treatment to the incinerator air emissions will likely need to be initiated, pending the outcome of the comments recently submitted on the proposed new incinerator air regulations. These comments pointed out numerous errors in the analysis used to develop the regulations and asked EPA to delay implementation in order to correct some of the analysis. If such a delay were to occur, the expenditures for incinerator air emission improvements could be deferred. Each of the major projects is described briefly after the table. Page 10 FY 2011 -12 TREATMENT PLANT PROGRAM CATEGORY PROJECT ANNUAL EXPENSE One Time Pump & Blower Building Seismic Imp. $1,000,000 Renovation Primary Treatment Renovation $ 750,000 Auxiliary Boiler Burner Upgrade $ 750,000 Outfall Inspection and Renovation $ 700,000 Recurring Piping Renovation Phase 6 $1,000,000 Renovation Treatment Plant Coatings Phase 4 $ 750,000 All Other $1,977,000 Total Baseline $6,927,000 Regulatory Incinerator Air Emissions Improvements $3,000,000 Total Baseline + $9,927,000 Incinerator Imp. Pump and Blower Seismic Improvements: The recently completed seismic analysis of treatment plant structures indicated that the Pump and Blower Building (PBB) would sustain significant damage /potential collapse during a major quake on the Concord fault. The PPB houses critical equipment such as the primary and final effluent pumps, aeration air blowers and service air compressors. Treatment plant operations would cease with the Toss of any of this equipment. This project will develop a preliminary design /cost to upgrade the building to withstand a major seismic event. Board approval will be sought prior to final design /construction of the proposed improvements. Primary Treatment Renovations: Most of the piping and equipment in the Primary Treatment area was installed in the early to mid 1970's and is more than 30 years old. Much of the piping has shown signs of corrosions and some of the process equipment is reaching the end of its respective service life. This project will evaluate /replace water and air supply piping, grit handling equipment, scum and grease removal and thickening systems, the electrical system /install new conduits and the sludge collectors /piping /pumping. In addition, the installation of a system to add screens and remove screenings from the flow will be evaluated and potentially implemented. A new baffle system will also be installed to improve the solids removal performance of the primaries. Auxiliary Boiler Burner Upgrade: Regulations on NOx emissions implemented by the BAAQMD require NOx emissions to be reduced from the current permit level of 30 ppmv to 15 ppmv by January 2013. In order to meet these limits, the two existing auxiliary boilers will be modified by replacing the existing burners with new low -NOx burners and other emission control devices. Outfall Inspection and Renovations: The Outfall was last inspected in 2003 and it is time to re- inspect both the land and submarine portions of the outfall as allowed by the current NPDES permit. The current plan is to retest the and portion of the outfall in a similar fashion to the work in 2003, and install any new seals as necessary. The submarine portion may need additional ballast and protection from boat anchors in Suisun Bay. During inspection the treatment flow will be diverted to Walnut Creek through the Dry/Wet Weather Bypass Structure, which is currently under construction and nearing completion. Page 11 Piping Renovations Phase 6: A significant portion of the piping systems on the plant site are over 30 years old and some have already begun to fail. The Piping Renovations Program is systematically evaluating the piping systems and addressing problem areas before pipe failures adversely affect the treatment processes. The Piping Phase 6 project will replace scrubber water piping, some centrate piping, leaking connections at the cake feed pumps, sludge blending tank piping, leaking hypo piping in several areas and air headers, air diffusers and valves in the pre- aeration tanks. Treatment Plant Coatings Phase 4: In the summer of 2009, KTA- Tator, Inc. performed a plant wide evaluation of protective coatings. The Phase 4 Coatings Project targets the areas identified in need of immediate attention. These include the Headwork's bar screen support, the fuel oil storage tanks, the carbide lime silos, the cogeneration gas compressor skid and various pipe and support systems in the Solids Conditioning and Pump and Blower Buildings. COLLECTION SYSTEM PROGRAM The major 2011 -12 projects planned for the proposed $13,897,000 collection system program can be grouped into five categories: renovations to existing sewers, pumping stations, developer services, capacity /renovation driven projects, and Contractual Assessment Districts (CAD's). A description of the major programs /projects follows the table of estimated expenditures. FY 2011 -12 COLLECTION SYSTEM PROGRAM CATEGORY PROJECT ANNUAL EXPENSE Renovation program Walnut Creek, South Orinda, $ 8,871,000 Lafayette, TV inspection and others Capacity /Renovations Pleasant Hill Road Trunk Sewer — $ 2,400,000 Lafayette, Grayson Creek Trunk in Pleasant Hill Pumping Stations San Ramon Pump Station $ 850,000 Upgrades /Bypass pump Developer services Developer Services $ 500,000 Contractual Current CADs — Vista Del Orinda Assessment Districts $ 500,000 All others $ 776,000 Total $13,897,000 Renovation Program: The renovation program continues the District's efforts to renovate /replace sewers indentified by the TV Program as being in poor condition. This year's renovation program focuses on Walnut Creek, Orinda, and Lafayette where 30 to 40 thousand feet of sewer mains will be renovated /replaced. In addition, design and right -of- way acquisition efforts for next year's program in Walnut Creek, Orinda, Diablo, and Lafayette will commence. Page 12 Capacity /Renovations: In May 2010, the update of the Collection System Master Plan was completed and a new list of priority capacity replacement projects was developed. This fiscal year the capacity program will construct approximately 5000 feet of 12 to 18 inch sewer in the Pleasant Hill Road area of Lafayette between Springhill Road and Highway 24. Work in Pleasant Hill Road (between Springhill and Stanley Boulevard) will be constructed during the summer when Springhill Elementary and Acalanes High Schools are out of session to minimize traffic impacts. An additional 600 feet of sewer mains in the same vicinity will be renovated /replaced. Design will also begin on the Pleasant Hill Grayson Creek Trunk which will install approximately 5600 feet of 18 to 24 inch line in Pleasant Hill between the intersection of Pleasant Hill Road and Mercury Way to the Pleasant Hill Relief Interceptor in Ardith Drive. Pumping Stations: The primary focus of this program for FY 2011 -12 is the installation of larger dry weather pumps in the San Ramon Pump Station and the procurement/installation of an emergency bypass pump dedicated to this station. When the San Ramon Pump Station was upgraded in 2003, the District decided to reduce the cost of the project by replacing only two of the 4 pumps with new 250 HP pumps. The two remaining 100 HP pumps would be replaced once the flows to the station increased. Over the past year, the flows at the station have increased to the point where one of the small dry weather pumps cannot handle peak dry weather flow. Developer Services: This project provides for appropriate capitalization of District force account labor and other expenses for planning, design, and construction of developer installed and contributed main sewer facilities in FY 2011 -12. Contractual Assessment Districts (CAD): The CAD program provides a financing mechanism for property owners to extend public sewers into areas which are currently served by septic tanks. GENERAL IMPROVEMENTS PROGRAM General Improvements in FY 2011 -12 are proposed at $ 4,100,000 and will include the traditional equipment budget, information technology budget and items associated with miscellaneous District facilities. The completion of the Collection System Operations Administration Crew and Warehouse Building is budgeted at $0.95 million for 2011 -12. Also budgeted is $2.4 million for seismic retrofit of District buildings, primarily the Headquarters Office Building (HOB) and the 4737 Imhoff Warehouse. Final design /construction of any seismic improvements to HOB will be brought to the Board for consideration once the preliminary design /cost estimates are completed. Any seismic improvements on the 4737 warehouse will be brought back to the Board Real Estate Committee once project costs /ADA implications are better defined. As you may recall, making seismic improvements to the 4737 warehouse will require also addressing non - compliance with the American Disabilities Act (ADA) and could result in a project that is not cost effective when compared to demolishing the structure and finding or constructing a new home for the District functions that are housed there. Page 13 RECYCLED WATER PROGRAM Recycled Water Program spending for the baseline budget is limited to that needed for recycled water planning and continued implementation of cost effective Pleasant Hill Zone 1 connections. This planning will include funds for staff time and consultant and lobbying efforts to pursue Title 16 funding for the Concord Landscape Irrigation project as well as pursue partners and support for a large -scale recycled water project to serve the Martinez refineries. The recommended baseline funding is $550,000. In addition to the baseline, we must consider the financial impacts if Title 16 funding for the Concord project is obtained and the District wishes to proceed and fund the remaining 75% of the project. Staff is pursuing financial support in the form of a loan from the State Revolving Fund to help pay for the District portion of Concord Irrigation Project. Therefore, in addition to the baseline program, a scenario where the Concord project is constructed with the benefit of Title 16 funding and an SRF loan will be considered. The District portion of the project which could be expended in FY 2011 -12 is $1.2 million. EPA AFFORDABILITY CRITERIA AND RATES When considering rates to fund wastewater services, it may be instructive to consider affordability and what the regulatory agencies consider to be affordable rates. EPA's guidance on affordability of investment in wastewater systems uses an average household rate of 2 percent of mean household income as one assessment factor. The mean household income (MHI) for Contra Costa County in the 2008 census was $78,469. For simplicity, if we assume the MHI for Central County is $80,000, then the annual affordable sewer service charge would be 2% of 80,000 or $1600. This is more than five times our current rate of $311. Thus, the anticipated requirement to invest up to $50 million in incinerator air emission upgrades and possibly remove ammonia for a cost of $70 million combined with the decision to construct the Concord landscape irrigation project would still leave District sewer service charge rates well below the EPA affordability criteria of $1600. SUMMARY In summary, the proposed 2011 Ten Year Capital Improvement Plan contains a moderate baseline plan for $275 million in improvements over the next ten years. The baseline program addresses needed reliability, capacity and building improvement projects, including renovating 100% of the high priority defective sewers identified to date, and provides $12 million to address needed seismic improvements. In addition to the baseline scenario, a number of likely funding needs, including improvements to the treatment of incinerator air emission, construction of the Concord irrigation project and addition of ammonia facilities; have been examined for their impacts on revenue requirements. Funding is from traditional sources of capital revenue, including property taxes, capacity fees and contributions from the City of Concord. Any funding deficit must be made up by increasing the sewer service charge capital component or by selling bonds. The scenarios presented examine a number of different combinations of likely expenditure needs and revenues from sewer service charge and bond sales. In all scenarios, it is clear that a significant increase in the capital component from the current $11 per RUE will be needed this year and for each following year throughout the ten year plan to bring capital revenues in Page 14 line with capital expenditure needs. The initial increases can be mitigated by utilizing bond funding for the incinerator emissions project; however this results in the ten year increase being significantly more to cover the interest expense on the bonds. The preliminary budget and plan and funding scenarios will be further discussed with the Capital Projects Committee on December 8 and with the full Board at the December 16, 2010 Capital Budget Workshop. RECOMMENDATION Staff recommends that the Board support the preliminary expenditures for the Capital Budget and Plan as proposed in this memo. Setting a conceptual budget for capital expenditures resolves one variable of the rate setting process. These figures are then used as District staff more fully develops and refines the rate planning scenarios as they gather current information on operations and benefits costs. Finally, a comprehensive rate planning document is prepared for distribution to the Board in late January and will be discussed at a workshop on February 17, 2010. Following the February workshop the Capital Budget and Plan expenditure figures are finalized. Page 15