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Home My WebLink About05. Public hearing to consider Service Charge (SSC) rate increase previously approved for FY 2018-19 Page 1 of 14 Item 5. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: APRIL 26, 2018 SUBJECT: CONDUCTA PUBLIC HEARING TO CONSIDER WHETHER OR NOTTO REDUCE THE 7% SEWER SERVICE CHARGE (SSC) RATE INCREASE PREVIOUSLYAPPROVED FOR FISCAL YEAR 2018-19 SUBMITTED BY: INITIATING DEPARTMENT: PHILIP R. LEIBER, DIRECTOR OF FINANCE & ADMINISTRATION-FINANCE ADMINISTRATION DANEA GEMMELL, PLANNING & DEVELOPMENT MANAGER REVIEWED BY: JEAN-MARC PETIT, DIRECTOR OF ENGINEERING AND TECHNICAL SERVICES ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey General Manager ISSUE In accordance with Ordinance No. 294, the Board must re-evaluate at a public hearing the previously approved 7% sewer service charge rate increase for residential and non-residential customers for Fiscal Year(FY) 2018-19 before it can be imposed. BACKGROUND During the spring of 2017, the Board of Directors (Board) adopted a two-year rate adjustment schedule through Ordinance No. 294, for the Sewer Service Charge (SSC) covering FY 2017-18 and FY 2018- 19. The schedule provided for a 5.37% rate adjustment for the first year to $530 per single family residence, and a 7% rate adjustment to $567 per single family residence for the second year. Given the potential for changed financial circumstances prior to the effective date of the second year adjustment, the Board committed to a check-in to determine whether the level of the adjustment remained appropriate, April 26, 2018 Special Board Meeting Agenda Packet- Page 32 of 177 Page 2 of 14 through the following language in the adopted Ordinance: "Prior to imposing the rate set forth under this Ordinance for Fiscal Year 2018-19, the Board of Directors shall consider, at a noticed public hearing: • the District's proposed budget • its financial condition • projected capital and operations and maintenance costs, • as well as other factors which bear on the revenue requirements of the District, before June 30, 2018, to determine whether the increased amount set forth herein for Fiscal Year 2018-19 is still necessary. If the District Board concludes by a majority vote that sewer service charges for less than the amount set forth in this Ordinance for Fiscal Year 2018-19 will produce adequate revenues for that fiscal year, the Board may by resolution fix the Fiscal Year 2018-19 sewer service charges to be imposed at appropriate amounts up to the maximum of the rates set forth herein without an amendment of this Ordinance. I n such case, the resolution shall clearly set forth such lesser charges that are to be imposed and those charges shall remain in place until further action of the Board. If the Board determines the rates set forth in the table are appropriate for imposition in Fiscal Year 2018-19, no further action of the Board shall be required." On March 8, 2018, a Board workshop was held to discuss the District's current outlook on the Ten-Year Capital Improvement Plan, explore alternative financial plan scenarios, and consider the current financial outlook and factors noted above. The Board provided the following guidance to staff, which has been incorporated into updated financial scenarios: 1. Create scenario with a flat Operations and Maintenance (O&M) budget for FY 2018-19. 2. Continue with a $1.5 million contingency in the Capital Improvement Plan rather than a higher amount of$5 million. 3. Continue budgeting $2.5 million to pay down employee (pension and other post-employment benefits) related liabilities rather than directing these funds towards the Capital Improvement Plan. A majority of individual members expressed support for maintaining the 7% rate increase for FY 2018-19, while changing the components of the revenue requirement to provide for less borrowing in FY 2019-20. This can be accomplished by funding an increase in the reserves, which will then be above the policy required level, and available for use toward funding sewer construction fund expenditures in FY 2019-20. Accordingly, the suggestions made by the Board at the March 8, 2018 Financial Planning Workshop were incorporated into two new scenarios that will be presented in conjunction with this position paper. These scenarios, based on current projections, include: 1. Scenario 1 (recommended). Flat O&M budget, continue with $1.5 million contingency, continue budgeting $2.5 million to pay down employee liabilities. Maintain 7% rate increase and reduce reliance on borrowing in FY 2019-20 to $50 million and $135 million two years later. 2. No debt scenario. Same as Scenario 1, except avoid debt by increasing rates significantly. This results in a 28% rate increase in FY 2019-20, and a 16% rate increase in FY 2020-21, with generally flat or slightly declining rates over the remaining years of a ten-year forecast. I n accordance with Ordinance No. 294, staff will present at the hearing the most recent financial projections. The presentation will include the District's proposed budget assumptions, its financial condition, projected capital and operations and maintenance costs, as well as other factors which bear on the revenue requirements of the District. Staff will be prepared to receive comments on increasing the annual SSC rates for residential and non-residential customers for FY 2018 -19. Once the public hearing has been held, the Board will deliberate, after which it must decide on one of the April 26, 2018 Special Board Meeting Agenda Packet- Page 33 of 177 Page 3 of 14 following options: 1. Take no action, which will confirm the annual SSC rates for residential and non-residential customers should be increased by 7% for FY 2018 -19, effective July 1, 2018 (Staff recommendation), or alternatively; 2. Adopt a resolution (by majority vote)fixing the annual SSC rate increase at an amount less than the 7% increase for FY 2018 -19. ALTERNATIVES/CONSIDERATIONS The Board can continue with the previously adopted 7% sewer service charge rate adjustment for July 1, 2018, or adopt an ordinance adjusting this amount downward. A financial plan and budget have been constructed based on preliminary feedback from the Board on March 8, 2018, based on continuing the 7% rate adjustment for FY 2018-19, and building reserves. Alternatively, a lower rate adjustment could be implemented, without changing the projected FY 2018-19 level of spending on O&M, Sewer Construction, Self-I nsurance and Debt Service. This would result in lower available reserves to carry forward into FY 2019-20. This would require a higher level of borrowing in that year to fund the forecasted level of capital spending of$78.9 million ($83.7 million with inflation), which represents a 85% (96% with inflation) increase from the FY 2017-18 budgeted capital spending of $42.76 million. Given the significant ramp-up in necessary capital spending that is currently projected, continuing with relatively level, moderate rate adjustments in the mid-single digit range helps to avoid two unadvisable outcomes: 1. Significant rate spikes as the capital spending level increases significantly in FY 2019-20; and 2. Excessive borrowing at a level not consistent with the Board adopted Debt Policy(BP 029 - Debt Management and Continuing Disclosure). Continuing the course with the 7% percent rate adjustment previously adopted for FY 2018-19 reflects an appropriate and prudent balancing of numerous considerations, and provides the following benefits: 1. Demonstrated fiscal discipline of another year with a flat O&M budget. 2. Reduced borrowing for the first bond offering in FY2019-20 (reduced from $95 million in the Baseline projection from last year to $50 million now) and over the course of the next decade (down from $535 million to $185 million); and 3. Moderated rate adjustments prospectively. FINANCIAL IMPACTS Continuing with the previously adopted 7% sewer service charge rate adjustment for July 1, 2018, will fund the FY 2018-19 budgets for O&M, Capital, Self-Insurance, and Debt Service, while contributing $8-9 million towards reserves that will be available to reduce borrowing for the capital program in FY 2019-20. Final reserve contribution will be dependent on current year financial results. Alternatively, reducing the previously adopted 7% sewer service charge rate adjustment for July 1, 2018, would require increased borrowing or higher rate adjustments in FY 2019-20. COMMITTEE RECOMMENDATION The entire Board provided direction to staff at the March 8, 2018 workshop, as outlined above. The matter was not brought to the Finance Committee. April 26, 2018 Special Board Meeting Agenda Packet- Page 34 of 177 Page 4 of 14 RECOMMENDED BOARD ACTION Recommend that the Board leave the two-year rate ordinance adopted in FY 2016-17 unchanged that specified a 7% Sewer Service Charge rate increase effective July 1, 2018. GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long-Range Financial Planning, Strategy 2- Manage Costs ATTACHMENTS: 1. April 26 2018 Public Hearing and Rate April 26, 2018 Special Board Meeting Agenda Packet- Page 35 of 177 CONSIDER ADOPTION OF A PROPOSED ORDINANCE TO AMEND - THE PREVIOUSLY APPROVED FISCAL YEAR ( FY) 2018 -1 9 RATE ADJUSTMENT 1- 14 f.. Public Hearing _ „�: . April 26, 2018 BACKGROUND Board approved two-year rate schedule during spring of 2017: 5.37% for FY 2017-18 and 7% for FY 2018-19 through resolution by Ordinance as follows: "Prior to imposing the rate set forth under this Ordinance for Fiscal Year 2018- 19, the Board of Directors shall consider, at a noticed public hearing the District's proposed budget its financial condition projected capital and operations and maintenance costs, as well as other factors which bear on the revenue requirements of the District, before June 30, 2018, to determine whether the increased amount set forth herein for Fiscal Year 2018-19 is s still necessary. BACKGROUND "If the District Board concludes by a majority vote that sewer service charges for less than the amount set forth in this Ordinance for Fiscal Year 2018- 19 will produce adequate revenues for that fiscal year, the Board may by resolution fix the Fiscal Year 2018- 19 sewer service charges to be imposed at appropriate amounts up to the maximum of the rates set forth herein without an amendment of this Ordinance. In such case, the resolution shall clearly set forth such lesser charges that are to be imposed and those charges shall remain in place until further action of the Board . If the Board determines the rates set forth in the table are appropriate for imposition in Fiscal Year 2018- 19, no further action of r the Board shall be required . i• ry FINANCIAL RATE Mr - L ASSUMPTIONS Basis of Model: Cost of Service Study Raftelis May 2015 Updated O&M Budget: Flat budget Number of employees per latest Staffing Plan Retirement (CCCERA data) Medical (with change to CaIPERS for savings at start of FY 2019-20) Additional annual payment of $2.5M for unfunded liability in the next ten years Capital Budget: 3% Escalation factor Updated 10-Year CIP: $806M, $45.3M in FY 2017-18 Use Reserves Targets per Board Policy Debt Service Coverage included for Bonds Based on New Board Policy on Debt Bonds assume 30-year term Interest Rate: 4.5% first five years, 5% thereafter Avoid double digit rate increases Minimize rate volatility over next ten years FY 2018=1 9 REVENUE REQUIREMENT: CHANGED PROJECTION FY • Projections Model)rN 4qFY 2017-18 Budget (Financial . • Operations and Maintenance $89,713,587 $89,713,587 $6,869 0.0% Sewer Construction $42,774,000 $45,319,000 $2,545,000 5.9% Debt Service $3,819,099 $3,611,038 ($208,061) (5.4%) Self-Insurance $936,500 $924,500 (12,000) (1.3)% Total Budget • • • • LUMA ftl . 1 . Reserve Contributions $1,289,413 $8,811,293* $7,521,800 583.4% Total Revenue Requirement • • . . • • . . 7.1546 1 CONCLUSION: Updated financial plan still requires 7% rate adjustment * Capital reserve will be available for future years capital needs and to offset borrowing. Capital FY 2017-18 carry forward will be addressed in capital reserve contribution at fiscal year end. Reserve calculations subject to final close of financial results for the year and may differ from projection. vE"rFa` I,N.F,°'`° °` °' — _--. - Reserves are calculated separately by sub-fund (OW, Sewer Construction, Self-Insurance) SUMMARY OF SCENARIOS Annual Rate Increases 0 1 2 3 4 5 6 7 8 9 10 10-Year Scenario Description 10 Year CIP Bond amt Ending 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 ID (millions) (millions) increase Projected future budgets based Baseline $873 $535 5.4% 7% 7% 7% 6% 6% 6% 6% 6% 6% 6% 62% on FY2016-17 budget Debt Issue millions $95 $146 $151 $'143 $535 Projected future budgets based on FY2016-17 actuals including CaIPERS healthcare 1 effective 7/1/19 and CGURA $806 $185 5.40% 7% 7% 7% 6% 6% 5% 5% 5% 4% 3% 55% R2tor effective 7 /I/!o with reduced CIP and flat O&M budget Debt Issue (millions) $50 $135 $185 Scenario 2 with no bonds, o 0 0 0 o o 0 0 0 0 0 0 2 $806 $0 5.40% 7/0 28/ 16/ 0/ 0/ 0/ -1/0 -1/0 -1/0 -1/0 47/ increased SSC Debt Issue millions $0 SEWER SERVICE CHARGE RATES FOR 27 BAY AREA AGENCIES Agency 2017-18 2018-19 Rank from AVR(Z) 2017-18 SSC Rate g Y 5SC(1) SSC(1) lowest plusAVR Increase Santa Rosa $1,290 $1,322 27 n/a $1,290 2.50% Berkeley(EBMUD for treatment) $1,296 26 n/a $1,296 Rodeo Sanitary District $995 25 $62 $1,057 Benicia $892 $971 24 n/a $892 8.86% Petaluma $940 23 n/a $940 Richmond $771 $824 22 n/a $771 6.87% Oakland(EBMUD for treatment) $740 21 n/a $740 Crockett Sanitary Department $764 20 $220 $984 Average of Agencies Surveyed $652 $661 Napa Sanitation District $638 18 n/a $638 Livermore $591 $632 17 n/a $591 7.00% Brentwood $621 16 n/a $621 Novato $594 $615 15 $66 $660 3.54% Concord(CCCSD for treatment) $547 $592 14 n/a $547 8.23% Mt View Sanitary District $571 13 $28 $599 West County Wastewater District $519 $576 12 $25 $544 10.989/o Central San Proposed 2018-19 $567 11 M $654 PittsburgDelta Diablo for treatment _ $551 10 $19 $571 Pleasanton(DSRSD for treatment) $549 9 n/a $549 Notes Stege SD(EBMUD for treatment) $531 8 $26 $558 Central San $530 $87 $617 (1) Annual Sewer Service Charge per Single —liffVallejo $520 7 $17 $538 Family Residence, or SFR. Antioch(Delta Diablo for treatment) $511 6 $26 $537 (2) AVR = ad valorem (property tax) Bay Point(Delta Diablo fortreatment) $502 5 $59 $561 revenue; data from CCC Auditor- Fairfield(FSSD) $452 $468 4 n/a $452 3.59% Controller's Report on 2016-17 Property Union Sanitary District $393 $407 3 n/a $393 3.56% Tax Administration. Dublin San Ramon Services District $397 2 $22 $419 Oro Loma Sanitary District $238 $256 lowest n/a $238 7.56% Rate Increase Average - r"! 0NSIFA RSRDF� RATION "Prior to imposing the rate set forth under this Ordinance for Fiscal Year 2018-19, the Board of Directors shall consider, at a noticed public hearing :" Factor Discussion the District's proposed budget • Distribution to Board on 5/3/18 • Presentation on 5/17/18 • Public Hearing and approval on 6/7/18 its financial condition • Reserves fully funded as of 6/30/17 • Favorable Revenue and Expense Variances of $3.3 million (as of March 2018) projected capital and • CIP ramp-up slower in FY 2019-20, but FY 2018-19 at $45.3 million is higher than operations and maintenance $40.3 million projected last year costs, • Overall CIP reduced $126M over 10 years from last year's projection • Projected O&M costs reduced from previous baseline, starting in FY2019-20 (Down: CalPERS transition, Up: CCCERA rate change potentially) as well as other factors which • Ramp-up of CIP spending still requires significant increase in revenue bear on the revenue requirement requirements of the District, • Board deliberations on acceptable level of debt still pending r' :r 3' - RECOMMENDATPON Recommend that the Board leave the two-year rate ordinance adopted in FY 2016- 17 unchanged that specified a 7% Sewer Service Charge rate increase effective July 1 , 2018 - 1 QUESTIONS ? 9' CENrFAL coy*F: �,s-a --• o _ �- -- _ _�_-