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HomeMy WebLinkAbout04.d. Discussion of Pending LAFCO Municipal Services Review regarding possible merger between Central San and Mt. View Sanitary District and the need for a study on the issuePage 1 of 4 Item 4.d. F--1-448�411C-S0 May 17, 2023 TO: REAL ESTATE, ENVIRONMENTAL AND PLANNING COMMITTEE FROM: PHI LIP LEI BER, DEPUTY GENERAL MANAGER -ADMINISTRATION DANEA GEMMELL, PLANNING & DEVELOPMENT MANAGER REVIEWED BY: ROGER S. BAILEY, GENERAL MANAGER SUBJECT: DISCUSSION OF THE PENDING LOCALAGENCY FORMATION COMMISSION (LAFCO) MUNICIPAL SERVICES REVIEW (MSR) THAT MAY RAISE THE PROSPECT OF A MERGER BETWEEN CENTRAL SAN AND MT. VIEW SANITARY DISTRICT (MVSD) AND THE NEED FORA STUDY ON THIS ISSUE Issue In the coming months, the Contra Costa County Local Agency Formation Commission (LAFCO) is expected to release a Municipal Service Review (MSR) report that may propose a study to investigate the prospects of a merger of Mt. View Sanitary District (MVSD) and Central San. Such a study would explore the costs, benefits, and operational & engineering implications of a merger. This memorandum provides background on this issue along with discussion of potential next steps. Background MVSD serves a population of approximately 22,000 customers (with approximately 8,000 sewer connections) within Martinez. Central San serves most of central Contra Costa County, including large areas of Martinez, and provides wastewater treatment services to a population nearing 500,000 with 120,000+ parcels. For many years, MVSD sewer service rates have been comparable to Central San's. However, MVSD has recently required significant financial investment to address aging infrastructure, with the rates beginning to diverge. As of Fiscal Year (FY) 2022-23, MVSD's Single Family Residence (SFR) rate of $814 is 18% higher than Central San's S F R rate of $690. MVSD has had a pending proposal to raise its sewer service charge by approximately 9% annually for the next five years. By the end of five years, MVSD's rates would be significantly higher (53%) than Central San's projected rates, a difference of $437 annually. During MVSD Proposition 218 rate increase notification process, several MVSD customers raised questions about whether Central San might be able to collect and treat the wastewater more cost effectively. The LAFCO MSR reports from 2008 and 2014 recommended a financial and operational study to determine whether a merger of the two sanitary districts would be of benefit to customers. To date, no studies have been conducted. A 2023 LAFCO MSR report, scheduled to be released this summer, is anticipated to provide a similar recommendation. With the previous LAFCO recommendations and current community discussions during MVSD rate proposal, there has been public requests that both MVSD and Central San explore the possibility of a beneficial merger. In light of this, Central San staff spoke at the MVSD rate hearing on April 13, 2023, and indicated that Central San would be willing to participate in, and fund a feasibility study to determine whether a merger of the agencies would be in the interests of their May 17, 2023 REEP Committee Meeting Agenda Packet - Page 28 of 33 Page 2 of 4 customers. Staff emphasized that Central San's Board had not taken a position on this matter, and that to do so, it would be necessary to obtain relevant and detailed information on the costs, benefits, and engineering implications of a potential merger. Subsequently, the General Managers (GMs) of Central San and MVSD held a discussion to begin exploring the logistics of a feasibility study, including the retention of third party consultants to assist in this assessment. On May 4, 2023, MVSD held a second meeting on their rate proposal which the MVSD GM recommended that their Board adopt only the first three years of the five-year proposal, with the first two years at the 9% per year level, and the third year based on inflation at that time. The final two years of the five-year proposal would be held and then considered after the completion of a feasibility study. Feasibility Study With regards to such a study, this would require selection of consultants, and consideration of the scope and structuring of a report. A study could be conducted to address the issues involved in a merger in phases, with a first phase addressing some high-level issues such as: • Does a financial analysis indicate benefits to both agency's customers if a merger were to take place? • Understanding any potential liabilities to be accounted for and addressed. • Identifying issues of concern to employees such as differences in benefit programs including Other Post Employment Benefits (OPEB). • What would be a reasonable timeline for such a merger? • What are the technical and engineering issues to be investigated and resolved in a merger? • What integration issues would be expected and how those could be resolved? • Whether a single rate consolidated rate or alternative zonal rates would be appropriate considering the necessary integration costs. If Phase I of the study indicated a merger held promise, the second Phase could provide a more in-depth analysis of expected issues including but not limited to: What additional treatment is needed to get water at the required level to the MVSD wetland? What are the costs to build a pipeline to/from MVSD'S existing facility to the Central San treatment plant. Considering the above, what is a realistic refined timeline by which to effectuate an integration of operations. Potential Benefits to each District A potential merger could offer the following benefits: Central San: Over an extended period of time, the rates paid by MVSD customers would be expected to exceed the incremental cost of treating the MVSD wastewater, thus allowing for a contribution toward Central San's fixed costs, thus benefiting Central San's existing customers. Central San might be able to use its facilities or help minimize the infrastructure upgrades and costs to lower the proposed fees. Thus, allowing for a better return on investment for both Districts. MVSD: MVSD customers could likely pay lower rates than if the agency were to remain independent and proceed with the five years of rate adjustments at 9% annually or future increases above Central San's rates. May 17, 2023 REEP Committee Meeting Agenda Packet - Page 29 of 33 Page 3 of 4 Some very preliminary calculations performed by Central San staff are supportive of the above prospective benefits, although a far more detailed analysis is warranted to ensure all relevant factors have been fully considered, and that assumptions on costs are accurate and realistic. An independent and experienced consultant could assess these issues in an objective manner. It should be emphasized that: (1) this informational memorandum is providing only very preliminary information and that no merger is proposed at this time; (2) if a merger is warranted it would take significant time to complete, and will have several formal steps along the way; (3) if a merger were to take place, it would be approached so that important stakeholders such as the employees of MVSD are not adversely impacted. Specifically, it would be expected that MVSD's employees would have continued employment, and that any duplication of functions would be handled through natural attrition from turnover retirements and other voluntary departures. Workplan/Next Steps I n a MVSD Board report dated May 4, 2023, the MVSD GM indicated that a study could commence after LAFCO concludes the finalized Wastewater MSR (expected in October 2023). This timing preference was also emphasized in a May 10, 2023 letter to LAFCO (and Central San) with a request that LAFCO prioritizes the completion of the MSR. The vocal community group urging a merger between Central San and MVSD have requested urgency in starting a feasibility study. The MVSD GM also indicated support for the development of an Memorandum of Understanding (MOU) to guide the development of a feasibility study. To those ends, the following steps can be considered. 1. Working with MVSD to establish guiding principles leading to and for the development of the feasibility study. 2. Given the time that may be involved prior to the commencement of work on the feasibility study, and in recognition of the community's desire for progress, beginning the selection process for a consultant to perform the feasibility study could commence prior to the availability of the MSR. Alternative approaches include working with consultants who are already contracted with either Central San or MVSD, or new consultants to be selected through either an informal solicitation, or an RFP process. For Central San, if the work with a particular consultant is to exceed $100,000, a formal RFP process would likely be required. 3. Both agencies agreeing to a study scope and phasing. 4. Obtaining Central San Board approval for the funding of a study to the extent it exceeds the General Manager's authority of $200,000. Central San has committed to work cooperatively with MVSD in the development of the feasibility study, and will be checking in on the timeline for release of the LAFCO MSR, as well as holding additional discussions with MVSD in preparation for a study. This memorandum is provided to inform the Board of these developments, and in order to provide for an initial discussion regarding the topic. No Board action is requested at this time. May 17, 2023 REEP Committee Meeting Agenda Packet - Page 30 of 33 Page 4 of 4 Strategic Plan re -In GOAL ONE: Customer and Community Strategy 2 - Promote initiatives to advance affordable and equitable access to services, Strategy 3 - Build neighborhood and industry relations GOAL FOUR: Governance and Fiscal Responsibility Strategy 3 - Maintain financial stability and sustainability GOAL SIX: Infrastructure Reliability Strategy 1 - Manage assets optimally GOAL SEVEN: Innovation and Agility Strategy 3 - Be adaptable, resilient, and responsive May 17, 2023 REEP Committee Meeting Agenda Packet - Page 31 of 33