Agenda Item - 3.
City Council Study Session Meeting
March 15, 2021
|Financially Sustainable Government Providing Excellence in City Services|
2022 Water/Sewer Rate Recommendation Overview
Public Works and Utilities Department: Chris Gray, Business Operations Coordinator; Max Kirschbaum, Public Works & Utilities Director; Brian Donahue, Water Resources Analyst; Andrew Bliss, Communication & Outreach Coordinator; Julie Koehler, Utilities Engineering Manager; and Drew Beckwith, Water Resources Specialist
: Tammy Hitchens, Finance Director; Bob Byerhof, Treasury Manager
Policy and Budget Department:
Chris Lindsey, Assistant City Manager; Mikeal Parlow, Policy & Budget Analyst; and Fred Kellam, Policy & Budget Analyst
City Manager's Office
: Larry Dorr, Deputy City Manager/Chief Financial Officer
Recommended City Council Action:
Review the proposed 2022 water and sewer rate recommendations and direct Staff to receive public feedback on the proposed rates and return in May for final consideration.
- The City charges water and sewer rates/fees to pay for the costs of providing safe, high quality, compliant and reliable drinking water and wastewater services to our residents and businesses.
- These costs include operating and maintenance expenses, payment of debt obligations, and large scale projects called capital improvement projects (CIP).
- Staff normally presents a two-year rate recommendation to City Council for adoption, and presented draft 2021/2022 water and sewer rate recommendations to City Council in February 2020. However, due to the COVID-19 pandemic, the City moved to a one-year budget process for 2021. Last summer, City Council adopted 0% water/sewer rate increases for 2021 to respond to the devastating impacts of the pandemic.
- The 2020 irrigation season was very hot and dry, and the City received a significant number of customer water bill complaints. To provide in-depth information about water rates to City Council ahead of the 2022 rate setting process, a series of foundational workshops were held with City Council regarding water/sewer infrastructure, costs and the rate setting process.
- Based on City Council direction from the meetings, Staff incorporated a series of very specific financial policy changes into the 2022 rate recommendation process, which resulted in over $700 million of savings over the next 20 years. At the request of City Council, Staff also committed to move forward with two new billing practices.
- The recommended 2022 water rate increase is 3.98%. The recommended 2022 sewer rate increase is 5.50%. The proposed 2022 water/sewer rate recommendations will impact customers differently based on their unique water use. For a residential customer who is considered an average water user, using approximately 83,000 gallons of water per year, the proposed 2022 water/sewer rates will be an average increase of $4.19 per month.
- For a seasonal perspective (winter/summer) for the same average water use customer, the proposed 2022 water/sewer rate recommendation will result in a $3.33 increase in the month of January and a $6.82 increase in the month of July.
- These rate recommendations represent the lowest sustainable cost to our customers while maintaining a safe and reliable water and wastewater utility.
- This 2022 rate recommendation includes a series of CIP projects, the most significant of which is the construction of the WATER2025 project. This project is the planned replacement of the City's Semper Water Treatment Facility, is the highest priority Utility project, and is the major driver to the 2022 rate increases.
- As reported to City Council at the January 28 workshop, Staff let the community know of the upcoming March rate discussion with City Council with a news story on the City website, along with the creation of a webpage inviting feedback about the policy direction that City Council provided to Staff. Comments to date have been provided in the attachment, WestyWaterRates.us Feedback.
- If directed to move forward, Staff will return to City Council in late May with a request to adopt the 2022 water/sewer rates. Staff will also continue public outreach regarding the 2022 water/sewer rate recommendations throughout this time.
- Staff will make a 2022 water/sewer rate recommendation presentation at the Study Session.
Source of Funds:
Should City Council review the proposed 2022 water and sewer rate recommendations and direct staff to receive public feedback on the proposed rates and return in May for final consideration?
City Council could choose to reject Staff's recommendations and not proceed with public outreach. Staff does not recommend this alternative, as the 2022 water/sewer recommendations represent the lowest sustainable rates for a safe and reliable Utility. Staff has implemented a number of financial policy adjustments to reach this recommendation. This lowest sustainable rate includes the funding of the WATER2025 project, which is the planned replacement of the aging Semper Water Treatment Facility and the highest priority Utility project. To reduce costs, Staff adjusted a number of factors in the short- and long-term, which resulted in approximately $700 million of savings over the next 20 years. A full list of these changes has been provided in the Background section.
The City operates and maintains a $4 billion water and wastewater Utility for its owners, the City's customers. This Utility is a complex system of infrastructure that operates 24 hours a day, seven days a week, 365 days a year, and therefore requires a significant amount of planning to ensure that all services can be provided to meet the needs of our residential, commercial, and irrigation customers. All customers connected to the Utility pay the rates and fees necessary to fund the operation and maintenance of the Utility, as well as a portion of the CIP.
Staff originally presented 2021/2022 water and sewer rate recommendations to City Council in February 2020. However, due to the devastating effects of the COVID-19 pandemic, City Council adopted a 0% increase for 2021 in June 2020.
Following a number of customer complaints about summer 2020 water bills, a series of workshops were conducted with City Council during Fall 2020 / Winter 2021. At these meetings, Staff reviewed foundational information regarding water/sewer infrastructure, costs and rate-setting processes ahead of the 2022 rate setting timeline, and responded to City Council and customer questions. Please see the City's website to review each workshop presentation, Staff report, meeting summary, and to hear a recording of each workshop: https://www.cityofwestminster.us/Residents/Water/Rates/2022WaterandSewerRates
These workshops were completed in January 2021, with direction from City Council to make a number of adjustments to the rate setting process before returning to City Council with 2022 water/sewer rate recommendations. Staff has incorporated the following financial policy and customer billing adjustments to reach this recommendation:
- Showing and billing customer water use on a per-gallon basis. Staff is researching how best to implement this and will return to City Council at a future date. This will change billing from the current process of truncating customer use at the thousand-gallon level and moving any additional gallons ahead to the next month; instead, this new billing at the per-gallon basis will allow for billing on gallons (versus thousand gallons) used in any given month.
- Implementing a 30/31 day billing cycle. Staff is researching how best to implement this and will return to City Council at a future date. Currently, water meters are read within a time frame of 27 to 33 days per the Westminster Municipal Code. The previous meters (currently being replaced) required a vehicle to be driven throughout each part of the City to wirelessly read the meters; weather, weekly schedules (e.g., falling on a weekend), etc. could impact the ability to read a meter one month at 27 days and the next month at 33 days. With the new meters and software update, Staff will be able to program for meter readings on a 30 or 31 day cycle.
- Keeping the City's affordability programs and expanding where possible. The City currently offers four assistance programs (bill credit, hardship, indoor conservation, and emergency repair) to help make water and sewer bills more affordable for low-income residents. One additional assistance program is available currently for customers who have experienced a financial impact due to the COVID pandemic. City Council expressed support for retaining these programs and looking for more opportunities in the future to provide assistance.
- Lengthening the Utility debt term. Historically, Utility debt has had a 20-year term. Based on the assets that are proposed to be debt-financed, Staff believes a 30-year term is appropriate.The WATER2025 replacement water treatment plant is a project with an anticipated life cycle greater than 50 years and is a substantial debt issue that Staff believes financing it over a 30-year term is appropriate. Spreading the debt repayment over 30 years allows for lower annual debt service payments, reducing the impact on annual rates paid by our customers. However, this will result in more interest being paid over the long term of the debt issue.
- Reducing the bond borrowing rate reflecting more current market rates. The current assumption is now a 3% rate in the rate setting model. By modifying the borrowing rate and including a longer bond term in the rate setting model, the change resulted in savings of approximately $200 million over the next 20 years.
- Using $11 million of the Water Fund's Rate Stabilization Reserve (RSR) account over the next few years towards expenses and to manage rates. The RSR was created to cover any revenue shortfalls due to such things as an unseasonably wet year or a drought year where customer water conservation leads to reduced water use. Based on historical low utilization of the RSR, the policy requirements for the minimum/maximum balance are proposed to be modified and will allow for the utilization of fund balance to help offset costs and manage rates in the coming years.
- Reducing the Utility's long term CIP funding strategy. Staff originally estimated that future CIP funding would gradually phase up to a more aggressive annual funding schedule by 2040. Reducing the long term CIP funding strategy downward will not stop the decline of Westminster's water/wastewater infrastructure, but will provide lower rate increases in the short-term. This change has deferred approximately $435 million in water/wastewater CIP expenses over the next 20 years in the rate setting model.
- Scrutinizing the annual CIP and operating expenses. The WATER2025 project is the Utility's largest and highest priority project, and the major driver of the 2022 rates. WATER2025 is the planned replacement of the aging but still reliable Semper Water Treatment Facility, which was constructed in the late 1960s and is nearing the end of its useful life. The new facility is anticipated to be online in 2025 and will use advanced technology that will provide greater resiliency in times of challenging treatment, such as a watershed wildfire; greater flexibility to adapt to changing regulatory standards; greater security to address future water supply shortages; more opportunities for environmental sustainability and resource stewardship; and reduced overall costs, as it would be more expensive to maintain the Semper plant long-term. A number of key activities have already been completed since a 2015 master planning effort determined that a new treatment facility was the most cost-effective way to move forward. Since that time, the City has been working to acquire property, determine the best treatment processes to implement, and begin work on the facility's design, all while incorporating the community's feedback. More information about the project can be found on the City's website here: https://www.cityofwestminster.us/water2025. Based on the prioritization of this crucial project, Staff will defer some planned CIP projects to outyears, and will return project funding to the Water Fund Capital Project Reserve account for a couple of projects that have been paused.
- Continuing with the six integrated polices adopted by City Council in 2018. This includes an increase to the fixed monthly meter service fee to gradually reach a 20% fixed revenue scenario and the rebalance effort to bring residential and commercial rates back into alignment (agenda item 10B on September 24, 2018).
- Reducing the annual operating and maintenance escalation factors. Staff uses different escalation factors to anticipate future costs for expenses such as parts, chemicals, leases, salaries in the rate setting model. Staff zeroed out the 2021 cost escalation factors, and reduced those used for expenses to reflect current market conditions. This resulted in savings of approximately $127 million over the next 20 years.
- Accelerating a cost allocation rebalance between the Utility Fund and the General Fund. Based on the results of a 2018 study, cost allocation transfers from the Utility to the General Fund were being rebalanced to better reflect the cost burden over a phased period of time. Staff proposes to accelerate this effort and complete the rebalancing with the 2022 budget.
- Working towards predictable and level rates. Staff will continue to analyze and refine the rate setting model each year with the goal of providing rate predictability into the future.
The recommended 2022 water rate increase is 3.98%. The recommended 2022 sewer rate increase is 5.50%. The recommended 2022 water/sewer rates will impact our customers differently, based on their unique water use. The recommended water/sewer rate increase impact is reflected in two different ways below:
Total water/sewer bill impact averaged over 12 months:
Low water user (36,000 gallons per year): $2.27/month
Average water user (83,000 gallons per year): $4.19/month
High water user (150,000 gallons per year): $7.13/month
Seasonal Bill Impact for the Average Water User (use of 83,000 gallons/year):
January (Winter): $3.33 increase to the bill
July (Summer): $6.82 increase to the bill
The 2022 water/sewer rate recommendations support the following Utility expenses.
|Utility Fund Operating Costs
|Existing Utility Fund Bond Repayments
The following table represents the 2022 CIP, along with the anticipated cost of the 2023-2026 CIP amounts. A full list of the projects is included as an attachment. As noted earlier, the WATER2025 project is the most significant and highest priority project in the list. When completed, the new treatment plant will provide safe, high quality, compliant and reliable drinking water to customers now, and for future generations. To ensure that this high priority project moves forward and to reduce short-term costs, Staff has delayed other previously planned infrastructure projects. This change will not stop the decline of the Utility infrastructure, but will provide lower rate increases while maintaining safe and reliable services.
Safe and Reliable
Utility Fund CIP
All of these CIP project costs are estimates and are subject to appropriation by City Council as part of the 2022 budget adoption process. Financing will be needed to fund the upcoming CIP program. Staff will work with our financial advisors to make the best recommendations, and will return to City Council at the appropriate time to discuss financing.
Residents who would like to reduce their outdoor water bill while maintaining a healthy and attractive lawn can participate in the City's water conservation programs, found on the City's website: https://www.cityofwestminster.us/Residents/Water/Conservation.
The City recognizes that any increase in a utility bill, no matter the amount, can have an impact on people living on fixed incomes or for those who struggle to pay even basic bills. The City offers a COVID-19 grant for customers who have been financially impacted by the pandemic, as well as a number of assistance programs for income-qualifying customers. All of these programs can be found at the City's website: https://www.cityofwestminster.us/waterbillassistance.
If Staff is directed to proceed with this recommendation, Staff will continue our customer communication and engagement plan, and return to City Council in late May for the 2022 water/sewer rate adoption. The City is currently offering virtual engagement opportunities to our customers, which can be found on the City's website at this location: www.westywaterrates.us. If there is an opportunity to return to in-person meetings before that time, Staff will offer in-person opportunities for residents and businesses to provide their thoughts and comments. Public comment received since WestyWaterRates.us feedback was opened in Februaryis attached for City Council's review.
This presentation to City Council of the 2022 water/sewer rate and fee recommendations supports the City's Strategic Plan Goal of Financially Sustainable Government Providing Excellence in City Services by providing the lowest sustainable water/sewer rate recommendation that maintains a safe and reliable Utility.
Donald M. Tripp