OPENING Mayor Hellar called the special session of the city council to order at 5:30 p.m. on Thursday, August 27, 2009 in the council chambers at City Hall, 1123 Lake.
ROLL CALL Council members Newton, Snedden, Logan, Reuter and O’Hara were present. Councilman Boge was absent.
RESOLUTION NO. 09-53 - ACQUISITION OF PROPERTY – BALDY ROAD - SPECIAL MEETING
Councilman Reuter felt it was appropriate to allow public comment on this matter with a consensus of council present. Mayor Hellar read the rules of procedure for public omment. No one commented.
Councilwoman Logan moved that the proposed resolution, “Acquisition of Property” be approved. Councilman Reuter seconded the motion.
Councilwoman Logan asked how the city would pay for the property. City Attorney Will Herrington responded that the funds would come from impact fees or would use the funds from the bonding left over from the waste water treatment plant improvements. Councilwoman Logan pointed out that she was friends of the Millers who own the property adjacent to the subject property and stated they have no objections to the city purchasing the property. She said they were attracted to the fact that there would be a possibility that the city would have a park on the property. She said the Millers see it as a solution to their personal interest rather than having high density cluster housing in the area of city impact area as referred to the most recent adopted comprehensive plan. She said Ms. Miller revealed that they would be interested in purchasing a portion of the property if the city was not interested in purchasing the entire parcel. Councilwoman Newton divulged that she discussed this matter with Fred Darnell, who also owns property adjacent to the subject property, who was in favor of the city purchasing the property.
The motion passed unanimously by a roll call vote of council present.
WATER AND SEWER RATES AND NEW USER FACILITY FEES – WORKSHOP
Public Works Director Kody Van Dyk introduced Tom Gould of HDR Engineering, Inc, who was hired by the city to conduct the water and sewer rate study. He noted that Mr. Gould also conducted the rate study for the city in 2004.
Tom Gould then led discussion of the results of his study. He said his focus this evening was to look at the revenue requirements and cost of service. This would be similar to the process that was followed for the 2004 study. He reviewed where the city has been since the 2004 study. He noted, at that time, the city was significantly underfunded because the rates were barely covering the operation expenses and wasn’t collecting enough to take care of the existing system or debt service costs. NUFFs were an important component of how the city wanted to pay for growth related facilities. He created a four year rate transition plan for 2005 through 2008 with adopted rates starting with a 40% rate adjustment to 8% for water, and 40% adjustment to 10% increase for sewer. Past decisions by city council to plan future capital needs has helped to better financially position the utilities today. Those decisions have served the city well. He provided an overview of the process setting the cost based rates with a three step process. The revenue requirement compares the revenues of the utility to its expenses to determine the overall level of the rate adjustment. The next step is cost of service which attempts to take the revenue requirement and equitably allocate among the various customer classes of service. The final step is the rate design such as conservation, people’s ability to pay, and revenue stability of the utility. There are a number of ways to design water and sewer rates. In 2004, there was a fair amount of restructuring of the rates to move to a more equitable basis. The philosophy used in 2004 may not work for the current study. The revenue requirements are a way of looking at the source of revenues and comparing them to the expenses. The expenses include operation and maintenance, taxes or transfer payments, debt service, and capital projects. Prudent financial planning criteria are also utilized in order to consider reserve funds and debt service coverage ratio. The debt service coverage ratio is a legal requirement to maintain rates to pay the debt. In order to find capital projects funded from rates, he takes the total capital projects then subtracts the bond proceeds, grants and NUFFs. NUFFs can be used to apply against a growth related project but can’t be used for operation and maintenance expense.
Mr. Gould explained to Councilwoman Logan that NUFFs can be applied to payments on current and future bond indebtedness as long as it’s applied against growth related debt service. He also said NUFFs can be applied or can be paid if bonded but only for the portion that’s growth related. He commented that the city’s transfer payments are not more excessive than other cities but could possibly be less. Councilman Reuter noted that the taxpayers are subsidizing the water and sewer rates and stressed this has to end. He noted the study needed to be done soon as the city would be adopting rates in the near future. Mr. Gould noted there was no change in the rate of transfers. He clarified there were two types of transfers such as in-kind services and in-lieu of transfer payments which is a portion of the revenues to the general fund. He noted there was no assumption of any changes in the historical transfer rates.
Councilman Reuter raised concern that if the utilizes were subsidized, he didn’t want an imbalance in utilities that could stop those capital projects that were necessary. Councilwoman Logan suggested following the policy direction needed as proposed by Mr. Gould, and was interested in having an analysis of the transfer payments. Mr. Gould noted that the objective of the study was not to look at transfer payments. He noted he would be utilizing the same analytical framework as the 2004 study in order to be consistent with the methodology. When a revenue requirement analysis is conducted, there is a need to look into the future because of capital improvement projects in order to minimize the rate impacts to customers. This is why it’s important to look longer than two years. He reported key financial planning issues are to maintain adequate reserves, meet debt service coverage ratios, and to have adequate capital improvement funding to maintain existing facilities. He assumed minimal customer growth in FY 2009/2010 and 2010/2011 with no rate adjustments with projected revenues FY 2009/2010 of $2.5 million per year for water and $2.2 million per year for sewer. Projected operations and maintenance expenses FY 2009/2010 were $1.5 million for water and $950,000 for sewer which includes administrative and overhead costs.
He said the major water capital infrastructure is the water treatment plant. The funding sources to pay $17 million for this infrastructure is the grant from a U.S. Department of Agriculture Rural Development Grant with $5.1 million funded and $11.9 million will be a loan funded from new bonds proceeds. None of the plant improvements have been paid from rates but if a bond is issued, it will appear as a debt service payment at a later point. The water distribution facility has slightly less than $1million per year of capital projects planned for the next five years with a portion paid from NUFFs and up to 50% paid from rates with the balance paid from reserves or NUFFs. There is a need to continue to gradually increase the funding of capital through rates with a goal of $700,000 by 2013/2014.
He said sewer has one major capital project with a significant amount of sewer capital projects in the amount of $18.3 million anticipated within the next five years. This includes $3.4 million over the next six years for I&I (inflow and intrusion) and at the end of the five year period, there will be $15.6 million in 2014 for the new water treatment plant which may be paid by a bond. $250,000 per year is currently paying for this with a goal to have $500,000 per year. Kody Van Dyk stated the $15.6 million is for the first phase of the treatment plant based on today’s costs but won’t know what the regulatory environment will be within the next five years. Mr. Gould stated the current outstanding water debt is $146,000 per year in payments with the anticipated water debt projected to increase $1 million per year. The current outstanding sewer debt is $650,000 per year in payments with anticipated additional sewer debt of $1.2 million per year. It is a legal requirement for the city to maintain their rates to pay their debt service. He reviewed the summary of water revenue requirements and noted that based on the debt service coverage ratio, the city won’t have sufficient funds through the existing rates to pay the full debt service payment. With the proposed rate adjustment, the city would have sufficient funds to pay for the debt service payment. The deficiency for sewer demonstrated $630,000 for 2008/2009 with a deficiency of 29% and starting in 2008 through 2014 in the amount of 83%. He suggested that the city assume to use no more than 50% of the NUFFs per year to pay for the debt service payment. The water rates are projected to be insufficient during the five year period with a deficiency of 24% FY 2010 and approximately 34% by 2014. The sewer rates are projected to be insufficient during the five year period with a deficiency of 29% FY 2010 and approximately 84% by 2014. He explained the capital infrastructure and issuance of new debt is primarily driving the need for rate adjustments. Water and sewer deficiencies are a combination of the need to properly fund capital improvements, to rebuild reserve levels, annual transfer/tax payments, and increased debt service on anticipated bond issues. Without sufficient rate adjustments, the city will be unable to issue revenue bonds to fund the needed capital projects.
He explained to Mayor Hellar that if the water bond election is defeated, the city can’t raise the rates but could impose a moratorium on new hookups. The city would also not have the need for a rate adjustment because the debt service wouldn’t exist. He suggested a smooth transition within a four year period, that city council make their decision based on the economy and to develop a proposed rate transition plan for both utilities. He recommended a three year time period establishing the rates with adjustments of 15% for 2009/2010, 9% for 2010/2011, and 2% for 2011/2012 for water with a total impact of an average of $7 per month for an average water customer based on 6,000 gallons of water. He proposed a 15% rate adjustment for sewer for 2009/2010 and 2010/2011 and a rate adjustment of 6% for 2011/2012 with a total impact at the end of the three year period of $10 per month for the average customer. He pointed out that sewer rates for residential customers have a cap associated with it.
Councilwoman Logan stated that she preferred multi-year projections and supported inputting figures for 2013/2014 because of the costs attributed to the new waste water treatment plant. Mr. Gould pointed out the rates need to go up by 80% unless city council chooses to wait until 2012/2013 to impose a larger adjustment. Councilman Reuter pointed out the voters rejected the bond in May 2009 and felt it was premature to move forward with a rate increase. Mr. Gould suggested constructing an ordinance that if the bond passed, the rates could go in effect after the election or the rates would remain the same. He said the sewer utility needs adjustment even absent any discussion of additional bonds. He said there was a possibility of creating two parallel paths by showing an adjustment of particular rates. He said there was a 117% increase for water and 103% increase for sewer for the past four years. He explained he restructured the rates at the same time. Mayor Hellar pointed out there was an $8.65 increase through the time period and wanted it clarified that there was neither a 117% nor 103% increase. Mr. Gould confirmed there would be an 80% increase in sewer for a five year period with a current deficiency of 30% in revenue and an additional $1.2 million for debt service. He said the city has been very conservative because they didn’t apply NUFFs against the capital projects or capital reserves. He said the city also didn’t apply NUFFs against the debt service associated with that.
Councilwoman Newton felt water rates shouldn’t be reviewed until after the November 3rd election. Mr. Gould reported there was a current balance today in the amount of $273,000 which would carry over to 2009/2010. He pointed out the difference between the 24% for the rate transition and 15% for the first year adjustment rate for water is made up through reserves and could use some of those reserves to transition and buy down the rate increases for the initial year. The most recent figure he had for reserves was approximately $2 million for the water operating reserve and $239,000 in operating reserves for sewer. He recommended a minimum reserve of $750,000 which demonstrates the sewer utility rates are deficient. Councilwoman Newton stated it could appear that the rate increases between 2005 through 2008 didn’t work because the city only has one-third of the recommended minimum reserve for the sewer fund. Mr. Gould commented the operation and maintenance expenses were higher than what was anticipated. He said this was a good example why the city shouldn’t extend the period of projecting costs. He pointed out the revenues didn’t cover the full amount of operation and maintenance, taxes and transfer payments four years ago. The challenge is infrastructure with the goal to get the utilities to fund the long term maintenance of the infrastructure. He stressed the need to take care of the current infrastructure but that there was a challenge on how to pay for growth when adding facilities. Councilwoman Newton suggested being more aggressive for sewer rates because the current reserves are one-third of what they should be now. Mr. Gould supported that idea but said he was trying to balance the council’s role in terms of trying to exercise fiduciary responsibility with consideration of the impact to customers. He said water and sewer rate adjustments need to be done at the same time.
Councilwoman Newton asked why the city has been drawing down the reserves. Kody Van Dyk explained there is a difference between operating and restrictive reserves. He said the operating reserve is a day to day fund but that other reserves are restricted to specific uses. He noted that the city provides sewer service to only one resident outside the city limits. Mr. Gould noted there was approximately $400,000 in reserves in 2004. He said he needed direction from city council regarding the level of adjustments and whether they want to adjust the water rates in advance of the issuance of the bond. The cost of service analysis is based on the facilities required to serve customers and how people use water. Cost of service is a snapshot of a point of time with the understanding of consumption patterns and how the city incurs costs. There are key assumptions of cost of service analysis for different classes of service of water for residential, commercial, industrial, and wholesale and sewer for residential, commercial grease producers and non-grease producers. He reviewed the summary of the water and sewer cost of service analysis and pointed out the percentage is what he looks at. If a class is within 5% of the overall adjustment, they are within the cost of service. There is no need to make any huge adjustments between classes for water. There could be consideration of issues other than strictly cost of service when establishing rates such as ability to pay, economic development, revenue stability, and other criteria. A discounted rate for low income and the elderly is a possibility. He said it’s more difficult to conduct a sewer cost of service study because there’s no meter data. He recommended the adjustment for water and sewer to be applied equally for all customer groups. He uses a rate return approach for wholesale users but felt the current proposed adjustment was a fair allocation. He suggested that city council take more time to digest the proposal and suggested coming back to a second meeting or that city council review independently on their own.
Councilman Snedden left the meeting at 7:00 p.m.
Kody Van Dyk confirmed a decision was made not to include the water and rate adjustments with the regular fee schedule. He felt city council may not come to a decision on the water and sewer rates until the time of the water bond election. Mr. Gould said the next step would be to restructure the water rates to be more conservation oriented. He explained restructuring will be the possibility of whether or not to break the existing rates such as looking at residential versus business. When looking at commercial rates there’s a broader array of customers. Trying to create a block rate structure for commercial customers doesn’t work well but suggested to look at conservation for commercial customers in a different way. He suggested not using only rates to achieve conservation. He stated there’s a fine line between encouraging conservation and appearing punitive. He said at the next meeting, he could provide examples of potential rates starting with the 15% adjustment.
Mayor Hellar asked if developed conservation rates in other areas had been in place enough in order to see how effective they have been in reducing consumption. Mr. Gould responded “yes” and “no.” He said research has been conducted on conservation base rates. The California Urban Water Conservation Council is a consortium of water utilities in the State of California which have best management practices regarding water conservation. They have four rate structures for conversation based on a uniform rate structure, seasonal rate, and a water budget rate structure. In order to have a conservation base rate structure you need to collect at least 70% through the volume metric portion. He suggested looking at a three block structure for block sizes (gallons). Discussion should also include the philosophy of what each block should include. Most commercial customers don’t respond to price in terms of conservation. If individual meters were installed for irrigation purposes, there would be substantial savings. The effectiveness is that people do respond to price for discretion and non-discretionary use. Councilman Reuter stressed that the costs need to be low as they can but put the burden on those who don’t conserve water.
Councilman O’Hara asked if seasonal and sewer rates could be tied together. Mr. Gould responded that you don’t bill simply based on total water consumption but that a cap is placed on the amount of use. He said he tries to keep the first block at a relatively low price but changes the prices above that. He said it’s difficult to know how people will respond to the price. He said there are current incentives for people not to have a lawn.
Mr. Gould said he needed to have recommendations based on the revenue requirement, cost of service, rate design, time period, and percentages. Councilwoman Logan read a statement from Councilman Snedden stating his preference for a three year time period for rates, being more aggressive for sewer rates, holding the water rates or develop a two track approach as mentioned and no class of service adjustment but to apply the rate increases equally. Mr. Gould said he could continue forward and would start working on the rate design fees. He said at the next meeting he could try to resolve this issue at the start of the meeting then proceed with discussion on the rate design fees. He suggested that if the city builds a facility in 2013/2014, the city should look at fees in 2011/2012 in order to pay for the debt service. He said if the city looked at only rates, there are more issues such as a moratorium and water restrictions with other factors that may impact customers. He said if city council needs him to conduct an additional analysis, they can contact Kody Van Dyk directly. Mr. Gould commented he would need 2 ½ to 3 weeks to develop the rate design.
ADJOURNMENT The meeting adjourned at 7:20 p.m.
Gretchen A. Hellar
ATTEST:
Maree Peck, City Clerk
