FOR: City Council and Rialto Utility Authority Meeting [February 27, 2024]
TO: Honorable Mayor and City Council
APPROVAL: David N. Carmany, City Manager
FROM: Stephen Dopoudja, P.E., Interim Utilities Manager
Toyasha Sebbag, Assistant to the City Manager
...Title
Conduct Public Hearing as Required Under Proposition 218; 2) Approve Resolution No. 8189 Approving the Proposed Adjustments for Water and Wastewater Services as supported by the FG Solutions Financial Planning Analysis Report; and 3) Adopt RUA Resolution No. 08-28 Approving the Proposed Adjustments for Water and Wastewater Services as supported by the FG Solutions Financial Planning Analysis Report.
(ACTION) POWERPOINT
...Body
BACKGROUND:
The City of Rialto operates a water and wastewater utility system. In California, rates for water and wastewater services must be designed to cover the costs reasonably borne in providing those services. This principle is often referred to as "cost-of-service" regulation. It means that utility rates should be set at a level that allows the utility to cover its expenses associated with providing water and wastewater services, including operation, maintenance, infrastructure investment, and any other relevant costs, while also ensuring that rates are fair and reasonable for customers. This report concerns the setting of utility rates to ensure compliance with these principles.
California Proposition 218, also known as the "Right to Vote on Taxes Act," (Prop 218) was approved by voters in 1996. It amended the California Constitution to establish requirements for local governments when imposing or increasing taxes, assessments, and fees. The proposition establishes procedures for local governments to follow when imposing or increasing fees for services.
In 2012, the City Council/Rialto Utility Authority (RUA) adopted resolutions approving a concession agreement with Rialto Water Services (RWS). The concession agreement outsourced the operations and maintenance of the City’s Water and Wastewater enterprise to a private contractor for a term of thirty years.
Per the concession agreement, the City maintains ownership of all assets and the authority and responsibility for setting utility rates subject to contractual obligations and financial performance standards.
In 2012, the City adopted a five-year rate schedule through the Prop 218 process. From the rate schedule developed in 2012, the water and wastewater rates were last adjusted on January 1, 2018. The multi-year rate adjustments approved in 2012 allowed for the financing and implementation of $41 million in improvements and repairs that improved system reliability and efficiencies for both the water and wastewater systems.
ANALYSIS/DISCUSSION
On April 11, 2023, the City Council authorized a sole source Professional Services Agreement Contract with F.G. Solutions, LLC to complete Phase 1: Water/Wastewater Revenue Analysis of the Water and Wastewater Rate Study. Staff presented the results of the Revenue Analysis to the Water Subcommittee on June 28, 2023, and again on July 26, 2023, to provide answers to questions from the June meeting.
On August 22, 2023, the City Council authorized staff to proceed with Phase 2, the Water and Wastewater Rate Study.
Proposed Water Rate Adjustment
The City of Rialto last increased water rates on January 1, 2018. The Revenue Analysis presented to the City Council on August 22, 2023, shows that with no rate increase and no capital improvements in the water system infrastructure over the five-year revenue planning period, there is a $13.2 million revenue shortfall.
The proposed Water rates are established to support the operation and maintenance of the water system, support capital improvements and system replacements, provide adequate reserves, and maintain Concession Agreement debt service coverage ratios. The water rates are structured to comply with Prop. 218, American Water Works Association (AWWA) industry standard guidelines, and state water conservation requirements. Water rates include a fixed charge based on meter size and consumption rates based on the water source, customer class, and delivery costs.
The proposed Water Rate Structure for the 5-year planning period takes the following into account:
1. Financing $6 million capital improvements: RUA, mirroring the challenges encountered by similar utilities, grapples with the pressing issue of capital improvement needs surpassing the available funds generated through the rate-setting process. Adding to the complexity, the water fund faces the critical challenge of prioritizing Concession Agreement debt coverage ratios before addressing high-priority CIP funding. In response, staff has compiled a roster of high-priority, fiscally sound CIPs, creating indispensable benchmarks to inform a prudent and economically viable rate increase.
City staff and Rialto Water Services (RWS) conducted several meetings to review the capital improvement needs of our water systems. Numerous projects were evaluated by considering the short-term and long-term needs. The table below identifies the results of this coordination and review efforts and reflects the high-priority CIP to be completed during the rate study period. Of the $20.9 million in proposed CIP costs, $6 million, or 29% of the CIP is proposed to be funded through water rates with coverage of 30-year bond financing at 6% interest. The final bond financing documents have yet to be determined; however, as recommended by the City’s Bond Consultant, Urban Futures, the forecasted bond scenario is the most likely and advantageous to RUA in today’s financial market and necessary to guarantee revenue debt coverage before confirming financing. The remainder of the project financing is through grant funds and development impact fees.
Table 1: Proposed Water Capital Improvement Financing
|
|
Total Project Cost |
Grant/ARPA Funded |
Development Impact Fee (DIF)1 |
Remaining Cost Funded by Water Rates |
|
Watermain Replacement Project |
$6.7 million |
|
$2.9 million |
$3.8 million |
|
Water System Security Upgrades |
$2 million |
$2 million |
|
|
|
Automatic Meter Infrastructure Upgrades |
$8 million |
$8 million |
|
|
|
City 3A Groundwater Treatment Project |
$4.2 million |
$2 million |
|
$2.2 million |
|
TOTAL |
$20.9 million |
$12 million |
$2.9 million |
$6 million |
|
|
|
57% |
14% |
29% |
c1Development impact fees (DIF) are a one-time charge to new development imposed under the Mitigation Fee Act. These fees are charged to new development to mitigate impacts resulting from the development activity and cannot be used to fund existing water system deficiencies.
2. Collection of Depreciation Expenses Starting in FY 2027/2028: The collection of depreciation expenses through rates would allow RUA to fund a portion of capital improvements with cash. Cash funding is considered advantageous because it eliminates interest costs and the need for bond coverage on new capital projects. An additional consideration is that much of a utility system’s infrastructure is underground and it is difficult to inspect material failures. Additionally, specific local conditions or catastrophic events may cause infrastructure to wear out or fail sooner than expected. For these reasons, it is proposed that RUA phase-in collecting depreciation costs and setting them aside for future capital improvement program (CIP) funding.
In the first years, the rate adjustment will be used for establishing an operating reserve consistent with industry standards. It is only in years 6 through 10 that RUA’s collection of depreciation expenses will be available to fund capital reserves. This approach will help build future reserves and help reduce the amount needed for future borrowing and rate increases.
The proposed water Monthly Minimum Charge increase on single-family residential using a 1/2" x 5/8” meter and a 3/4" meter is $2.96, or 9.7% starting March 1, 2024, then one 12% increase on January 1, 2025, followed by three 6% annual increases starting on January 1, 2026, on each January 1 thereafter through 2028. These meter sizes account for 94% of all Rialto residential water customers. The additional revenue generated from the proposed rate increases over the five years is primarily to support high-priority water system capital projects and increased operating costs that have increased over the last five years without an adjustment to the water rates. These increases are partially offset by using non-rate revenues to lower the cost of Tier 1 and Tier 2 water consumption rates.
Table 2: Proposed Water Meter Fixed Costs
Currently, the City has 4-Tiers for single-family residential customers’ water consumption and proposes to move to 3-Tiers. The proposed 3-Tiers consumption rate structure will better align with the State of California’s indoor and outdoor water-efficient standards as a component of the 2018 Legislation of Making Water Conservation a Way of Life.
1. Tier 1: 0-9 ccf aligns with Senate Bill (SB) 1147, which requires California's water agencies to limit residential indoor water use to 47 gallons per person per day starting in 2025 and 42 gallons in 2030. The calculation of 47 gallons equates to 0.063 ccf per person per day. Furthermore, 0.063 ccf per person per day times 30 days in a month equals 1.89 ccf per person per month. Rounded to the nearest whole number from the 2020 census of 4 persons per household living in Rialto, equals a standard monthly household indoor total water use of 7.56 ccf per month. This is below the Tier 1 proposed rate of up to 9 ccf per month for household water use.
2. Tier 2: Aligns with the state’s Water Code, Division 6, Part 2.55, Chapter 9: Urban Water Use Objectives and Water Use Reporting. The 10 - 30 ccf aligns with efficient outdoor water use for single-family. Similarly, dedicated irrigation meters for commercial, industrial, and institutional customers equate to efficient outdoor water use of 0 - 30 ccf per month and carry the same proposed outdoor irrigation use rate schedule over the 5-year planning period as single-family residential.
3. Tier 3: Aligns with the state’s Water Code, Division 6, Part 2.55, Chapter 9: Urban Water Use Objectives and Water Use Reporting. The >31 ccf aligns with less efficient outdoor water use for single-family. Similarly, dedicated irrigation meters for commercial, industrial, and institutional customers equate to less efficient outdoor water use of >31 ccf monthly and carry the same proposed outdoor irrigation use rate schedule over the 5-year planning period as single-family residential.
4. Multiple Apartments: For Multiple Apartments with over 49 units and mobile homes, the City is maintaining its policy of having a single rate tier for all water use. The water cost-of-service analysis uses this single rate tier to provide equitable cost recovery from the Multiple Apartments with > 49 units customer class.
Table 3: Existing Water Consumption Tier Rates
|
Volume Charges, $/ccf |
|
Residential, Multi-family < or = 49 units, Commercial, Industrial |
|
1 - 5 units |
|
$1.07 |
|
|
6 - 30 units |
|
$1.69 |
|
|
31 - 60 units |
|
$2.70 |
|
|
61 - over units |
|
$3.32 |
|
|
|
|
|
|
|
Multiple Apartments |
|
Over 49 units and Mobile Homes |
$2.40 |
|
|
|
|
|
|
|
Landscape |
|
1 to 30 units |
$2.70 |
|
|
31 and over units |
$3.32 |
|
Table 4: Existing vs. Proposed Water Consumption Tiers
Table 5: Proposed Water Consumption Costs
Proposed Wastewater Rate Adjustment
The proposed Wastewater rates are established to support the operation and maintenance of the wastewater system, support capital improvements and system replacements, provide adequate reserves, and maintain debt service coverage ratios of the Concession Agreement. The goal of the design of rates is to achieve fairness while ensuring that each customer class pays its fair share of costs. Rates should be simple to administer, easy to understand, and comply with regulatory requirements. The proposed Wastewater rates include a flat rate service charge based on customer classes.
The proposed Wastewater rates are adjusted to account for increases in operating expenses and high-priority wastewater system capital improvements. Wastewater revenue from rates for single-family residences is increased by $3.30, or 5.3% starting March 1, 2024, then annual increases ranging between 2.4% and 4.1% each January 1 thereafter through 2028. The additional revenue generated from the proposed rate increases over the five years is due primarily to support for increases in operations and maintenance expenses and support for high-priority wastewater system capital projects. These additional costs are offset by paying down existing debt to reduce rate increases.
The proposed Wastewater Rate Structure for the 5-year planning period takes the following into account:
1. Financing: RUA is not unlike similar utilities in that we have more capital improvement needs than cash readily available through the rate-setting process. Therefore, a list of high-priority capital improvement projects (CIP) was compiled to establish benchmarks for an affordable rate increase.
City staff and RWS conducted several meetings to review the capital improvement needs of our water systems. Numerous projects were evaluated by considering the short-term and long-term needs. The table below identifies the results of this coordination and review efforts and reflects the high-priority CIP to be completed during the rate study period. Of the $50.5 million in proposed CIP costs, $31.1 million, or 62% of the CIP is proposed to be funded through wastewater rates with coverage of 30-year bond financing at 6% interest. The final bond financing documents have yet to be determined; however, as recommended by the City’s Bond Consultant, Urban Futures, the forecasted bond scenario is the most likely and advantageous to RUA in today’s financial market and necessary to guarantee revenue debt coverage before confirming financing. The remainder of the project financing is through grant funds, the drawdown of Wastewater Reserve Funds, and development impact fees.
Table 6: Proposed Wastewater Capital Improvement Financing
1Signed into law on March 11, 2021, the American Rescue Plan Act (ARPA) provided funding for Cities to make necessary investments in sewer/wastewater infrastructure
2Development impact fees (DIF) are a one-time charge to new development imposed under the Mitigation Fee Act. These fees are charged to new development to mitigate impacts resulting from the development activity and cannot be used to fund existing sewer deficiencies.
2. Collection of Depreciation Expenses Starting in FY 2027/2028: The collection of depreciation expenses through rates would allow RUA to fund a portion of capital improvements with cash. Cash funding is considered advantageous because it eliminates interest costs and the need for bond coverage on new capital projects. An additional consideration is that much of a utility system’s infrastructure is underground and it is difficult to inspect material failures. Additionally, specific local conditions or catastrophic events may cause infrastructure to wear out or fail sooner than expected. For these reasons, it is proposed that RUA begin collecting depreciation costs and setting them aside for future capital improvement program (CIP) funding. For these reasons, it is proposed that RUA phase-in collecting depreciation costs and setting them aside for future capital improvement program (CIP) funding.
The city is planning on using a portion of its RUA reserves for capital projects in the next few years. Collecting depreciation expense through rates will rebuild the wastewater reserves over time. Since collecting depreciation expense through rates is phased in through 2027/28, the accumulation of reserves for future capital improvement projects will primarily occur after 2027. This approach will help build future reserves and help reduce future borrowing and rate increases.
3. Extraterritorial Rates: Following the City Council policy established by Resolutions No. 4746 and 6209, extraterritorial customers will continue to pay the 1.3X rate charged to in-City customers.
4. Non-residential Group II Commercial Proposed Rate Decrease: Based on today's cost-of-service analysis of wastewater rates, Non-residential Group II Commercial customers would see an initial rate decrease on March 1, 2024. This is because these customers discharge lower-strength wastewater that costs less to treat than other customer classes. This methodology is important for compliance with the requirements of California’s Prop. 218, such that each customer class pays its proportion of the cost to provide services.
Table 7: Proposed Wastewater Rates
Proposition 218 (Prop. 218) Notification Process
The City/RUA is committed to a transparent public rate-setting process. Proposition 218 requires all property owners to be notified by mail at least 45 days before the public hearing date. The City/RUA went above the minimum requirement and conducted extensive community outreach by:
1. Mailing Prop. 218 notices to property owners as well as to the utility customer of record in English and Spanish.
2. Making available the Final Draft Water and Wastewater Report for public review on the City’s website.
3. Hosting 4 Public Engagement Workshops with one presentation in Spanish to answer questions and receive feedback on the rate-setting process. Workshops were advertised in the Prop. 218 Notification, city social media platforms of Nextdoor, Facebook, Instagram, and “X”.
4. Attending the Rialto Farmers Market in January and February to answer questions and receive feedback on the rate-setting process.
5. Dedicating a section of the city website’s homepage to link to information about the Rate Study, Prop. 218 Protest Process, and Prop. 218 Mailed Notification in English and Spanish.
ENVIRONMENTAL IMPACT:
The requested City Council action is not a “Project” as defined by the California Environmental Quality Act (CEQA). Pursuant to Section 15378(a), a “Project” means the whole of an action, which has the potential to result in either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment. According to Section 15378(b), a Project does not include (5) Organizational or administrative activities of governments that will not result in direct or indirect physical changes in the environment.
GENERAL PLAN CONSISTENCY:
Approval of this action complies with the following:
Our City government will lead by example and will operate in an open, transparent, and responsive manner that meets the needs of the citizens and is a good place to do business.
In addition, approval of this action complies with the City of Rialto General Plan Goals and related Policies:
Policy 3-6.3: Require an increasing level of public safety infrastructure and service capability tied to population increase and increasing service demand.
LEGAL REVIEW:
The City Attorney has reviewed the resolution and approved it as to form.
FINANCIAL IMPACT:
Operating Budget Impact
On April 11, 2023, the City Council authorized a Sole Source contract with FG Solutions, LLC for both Phase 1 and Phase 2 of the Water and Wastewater Rate Study for an amount not to exceed $138,297.
The proposed water and wastewater rates will provide resources that will create operating and capital budget impacts for the Water and Wastewater Enterprise Funds. Over the five years, the water rate adjustments are projected to generate $17.6 million in needed revenue, and the wastewater rate adjustments are projected to generate $15.3 million in needed revenue.
If the proposed rate adjustments are adopted, the projected RUA water reserve balance will be an estimated $2.2 million by the end of Fiscal Year 2027/28. The projected wastewater reserve revenues are estimated at $17.5 million for the same period.
With no rate increase and no capital improvements in the water system infrastructure over the five-year revenue planning period, there is a $13.2 million revenue shortfall.
Capital Improvement Budget Impact
Without rate increases, the City’s ability to complete capital improvement projects will be limited to development impact fees and reserves.
RECOMMENDATION:
Staff recommends that the City Council and Rialto Utility Authority Board: 1) Conduct a Public Hearing, as Required Under Proposition 218; 2) Approve Resolution No. 8189 Approving the Proposed Adjustments for Water and Wastewater Services as supported by the FG Solutions Financial Planning Analysis Report; and 3) Adopt RUA Resolution No. 08-28 Approving the Proposed Adjustments for Water and Wastewater Services as supported by the FG Solutions Financial Planning Analysis Report.