For City Council Meeting April 23, 2024
TO: Honorable Mayor and City Council
APROVAL: Tanya Willliams, Acting City Manager
FROM: Stephen Dopudja, P.E., Interim Utilities Manager
Toyasha Sebbag, Assistant to the City Manager
...Title
Request City Council to Set a Public Hearing for June 25, 2024, regarding Water and Wastewater Utility Services Rate Adjustments. It is recommended that the City Council and Rialto Utility Authority Board adopt Resolution No. 8204 and RUA Resolution No. 08-31.
...Body
RECOMMENDATION
It is recommended that the City Council and Rialto Utility Authority Board adopt Resolution No. 8204 and RUA Resolution No. 08-31 to set a Public Hearing for June 25, 2024, as Required Under Proposition 218 to Consider the Proposed Water and Wastewater Utility Services Rate Adjustments as supported by the FG Solutions, LLC Financial Rate Analysis.
BACKGROUND
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 Proposition 218 (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/RUA 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/RUA authorized staff to proceed with Phase 2, the Water and Wastewater Rate Study.
On December 12, 2023, the City Council adopted Resolution No. 8172 and the Rialto Utility Authority Board adopted Resolution No. 08-25 to set a Public Hearing for February 27, 2024, to consider the proposed water and wastewater utility services rate adjustments.
At the February 27, 2024, City Council/Rialto Utility Authority Board Meeting staff requested that the item pertaining to a public hearing under Proposition 218 to adjust water and wastewater rates be tabled until a future date to be determined. It was further explained that staff would bring back for City Council and Board consideration to set a new public hearing with new and proper 218 notification materials.
Subsequently, staff requested a 2023 Water and Wastewater Rate Study Amendment No. 1 to a professional services agreement with FG Solutions, LLC with a timeline to update the rate calculations with rates effective January 1, 2025, 2026, 2027, 2028, and 2029. Below is the proposed milestone schedule:
|
Proposed Milestones |
Date |
|
Notice to Proceed |
03/08/2024 |
|
Draft Rate Proposal to City Staff |
03/26/2024 |
|
Water Subcommittee Meeting |
03/27/2024 |
|
Attend Various Meetings |
TBD |
|
Final Rate Proposal Developed |
04/09/2024 |
|
Utilities Commission Meeting |
04/16/2024 |
|
Council Sets Proposition 218 Hearing |
04/23/2024 |
|
Preliminary Draft Report Delivered |
05/16/2024 |
|
Final Draft Report Delivered |
05/31/2024 |
|
Proposition 218 Public Hearing |
06/25/2024 |
|
1st Rate Adjustment |
01/01/2025 |
On March 26, 2024, the Water Subcommittee provided feedback on the proposed Water and Wastewater Rate Model. At the time of the preparation of this agenda report, the Utilities Commission is scheduled to hear a presentation of this item and provide feedback at their April 16, 2024, meeting.
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, showed that with no rate increase and no capital improvements in the water system infrastructure over the five-year revenue planning period, there is a $26 million revenue shortfall.
Furthermore, on March 26, 2024, to remain in compliance with all contractual and credit requirements of the Concession Agreement, the City/RUA authorized the transfer of an additional $5.3 million from the unrestricted general fund reserves to provide for water fund cash flow shortage for the remainder of the fiscal year 2023-2024 and fiscal year 2024-2025. Per City Resolution No. 8196 and RUA Resolution No. 08-30 authorizing the repayment of the $5.3 million, the updated water rate schedule includes the interest rate on this loan from the City of Rialto’s General Fund that is equivalent to the rate of return earned by the City on funds invested in the Local Agency Investment Fund (LAIF) and the repayment is structured to align with the water fund's cash flow and financial obligations of a loan term of 10 years.
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 Proposition 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 (CIPs): 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, we have diligently compiled a roster of high-priority, fiscally sound CIPs, creating indispensable benchmarks to inform a prudent and economically viable rate increase.
The table below identifies 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
1Development 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 Through Rates: 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 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. Collection of depreciation expense through rates is being phased-in starting in FY 2028-2029 and will be fully phased-in by FY 2031-2032. Should the proposed water rates include establishing a CIP Reserve Policy for RUA then staff will return with a Resolution for City Council consideration that will require an affirmative supermajority vote to set aside deprecation reserves for future CIP costs.
3. Changes Since the 2023 Rate Proposal: As mentioned, on March 26, 2024, the City Council/Rialto Utility Authority Board authorized a $5.3 million interfund loan for the Water System from the General Fund. The new proposed rates take into account a 4% interest rate in rate projections to be repaid by FY 2032-2033.
In addition, it is projected that in 2026, the water fund may need an additional inter-fund loan for the water system of up to $2 million. Therefore, the new proposed rates do take into account an interfund loan in 2026 at a 4% interest rate in rate projections to be repaid by FY 2032-2033.
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 $4.11, or 13.5% starting January 1, 2025, then one 14.4% increase on January 1, 2026, followed by three 7.5% annual increases starting on January 1, 2027, on each January 1 thereafter through 2029. 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 repayment of the general fund loan, 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
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 $4.95, or 8% starting January 1, 2025, then annual increases of 6% each January 1 thereafter through 2029. 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 $31.1 million capital improvements: 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.
The table below identifies 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 Through Rates: 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 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. Collection of depreciation expense through rates is being phased-in starting in FY 2025-2026 and will be fully phased-in by FY 2030-2031. Should the proposed wastewater rates include establishing a CIP Reserve Policy for RUA then staff will return with a Resolution for City Council consideration that will require an affirmative supermajority vote to set aside deprecation reserves for future CIP costs.
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. Attending the Rialto Farmers Market before the June 25, 2024, Public Hearing to answer questions and receive feedback on the rate-setting process.
4. Dedicating a section of the city website’s homepage to link to information about the Rate Study, Proposition 218 Protest Process, and Proposition 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 this staff report.
FINANCIAL IMPACT
Operating Budget Impact Consulting Costs
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. A Professional Services Agreement Amendment No. 1 for FG Solutions, LLC for $65,651 was authorized to update the rate study through 2029 to include revised financial conditions, bringing the total contract cost to $203,948. Amendment No. 1 is within the signature authority of the Assistant City Manager because it is for under $100,000 and does not need to be returned to the City Council for authorization.
Funds are available in water and wastewater contract services operating accounts, with funds split based on the number of accounts served.
The 2023 Water and Wastewater Rate Study Amendment No. 1 costs are split as follows:
|
Water with approximately 12,500 (37%) accounts |
$24,291 |
|
Wastewater with approximately 21,470 (63%) accounts |
$41,360 |
|
Amendment 1 Costs |
$65,651 |
Operating Budget Impact 5-year Planning Period
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 $22.9 million in needed revenue, and the wastewater rate adjustments are projected to generate $23.1 million in needed revenue.
If the proposed rate adjustments are adopted, the projected RUA water reserve balance will be an estimated $1.2 million by the end of Fiscal Year 2028/29. The projected wastewater reserve revenues are estimated at $8.7 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 $26 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.