HomeMy WebLinkAbout2017-04-04 Finance Committee Summary Minutes
Special Meeting
Tuesday, April 4, 2017
Chairperson Filseth called the meeting to order at 7:02 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth (Chair), Fine, Holman, Tanaka
Absent:
Oral Communications
None.
Action Items
Finance Committee Discussion and Recommendation That Council Adopt (as Part of the Fiscal Year 2018 Annual Budget) a Resolution Amending the Residential Refuse Rates for Fiscal Year
2018 to Cover Program Costs and Keeping all Other Rates the Same.
Chair Filseth: …which is refuse rates. Thank you. You have the floor.
Ron Arp, Zero Waste Manager: Thank you Finance Committee. My name is Ron Arp. I’m the Zero Waste Manager with the City and I have Matt Krupp with me, Manager, Environmental Control Programs.
He is familiar with our rates. He kind of handles our rate model. So, we are here to present our rate recommendations. So basically, for the refuse enterprise fund we are recommending
a 5 percent rate increase for residential customers in Fiscal Year ’18. No commercial rate increases are proposed and no C&D (Construction & Demolition) or debris box rate increases
are proposed. Just to give context to the newer people, in 2015 we had a consultant, we hired a consultant who performed a cost-of-services study on the refuse fund and they determined
that the residential revenues did not fully cover the expenses, so we then came back to Council, we came back to Finance and then later Council and we proposed a three-year rate increase
plan as shown here, basically, for the average customer, and we went to Council with that plan and in Fiscal Year ’16, as you can see on this we proposed a 9 percent, implemented a 9
percent, and this year we implemented another 9 percent. The rate plan showed us implementing an 8percent in Fiscal Year ’18; however, our original forecast did call for an 8percent,
but we have a better budget situation this year for a few reasons and we’re in a little better shape than forecasted, so we calculated that a 5 percent rate increase in the residential
side would be sufficient to balance the sector’s revenues and expenses and get us in conformance with Proposition 218 legal requirements. So, this table here will show the three-year
plan as implemented and the resulting rates. On the left side, the left column is the service levels, the 20-gallon, 32-gallon, 64-gallon, etc., and that’s based on the cart size. And,
of course, the next column over is the base year 2015 when we came up with the plan. And then there is the three-year plan that we implemented the first two years and proposing, with
the red box around it, the Fiscal Year ’18. It should be noted that over 90 percent of the customers in the residential sector are in the first and second columns, or rows rather, so
the 20-gallon, also known as the mini-can, is the smallest can size, cart size, and then the 32-gallon. So over 90 percent fall into that, meaning for the 32-gallon, which is about 50
percent of the residential customers, that they will be paying $2.38 per month more. Okay, this slide shows a breakdown of the refuse fund expenses for Fiscal Year ’18. As you can see,
the refuse fund not only pays for the normal things that you would expect, solid waste, recycling and compost, but it also pays for these other three columns on the right; landfill,
household hazardous waste and street sweeping. So, the reason we’re presenting this slide to you is just to demonstrate that not all cities have these three kind of alternative cost
elements of them. For example, Menlo Park pays for street sweeping out of their general fund and out of a landscape assessment fund. Mountain View, they have a shoreline fund, so they
don’t ask the ratepayers to pay for their landfill post-closure maintenance. So, you can see, the total on these three items to the right are a total almost 20 percent of our costs.
Okay, Slide 7 discusses the commercial sector. As I said before, that no rate increase is proposed, but I wanted to put this in just to show you we are proposing to recognize $875,000
more in revenue in the budget due to growth of the economy and new compost service required by the newer recycling and compost ordinance. In the past, we have been a little cautious
about recognizing these increases in revenue. We were highly dependent on the economy. When the economy is going great we get a lot of activity, there are low vacancy rates, there is
a lot of C&D construction, demolition activity, which generates quite a bit of revenue, but we’re just seeing quite a bit of activity out there. So, it’s a cyclical thing, but it’s something
that I wanted just to mention. Okay, so Slide 8 shows, I just wanted to give you the big picture of expenses going back to 2011. The reason I picked 2011 is that’s kind of when we had
some problems in the refuse fund. We kind of cratered, if you will, with a minus $5 million rate stabilization reserve due to a variety of things, reasons. But I wanted to kind of show
the big picture. The first thing is we’re only, in spite of the fact that we are, CPI is 2 to 3 percent, we’re only proposing a little over 1 percent, expense, operating expense increase
for Fiscal Year ’18. Let me show you kind of the big picture since 2011, we implemented lots of cost saving initiatives and we have kept the expenses fairly flat since then. So, some
of these expense initiatives, cost-cutting that is, have been closing the landfill early in 2011, closing the composting facility early. We have had a cost savings in efficiency street
sweeping plan, which saved quite a bit of money. So, we have really been able to, I think, and a lot of other things I could mention, that we have really been able to keep our expenses
pretty low the last several years. This Slide is similar to the last one, only showing operating revenues, and we are projecting the 3.5 percent revenue increase for Fiscal Year ’18.
Most of that is the, just the recognition in the budget of the revenues, the commercial revenue increases, but also the 5 percent residential is included in there. And, again, it is
kind of similar to the last slide. It’s been a fairly flat revenues over that time period. And that’s the final slide and we would be glad to answer questions.
Chair Filseth: Questions and comments.
Council Member Fine: Just one quick question. I previewed with you before. I was hoping you could give us a quick breakdown of the percentage of residents using the different cart sizes,
even if it’s just a guesstimate.
Mr. Arp: Okay, let’s see. Let me get back to that slide. It’s, and I know our goal, our budget goal for Fiscal Year ’18 is that 40 percent of people would use the mini-can. I think we’re
kind of on line with that. It’s about 50 percent is the 32-gallon, and then I think the rest is probably the 64-gallon with just really a handful that are using the larger than that,
96-gallon or larger, so it’s, very few people are in those last two categories.
Council Member Fine: Okay, thank you.
Mr. Arp: Sure
Chair Filseth: Council Member Holman.
Council Member Holman: Yeah, a couple of questions, please. Thanks. The staff report says that it’s not anticipated that a significant number of people will downsize. Do you think we
have already saturated the market for 20-gallon cans?
Mr. Arp: That’s a good question. Well, we don’t know for sure, but we saw when we implemented the first 9 percent in 2016, that we, really 10 percent of all the customers across all
of those service levels downsized their carts, and then this year, Fiscal Year ’17, we, it’s less than that, so, yeah, I think we’re kind of getting to the point where it’s going to
be less and less, so I don’t know if I can say what percent I think would downsize. There could be a couple percent. I don’t think we’re going to see, you know, 5 percent, but we’re
not sure.
Council Member Holman: So, what kind of change did you see, if you have an idea, when we started taking compost out of garbage?
Mr. Arp: So, that was the first year of this cost, of this rate plan, and so we did it, as you know, in conjunction with the residential food scrap collection program, so that’s, I think
that’s what precipitated the massive downsizing, the 10 percent of all customers going to smaller containers, so I think that really helped. The volume did shift over, I believe, and
people made it work and I think quite a few of them did save money in that process.
Council Member Holman: And, it’s not exactly on our agenda, expect it does have to do with the finances of it, so bear with me while I ask another question.
Phil Bobel, Assistant Director of Public Works: Can I just add one thing to what Ron said?
Council Member Holman: Sure Phil.
Mr. Bobel: The reason that we’re not predicting so much of a switch this year is, there is no new incentive that we’re pushing forward. The old incentives were pretty high increase in
the percent, the 9 percent of the other two years, and then secondly, as you know, the implementation of our new compost program for residential is relatively new. So, we don’t have
any new push driver this year that we think would do that.
Council Member Holman: Okay, and then, this has come up before and it does have to do with revenues, so I guess it’s related. So, has there been any kind of, I know there hasn’t, but
would staff consider any kind of, you know, limit or focused survey to see what portions of the City, or if residents would be interested in an every-other-week pickup or such? I mean,
a lot of the people on my block talk about how, you know, I put out my garbage can, you know, once or twice a month, and that’s with mini-cans. So, is there any thought of that, or are
we just be like biting our nose off to spite our face, because…
Mr. Arp: Well, that’s an interesting proposal, and as you may know, Mountain View proposed, their solid waste manager, proposed to go to every-other-week garbage service, in conjunction
with the new food scrap collection program, and they got quite a bit of opposition from it. That doesn’t mean that Palo Alto will, and I do think that could be the future for everybody,
you know. So, yes, we should consider getting more feedback on that. I think that’s a good idea.
Council Member Holman: Yeah.
Mr. Bobel: I would just add the thought that we, I personally think that is the future, as Ron said, and we need to try to move in that direction. The two major things sort of holding
this back are, right now the way, sort of, we’re interpreting State law is, you need to provide weekly pickup for so-called putrescible waste, which is more than food scraps, which we
are providing, and what it is, and that’s the second problem, is diapers, pet waste, hygiene products. Until we solve that problem of not wanting to put them in the compost, which most
compost people don’t want and (inaudible) definitely doesn’t want, until we solve what I call the “poop problem”, pet waste, diapers, we’re sort of, I think, stuck because we’re going
to get a substantial reaction, I think, like Mountain View did. Not maybe people that are your neighbors, but young families with diapers and people like that are going to not think
this is a great idea. So, we’re trying to, and we actually put in the sustainability/climate action plan, a major bullet for us to try to figure out what the devil to do with these three
products that I just named. So, we are going to work on that, but we don’t have a solution at the moment. So, we aren’t proposing to go to every-other-week pickup, but we would love
to do it if we could figure out what to do with those three things.
Council Member Holman: Okay, thank you. My last question is, the chart on Page 6, Table 3, it’s comparing us to other cities and understanding, you know, we provide more services than
they do, but what size can is that comparing to for the other cities? For us it’s the 20-gallon, but what size can for the other cities? Are we comparing apples to apples?
Mr. Arp: It’s indicated on that chart, maybe not as clear, but I’ve got a backup slide here. Okay, so the one asterisk is a mini-can and the two asterisks together is a 32-gallon container.
Council Member Holman: I’m looking at this chart? Oh, sorry. I’m looking at the wrong (crosstalk).
Mr. Bobel: We can get you a hard copy of it, but for now we will have to ask you to look at the screen and notice that (inaudible) said it is a little bit of apples and oranges, so we
tried to show with a single asterisk the people that do have mini-cans and the double asterisk people that don’t have mini-cans, so you sort of have to draw your own conclusions from
this. The thing to keep in mind is what Ron was saying earlier, is that when you compare these cities the real apples to oranges problem isn’t so much, I don’t think what the size of
the can is, is that what other services are included in that amount, and it’s the street sweeping, household hazardous waste and then the rent that we paid to the general fund on the
landfill. Those are kind of the three big ticket items that some of the other cities don’t have.
Council Member Holman: Not a complaint, just wanting to know what we are comparing here. Okay.
Mr. Bobel: Yeah, it is hard to compare. I’m glad you highlighted that problem for us.
Council Member Holman: Thanks, I think that’s it.
Chair Filseth: (inaudible) Council Member Tanaka.
Council Member Tanaka: Thanks for putting this together. So, I just want to kind of continue the question that Council Member Holman was asking, which is, I understand it is hard to
compare, but do you also have a chart on how the rate increases compare to other cities? Like, because so far it looks like we’re, the rate increases have greatly outpaced inflation,
if I’m not mistaken, correct? Like doubled.
Mr. Arp: During this three-year plan to balance this sector, yes. They have not trended with CPI.
Mr. Bobel: So, we do need to underscore why we had those rate increases. It wasn’t so much to keep up with expenses as it was to redistribute. Under Prop 218 our attorneys determined
that we needed to rebalance the expenditures that we were charging our commercial customers and that we were charging our residential customers. So, we think this three-year plan, 9,
9 and now 5 percent increases have done that. So, looking to the future now, we think we’ve solved this Prop 218 problem, and we can have expenses going to the future that are really
related, I mean, rate increases that really relate only to the true expense increases, but that wasn’t true, especially for those two 9, 9 years. Those were balancing years. Those weren’t
just trying to track our expense increases. They were greater than our expense increases.
Council Member Tanaka: Yeah, I think our expense increases, it looks like you guys are doing pretty good in terms of the, the operating expenses are relatively flat, but the rate increases
are much more, so, I mean, to the average consumer would be thinking, “what’s going on here”, right?
Mr. Bobel: It’s a difficult concept, and we, but that’s what we thought we had to do. Now, now all cities are doing this, to be honest with you, but we approached these Prop 218 things
very seriously and the former Finance Committee was in full support of that 9, 9, 8 plan that we originally had three years ago.
Council Member Tanaka: So, I mean, if the rates are going up, that must mean we are making extra money, right? Is that true or not?
Mr. Bobel: Well, remember, we’re not increasing the commercial, we didn’t increase the commercial rates during that time period, very significantly. I can’t remember what our commercial.
Mr. Arp: Yeah, the commercial has only had one increase since 2010, so it’s been pretty flat, but, you know, it’s probably out of whack a little bit before that.
Council Member Tanaka: I see. Okay. And do you guys know what percentage of our cost is actually labor, do we know?
Mr. Arp: Not offhand. I would have to…
Mr. Bobel: Let’s give him some broad parameters (crosstalk).
Matt Krupp, Environmental Control Program Manager: Honorable Council Members, Matt Krupp, Public Works Zero Waster. The general breakdown of our costs is about $15, $16 million of our
$31 million makes up the Green Waste collection costs. It’s by far the largest portion of our expenses related to the refuse fund. The next largest expense on the collection side is
processing and landfilling at the SMART station in Kirby Canyon landfill, and that makes up around $5 million. So, the other costs are, I don’t know if Ron has the details over there,
but the other costs are administrative costs, and you saw there is the street sweeping costs, household hazardous waste costs. But we don’t have right now the breakdown of the Green
Waste labor, which the most expensive portion…
Council Member Tanaka: (crosstalk) I was talking more about our labor.
Mr. Arp: Just looking at the preliminary budget for this year, it’s right under $3 million, is total salary and benefits.
Council Member Tanaka: For handling this.
Mr. Arp: Yeah.
Council Member Tanaka: Do we know how many employees that is?
Mr. Arp: There are almost 16, there’s 15 point something employees. Just a note in context, back in 2012 we had 38 fulltime employees charged to the fund.
Mr. Bobel: And to follow up on that, so the major changes that we made, we cut in half the number of people working for the refuse fund, was closure of the landfill and the change in
street sweeping, where much of that is contracted out now.
Council Member Tanaka: I see. So, it’s about $190,000 per employee roughly.
Mr. Arp: That sounds about right.
Council Member Tanaka: Okay. And you know, this is the first time I’m on the Finance Committee so I’m just curious.
Mr. Bobel: Could I just say one other thing about the employee costs. So, what we’re not including in this, I don’t think, are what are called ‘allocated charges’ where the refuse fund
and all the enterprise fund pay the City, pay the general fund sort of, for the costs of attorneys, ASD employees that work on it, the budget people, all of these other people that aren’t
in those 16 positions that Ron talked about, which are in Public Works. The rest of the people that support, like attorneys, budget, these people you could ask, and that’s why it’s a
little bit complicated to say what the total salaries are, because really, we should include those. Almost all of that ‘allocated charge’ is people, and you know, that’s something we
could do. But I don’t think we’ve ever tried to put the two together and say, “what are the Public Works employees, what are the other department employees” and give you a figure. We
could do that.
Council Member Tanaka: Okay, but just roughly $190,000 doing the administration of this, the 16 people doing the administration of this is roughly what the cost is.
Mr. Krugg: Yeah, I want to add to that, we do, beyond just administration we do run our own programs here with the Zero Waste Program. We provide a higher level of service than you do
see with other communities. We’re out there in the community talking to our residents, talking to the businesses. So, one of the reasons that it’s hard to do a direct apples-to-apples
comparison with our other communities is that we do offer a higher level of service than the other communities, and our residents tend to expect that level of service.
Council Member Tanaka: Okay, what is the higher level of service?
Mr. Krugg: Well, that’s a good question. Yeah, feel free Ron.
Mr. Arp: Okay. Well there’s quite a bit. You know, the, of course we talked about the post-closure maintenance monitoring and reporting on the landfill. Street sweeping, we have a higher
level of street sweeping than just about any city.
Council Member Tanaka: So, we sweep more often?
Mr. Arp: We sweep more often. We have, we send all of our garbage or MSW, municipal solid waste, through what’s called a dirty murf, and the recyclables are sorted out of it. Many cities
don’t do that. To the north of us they go to a transfer station. We have a household hazardous waste program that’s a weekly program. It’s more convenient than most anybody that I know
about. We have a lot of Zero Waste-related services. We’re always out in the public auditing and training and doing that sort of thing. We have a home compost program where we’re maximizing
the amount of people that do training and we give away home composting bins.
Council Member Tanaka: I mean, I’m looking at the prices here, right. I mean, I realize there’s a lot of other stuff going on, but we’re at 27.8, right? Our rate increases have been
a lot and compared to our neighboring cities where, for the same size can, it’s substantially more, right?
Mr. Arp: Well, I would agree with that. I think the one thing that may be missing, we went through this cost-of-services study and legally we kind of had to rebalance. Sunnyvale did
that before us. Mountain View is right in the middle of it, and I think they’re looking at a 28 percent or something similar to us. Menlo Park is kind of, from my understanding, they
just hired a consultant to look at their services, so I think a lot of these cities, they haven’t looked at those cost-of-services quite yet, and you know, got them incompliance.
Mr. Bobel: I’d just add two things. One is that all those, most of those program that Ron kind of ticked off, they go to a numeric, which we refer to as the diversion rate. So, we have
as high a diversion rate as anybody in the State, probably in the country, although those statistics are - so we are paying more for a higher diversion rate, keeping stuff out of the
landfill. And that both the commercial, it’s residential, it’s our C&D, construction and demolition. We are paying more for that. I would also remind you that what skews this chart are
those three things that we take out of this account where other cities don’t necessarily do that, and that is street sweeping, household hazardous waste and the landfill costs.
Council Member Tanaka: Sure, go ahead.
Chair Filseth: I noticed that it looks like the street sweeping as a percent of our total costs is $1.4 million, about 4 percent of our total costs. Hazardous waste is about half that,
so it’s about 2 percent. So, landfill, including deferred rent, is $4 million, but if you look at those three things, it’s a pretty small fraction actually of our total costs. It looks
to me like about two-thirds of our total cost is solid waste and recycling, which everybody does, right. And you know, even that is more than Menlo Park, just for those things right
now, so I sort of had the same question. I don’t mean to interrupt.
Council Member Tanaka: Please continue.
Chair Filseth: You know, boy, it seems like a big difference. You know, San Jose, I mean if you count the 32-gallon cans, we’re still 2x San Jose too. So why is that? And it’s sort of
what we’re…
Council Member Tanaka: Yeah, that’s what I’m trying to figure out. So, like, okay so, the biggest chunk of our cost is Green Waste, right, $15 to 16 million, $16 million, okay. So, I
assume we’ve shopped this around, right? The contract for this, and is it competitive? How does it compare against other cities? I mean, is it normal, is it?
Mr. Arp: Of course, we selected Green Waste on a, you know, it was an open bid, but it’s been a few years. But, yeah, it was, you know, we plan on doing a cost-of-services comparison
or survey with this, in this next Fiscal Year, so that is something that will help us to hone in on how competitive we are. For base services Green Waste provides, you know, zero waste
services that go beyond that too, so.
Council Member Tanaka: I’m just worried that our residents will look at this and go, “what the heck” right. I mean, you have a very complex message where you have all these programs,
right, and there’s this new law you have to comply to, and you know, it’s not a very clean message when someone looks at this and goes, “what’s going on here”?
Chair Filseth: Especially if the answer is, well, they account for street sweeping somewhere else, which is like one out of three.
Council Member Tanaka: Yeah, it doesn’t really hold water. (crosstalk)
Council Member Fine: You’re saying we’re not increasing the rates on the commercial side, even if that’s particularly the purpose, to rebalance them.
Mr. Bobel: Well, without getting defensive about this, I would just offer up one other note, and that is, when we set up our current situation we set up these three contracts that Matt
referred to, and I do think we’re going to gain some efficiencies if we can figure out how to make, like most cities do, have one contract with somebody. So, we’re starting the process,
because these three contracts end in 2021, and it’s actually not too soon, and we’re starting the process now of figuring out what to do to replace these contracts, and a goal that we’ve
set for ourselves is to try to figure out how we cannot have three different contracts in so many different places we’re taking stuff. And I think that has hurt us. You’ll notice that
Sunnyvale number is high, and you could say, “oh, that’s a 30-gallon container or a 32, not a 20-gallon container”, but you know, when we look at that different size, it’s not nearly
as important as, to the cost, as just picking it up. Most of the cost is picking it up and taking it somewhere. It doesn’t really matter how much we pick up at a given location. So,
it is sort of valid to compare us and Sunnyvale, for example.
Chair Filseth: We’re still 30, 35 percent more than Sunnyvale.
Council Member Tanaka: Per gallon we are.
Mr. Arp: Let’s see. If I’m looking at this right, Sunnyvale is 38.
Council Member Tanaka: No, 15 percent higher.
Mr. Bobel: We’re comparing it to 27.
Mr. Arp:… so I think you’re trying to control for the volume which really may not apply. It’s the number of pickups, not the size of the can.
Mr. Bobel: No, right. Are you multiplying the 27 by 2? Is that what you’re doing?
Chair Filseth: 50 on your table (inaudible)
Mr. Bobel: Oh, I see what you’re doing. You’re comparing the 32 to 32, okay.
Chair Filseth: Because that would be a normal thing to do.
Council Member Tanaka: Because if you look at per gallon, right, we’re almost double per gallon versus, I forgot which city it was, the one that was at 1399, and even at the closest
one we’re like 14 percent higher.
Mr. Bobel: Well, I can say, the one thing, almost all the costs, and we went through this and I don’t know if it was like 90 percent, but it was on that order, of the costs were the
costs of picking it up. It really isn’t valid to look at a per-gallon ratio. That’s not what drives the cost. It’s picking it up.
Council Member Tanaka: I actually thought about that too, because I looked at, you know, our rates. Like 27, 50, 100, 150 and you look at per gallon and you know, at 20 gallons is $1.39,
and then at 32, 64, 96 it’s $1.56. So, if we would truly think about it in terms of true cost recovery, it would get cheaper the bigger it got, right? Like bigger is cheaper, but it
does the opposite actually. The smaller is actually cheaper per gallon. Now we could also say that we want to push people to have less waste, and thus we want to incentivize smaller
cans, which may be true, right. But if our costs are driven by the cost of picking it up, not how much is in there, then maybe we should price it the other way around, right? Have it
be cheaper for bigger, maybe people would share trash, right, or share carts? Who knows.
Mr. Krugg: So that’s a great comment. If we look at the overall cost of our waste collection for the residential sector, and you take that and divide it by the roughly 18,000 single-family
households that we serve, the marginal cost is around $50, so that’s the, if just straight-up math doing that. We have a cost structure that’s been proven to work in terms of diversion,
which a pay-as-you-throw model and our attorneys have given us clearance through Prop 218 that this is an appropriate way within the sector to incentivize better sorting behavior. You
know, the smaller people’s garbage cans, the less they are apt to use it. Cities that have one-sized garbage cans, like Milpitas and Gilroy, have the lowest diversion rates in the County.
So, we believe this is a pretty effective way to work. I hear what you’re saying, though, and you know, one of the challenges we had when we were working on trying to bridge this Prop
218 gap of our residential expenses was, how can we make sure that the residents who were paying around, you know, $20 a month for their mini-cans didn’t end up paying $50 a month for
their cart. You know, which is again like the marginal cost for garbage service. So, we had to figure out a way to be fair to our residents to try to pay for all the costs that we possibly,
that we can to cover all of our residential expenses. So, I would say that our program, we have been highly touted around the State. We have very few complaints about Green Waste service.
If you call us up on the telephone, our telephone number, you can reach us at extension 5910 if you’re here at City Hall, there is almost always someone there to answer your call. And
I guarantee that you won’t find that same level of responsiveness in any of these other cities. So, I’m very proud of what we offer here in Palo Alto. Yes, it is a little bit more expensive,
but what we can provide and the diversion rate that has materialized because of that is the highest in the State, and it’s something that we’re very proud of as a program and we want
to keep doing. I just want to add really quickly. Mountain View, one of our SMART station partner cities, they only offer every-other-week recycling collections, so it’s less convenient
for the residents. They can save costs like Council Member Holman, what you were saying, you know, a way to reduce costs is by reducing the number of trips, cart and truck trips. We
experimented with that when we ran a two-cart pilot in the Green Meadow neighborhood a couple of years ago, before we instituted our food scrap program. So, we’re doing our best to try
to find ways to cut costs wherever we can, and provide the highest level of service. We are going to be coming up probably early next year, I would say, with a proposal on how we’re
going to move forward in terms of our future contracting. All of our contracts are essentially up in 2021, and so at that point in time there might be opportunities, further opportunities,
for us to save money and realize those savings to the rate payers.
Chair Filseth: Pay the $31 million for FY18.
Mr. Arp: Yes, it does.(inaudible)
Chair Filseth: Are those like $500, $5 million (inaudible)?
Mr. Perez: Let us take a look because I’m looking at a big summary. No, it’s okay. I’m looking at the adopted ’17 budget. Ron’s looking at the one that it’s coming, being prepared. But
one big thing that you heard Phil talk about is the rent and remind me guys, 2021?
Mr. Arp: Yeah, 2021.
Mr. Perez: The $2.5 million goes away in 2021, so that’s going to – you know, right now in the ’17 budget it’s $2.6 for salary and benefits and $2.5 for rents and leases, just to put
it into perspective. So, it’s like getting rid of salary and benefits in 2021.
Chair Filseth: …It sort of seems like the direct people stuff is 10 percent, right? So, that’s sort of a relatively minor piece, and the allocated charges is (crosstalk).
Mr. Perez: But it’s going to be much smaller than that, but I don’t want to guess here. I want to (inaudible).
Chair Filseth: But most of the expense is the contractors, is that an accurate statement?
Mr. Arp: Yeah, it’s $20 million, you know, over $20 million is just those three contracts that are just dependent on CPI’s.
Mr. Bobel: Just a note on that would be, like Matt and I both said, we’re going take another hard look at that in the course of the next few years.
Chair Filseth: I know Menlo Park uses some of the same contractors. I see the Green Waste trucks going down there, picking up their cans, too. In fact, because the first time I saw one,
I was like, “hey, that things got a mechanical arm on it’, right, and it was Menlo Park. So, they must use the same guys we do.
Mr. Arp: But they don’t take it through, they don’t send their waste to be sorted though. I mean, it just goes to the transfer and then out to Ox Canyon.
Male: Ox Farm.
Mr. Arp: Ox Farm, yeah, sorry, landfill.
Mr. Krugg: One more thing.
Chair Filseth: Make it quick.
Mr. Krugg: Yes, sorry. I wanted to be sensitive to the numbers and I’m thankful for Council Member Tanaka, your questions. One thing for perspective as well, a number that I don’t think
is represented in the staff report, is that the residential portion of the expenses make up about a third or about $10 million worth of our expenses. The commercial sector, which includes
construction, demolition debris, but also the regular collection of commercial garbage, represents two-thirds of our expenses, so the residential portion is, it’s just a set of that,
so that’s what we’re trying to cover with these rates. Just, it’s like a $10 million nut that we have to cover.
Chair Filseth: I sort of usurped Greg’s time so. I was just going to say one number that would be interesting that I don’t see here, I mean, first of all, thank you guys very much for
providing all this data that we got to pour over. One other interesting piece would be sort of our total cost versus number of people in town, so what’s the per capita as well, because
we have a lot more people here than Menlo Park too, and is it scale, is it not scale, and I don’t know, so. Council Member Holman.
Council Member Holman: Yes. A little bit of history, but Phil something you said made me kind of raise my eyebrows a little bit. I thought we were out of all of our put-or-pay contracts,
but something you said made me think that maybe we were not?
Mr. Bobel: I didn’t mean to imply that we still had a significant put-or-pay issue. That we primarily eliminated. Have we completely eliminated it, Ron?
Mr. Arp: Not necessarily. There are still, depending on what happens to our tonnage, we could have a very small amount of put-or-pay, but for the most part we have negotiated most of
that away.
Council Member Holman: Okay. Does everybody know what put-or-pay is?
Mr. Arp: Okay, sure. It’s a, we’re in a commitment with Waste Management in Kirby Canyon landfill in San Jose 30 years ago, when we started this contract, or 27 years ago or whatever,
to provide a certain tonnage level that increased really over population projections, and what happened is that basically the projection just kept going up and we got into the zero waste
community, started diverting everything, us, Sunnyvale and Mountain View, and basically we had to pay for the tons going in there, pay for the tons that did not go there but we were
contractually obligated to send in there. It was getting to be $500,000, $600,000 a year in just penalties basically.
Council Member Holman: Is there, you don’t have to answer this now, but I am looking forward to the time when we just don’t have any of that left.
Mr. Arp: Yeah, it’s pretty much, I think if we had a very small amount. I mean, just tens of thousands, it was last year. I think this – depending on tonnage, I think we’re not in that
put-or-pay situation now this year.
Council Member Holman: Okay, and then on the, I meant to ask this earlier, apologies for that, on the last page of the staff report, page 7, it talks about last sentence, in the resource
impact paragraph, it says “rates in all sectors are sufficient to cover expenses to continue rebuilding refuse reserves to appropriate levels”. But it doesn’t indicate what appropriate
levels are, and as you indicated, there was a $5 million hit a few years ago, so where are we with…
Mr. Arp: We are in pretty good shape now. We’re within our guidelines and we’re towards the top of the guidelines now, so we’ve been really putting a lot of money back into the rebuilding
the reserves, and a lot of that came with the closing the landfill and composting facility and selling, salvaging off the equipment and returning the vehicle funds back and that sort
of thing. But we’re getting, we are in an acceptable range right now.
Council Member Holman: What is that range?
Mr. Arp: It’s 10 to 20 percent of sales.
Mr. Perez: Minimum 10, max 20.
Council Member Holman: Okay, 10 to 20 percent, okay.
Mr. Perez: The (inaudible) the charge is $1.7 million.
Council Member Holman: What was that?
Mr. Perez: $1.7.
Council Member Holman: And the other thing is, just a quick comment, no response is needed, but you know, one of the things that kind of makes me a little nuts in watching our cans get
picked up is that they come down one side of the street and pick up the garbage cans and come down the other side of the street and pick up the garbage cans, so if we could go to something
like an every-other-week model or something like that, or shared can model, something like that, we would not only save on costs, but we would also save on greenhouse gas emissions.
It’s really unfortunate, so.
Mr. Bobel: We agree and we’ve got it in as a staff goal to reduce greenhouse gasses from garbage trucks, sustainability/carbon, climate action plan. So, we agree and are working hard.
We, I just mention in that direction, one thing we are doing is we’re going to have our first electric garbage truck next year, Green Waste is purchasing that and we’re excited about
that.
Council Member Holman: Okay. And then the last thing, since there hasn’t been a commercial increase since, you said 2010?
Mr. Arp: There was one.
Council Member Holman: There was I mean, one since 2010. Is that because it was fully in alignment with Prop 218, or is it because they generate so much waste that, so what?
Mr. Bobel: Let me try that one, Ron. I’m going to use hand motions to do it. So, picture a situation where the residential is paying too much and the commercial, I’m sorry, the commercial
is paying too much and the residents are paying too little, I’m sorry. So, this is commercial, it’s paying too much. So, if we raised rates the same amounts in both sectors, we wouldn’t
get anywhere toward balancing, right? So, we have had to increase residential much more than commercial in order to get the two back in balance. So, like Ron said, we only increased
the commercial one time over this time period and we have been increasing residential so that it’s balanced. Now going forward, what we hope to do is have both sectors continuing to
pay their fair share, and the two would go up more or less with CPI, Consumer Price Index, we hope, in the future.
Council Member Holman: I understand the level, the little teeter-totter here. At the same time, is it, if it’s proportional to how much waste they are generating how much service they
get, isn’t that a different dynamic than this?
Mr. Bobel: You’re right that there are sort of competing goals in there and we’ve let the goal of balancing those two sectors control for the last three years. It was the only way to
get the two sectors back in balance, and what we were advised was the most critical thing and the way other cities have approached this that have tried to address the problem. The most
critical thing with respect to Prop 218 is that the sectors are balanced, rather than trying to micromanage within the sector.
Council Member Holman: Great. Thank you.
Council Member Tanaka: What is the balance actually? I’m assuming it’s not 50/50.
Mr. Arp: That’s right, two-thirds, one-third.
Council Member Tanaka: And what is that proportional to from Prop 218? Is that based on their service? Is it based on the number of businesses versus the number of households? What’s
it actually based on?
Mr. Arp: Our expenses.
Mr. Bobel: Could I just add one thing, back to your question, I still feel like we haven’t completely answered, why does it cost more in Palo Alto for a 32-gallon can.
Chair Filseth: Well, I think if you look at your chart. I mean, we’re the most expensive guys in town, right, pretty consistently. And it isn’t just the street sweeping, because that’s
like that much of it. So, I guess we’re sort of trying to understand better why that is.
Mr. Bobel: So, let me sort of throw out another thing that we haven’t discussed. And it is hard for even us to judge this, but some cities, and I think Menlo Park is a good example,
actually all those cities that use Recology and use that San Carlos transfer station between Menlo Park and what, South San Francisco, they are all in the same boat. They’ve formed this
joint powers authority, and they use that transfer station at San Carlos and they transfer the garbage to a landfill. That’s all they do. So, what we do is we do three different things.
We take our garbage to the SMART start in Sunnyvale where it’s sorted and recyclables that human beings have failed to remove is removed. So, a lot of cities don’t do that. They don’t
put their garbage through a processing line. Secondly, we take our compostables in the green container, the green container goes to a new state-of-the-art facility, first of its kind
in the nation actually, in north San Jose, which is a dry anaerobic digester. And just to provide some context for the newer folks, we sent through this exercise of costing out doing
something similar to that here in Palo Alto, and that was directed by the Measure E initiative in Palo Alto, that we investigate this. We determined that that cost was too high to have
our own facility here in Palo Alto, but the fortunate thing that occurred was it happened to be our hauler built this state-of-the-art facility, mostly for San Jose, but we got in on
the deal. So, our compostables are now going, both our yard trimmings and our food waste mixed together are going to this state-of-the-art facility in north San Jose, where it goes to
a dry anaerobic digester, methane is extracted and then the residual goes to their compost facility in Gilroy. And this was as good as we could do, and is much better than other cities
are doing that are not using that facility. So, we’re extracting both energy and compost from our compostable materials. Actually, those are the two main differences that I would point
to. Now, we may be paying more than we could negotiate again if we had to start over, and that’s why in 2021 it’s going to be important for us to really see who can provide all of these
services under one umbrella for us. Because I think that will be cheaper than having the three contracts we have now. So, I did want to point out that, like in Menlo Park, their stuff
doesn’t, I mean, it disappears and if that’s all one is interested in, then yes, it can be much cheaper. But ours is taken to essentially state-of-the-art facilities.
Chair Filseth: I understand. And so when you say Recology and transfer to this station in San Carlos and it goes to landfill, you’re talking about compostables, is it? Are we comparing
apples to apples here?
Mr. Bobel: It doesn’t go to the place in north San Jose where ours goes.
Chair Filseth: Well, our garbage doesn’t go there either. It’s our yard trimmings and food scraps.
Mr. Bobel: Well, you wouldn’t want to put your garbage in there. And I thought you were asking where do their compostables go.
Chair Filseth: Well, it’s sort of trying to do an apples-to-apples comparison.
Mr. Bobel: We’re not sure where their compostables go.
Chair Filseth: Okay, because I mean even if you look at that, compostables is $5.6 million out of the total, which is like 16 percent or something like that. So, even if they are paying
half that for compostable, it’s still only a couple of million dollars’ difference. So, I mean, it sounds like you’re sort of potentially looking at, yeah, a couple million here, a couple
million there and so forth, and it adds up after a while. But it still struck me that solid waste and recycling together account for more than everything, for some of the other cities.
It’s still not terribly visceral.
Mr. Bobel: And it could be that the economies of scale are helping those north cities out. Like I say, they banded together.
Chair Filseth: Although I assume if you’re talking north cities, then Santa Clara and San Jose probably wouldn’t be part of that.
Mr. Bobel: They’re not part of it. It’s just the ones to the north of us.
Chair Filseth: We’re still quite a bit more. I mean, it’s up and down, the pattern is up and down the peninsula, right. It’s not just the north cities, it’s the south cities too. Are
there any more questions? Yes.
Council Member Tanaka: So how do our commercial rates compare to other cities?
Mr. Krugg: Well, our commercial rates, as Ron mentioned, we only had one rate increase, the 5 percent rate increase last year. Generally, our rates are competitive. We haven’t done a
full rate comparison in the time that I’ve been here, in the five years that we’ve been here, because we haven’t really monkeyed with the rates at all.
Council Member Tanaka: The reason I’m asking is, because one of the reasons you said why ours is 2x, 15 percent to 2x more than our neighboring cities is because the residential rates
are artificially low, now this is going to catch up eventually to be, you know, compliant with 218. So, what I’m wondering is, are our commercial rates like higher too, and if so, then
we have a problem, right? I mean, we have a structural expense problem. Or if it’s lower than other cities, then what you said makes sense. Maybe we’re just trying to rebalance stuff.
So, I’m just trying to understand what’s happening here.
Mr. Krugg: I don’t want to give you misinformation. We don’t have, I don’t have a comparison in front of me and I know that I just got a request from San Jose that’s looking at reviewing
their commercial rates, so they are looking to share their information with the rest of the folks in the County to see where everyone’s at relative to the commercial rates. So, I can’t
tell you one way or the other whether our rates are high or low. One thing that we did do this past year was that we, when we raised our garbage rates 5 percent, we actually lowered
the rate of our organics, the compost side, so it was priced at a 10 percent discount relative to garbage, and now it’s at a 20 percent discount relative to garbage. So, we believe that
was designed to help defray the costs of our recycling composting ordinance requiring people to have compost service.
Mr. Bobel: Let’s try, we’ll be back to Finance on this, so we’ll get some commercial comparisons and bring that back.
Council Member Tanaka: Okay. Well, maybe an easier question is, if we look at this, so two-thirds of our cost is commercial, right, and one-third is residential. And in terms of revenue,
what percentage right now do we get from residential, and what percentage do we get from commercial?
Mr. Bobel: So, we’re only out of balance by that 5 percent that we’re increasing, right, so at the end of FY ’18 we hope to be able to say that our math has all worked out.
Chair Filseth: (inaudible). So, what are we asked to do tonight?
Mr. Perez: You’re asked to approve the staff recommendation for just status quo except for the outer year, and what they will do is then go through the Prop 218 notification and notify
the rate payers and wait for the results of any complaints submitted to the Clerk’s Office. If there’s 51 percent or more against the rate, then it does not go forward.
Chair Filseth: Does this go to the Council (inaudible) or anything like that?
Mr. Perez: What will happen is it will go as part of the budget adoption process in June, so you will get another cut at the pie, if you will, in May.
Chair Filseth: So, we’ll see this again during the budget process?
Mr. Perez: Yes, you will see the whole refuse budget in May.
Chair Filseth: Got it.
Mr. Bobel: And that’s when we can bring back a couple of these things you’ve asked about, most notably the commercial comparison.
Chair Filseth: Actually, you know, the number that I would like to know what is, is it would be really good to do – I mean, kind of this good analysis you guys did on rates relative
to context of other cities. It would be really good to see the cost – and I suppose we’re talking about the residential cost, right, the cost per capita versus the other cities, and
I think not just the total but maybe broken out in some of the major components. So, solid waste, recycling, composting, because I’m getting confused. I mean, I can’t keep up, I’m getting
confused thinking about, okay, composting is going to San Jose but oh the landfill is going somewhere else. It would be nice to see it all parsed out.
Mr. Bobel: Right, and I already had a note on that, because Council Member Holman had raised this, the total cost per number of people. So, we’ll…
Chair Filseth: But that’s what we ought to be looking at right? Our cost of delivering services per capita and, so what’s the difference?
Mr. Bobel: We can do that.
Chair Filseth: How do we?
Mr. Bobel: We can do that.
Chair Filseth: You know, are we getting our money’s worth for the difference and so forth? Okay. Motions.
Council Member Fine: I’ll make the staff Motion that we recommend Council adopt the attached Resolution amending the utility rate schedule R1.
Council Member Holman: Second.
MOTION: Council Member Fine moved, seconded by Council Member Holman to recommend the City Council adopt (as part of the Fiscal Year 2018 Annual Budget) the Resolution Amending Utility
Rate Schedule R-1 (Residential Refuse Rates).
Chair Filseth: Do you care to speak to your Motion?
Council Member Fine: I mean I do want to thank staff for all the hard work and sorry if we gave you a hard time. I think it is important for us to just evaluate these costs in comparison
to other cities, so we look forward to working with you again.
Mr. Bobel: I was just going to say, the other thing we can do that I think may help, as we discussed all the reasons, we kind of threw them out one at a time, and none of them were huge,
these differences. So, I think if we listed them all and showed you the amounts and added them up, in fact you said it, it’s like, “well, it’s a million here, it’s a million there”.
Nothing’s really significant, but you add these things up and then that is the difference. So, we’ll try to do that better for you next time.
Mr. Krugg: I just want to add, we could also add some cities that actually are more expensive than us too, up in the rest of the Bay Area. So, there are some, believe it or not.
Council Member Holman: And also, to thank staff for all the good effort and I was at the Arbor Day event I think recently, and learned something from Matt having to do with garbage and
recycling that I was not aware of, so thank you for that. This group of people is always like so well informed and ready to respond. It’s really impressive and much appreciated, and
appreciate very much your continued endeavors to help us get lower and lower on what we’re putting in cans.
Council Member Tanaka: Yeah, you know, I think 5 percent makes sense, just because you have to make things balance, but I’ve got to tell you, a lot of other things don’t pencil out.
I mean, that’s the only thing that maybe pencils out for me, but everything else doesn’t make sense, right. Our cost, a lot of other things we talked about, so I’m actually pretty dissatisfied
with this and I think Chair Filseth’s recommendation of having some sort of KPI makes total sense to me so we kind of understand where we stand. Because right now it’s hard to know.
I think to our rate payers it doesn’t seem fair, it doesn’t seem right. I mean, unless I sat down and really looked at this, it wouldn’t make sense to the average consumer. So, I think
it makes sense in terms of balancing, but other than that, it doesn’t make sense at all.
Chair Filseth: I think, given sort of the fixed nature of all this, it’s not like we’re going to be making a lot of adjustments now to contracts that don’t expire until 2021 and so forth,
but what I would say is if we were coming out in the middle of everybody else, I mean, if Menlo Park was there and Mountain View was there and we were there and so forth, you probably
wouldn’t get this level of scrutiny. So, I think it’s incumbent on us when you see something like this, where we’re kind of the outlier here, you know, that actually it probably should
get some scrutiny, both now and in the budget process that’s coming in May. With that, all in favor?
Motion caries unanimously. Thank you, guys, for all your work on this and for the highest rate of diversion.
MOTION PASSED: 4-0
The Committee took a break from 8:04 P.M. to 8:06 P.M.
Utilities Advisory Commission Recommendation That the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2018 Water Utility Financial Plan; and (2) a Resolution Increasing
Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-4 (Residential Master-Metered and General Non-Residential Water
Service), and W-7 (Non-Residential Irrigation Water Service) and Removing the Drought Surcharge.
Chair Filseth: Let’s proceed to Item Number 2, which is the UAC recommendation on the water utility financial plan.
Jonathan Abendschien, Assistant Director of Utilities Resource Management: Good evening Finance Committee members. I’m Jonathan Abendschein, Assistant Director of Utilities Resource
Management and tonight we’re going to talk to you about the water and wastewater utility financial plans and rate changes, starting with the water. So, I will turn it over to Eric Keniston,
our rates manager for the water utility financial plan presentation.
Eric Keniston, Utilities Resource Manager: Good evening Council Members. So, launching in, tonight we’re going to be discussing, actually we were here just two weeks ago and nothing
significantly has changed from what we mentioned last, those two weeks ago. So, the water rate increase we’re bringing to you tonight is 4 percent. I guess the other things you might
– I could also say wastewater is proposed to be zero. On the other utilities out there, we’re showing a 12 percent in electric and no in gas. So, again, our favorite chart shows all
the utilities. The blue line shows revenues projected, and actual going back five years. As you can see, the largest component of our costs is the water supply, and that is also the
one that is projected to be going up by the most, and is the reason why we are requesting the rate increase tonight. The rate increase we are requesting is entirely for water commodity
costs. The other notable components here are the orange, the capital investment. As you notice in FY ‘17 and ’18 we have a two-year, we’re not going to be creating any new capital projects
for main replacements. Those will be restarted up again in FY19. Operations and maintenance and debt service continuing on, are roughly about inflationary increases going forward. This
is a new slide we’ve added this time around. We are showing just the change between FY’17 and FY’18. As you can see, the vast majority is projected to be water supply. So that’s where
we’re really seeing our – what we’re planning on happening and the upcoming increase. It’s going to be a $0.36/CCF increase. That’s what we’re anticipating the SFPUC is going to be passing
on through to use. As for reserves, we’ve pretty much used up any rate stabilization reserves that we have in play. FY ‘17, ’18, we’re going to have a little bit of capital reserve that
we can use, bolster. There’s that unassigned. It’s an anachronism of the model, but we are projecting to draw down reserves a little bit in the future years, which is why in the future
we have a series of 7 percent increases going forward. When we first came, when we were first looking at rate increases, we were thinking we might do a 6 percent rate increase, but we’ve
opted to drop that down to 4. I think the main thing, and I waited a bit too long to bring it up, but we’re going to request deactivation of the drought surcharge, and what this will
end up doing for customers is, even though we are increasing the base rates by 4 percent, with the removal of the drought surcharge, customers are actually going to see a rate decrease.
The reason why we’re going to see, or we’re projecting that we’re going to get slightly increasing revenues is because we’re seeing sales increasing, as is typical after a drought, sales
continue to tick up. Hopefully, this trend will continue. And something we’ll bring up in the future is something that is allowed under Prop 218, is that we may suggest doing a sort
of pass through of the SFPUC commodity rates, particularly if the SFPUC rates end up coming in lower than what we projected, we might opt to do another, we would have to do this as another
Prop 218 notice, notify customers that this is the, we want to pass through this cost from SFPUC and do it the same way. We could do that for up to five years before we would have to
reratify. For projected rate changes, we are coming in lower than what we had projected in last year’s financial plan for FY’ 18 and ’19. It’s been our past requests to try to levelize
rate increases whenever possible, and at this point in time reserves allow for that, so we are, that’s what we’re planning, a 4 percent with a series of 6 percent rate increases going
forward. Sorry if I misspoke earlier. And with this path of rate increases, operations reserves are expected to remain healthy, right around the target reserve range, so adequate to
meet future needs. Again, here’s the 4 percent rate increase off of the base rates, but the actual impact if we remove the 20 percent drought surcharge will be a decrease for all customers
across the board. So, that will, hopefully, be welcome news to all. And that actually ends my presentation, my formal presentation and thus the recommendation to adopt the resolution
for the financial plan and to amend rates as shown, and I welcome your questions.
Chair Filseth: Thank you very much. Any questions? Council Member Fine.
Council Member Fine: Thank you. I’ll lead off. Thank you very much. A lot of good info in here. One big comment and a couple of random questions. So, one, it’s really nice to see that
we’re actually reducing rates across the board, commercial and residential. I think that’s really important in messaging actually. You know, don’t message this as a 4 percent rate increase,
just say, like your rates are going down 1 or 2 percent, and I think to some degree, you know, residents just see that, the final cost. A couple questions. So, I saw that the capital
reserve is going away. Do we have any need to build that up over the future, are we planning to?
Mr. Keniston: So, the capital reserve, it’s set aside, we put money there to be used for future projects, but it’s nothing that we really, we don’t actively ever try to increase or fund
those reserves, unless we know that we’re going to have some sort of long-range projects big that we need to work on in the future. And right now we’re still, there’s always potential
that something could crop up, say replacement of the ling going up into the foothills, but for right now we don’t have any specific projects in mind that would require us to actively
increase that reserve.
Council Member Fine: Fine: Okay, but I did note in your report, it says you’re seeing a lot of replacement delays. I’m wondering if you could kind of explain those, what’s causing them,
and if there is anything that may be blocking you actually from doing those faster and more cheaply?
Mr. Keniston: Well, so as I mentioned last time I was here, one of the main drivers for why we’re delaying CIP projects actually in water, wastewater and gas are that we’ve seen costs
increasing from the bids that have been coming in for projects as spect, have been higher than what we had budgeted. Now, taking those projects back, redrafting them, trying to get them
into smaller size and then repackaging them and get them out for rebid, it’s sounds good, except we’re also understaffed, so we’re having some issues. We just got a crunch in time and
staff and resources to get projects redrawn. We also have, we also are limited in staff in regard to actual construction staff and operations, operational staff, so it’s – we also have
a backlog in projects. The California Avenue project is kind of creating a little bit more, needs a bit more maneuvering. So, all that being said, it’s just a more realistic plan that
we work on what we have currently in the hopper, and then come back in 2019.
Council Member Fine: It would be nice to track this.
Ed Shikada, General Manager of Utilities: Yes. If I might correct that, Eric. You said California Avenue. I think you meant University Avenue. (crosstalk) You have a major water replacement
on University and recognizing the potential for business disruption, we’re taking extra time, both in terms of the planning, preparation, coordination with others as well as the outreach
that’s upcoming.
Council Member Fine: And just two last quick ones. One, so I also notice you are thinking of recommending the pass through just for the commodity costs. Has this Council ever turned
those down?
Mr. Keniston: Pass through, no. We’ve never, I believe every time we’ve offered a pass-through option they’ve been accepted. We’ve done it with the gas for commodity costs, with transportation
costs. So, in general, they’ve been accepted. What would make this one different is when it comes to water, it is Prop 218 beholden, so it comes with a bit more rigmarole. There’s the
noticing process. Then again, it has to be reratified every five years.
Council Member Fine: Okay. I’m just trying to identify what challenges there would be for there. And then, just the last one. So, how have our estimates in the past against SFPUC played
out in terms of the CCF price, because it seems like we’ve got to go out and notice folks beforehand, before they set their prices. How close have we been, or how far?
Mr. Keniston: Well, most notably, when we did the last run of financial planning we thought that the rates would come in at $4 and a penny. They actually ended up coming in at $4.10,
so there can be quite a bit of variation at the last minute, if the SFPUC comes through and says, “we need these funds”, okay. Is it possible that they come in at something lower than
what we projected? Yes, but unfortunately, we don’t get the final word on that until it’s too late from our perspective.
Council Member Fine: Okay, thank you.
Chair Filseth: Council Member Holman. Yes, two things. I noticed when I was reading this, and I underlined them. Packet Page 16, the next to last paragraph on that page. It says that
water utility may see a million dollar increase in operating costs for capital, leased, for emergency generators, as well as pump stations. Why? And if you go back further up in the
page, it talks about the next five years and then going back down to this, aside from that, operating and CIP costs are projected to roughly rise 2 percent to 4 percent annually over
that time. So, two things. One is, why the $1 million dollar increase anticipated, and why 2 to 4 percent CIP cost increases given the different kinds of construction projects, but we’re
being told other construction projects are coming in at much higher escalating rates than that? It’s good news that these are lower, but I’m wondering where the disparity is. Does that
make sense?
Mr. Keniston: My apologies. I was trying to bring up the report here.
Mr. Abendschein: So, the $1 million increase related to the emergency generators, this is to ensure that we have generators at every well and booster station for emergency operations
in the case of a power outage. If we have to move water around the system, we need to have backup generators. Right now we have a few generators that we can move to different locations
on the system to maintain a critical level of operations, but for long-term emergency preparedness we have been looking at adding those in for a while.
Council Member Holman: So, to be clear here, so we have generators that we could move around, but we don’t have a generation, excuse me, a generator per site, and that’s what’s being
recommended here? I think it would be good to clarify that.
Mr. Abendschein: We can do that. And you also asked about the 2 to 4 percent increases.
Council Member Holman: Yeah, for CIP operating and CIP costs.
Mr. Abendschein: You know, this is just related to the increased costs of materials and construction that we have been seeing for the last few years. The construction industry is booming
in the Bay Area, even for underground construction, and we have seen very significant increases in costs. That said, the increases for main replacement costs that we see are a portion,
not all of our capital costs, so when you factor it into the entire capital and operations bucket of costs, it comes out to a 2 to 4 percent increase. So, very large increases on a small,
but significant portion of the entire bucket of operations and capital costs.
Council Member Holman: Okay, large on some, small on others, so it averages out to this 2.4.
Mr. Abendschein: That’s right. We do some of our capital in-house, for example.
Council Member Holman: Yeah. I think, just speaking for myself, I think that’s also a little bit misleading. Again, we’ve just been talking for how many months about escalating costs
of construction/CIP costs and some of this is, I think the way you described it would be helpful, so it doesn’t raise the same question for somebody else.
Mr. Abendschein: Okay.
Council Member Holman: And, I think I had, yeah, looking back where we were the last time, looking at Packet Page 17, Comparison of Costs, Table 8, and these are residential monthly
water bill comparisons, and when I first glanced at this I thought, “oh, it’s because we get our water from SFPUC”, and then I started looking at the town, it’s like, “well, wait a minute,
they probably do to.” And then the text after that it talks about Menlo Park gets 95 percent, Redwood City 100 percent, Mountain View 87, and 100 percent for Hayward. They are all SFPUC
water. So, once again, why are we not an outlier, but we’re up there compared to other SFPUC jurisdictions?
Mr. Keniston: We actually did a benchmarking study back in 2010 to sort of look at this exact issue, and one of the things is actually made a slide for it, so it’s right up here. Our
facilities in general compared to other (crosstalk).
Council Member Holman: You’re ready, but holding out.
Mr. Keniston: But in general, our water system is older than surrounding communities, so requires more maintenance capital needs. We do have a more aggressive infrastructure program
than surrounding communities. One of the other things is, we also with the zones – I mean, if you look at some of the other places where we compare to is going to be flatter. We have
more hills and that does come with some additional costs, more pressure zones, more miles in main per customer.
Council Member Holman: Can I just interrupt. Redwood City, for instance, they have some pretty significant hills.
Mr. Keniston: They do in some parts (crosstalk).
Council Member Holman: So, and they are $10 less than we in some areas, and more in others.
Mr. Keniston: I can’t speak directly to Redwood City, but I believe it’s also a choice of how much main replacement is done, is chosen to be done, how much of system replacement is chosen
to be done. So, we do have a higher quality of service, fewer complaints and outages. Now, also, when you come to, I believe Redwood City also does utilize some well water. I won’t speak
much on that.
Mr. Abendschein: I think you can boil down the, what we found in the past, because we’ve been looking at this question, it comes up regularly because we have had higher water rates than
most of our surrounding cities and, in fact, all of them at this point, for probably 15, probably over 15 years. If you go back and look at the 25-year history, we started to see major
increases in water rates when we started to do our aggressive infrastructure replacement, back in – we adopted it in the 80’s and kicked it off in the 90’s. There are very few cities
in the Bay Area that are replacing their infrastructure on the pace that they need to be replacing it on. When we started that, well earlier than other cities, we started seeing our
rates, our rates rose above surrounding cities. So, I’d say there are two things that make our rates higher than surrounding cities. One is higher level of service. And that goes to
sustainable infrastructure replacement number one. Number two, emergency preparedness. We have an ability to restore service and continue service in case of an emergency that surpasses
most surrounding agencies. Then number three is the fewer complaints and outages. That’s also been found in the benchmarking studies we’ve done. So that’s, factor number one is higher
level of service. Factor number two is certain aspects of the layout of our system that are substantially different from surrounding cities. You say Redwood City has a lot of hills,
but there is no comparison to the setup that we have with a large transmission line running way up into the foothills and five reservoirs up there, and nine different pressure stations.
That development was put in place years ago when there was still the possibility of expanding up into the foothills, expanding development up into the foothills. After the system was
developed and that configuration, we no longer, we were left with this infrastructure setup and it imposes additional costs. So, for example, one of our water transmission representatives
or employees who has to sample at the reservoirs and monitor the reservoirs has to drive 45 minutes up into the foothills to actually do that sampling, and this is, you know, a weekly
operation. So, that and a series of other factors related to customer composition and different usage patterns all contribute to the higher cost of water in Palo Alto. We can share some
of these benchmarking studies. We have sent them to the Finance Committee in the past.
Council Member Holman: If there is a short way to answer, because I don’t want to take a lot of time here, but if there’s a short way to answer the nine lines that feed up into the foothills,
when was that put in place?
Mr. Abendschein: I believe it was, it would have been back in the probably 50’s or 60’s. Yeah. So, we’re in the process of replacing, this is the aging infrastructure aspect. Palo Alto
was one of the first cities to develop on the peninsula, so this infrastructure that was put in place is now, it’s getting time to replace it, so that’s another reason for our higher
maintenance and capital investment costs.
Council Member Holman: So, I guess my question is, directly related to finances, if those nine lines were put into place, I know even in the City…
Mr. Abendschein: Can I clarify. It’s not nine lines. We have nine different pressure zones, so you have to segregate by pressure as you go up the foothills. So, there is one line, five
reservoirs, nine pressure zones.
Council Member Holman: Okay. That makes a big difference.
Mr. Abendschein: Yeah, it’s not nine lines. I suppose, was that where your question was going? Why did we put that many lines?
Council Member Holman: Well I was just saying, like if, because we’re not going to develop the foothills, so it’s like can we just not replace some of those. That’s where I was going.
So, but now I understand it’s pressure zones and not different lines.
Mr. Abendschein: Well, we are looking at ways to improve on that layout. For example, these reservoirs, we’re looking at, because they have aged out, we’re looking at replacing them.
Well, we’re considering options right now on whether we can rebuild or consolidate reservoirs to reduce some of the maintenance expenses in the future. So, we’re looking at options like
that.
Council Member Holman: Okay, good. Thank you very much.
Council Member Tanaka: Thank you for your report and putting this together. I almost feel like déjà vu, because the same theme happens, which is, we have higher level of service and
so thus we cost more. And it seems to be a very, like a theme that goes across all of this. Because I lived in (inaudible) for many years. I lived in Mountain View for many years. And
I have to tell you, from the consumer point of view, or from the resident point of view, I mean, I’m just thinking about like, do I feel like my trash has a higher level of service,
do I feel like my water has a higher level of service or my power had a higher level of service? I would say “no”. I mean, if you were to ask the average person. Now if you really got
into the report, maybe you could see small greys of differences. This seems to be a very hard thing to explain. Across the board we have higher level of service which are largely invisible
to most people. At least, I would assume so. So, it seems like a very systematic pattern across everything in the utilities. Is that pretty much true? Like we have higher rates than
all of our neighbors, (crosstalk) high level of service.
Mr. Abendschein: I actually wouldn’t characterize it that way. So, we have some utilities where our prices are lower, for example our sewer and electric utilities, significantly lower
in our electric utilities, and in some cases lower and we provide a higher level of service. So, for example, our sewer utility provides a higher level of service to residents by taking
care of their lower laterals, which very few other cities do, and yet we have lower sewer rates. The same with our electric utility, we have 100 percent carbon-neutral electricity and
a variety of other services, great reliability, and yet we have some of the lowest utility rates in the State.
Mr. Shikada: So, if I were to perhaps reinforce that, a couple of things that Jonathan hit. Conservation has absolutely been a priority for this community and that’s reflected both in
terms of the approach to services and to a certain extent the cost, but not always in higher costs. The other is reliability, and you know, it is sort of a buzz word. So, to unpack that
a bit, as specifically related to the water utility, projects such as the El Camino Park reservoir and the emergency supplies provided by the reservoir system that the City has established
over decades, but again, as Jonathan pointed out, it does require ongoing maintenance, replacement. It does, in this particular case, require a higher level of investment. So, I think
those are two examples where I have certainly seen in the brief time I’ve been with the City, a very consistent pattern of investment and placing priorities on those for the organization.
Council Member Tanaka: Okay. Well, we just came off of one action item which was trash rates, right, and we were the highest I think. We just a few minutes ago, so I do remember that.
Mr. Shikada: Don’t forget electric though. We are significantly lower than PG&E. So again, it’s all in packaging.
Council Member Tanaka: Okay, so, for – do you guys have a breakdown of how much labor the City of Palo Alto has in this? What percentage is labor?
Mr. Keniston: I don’t believe we have a graph here.
Mr. Perez: The total benefits and salary is $6.5 million out of $57.8 million budget, so (inaudible). Yeah, and then in terms of – I’ll let you do that. I think you’re doing the calculation.
Council Member Tanaka: So, it’s 11.2 percent, is that right?
Mr. Perez: That sounds about right.
Council Member Tanaka: Okay, and what has the increases in labor been over the past few years?
Mr. Perez: Well, it depends on capital projects, right. So, if they have, because depending on the workload they move people around from different areas, so the salary itself, the actuals
have ranged over the last couple of years, $6.1 million, $5.9, $5.7 to the $6.46 that I just gave you.
Council Member Tanaka: What percentage is that yearly?
Mr. Perez: Year over year?
Council Member Tanaka: Yeah, every year.
Mr. Perez: Well it declined…
Council Member Tanaka: What’s the average?
Mr. Perez: You know, our increases have been in the 2.5 percent in terms of general salary increases.
Council Member Tanaka: And over that time period in terms of head count.
Mr. Shikada: Again, I’ve only been here for a couple of years, but it’s been pretty flat. Jonathan, can you speak to increases in personnel?
Mr. Abendschein: Yeah, I believe it stayed fairly flat overall.
Mr. Shikada: And most single digit increase in number of personnel. I would also note that Jonathan actually now in this role of Assistant Director, it’s a new role for him because he’s
actually spent the last three years, is it?
Mr. Abendschein: Two years.
Mr. Shikada: Two years as the manager of water, gas, wastewater, operations, and notable to your point on labor that organizationally we have the water utility, the gas utility and the
wastewater utility as an integrated unit, effectively, somewhat distinct from the electrical in terms of the skills involved, but allows them to redeploy people as needed among those
utilities.
Council Member Tanaka: Okay, and if you compare this 11 percent of labor, how does that compare to other cities in terms of percentage of labor? Are we higher or lower?
Mr. Abendschein: It’s very challenging to benchmark. We did an extensive, we dug into, did an internal benchmarking in 2014 and it does look like maintenance – I don’t know if we got
down to the level of labor versus materials, but overall, operations and maintenance was higher for Palo Alto than other cities. It’s very…
Council Member Tanaka: A lot more or just…
Mr. Abendschein: I’d have to go back to that benchmarking study, but it was enough to, you know, it was enough to be significant and, again, that goes back to some of the issues we were
talking about, about the design of the system and the fact that it’s older. We have a lot of water leaks that we have to replace or fix.
Mr. Shikada: That said, I would note, I really appreciate the question because as we are heading into the budget cycle and public discussions of our rates, it is really important, and
a conversation that we have been having among staff, that we be able to answer those questions quickly. So, you’re giving a heads up on some of the homework that we want to do to have
these answers prepared and ready to go.
Mr. Perez: You also have a limited number of cities to compare yourselves to, because not so many cities in California…
Council Member Tanaka: You could probably against PG&E as a whole.
Mr. Abendschein: For electric we can do that, but for water we would want to – and it gets challenging because different people will categorize different costs. Some might have meter
reading or meter – they might have meter reading sitting in their Finance Department, so it doesn’t show up on their financials, and then you’re asking – it can be difficult to get staff
attention to help you hack through every single piece of their financial reports, so we did that a few summers ago, and we got, we had some results, but I don’t have everything in front
of me tonight to share with you, unfortunately.
Mr. Perez: I should have clarified my comment. I was referring to gas, because I assumed you were talking about the whole package, sorry.
Council Member Tanaka: I mean, it’s, I think what’s important is a set of benchmarks, right, so we understand how we compare. Are we best-in-class, right? Like, for instance, we say
we’re best-in-class where we have a higher quality of service than other cities, right. It would be great to say where that is. To say we have less calls. Really, like 30 percent less
calls or 10 percent less calls or 1 percent or – maybe the higher rates are okay because we do provide this higher quality of service, but what is it, right? Like, quantifiably, how
much higher is it, and does this higher quality of service, is it worth the extra… You know, I look at some of these rates here, we are like, compared to other cities we are, you know,
double. Like, again, Santa Clara. And maybe we have double the quality of service. What is it, like quantifiably what is it, because we see the dollars very quantifiably, right, that
we’re much more expensive, but where are the numbers that back up the quality of service claims?
Mr. Abendschein: And we and you have to be able to articulate that quickly and easily, and I, I think we need to keep working on that. For Santa Clara, I’ll just speak to Santa Clara
specifically, that is the one comparison agency that uses no SFPUC water, so they use ground water with the attendant quality and equipment impact issues, and they don’t have the seismic
resiliency in their water supply, because the State’s water project and Central Valley project have not actually done the seismic work they need to do that the Hetch Hetchy system has.
Chair Filseth: So, if I can interrupt my colleague here and throw in a data point that speaks to what he’s talking about, and that’s you know, when I heard you talking about this stuff,
it sounds like an architectural problem basically, which you would look at. So that makes sense. If you look at the cost projections, right, this wonderful chart, it looks like, you
know, a little under half of our total expense is commodity, right. It’s the same commodity cost between us and all the other cities that use SFPUC, so if we’re what look to me like
30 percent, 40 percent more expensive than other cities on the SFPUC clients, but half the costs are the same, then for the other stuff we’re like 60, 70, 80 percent more expensive than
the other cities. That’s a lot of architecture difference, so it sort of speaks to Council Member Tanaka’s point of, where is this, right.
Council Member Tanaka: Yeah, to me it seems like we have, it seems we have a structural problem, right? I don’t know what it is, and I wish, I mean, like when I asked what percentage,
like a percentage of labor, like how much higher are we. I wish you guys actually knew, because something doesn’t seem right. Like, how can we always be higher and yet we can quantify
a lot of the quality-of-service claims that we have. So, I look at the water utilities, it goes up, you’re projecting 6 percent going out, which is, I guess, about double the rate of
inflation, right, roughly.
Chair Filseth: Yes, commodity cost.
Council Member Tanaka: I understand that’s commodity cost, but still seems… Anyways, I don’t think I fully understand why.
Chair Filseth: I take it back. That’s our cost. Commodity cost is around 3 percent, right?
Council Member Tanaka: Yeah, that’s true.
Chair Filseth: Commodity cost is only going up 3 percent a year?
Mr. Abendschein: I’m sorry. Where are you looking?
Chair Filseth: Yeah, commodity costs rising 3 percent a year, our charges rising 6 percent a year.
Mr. Abendschein: That’s right. So, and that has to do with the fact that our revenues, again, our revenues are below costs, and so we’re trying to catch up, which, again is hard to explain.
Council Member Tanaka: We have some of the highest rates, and…
Mr. Abendschein: So, we, I’ve tried to satisfy myself on this question, because it is a – you want to be able to point to one specific thing, and the problem is, it is three or four
different things. It’s not just the one architecture problem, it’s three or four architectural problems. It’s not just the one reliability issue, it’s three or four, or reliability value
that we’re delivering, it’s two or three different reliability values. And so it’s very hard to deliver in two or three sound bites, but it is the kind of thing that I think we, I think
we may be, I think in a more extensive discussion we might be able to dig into.
Council Member Tanaka: Yeah, I suppose. I think what you guys have to do is you have to actually have like a more detailed spreadsheet and compare it against other cities, like apples-to-apples
comparison, to understand what’s going on. So, actually, I have a question for the Assistant City Manager. So, the last time we talked about the electric rates I suggested looking into
moderating some of the fluctuations with derivatives. I was wondering how you are doing on that?
Mr. Shikada: Yes, actually the staff here at the table have been doing some background research and pulling together some information that they will be able to present soon. I don’t
think it’s quite ready to flush out.
Mr. Abendschein: More importantly, we want to speak to that a lot more when we are talking about the electric utility, since the derivatives discussion is specifically focused on the
electric utility.
Council Member Tanaka: Oh no, I think derivatives could be used also in water as well, with the futures. I mean, farmers use it all the time to make sure they don’t go bankrupt when
they are growing the crops.
Mr. Abendschein: Okay, we haven’t done derivatives research around the water utility. That’s something we can look at and come back on. The thing about the water utility is that we don’t
have a variable, so typically we use derivatives when we have, when we’re trying to protect against price risk.
Council Member Tanaka: Yeah, weather derivatives, right? So, it’s like farmers, if they plant a crop and it doesn’t rain, they basically get like insurance on that so they don’t go belly-up.
Right? So, like for us, we could use it, like, how much snow, how much raid doesn’t happen in the Bay Area, so we don’t – Like this year we had record rainfall, right? So, we have some
of the highest rates, we had record rainfall and we go back to our residents and say, we’re going to jack up the rates 4 percent, it doesn’t – like, what?
Mr. Abendschein: We’ll have to look into that. I don’t think I’ve heard of a water utility using weather derivatives that way.
Council Member Tanaka: I don’t know if they have or not. I’m just suggesting it.
Mr. Abendschein: Yeah, we can take a look at it, ask around about it.
Council Member Tanaka: Because I think we owe it to, when we have it higher rates already, and we are raising rates even more, I think we owe it to our constituents to do our homework,
to see what’s going on and what can we do to mitigate it.
Mr. Abendschein: Yeah. I think a really important thing to note though about derivatives is that they will not protect against long-term, rate increases associated with long-term cost
increases, and that’s what our rate increases are about. We’re not – what a derivative might protect against is something along the lines of the drought surcharge that we’re dealing
with. So, for example, we have a decrease in consumption related to drought mandates, and if there were an insurance product against that, we might not have had to put a drought surcharge
in place.
Council Member Tanaka: Yeah, but why do we have this operation reserve right now? It’s, what, it’s $10 million, $10, $15 million. Like what’s the purpose of that?
Mr. Abendschein: We use that for self-insurance against cost fluctuations.
Council Member Tanaka: Yeah, there you go. So, I mean, that’s why people use – Okay, so farmers don’t have as much (inaudible) as the City of Palo Alto, right? So, they use weather derivatives,
so this is where we’re tying up about $10, $15 million worth of capital, right, to do this, versus to use derivatives to stabilize the fluctuations.
Mr. Abendschein: Right, yeah, and I think that’s what we would look into is whether there are derivatives out there available to moderate against fluctuations. And, you’re right, if
there were such a product, then it would mean we wouldn’t have to have as much money tied up in reserves.
Council Member Tanaka: Okay, thank you.
Chair Filseth: Well, actually I had a couple, and we had the discussion, I mean, which is, it looks like our commodity costs are rising 3 percent a year and our charges are rising 6
percent a year. So, I think we sort of talked about catching up with, revenues catching up with, or costs catching up with revenues or vis versa. I mean, is that basically the answer?
Mr. Keniston: Yes, revenues need to catch up with costs.
Chair Filseth: The other question I wanted to ask is, I think we would all like to see the drought surcharge go away. So, when does that go away?
Mr. Keniston: If approved it would go away July 1st.
Chair Filseth: July 1st, okay. And when to we tell everybody?
Mr. Keniston: We’re actually putting together a communications plan right now to have that in place with the hope that that gets passed. It is a Council decision. You can always choose
not to do such at the June Meeting, but the – yeah it’s in the Prop 218 letter as well, so I guess if members of the public choose to protest against removing the drought surcharge,
50 percent plus 1, then we couldn’t (crosstalk).
Chair Filseth: I don’t think I’d invest in a derivative against that one. Okay, so what happens, if we adopt the resolution tonight, what happens next?
Mr. Keniston: So, what happens next, and I do have a slide on that. So, the process as it rolls is, after tonight’s meeting we would then write up the, we have the Prop 218 notice drafted
out with the existing proposal. If accepted by you tonight, then we would start, and the goal is to get that printed and mailed out to all customers, property owners and rate payers,
by the end of April so that we have, we’re within our 45-day window before the Council meeting in June. If, as I said, 50 percent of customers plus 1 write in and oppose, then Council
may not accept the rates as proposed, but if we don’t hit the 50 percent, it’s still up to the Council’s decision as to whether or not to adopt said rates.
Chair Filseth: If the Council didn’t adopt these rates, I mean, let’s say 60 percent of people that wrote in complained and so forth, right, then what would happen?
Mr. Keniston: Well, then we get to go back to the drawing board. We would, probably we would, if we were seeing a large influx of customer response coming in we would probably notify
folks that we were sensing that we were getting near the limit and we might need to reevaluate. We would probably start working internally on an alternative proposal. If Council said,
at the moment that they didn’t want to pass the rate increase as proposed, then we would have to draw up a new proposal, bring that back again, and then there would again be another
45-day waiting period. We would have to renotice all customers, send that out. So, then the earliest rate increase we could do, if not approved, would be September.
Mr. Abendschein: Is your question about what we would do as an organization?
Chair Filseth: Yeah, both what would happen with respect with us and the City and customers, and then what would happen as an organization. I assume the answer would be along the lines
of, we would go back and sort of revisit projected capital expenses and when stuff was going to be built, and so forth.
Mr. Perez: Or you would draw on your reserves.
Chair Filseth: Yes, or you would draw on your reserves. We don’t have rate stabilization reserves anymore, so that would be (crosstalk). It’s not supposed to be used for rate stabilization.
Mr. Perez: That’s why the rate increase is recommended.
Chair Filseth: Right. As a member of the church that doesn’t believe in rate stabilization reserves, I understand that. I think that, you know, on this one you are sort of hearing sort
of the gee, and I know you’ve heard this before and studied it before, okay. Is it, “Gee, seems a little high, why is that?” So, if we adopt this tonight, I would expect there would
be more discussion in May. Is that a logical place to continue?
Mr. Perez: Yeah, you can definitely review the budget and to the point you were illustrating earlier, you were pointing at the chart of our operating capital expenditures, there are
some expenditures where you wouldn’t have flexibility. Others that you may, but they would have consequences, so it would be up to us to explain what those impacts would be.
Chair Filseth: Okay, any further? Council Member Fine.
Council Member Fine: Just on that, when you do come back to us, I think it would be helpful, for one, as the Chair mentioned, to kind of see what are these architectural costs, and break
those out just for us, and for the public. And then, additionally, it’s a second question, what would the new project plan be, particularly in terms of op and capital if it weren’t approved?
Something so we can kind of move towards the middle of it on both sides.
Chair Filseth: Well, I’m going to guess that one of the interesting financial ratios here is looking at capital expense per capita income, right, as a comparison. If, if fact, what we’re
doing is a lot of infrastructure work and so forth. I mean, some of it ends up in op ex too, right. If you have to do more maintenance because people have to drive out in the hills and
stuff like that. But I think the capital expense might be a kind of interesting one.
Mr. Perez: Yeah. I’m looking at the adopted budget, your current budget, and I’m looking at the capital program, so starting in ’14, now this is budget, not actual expenditure, 7 point.
Excuse me, actual expenditure, not budget, the first two 7.3.
Chair Filseth: No, I understand, but I think, I mean, the interesting comparison is, how does that stack up against some of the other cities that are on the same, also that are SFPUC
clients. Where we’re comparing more the apples-to-apples.
Mr. Perez: Yup, okay.
Mr. Shikada: Well, perhaps just on that a little bit, presuming we find that our capital expense per capita is high, I’m not sure what that would lead to in terms of our strategy. Again,
our baseline, the conclusion at this point is that the infrastructure plan for replacement is in need of replacement, so, unless we’re going to change that conclusion, or perhaps, I
suppose it could cause us to look at our method of replacement. You know again, a major policy decision for the Council to consider if it went there would be, we are undertaking an evaluation
of our emergency supplies, so if, and again, this would be a significant undertaking, so we don’t want to underestimate it, if the City were to decide that having the emergency supply
is not as important as currently provided, then that would involve a lower investment longer term.
Chair Filseth: I understand. I was sort of looking at that a little more broadly, which is, you know again, we just did a sort of (inaudible) that maybe these costs are 50 percent higher
or something like that than sort of the local averages, right. And we’re speculating that a lot of that is in the capital area. I’d just like to know if that’s true or not. We might
find that, oh, you know, like it’s 200 percent higher in the capital area and 50 percent lower in the operating. I mean, we should know that.
Mr. Shikada: Good, so we can look at some metrics that would provide some detail on that.
Mr. Perez: Another thing that we can provide you, it’s a couple of years old now, but we had an organizational study of the Utilities Department, and I forget if you were here. I know
Council Member Holman was here.
Chair Filseth: I think it was before I was born, actually.
Mr. Perez: We did a review in 2013 of all the utilities, and compared it to other like agencies, and reviewed operations, capital performance and also some metrics. We would be glad
to send you that report if you feel it’s of interest or possible use.
Mr. Abendschein: The other thing we can provide is the 2010 HF&H Consulting deep benchmarking study that they did against all of our comparison agencies. They looked at the capital and,
I mean, they dug into the questions that you’re asking.
Council Member Tanaka: So, I have a Motion, and I think that I want to basically follow staff recommendation, except for one point, which is that instead of a 4 percent increase, we
do a 3 percent increase, and let me explain why. The reason is, commodity costs are increasing by 3 percent, so we should do that, right. I think just to keep up I think we do need to
do that. But I think if we just approve staff’s recommendation for the 4 percent increase, I think it doesn’t – I think need is the mother of invention. I think being able to truly optimize
the financials, being able to optimize what we’re doing I think is important that staff actually has a goal for that. We are in a year where we had, you know, thankfully, for most part
the drought is over official, which is good. We have some of the highest water rates in the area, and I think that we need to figure out, and I don’t think we’re going to figure it out
here in this room, but we need to figure out what’s going on, so having a 1 percent target of figuring out where that overages are, I think, would be worth it. So, I think that rather
than just going with the automatic staff recommendation, I think we should ask them to sharpen the pencil and figure out where to get that extra 1 percent. So that’s my motion.
Chair Filseth: Are you leaving intact the 6 percent raises in ’19 through ’23?
Council Member Tanaka: I think for now I think I would. I think if we can, because that 1 percent now doesn’t mean that that 6 percent doesn’t go on top of that 1 percent. I would hope
that the work that staff does on figuring out where to get that extra 1 percent would maybe mean that we don’t have to do this additional 6 percent later on. I don’t know, but we would
look at this next year, I guess, right? So we could look at it next year to see if it has to be 6 percent, but I think it’s important for us, you know, I think we are raising rates almost
across the board, well, not all the rates, but raising the water rates and I think we have to be conscientious that not everyone here is Palo Alto can just absorb the costs without a
problem, so I think we need to be conscientious about being mindful about our own budget before just automatically passing the costs on to the residents.
Chair Filseth: Before you talk to your Motion, is there a second?
Council Member Fine: So, I just want to ask the Chair, maybe staff, if this is the appropriate venue to push something like this, or if our May budgeting session is more appropriate?
Because I actually do agree with Greg here about need being the mother of invention, and I think it is sending a signal to our residents and to our staff which may be helpful, but I’m
just trying to figure out where is the best?
Chair Filseth: See what the utilities think. I would have said it’s within the prevue of this group, although the budget process is more directly related to the expense side, right,
than this. On the other hand, they are integrally linked.
Mr. Keniston: So, from a timing perspective, the decision tonight, because, like I said, we have to, we would have to mail out notices to customers by the end of this month in order
to have a July 1 rate increase, so delaying the discussion till May and then doing noticing afterwards would push your, you know.
Chair Filseth: I think what Council Member Fine is saying is that we would still give the 4 percent, right, but we would have a discussion on expenses during the budgeting cycle, which
wouldn’t impact the scheduled notification of voters. I think that’s what you were suggesting, right?
Council Member Fine: Right.
Mr. Keniston: And we can always, if it turns out that expenses come in lower or that SFPUC costs come in lower than expected, we can always go back and ask for a rate decrease. We don’t
have to do it strictly in July.
Council Member Fine: Then just a last question. I may give a second, depending on this. What does that 1 percent represent in terms of revenue, and how much would that cut into our ops
reserve, if that’s what we chose to do?
Mr. Keniston: So, it would be a roughly $0.27 increase. I can’t offhand, off the top of my head. I’d have to look and see what the – If you give me a second I can look and see what that
would be for revenue.
Council Member Holman: In the meantime, could you restate your Motion?
Council Member Tanaka: Oh, basically the staff recommendation except instead of a 4 percent, it’s 3 percent.
Council Member Holman: Three percent, okay. And the other years stay intact at this juncture.
Mr. Perez: I was going to suggest you could do up to 4 percent and on the notification, you could end up at 3, but you’d notice at 4.
Council Member Tanaka: But with direction to staff to look at means of reducing that by 1 percent?
Mr. Perez: Because either way, you would affect the change if you wanted to. It may not be in the first year. It could be in the second year.
Chair Filseth: So, I think we have an answer to your question.
Mr. Keniston: Yeah, it’s about $500,000 a year.
Council Member Fine: I’ll second that.
MOTION: Council Member Tanaka moved, seconded by Council Member Fine to recommend the City Council:
Adopt a Resolution approving the Fiscal Year (FY) 2018 Water Utility Financial Plan; and
Transfer $1.877 million from the Rate Stabilization Reserve to the Operations Reserve; and
Adopt a Resolution increasing water rates by amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-4 (Residential Master-Metered
and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) and removing the drought surcharge with the following change:
That the increase in water rates be 3 percent beginning July 1, 2017
Chair Filseth: Do you care to speak to your Motion?
Council Member Tanaka: (inaudible)
Chair Filseth: Do you care to speak to your second?
Council Member Fine: So, I think this may be a little unorthodox, but I think this is actually a helpful signal at this point, and I actually agree with Council Member Tanaka that at
the moment, especially given the state of the rain and the drought and that we’re removing the drought surcharge, I think it is fair to pass on to residents kind of the commodity cost,
but much more than that may not be justifiable at the moment.
Council Member Holman: Just one quick follow up to what Lalo was saying, or what Ed was saying, so we can go ahead and send the notification cards out for 4 percent, it’s up to 4 percent,
okay, and so that way we have the latitude, we wouldn’t need to renotice and all that sort of stuff. So, if we end up charging less, okay, good. That’s the only clarification.
Mr. Shikada: Just in terms of timing, and I’ll look to Lalo to see if this works, that as a part of the budget discussion that we bring back to the Finance Committee, that staff would
be directed by the Committee to look to the additional 1 percent savings.
Mr. Perez: Right. We would have to, you know, we’re probably (crosstalk)
Mr. Shikada: Because it’s a little late.
Mr. Perez: It’s a little late in the production, but that doesn’t mean you can’t make changes to what we bring to you as a proposed budget (inaudible).
Council Member Holman: What’s interesting about this too is, because it’s an enterprise area, it doesn’t spill over into affecting any other departments, so.
Chair Filseth: Just one question, one of the elements of discussion here has been sort of the structure of customers’ bills that sort of calls out the commodity prices. Is moving to
that within this Motion?
Mr. Shikada: We’re not planning, or don’t currently provide a separate commodity charge in the water rate, so as a result it’s not a part of the proposal that’s before you.
Chair Filseth: Okay. All in favor? Motion passes unanimously. Thank you, guys, very much.
MOTION PASSED: 4-0
Mr. Perez: Just to clarify, it was up to, in terms of the Motion, up to 4 percent, or was it at 3 percent?
Chair Filseth: Your Motion was up to 4 percent? Well, your Motion directed at 3 and then for customers up to 4.
Mr. Perez: Thank you.
Council Member Holman: Was that, that wasn’t actually discretely part of the Motion. Now do we need to amend the Motion to include that, or that’s just what you’ll do.
Chair Filseth: The Motion was just the rates, and wasn’t sort of exactly how it’s communicated to the customers.
Mr. Perez: You might want to.
Ms. Brettle: The Motion as it stands just includes that the rate increase be 3 percent. We don’t have anything about the notification in the current Motion.
Council Member Holman: Well, 3 percent with leaving the…
Ms. Brettle: With 6 percent rate increases in 2019 through 2023.
Mr. Perez: I think it would be good for you to have the notification up to 4 percent.
Council Member Holman: Yeah, so Greg, do you want to amend your own Motion?
Council Member Tanaka: Yeah, I don’t see in the recommendation anything about notification, right? I mean, that’s kind of solid on that, right?
Mr. Keniston: So, the notification to customers has to happen between, so that would just come out of this decision and it would have to, so whatever your decision is, that’s what we
would have to notice.
Mr. Perez: So, our point is, if you want it to be effective July 1. If that’s not important to you and you say, you know, that’s not important, it will be the timing that it will be
then. (crosstalk) Well, that would be our recommendation.
Mr. Abendschein: To add another tricky thing in here. I mean, if we have a unanimous Finance Committee recommendation at 3 percent, then we would take that on to Council consent. Am
I right about that?
Mr. Perez: Well, it’s a public hearing, so it would be discussed in a public hearing.
Mr. Abendschein: Oh, that’s right. Thank you.
Chair Filseth: But the language of the notice to customers isn’t specifically part of this staff recommendation here, is it?
Mr. Perez: Well, I think you want to have the leeway, would be our recommendation. Because that way you can keep it at 3 and if for some reason the Council as a whole made a change of
heart in June and you wanted to go to 4, then you’re not limited.
Chair Filseth: I see.
Mr. Perez: That’s the insurance you get from this.
Chair Filseth: I think, if I can, what I heard Council Member Tanaka say, and correct me if I’m wrong on this, is his intent was to leave that to the discretion of staff, right, as opposed
to dictating exactly what the language would be here. We heard a reasonable proposal here. But if you want us to dictate the language we can.
Mr. Abendschein: Our risk to staff is if you’re proposing a 3 percent and then we send out a notice saying we’re going to raise rates 4 percent, there’s a perception problem.
Council Member Fine: I think it’s probably safe to put in here that staff can notice up to 4 percent. We recommended 3 percent, which goes in the consent calendar and if our other five
colleagues disagree with that, then they’re covered by the 4 percent notice.
Chair Filseth: So, acceptable (inaudible).
Council Member Holman: Actually, except as was noted, it didn’t really go on consent calendar because it has to be a public hearing, so there is not consent calendar under action that
was taken.
Council Member Fine: And then we’re covered if the other five out vote us.
Council Member Holman: Yeah. So, an Amendment would be.
Jessica Brettle, Assistant City Clerk: have already voted on that Motion, so you can’t go back and amend it, a Motion you have already voted on, so you will have to make a second separate
Motion.
Council Member Holman: Or we could ask for that motion to be reconsidered, because we all voted for it. So, we would just ask for the motion to be reconsidered, and I’ll make that Motion.
Chair Filseth: What’s easier.
Ms. Brettle: In my opinion, just to make another Motion.
Chair Filseth: Let’s make another Motion.
Council Member Tanaka: Okay, so do we say we cancel the old Motion, how does that work?
Ms. Brettle: No, the old Motion stands. You’re just going to make a new Motion related to that.
Council Member Tanaka: The new Motion is that staff can notice up to 4 percent.
Chair Filseth: All in favor? Done.
Mr. Abendschein: Can I ask, one clarification on the previous Motion. You had mentioned, well you had mentioned that there was something about the later year rate increases being at
6 percent. Was that, can I clarify whether that was part of the motion, because we generally don’t ask for actual action on future year rate increases, because they are very uncertain?
Council Member Tanaka: You can ignore that if you like.
Chair Filseth: This does not change, the only change (inaudible)
Mr. Abendschein: Right, it was the staff recommendation, except it was a 3 percent. Okay.
MOTION: Council Member Tanaka moved, seconded by Council Member Fine to authorize Staff the ability to notice the increase in water rates at an amount up to 4 percent.
MOTION PASSED: 4-0
3. Utilities Advisory Commission Recommendation That the City Council Adopt a Resolution Approving the Fiscal Year 2018 Wastewater Collection Financial Plan.
Eric Keniston, Utilities Resource Manager: On to the wastewater collection financial plan and proposed rates with proposed rate changes of zero on the wastewater side, as mentioned earlier.
Here again, same graph. With the FY ‘17 and ’18 our revenues are projected to be higher than our expenses and so we’re quite a bit more confident in saying that no rate increase this
year is at all necessary. So, again, similar state of affairs where the collection capital expense has been delayed for two years for new replacement projects, out to 2019. One of the
other always increasing and growing side is the treatment operations and there the capital expense related to capital at the plant itself and that we know is going to be increasing in
out years. The plant is aging out and definitely requires a lot of work, so that has been factored into their increase, the increased projections on that side. As for projected changes
from FY ‘17 to ’18, much smaller dollar amounts in the grand scheme of things, but the vast majority of it is in collection capital expense, about 57 percent of it. Collection operations
increasing by about 31, but the overall differentials $650,000. Reserves are relatively healthy in this fund, so again, the outlook for needing an immediate rate increase is just not
there. And, again, continuing with the future, instead of having the larger rate increase upfront then dropping off over time, it’s more of a steady increase, view point 7 percent. Reserves
are anticipated to remain within guideline levels. And actually, wastewater is a fairly quick fund. So, any questions really on the wastewater side, being as we have no rate increase
tonight, so.
Chair Filseth: We’re going to ask for a decrease.
Mr. Keniston: You’re going to ask for a decrease.
Chair Filseth: Very good. Thank you. Question, comments? Council Member Fine.
Council Member Fine: Thank you so much. This is a more palatable one. Just a question. I think it was last week when we were talking about electric and kind of front-loading some of
the fees here. I was interested, it looks like we’re having a lot of debt expenses and capital expenses coming up. Is there any advantage to kind of smoothing that increase to today’s
money? It just seems like some of the other ones you brought to us were a little bit more smooth, and this is like, we’re taking a zero right now, but we’re going to pay for it down
the road.
Mr. Keniston: Yes, and then we thought about that, but if you take a look at where the, do I not have the reserve graph at all? The projections on reserves, we would be hitting right
up near maximum if we, I mean, we’re already, by FY18 we’re hitting the maximum level. If we were to do a rate increase now with maximum reserves, it would throw it into unassigned and,
yes, we could use that going forward, but if you could take a look, it’s a potential that we could do a small increase now and then bring things down to like futures in sixes, but that
would be small.
Council Member Fine: That’s a helpful answer. I guess it would be nice across the board to kind of know why we hit the top of our reserves in some of these funds, just historically.
Mr. Keniston: We hit the top of the reserve in this fund mainly because of the capital improvement. The budgeting where our revenues are going to be above expenses here.
Phil Bobel, Assistant Director of Public Works: Eric, could I point out one thing. In the spirit of full disclosure, as Mr. Shikada pointed out when we went over this, what three weeks
ago or so, we went over it in less detail. On that, can you put back that graph of all the bars. So, one thing about this is it only includes our capital plan for the wastewater plant
for the next five years, and that’s, so that debt only relates to what we plan to do over the next five years. As most of you know that were here last year, we’ve got a serious problem
with this plant being now 45 years old at best. Some parts are much older, and we’re going to have to have more expenditures than are shown here between the fifth and the tenth year.
So, this is an optimistic projection from the five to the ten-year period, because, frankly, we haven’t figured out how to fund these things yet. So, we’re going to have to come back
each year now and try to sharpen our pencil for those out years. I just wanted to point that out so you weren’t shocked when we change this those last five years in the future.
Chair Filseth: Yeah, I’ve heard you say that before, so we’re prepped for it, or those of us who were here last year. Yeah, I understand, we’re prepped for it and thank you for that.
One of my questions was going to be, when will we have more visibility on that. It sounds like, you know, not this year, right? I wonder if there shouldn’t be sort of a standard note
on charts like this to say something to that effect, right. You know, the red line is a dashed line or something like that, or an asterisk somewhere.
Mr. Keniston: Yeah, I mean, really, cost projections going out more than a few years and revenues projections are very, are speculative, so that’s another reason why we don’t come back
and ask for a whole string of rate increases going forward. We could look at doing those in more of a dash format or lighter color shades for those.
Chair Filseth: I mean, they’re speculative, but they’re not without value.
Mr. Keniston: Right. Uncertain, yes. I should choose my language more carefully. Thank you.
Chair Filseth: Questions. Council Member Holman.
Council Member Holman: Yeah. Going back to the staff report, somewhere I read this, going back to the staff report for Item 2, and I presume that would apply to this item as well. Top
of page, Packet Page 13, it says, I’m sorry. Under background, it’s in the bottom part of the first paragraph under background. It says, “Each financial plan also contains a set of reserve
as management practices describing the reserves for each utility, management practices for these reserves”. I’m tired tonight. So, where would we find those, or have I overlooked them,
or – because there are a lot of questions that have come up tonight about the reserves and what the practices are, the best practices are for those, and why we’re deviating where we
are and whether it’s capital or operations and what the reserve levels should be. I mean, we have targets, but how does that relate to… I’m sure you’re consistent with it, but how does
it relate to financial plans?
Mr. Keniston: It’s usually, it’s on Page 103. It’s usually Appendix B or Appendix C to the financial plans themselves. So that’s where we go into the details of what each of the reserves,
what it’s there for, as well as what the min/max and target levels are set up to be.
Council Member Holman: So that’s for wastewater collection.
Mr. Keniston: Each fund has its own set of practices. They are all very similar, but electric is by far, a little bit more complex, because it does have more reserves to play with.
Council Member Holman: So, I guess I didn’t get to that one. Is it also in the other two items too?
Mr. Keniston: Yes.
Council Member Holman: Okay, I’ll go back and look at those.
Mr. Keniston: Well, it’s, we have it on the water and wastewater collection. I’m not sure if there’s the reserve practices for…
Council Member Holman: The refuse?
Mr. Bobel: Refuse, is that your question? So, we didn’t show you that chart, but we have it, and we’re within that, we’re about to move to the upper level of our reserve guidelines on
refuse.
Council Member Holman: So, it might be helpful, and I’ll see how my other colleagues feels about this, but it might be helpful to not just talk about reserves and here we are and we’re
at the top level, but just compare them to where the recommendations are from the financial standards that are set for the different utility funds. You know, the best practices.
Mr. Shikada, General Manager of Utilities: Since we have the maximums and minimums, that’s what those reflect in the graphs. So, the solid lines at the top and the bottom, are the maximum
for the plans with the dotted line or the double dotted line, that do-not-cross line at the bottom.
Mr. Keniston: Yeah, the do-not-cross line is the risk assessment value that’s sort of the sum of all fears. If we had a one-time 10 percent hit on capital improvement costs as well as
a drop in revenues. For the wastewater collection utility, it’s 90 percent flat rate residential, so you don’t get a lot of revenue variability at all here, which is why we’re only talking
about reserves. The risk assessment level is only about 2 million, but generally within that 45 to 120 day, 60 to 120-day range for the min to max, yeah.
Council Member Holman: So, that’s helpful, because I’m not sure…
Mr. Keniston: Of operation’s expenses.
Council Member Holman: So, I’m not sure I had appreciated before that those are not Palo Alto set standards.
Mr. Keniston: No, those are internal.
Council Member Holman: I’m not sure I had fully appreciated that before. Okay.
Mr. Keniston: Those are standards that we came up with in, after 2009 was it, when we redid the reserve guidelines. Before, going back into what we had before, it was just a general
rate stabilization reserve, and we had min/max, minimum and maximum guidelines, but they were very loose and the reserves ended up being larger and (inaudible) funds, we were sitting
on more cash and we didn’t feel that was appropriate for our customers. So, we went through and reevaluated what was actually needed to get by in each of the funds, and thus, that’s
what we came up with. And looking also at what other agencies did regarding that, so that’s why these guidelines were derived. But there is no industry standard practice for those, but
this was the most prudent.
Council Member Holman: Okay, thank you.
Mr. Bobel: I just need to add a footnote about the wastewater treatment plant. As you know, that’s a unique feature. It’s owned and operated by the City of Palo Alto 4 to 6 partner agencies,
one of which is Palo Alto. So, there is a reserve amount that isn’t included here or discussed tonight that is for the wastewater fund. So, they use the work, against my recommendation,
wastewater collection to include the Palo Alto component of the wastewater treatment plant. That is the 35 percent of the plant expenses is paid for by this wastewater collection fund,
so that all of Palo Alto’s true expenses are included in their wastewater collections fund, even the treatment plant. But the other 65 percent of the plant isn’t in their stuff, so sometimes
we’ll show you graphs for the plant. Like when we come back to discuss these capital projects I’m talking about, we’ll be showing you stuff about the plant and it will be 35 percent
Palo Alto funding and 65 percent these other cities just so – and we’ll show you from time to time the reserves associated with this wastewater treatment fund. I just wanted to get that
out there so you would know there is another thing out there. And that we do need to reconsider the way that, those guidelines are because the purpose of the treatment plant reserves
are going to have to change and be different and they are going to have to take into account the fact that this facility we have, unlike anything else the City operates frankly, is a
$300 million thing which now needs to be rebuilt, and so we’re going to come up with a new reserve policy over the coming months and be bringing it to you, I think, separately, because
of its importance. And it’s going to have to take into account the funding for this major rebuild in the reserves. We’re going to have to have money that we don’t now have, because the
variability in costs associated with these huge ticket items, it’s already caught up with us just on this first one where the, well, I won’t get into the details. But we’ll be bringing
that back to you, so the wastewater treatment plant reserves are a different matter and we need to bring that back to you.
Council Member Tanaka: So, on this one it’s good news, right? So, on this one, it’s interesting because we look at our surrounding cities and we’re actually doing really, really well.
And the thing that I wonder is like, why is this the anomaly. Why are we at the upper end of everything else and on this one we’re at the more reasonable end. What’s different?
Chair Filseth: That was my question.
Council Member Tanaka: Yeah, so what’s, what are we doing right here, or can some of the best practices or whatever is happening here be transferred to other departments? I guess, maybe
does staff have any insights to what’s going on here?
Mr. Keniston: I cannot recall if we have performed any benchmarking studies against other wastewater utilities in the area, so, we’ve done that on the water because we knew that we were
higher, but when it comes to wastewater, because we’re lower or in the middle, it just hasn’t been the priority there.
Mr. Abendschien, Assistant Director of Utilities Resource Management: So, there’s going to be a treatment component that Phil can speak to and a collection component that I can speak
to. So structurally, architecturally, our sewer system is much less complex than our water system, so that’s one of the features. It’s tough to separate out this operation from the two
other operations, like General Manager Shikada was saying, we have, we use the same staff to manage our gas, water and sewer utilities, so somebody who is trained in sewer is also trained
in water and gas, so we actually see some of the same efficiencies across those utilities, but there are some of the structural issues for water aren’t really present for sewer.
Mr. Bobel: Can I just add to that, on the, just on the collection side, having a lot of grey hair and seeing what other people are doing, a lot of these cities have a lot of infrastructure
that we don’t need related to pump stations. We do almost no pumping to get our sewerage to the sewerage treatment plant, and when you go north there is one treatment plant, Redwood
City, in Redwood City, which serves from Menlo Park to somewhere up there, and they, almost all those cities have to pump their sewerage. That’s a huge difference than just letting it
roll downhill in a pipe. So that’s one thing I would point out. The other thing…
Chair Filseth: Menlo Park and Redwood City and (inaudible)
Mr. Bobel: Yes, they are and we keep pointing out to East Palo Alto, the City folks, that their rates are much better because they go to our treatment plant where the costs are less
and because they don’t have to do any pumping. So, if you look at San Mateo County, East Palo Alto actually has the cheapest rates in the County. So, when they bring up, you know, when
they are concerned about things, I keep pointing to their own chart about how cheap their rates are. But, anyway, the other thing I wanted to point out was about the plant. So, the plant,
it’s a two-edged sword. Our expenses are less than many of the other plants in the Bay Area, but frankly, we’ve not kept pace as we should have, with these replacement things that are
now catching up with us. So, as I pointed out, much of the plant is 45 years old. A substantial part of it is even older. So, a lot of plants, and Redwood City is an example, have started
sooner than we have replacing this stuff, rebuilding this stuff, and their rates are higher already. So, those are two features I just wanted to point out.
Council Member Tanaka: It would be very interesting to understand how, because it seems like just from our previous discussions, it seems like a lot of this has to do with, we’re investing
in infrastructure, right, or not investing. So, it would be interesting to see how – I’m not sure if this is easily accessible or not or whether we could see the numbers, but, that’s
collecting dark matter, so to speak, and this whole game is like, well, how much are you investing or not investing and how much debt, or infrastructure debt accumulates as a result,
right? Okay, one other quick question on this is, so for this what percentage of cost is labor, do we know?
Mr. Shikada: Lalo just had it on his screen, and poof, it disappeared. So, while he is looking for that I would note just a couple of other factors that Phil pointed out, but in addition
to the architectural, I think it’s important to keep not and in particular for the wastewater, but also for all of the utilities geography has a huge impact. You know, we talk about
the slope as well as the necessity for pumps in a system. Another is demographics as it relates to demand, and not to draw any particular conclusions, but usage and demand side, in particular
for the sewer system, is an ongoing issue, especially as it related to the need and in particular, in combination with geography, for cleaning of sewer lines, of backups as they may
happen, and as that can relate to significant costs on the operating side. And related to that, it’s land use and the manner in which land use is laid out has a huge impact on potential
costs for the system. Okay, back to Lalo.
Mr. Abendschein: Again, and you’re going to see this is pretty common with the utilities, 10 to 15 percent are the salary and benefit costs relative to the rest of the costs.
Council Member Tanaka: We don’t know what it is, or that’s it?
Mr. Perez: It’s slightly over 10.
Mr. Abendschein: I just put it into my calculator.
Mr. Perez: $2.6 million on a $23 million budget.
Council Member Tanaka: Okay, thank you.
Mr. Shikada: The one oddity, if it’s that consistent across the utilities, is in this case we don’t have a commodity, so why that would be the case is, you know, maybe more just coincident.
Mr. Abendschein: It’s a good point to bring up, because actually there is a whole other set of, well, so treatment is effectively the commodity for sewer and there’s a whole other set
of City-related salary and benefit costs that are embodied in the sewer, in the treatment plan.
Mr. Bobel: I think that’s a good way of looking at it. The treatment plant is sort of the commodity. So, you pay an expense out of this collection fund that is to the treatment plant
and you don’t bookkeep in the collections fund exactly how it’s spend. If you look at the wastewater treatment fund, we can tell you all that, but the wastewater collection fund just
views it as an expense, the treatment plant. And that’s sort of like a commodity expense. I think that’s a great analog.
Mr. Abendschein: And if you want to keep going with the analogy, if you look at the commodity costs for water or gas or electric, if you were to go upstream to the generators or the
gas, you know, the wells or to the SFPUC, you would probably find some more ratios there too.
Chair Filseth: Their commodity cost is real low too, because they amortize it across, they amortize infrastructure across the commodity, and that’s how we see it, right? Why is Menlo
Park and Redwood City so much higher than we are? So, thanks very much. Actually, let me ask one thing, which is, how long in advance do we notice people, I mean, we typically noticed
people within the same year there is going to be a rate hike or rate increase or change or lower, right? We don’t ever come back and say, “Starting four years from now we anticipate,
you know, a series of rate increases to deal with this major capital investment.” We don’t ever do that, do we?
Mr. Keniston: Some utilities do, I mean, you’re allowed, under the Prop 218 you’re allowed up to like a five-year window of prenoticing. Again, it’s usually related to rate of inflation
change or pass-through.
Mr. Bobel: It’s not a formal notice, but when we have a multi-year plan that we can see, like the refuse thing we talked about, the 9-9-8 for the residential sector, it wasn’t a true
notice but we, all these documents were public, tried to make it real clear what we were up to. The papers reported on it, you know. It’s probably more effective than a technical notice.
Chair Filseth: Okay. Any further questions, comments? Motions? Let’s see, what are we going to do here. So, I’ll move the staff recommendation that we adopt a Resolution approving the
Fiscal Year 2018 wastewater collection financial plan.
Council Member Holman: Second.
MOTION: Chair Filseth moved, seconded by Council Member Holman to recommend the City Council adopt a Resolution approving the Fiscal Year (FY) 2018 Wastewater Collection Financial Plan.
Chair Filseth: I don’t think I’ll speak to it. Care to speak to your second?
Council Member Holman: No.
Chair Filseth: All in favor? Motion passes unanimously. Thanks folks.
MOTION PASSED: 4-0
Future Meetings and Agendas
Chair Filseth: Future meetings and agendas. Thank you very much. I think…
Lalo Perez, Chief Financial Officer: That’s correct. What happened was we had the CDBG item, but as I kind of warned you, that if the Federal Government is considering cuts, the Federal
Government has extended the deadline for the submittal of our proposal from May to August, and so staff, given the uncertainty, wants to wait until the last possible minute to submit
a plan to you. So, we’re looking at June 6 as the date to come to you with CDGB plan and we had to move the (inaudible) update, which is the gas long-range plan out, and so there will
be no meeting on the 18th, because we won’t have any agenda items. So, the other, I’m sorry Chair. I just kind of started and didn’t wait for you.
Council Member Holman: I didn’t find the CDBG (crosstalk)
Mr. Perez: It’s a last-minute change, so it’s not on there.
Council Member Holman: So, it’s not on here. I was trying to find where it was going to be. (crosstalk)
Mr. Perez: I was just notified by Planning this last Thursday.
Council Member Holman: And just, if you don’t mind, while I have to mic here, took the mic here just a second. I have to be, I won’t be here on May 11. I am going to a graduation on
May 12. I notified the Chair of that.
Mr. Perez: If you’re okay, we can go through the budget hearing schedule and here’s what we thought we heard and you let us know what you want to do. So, I first have to say, and please
don’t take it the wrong way, but it is perfectly normal that when you have a Finance Committee that has new members, that there are a lot of questions. Tonight is a perfect example,
2 ½ hours for three rate discussions. Not budgets, rate discussions. So, please keep that in mind when I tell you that you just have to trust us, having done this for a long, long time,
that you’re going to need the time to discuss it. The later you go, the less accurate we will be and tired, all of us, both you as well as us. So, right now we have the kickoff meeting,
which usually we have a lot of discussion about the format, the process, you know, how we’re going to deal with differences, all of that structure. So, we were recommending to start
at 6:00 so we can get all of that set and in order for that evening. We will have, we have estimates of what we think it is, but they are very general estimates, obviously, because you
may want, decide to go into a lot of detail or not, depending on the departments and the budget requests and changes. So, this is a very full night because we’re going to give you an
update of everything and what the City Manager’s plan is. Then we’re going to get into the CAO Offices. We’re going to talk about HR. The item that you probably want to discuss, and
you’re going to spend a lot of time, is the general employee benefit funds. That’s when we’re going to talk about pensions and we plan to give you some ideas and proposals of what we’re
thinking. Obviously, this has been a big discussion with the prior Finance Committee. A couple of you are carried over, so we anticipate the need to discuss that. The retiree benefit
fund, it’s probably another significant discussion because of the magnitude of our unfunded liabilities for both pensions and retiree medical. Then we get into my department, and non-departmental.
It has been very often where we don’t get to them, to my department, and we just punt and move it to another night because usually we have a lot of questions. Then we go to Thursday,
the 4th. Here I think we, the Chair was trying to find a balance of the time, so here we are starting at 7:00. We would have IT, both the operating and the capital. The library, I think
one that had a lot of discussion last year and may again, is the development service center budget. Then we get into the Public Works budget and the Public Works budget is significant
because you have, now you’re going to hear the details of the refuse fund. What we talked about today, you’re going to get a chance to talk about the details of the operating and capital,
the storm drain, the wastewater treatment. Then the airport. The airport has significant implications to the general fund in the magnitude of millions of dollars, so there’s probably
going to be a need for a lot of discussion, a lot of questions, to understand what our proposals are. Keep in mind, there was a plan to have a pay-back to the general fund of loans.
Well, that’s not going to happen any time soon, so we want to talk about all those things. So, again, warning you that…
Chair Filseth: So, we’ve got an hour? (inaudible)
Mr. Perez: Well, Public Works, we have an hour, 9:00 to 10:00, but chances are we’re going to blow through that because of the items we have. Then we have vehicle and there’s been a
lot of interest to understanding where we’re at. You know, the size of the fleet, the alternative fuel vehicles, the EV vehicles and all of that, so that’s part of the discussions as
well with you on the fourth. Then we go to Tuesday, the 9th. This one is also a 7:00 start. We have Police and OES. Probably the biggest item is going to be the Fire operating budget.
We’ve had a lot of discussions with the department in terms of how we can offset some of the costs for the revenue losses that we’re anticipating with the upcoming contracts with Stanford
for the Fire services, so that’s probably a significant discussion there. That’s why we have allocated about an hour. Planning, usually that’s a big item as well, because you have a
lot of items of interest, transportation being one of the main ones, enforcement, code enforcement that is, and other issues that are on your usual list of priorities. Then we get into
more transportation items through the special revenue funds, which is the parking district, that tends to be somewhat of a challenge to understand, but we do have items coming to you
before the budget hearing, such as the Downtown Parking Report that you will be hearing in April, so you may, there might be some correlations there and tie-ins to that. So right now,
we have it at 7:00.
Council Member Holman: Can I ask a question of Lalo. So, I notice on a lot of these meetings the start time is 7:00. The one meeting that starts at 7:00, the 5/16 one, is the night that
I have the conflict, and 7:00 is a better start time. Is there a reason the others start at 7:00 and this one starts at 6:00?
Chair Filseth: I believe the discussion around this one was the agenda for this night was very full.
Mr. Perez: We were hoping we could – do you think 7:00 would be the time you would arrive?
Council Member Holman: Um-hmm.
Mr. Perez: So, we were hoping to do what we did last year, so we talked about it because you had a similar situation last year, and what we did is we started with the Utilities Department
to ensure that you were able to hear the general fund capital budget, because that was the item of interest to you last year. So, we did that.
Council Member Holman: Yeah, I was just wondering why some of this wasn’t moved to some of the other meetings that could start earlier, instead of.
Mr. Perez: So, the problem was there was a compromise of starting times. As you can see, we have three at 7:00 and two at 6:00 and it just depended on the magnitude of the items and
how we can accommodate the pieces, because we have to keep all of the Utilities together so we can have the team here and not bring them up different nights. Then the general fund, we
tend to bring all the departments that night.
Council Member Tanaka: (inaudible)
Council Member Holman: Well, you have the general fund though, and that’s the one night I’m not here.
Chair Filseth: (inaudible)
Council Member Holman: I do apologize. It’s a relative’s graduation and I just, I would be excommunicated if I didn’t go.
Mr. Perez: Our recollection from last year’s comments, and that’s what we’re kind of working with is, you had a lot of interest in participating in the CIP.
Council Member Holman: Um-hmm.
Mr. Perez: So, maybe I’ll finish and then we can revisit. Then, so I think we got into the 11th, and you mentioned your conflict. The muni fee schedule.
Council Member Tanaka: (inaudible) I’m on an airplane at that time.
Mr. Perez: Oh, so then we don’t have a quorum.
Chair Filseth: So, do we have a night, so you are gone that whole night?
Council Member Tanaka: Yeah, I’m on an airplane.
Chair Filseth: So Thursday, the 11th we don’t have a quorum.
Mr. Perez: Yes, so we need to find a different night. You fly out the 10th, you said?
Council Member Holman: Yes.
Council Member Tanaka: I fly out on the 9th, so my flight is at 11:00.
Chair Filseth: Wednesday, the 10th. (inaudible) I understand. Karen, are you here on the 10th, or?
Council Member Holman: I need to get out of here to get there. I haven’t made my reservations yet.
Mr. Perez: So, may I suggest that as long as you have a quorum, and that we have a wrap-up where all of you are present, that way you can discuss anything that you missed on a particular
night, that we go forward with meetings as long as you have a quorum.
Council Member Tanaka: It sounds like the 11th we don’t.
Chair Filseth: We don’t have a quorum on the 11th.
Mr. Perez: Right. So, I was specifically speaking to the 9th right now, because it sounds like Council Member Tanaka is not available.
Council Member Tanaka: Well, I’m flying out at 11, so I would probably have to leave here at 9:00.
Mr. Perez: Okay, so you’ll leave at some point during the meeting. Okay, but as long as we have the other three of you. Okay, so we’re okay on the 9th it sounds like, and we just need
to make sure we keep the quorum. Then, we need to find a replacement now for the 11th. We have the muni fee schedule and CSD. One option, and if we can’t find a common date for everybody,
is to add items to other nights and start them earlier. You know, we can try to see if we can find common dates. It’s probably preferable to you.
Chair Filseth: I’m sorry. I’m spaced on this. What did you say about your availability on Wednesday, the10th Karen?
Council Member Holman: Like I say, I haven’t made my reservations yet, but I may be here. I haven’t made my reservations yet.
Chair Filseth: And you are not here at all on the 10th? Are you here on Wednesday, the 10th?
Council Member Holman: So, what about the 18th? Because you have three wrap-up meetings.
Chair Filseth: That’s a discussion you missed from the last one.
Mr. Perez: Yeah, let’s talk about the 18th. So, our original recommendation was to do the wrap up on the 18th and start early in the afternoon because, as you may recall last year, it
went pretty long. But there were a lot of conflicts with starting early that afternoon, so what we were recommending was to do the 18th and the 22nd as the wrap up and finish that, and
the 22nd would have to be in the daytime, because it’s obviously a Council Meeting night and then you would have a hard stop. One accommodation that we could make was to push it to the
23rd, with the understanding that the packet would be late. It would not have the typical two-week notice because we just can’t turn it around.
Chair Filseth: So, I had a discussion with the Mayor on that, and the Mayor is strongly opposed to that.
Mr. Perez: Okay.
Chair Filseth: So, I think sufficiently strongly that I think we need to get the packet out, we need to give you guys time to get the packet out on schedule.
Mr. Perez: Okay. So, if we were to move the items, so the 11th to the 18th, then that would just mean that we would have to start earlier and get it all done, or split it up between
the 18th and the 22nd, so we could make the packet. But, again, start earlier.
Chair Filseth: I don’t think we should do that. I actually did discuss with the Mayor and he agrees with me that I don’t think – because, in particular this meeting, I mean, we’re going
to have a large number of staff and I think we can’t call staff, I think we can’t call dozens of people in on a Saturday.
Mr. Perez: We’re going to have 40 staff members probably.
Chair Filseth: That’s my recollection, in chambers, a huge number of people cycling through. Which means that we are stuck with daytime on the 18th and possibly the 22nd is what you’re
saying, if I heard that right.
Mr. Perez: Correct.
Chair Perez: Is there any way that we can do this in such a way that there is only one daytime meeting?
Mr. Perez: I think if we were to start at 2:00 on the 18th, you know, because you may not have a full agreement and recall last year, for new Council Members, we had what we called the
parking lot and you parked stuff where you didn’t quite have agreements, and what we did is we passed that on to the Council and said, “these items we had agreement in, these we did
not.” So that allows you to have Board deliberation at the Council level with the rest of your colleagues, and then make the final determination. So, I don’t think you need to have full
agreement on everything, so I think we could do it.
Chair Filseth: So, if we did that, then that would in principle obviate the need for a daytime meeting on the 22nd, other than the disposition of what we do with the 11th. Is that right?
Mr. Perez? Correct. I’ll try to figure out how we can either split those items into the other meetings or we just have to make them part of the 18th.
Council Member Tanaka: Can we do Friday night instead?
Chair Filseth: Friday the 19th?
Council Member Holman: So, what about Wednesday, the 24th? Did you talk about that before? It says 22 and 23, but 23 and 24?
Mr. Perez: Anything past the 22nd we won’t make the packet, because it’s that Thursday. So, as it is, it’s already jamming everything in 2 ½ days to get a packet done. So, then I should
say it’s going to be hard to get everybody in here because that’s a 980, so people probably have plans. I’m in St. Louis myself. Should we suggest a time for the 18th?
Chair Filseth: I think we’re going to have to do the 18th in the daytime.
Mr. Perez: Do you want to do 1, 2:00? We started, you had a harder stop, so I want to say we started about 11:00 because you had to stop at 4:00 and try to eat your dinner because your
Council meeting was starting at 5:00 and you ended up going all the way to like 4:45, or something, rushing your dinner.
Council Member Holman: Should we start it at 11:00 again?
Council Member Fine: I can make it whenever. I’ll just take a half day off of work.
Chair Filseth: Karen, the 18th? (inaudible) In that case, I would almost say that an earlier start give you more flexibility (inaudible)
Ms. Brettle: I was looking at the minutes from last year. The wrap up started at 11:00 and went till 4:30.
Mr. Perez: So, I was close. I said 4:45. What we might have to do is more the 11 items, the May 11th items to the 18th.
Chair Filseth: I don’t have an issue with evening. The only question is, is staff going to be standing and waiting.
Mr. Perez: If we start early what we can do is we can triage, so we can minimize the number of people that stay late. We’ve done that before where we’ve asked you where do you think
you have your potential budget changes, and let’s keep those staff and let the rest go. I mean, I have to be here so it doesn’t matter to me.
Chair Filseth: What if we start at 1:00 and went to what if?
Mr. Perez: Okay. So, let me recap to make sure we’re all on the same page, if you don’t mind. It sounds like May 2nd, 6:00.
Chair Filseth: May 2nd, 6:00, yup.
Mr. Perez: May 4th, 7:00. May 9th, 7:00, and Council Member Tanaka is out, or you’ll be here. So, the 9th is okay.
Chair Filseth: What if we started at 6:00 on that one and that would give us some time. What if we started at 6:00?
Mr. Perez: Okay, 6:00. So, if we have anything carryover, it also helps from the other nights. Okay, so the 11th is out, but the items we will move them to the 18th. The 16th 6:00, Council
Member Holman will join us in progress. And 5/18 1:00 with bringing the items from the 11th.
(inaudible, crosstalk)
Chair Filseth: What if we start at 2:00. Another hour.
Mr. Perez: Instead of 1:00.
Chair Filseth: I think if we put the stuff from the 11th on here it’s going to be (inaudible).
Mr. Perez: Okay, 2:00? (crosstalk) 2:00 on the 18th. Okay. So, I think we’re set.
Council Member Tanaka: I have a question. So where is the item with revenue ideas?
Mr. Perez: You can bring those when we do the general budget overview on the 2nd, so we.
Council Member Tanaka: Something the Staff comes up with, (inaudible).
Mr. Perez: There are some that we have, but I don’t believe they are aligned to exactly your goal, your target, but I think that would be a good time for us to discuss that and what
it would entail and what it would look like, and then from that meeting, what typically happens is we have a discussion and if there’s enough interest from the Committee you give us
direction and we go work on it and try to come back at one of the later meetings and give you, produce back the information that you as a Committee is seeking. At that evening we can
talk about specifically items that any of you have then you as a Committee can agree on how you want to proceed on how to do this, and then at the end of each item you are approving
it on a tentative basis, because you may come back at the wrap up and make a change. So, you still have a chance, that’s why I think from our perspective it’s best – exactly, that’s
why it’s long and it’s best to have you all there because then you are doing all these decisions as a Committee. Okay, at the wrap up?
Chair Filseth: So, I’m trying to understand exactly what you’re suggesting. If there is an agenda item that is maybe an hour long or something like that where staff brings their four
best ideas and Committee Members bring their four best ideas and? What exactly?
Mr. Perez: Yeah, well, it may be something that needs to be discussed with the Council and then the Council give direction. If it’s a significant change, for example. In other words,
it goes as a recommendation from you as a Committee to the Council for staff to pursue this new generation of revenue and there might be some specific to that. I’ll make up something,
increased rent by 50 percent, what would it look like, what would be the consequences, and then the Council said yup, we’re interested in see that in discover. Or there may be a discussion
well, who are the renters. Well, the majority are nonprofits. Well, we don’t want’ to do that. So that’s why it would need to have some vetting and that’s usually what happens with these
items. They take a while to discuss because of the complexities of it and to understand the item. So, one recommendation that I would strongly suggest is as long as it’s no more than
two of you, we can have discussions leading up to those meetings. I’ll make myself available. And if it’s another department, I will try to convince them to make themselves available
as well, so we can discuss some of this and prepare so by the time we get to the meeting, you have more data, more information to make an informed decision or recommendation, suggestion
or motion.
Council Member Tanaka: Are we still at $61 (inaudible)
Mr. Perez: It’s better and we’ll bring you a balanced budget. The definition of balanced is going to be a discussion and how we approach it and we are going to have to also talk about
the outer years, because we can’t just talk about one year. So, there’s a lot to discuss.
Council Member Tanaka: (inaudible)
Mr. Perez: Yeah, and I think this is the format, this is the place to do that, and I think if we’re able to discuss some of it premeeting so any of you understand the base of what we’re
starting with and what the potential possibilities are, then it might make our discussions at the actual meeting a little more fluid, because instead of us going back and saying, “well,
you can’t do this because of this proposition.” You know, we will make it more effective.
Chair Filseth: I think what I heard is maybe a premeeting sometime in the month of April?
Mr. Perez: Yeah, like I said, as long as it’s not more than two of you, we can do individuals or two at a time on your various topics, especially for our newest Council Members, we will
offer that opportunity to discuss the budget process and any questions you may have.
Council Member Holman: If I can make a suggestion or if not, a request, assuming it’s not inappropriate, there were a couple of things last year that were like really heated topics of
discussion and then the Council changed them. One of them was the pruning cycles to the trees, and I’m hoping that we don’t have to revisit that, for instance. I think there were a couple
other things that were topics of long deep conversations, and I just hope we don’t have to reargue those same things again. I’m not looking for an answer, but I’m not liking your body
language.
Mr. Perez: You’re a good reader.
Council Member Tanaka: But that’s the issue, right. If you don’t have revenue increases, somehow we’re going to have to do stuff like that. There’s just no choice.
Mr. Perez: Trying not to get into an item that’s not necessary in there, I think it would be good for us to sit down and discuss to see what really is the base that is available, because
it’s very small. Once you take out the taxes, transfers, what’s left in terms of what you could increase, it’s a smaller piece. And we definitely are increasing fees to keep up with
our cost of doing business, but there are some policies that prior Councils have put in play that are limiting that ability of full cost recovery, because they were value choices versus
economic choices, and so we could certainly talk about those and we do that with you when we go through the fee schedule.
Council Member Holman: Do we continue to hope there is no grocery store at Edgewood Plaza so…
Mr. Perez: And some of it is opportunities that will be upcoming. So that’s part of the discussion we plan to have with you. There are some hotels and discussions, there’s potential
auto dealers. You know, what you do with those revenues is something that is important as we move forward, and there is a large list of desirable expenditures and your previous discussions
in various areas of the City and we just don’t have the funding for all of them, so understanding that as well, and how we prioritize those needs that we want and the community wants.
Council Member Tanaka: Okay, that’s all I have.
Mr. Perez: Thank you.
Adjournment: The meeting was adjourned at 10:05 P.M.
TRANSCRIPT
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Finance Committee Action Minutes
April 4, 2017
FINANCE COMMITTEE
TRANSCRIPT
Page 1 of 68
Finance Committee Transcript
April 4, 2017